Teladoc Health, Inc. (TDOC) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the Teladoc Health's First Quarter 2019 Earnings Conference Call and Webcast. All participants have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and answer-session. [Operator Instructions] Thank you. It is now my pleasure to turn the floor over to Valerie Haertel, at Teladoc Health Investor Relations.

Thank you, and good afternoon, everyone. Today, after the market closed, we issued a press release announcing our first quarter 2019 financial results. The press release is available in the Investor Relations section of the teladochealth.com website. Joining me this afternoon to discuss our results are Jason Gorevic, our Chief Executive Officer; and Gabe Cappucci, our Chief Accounting Officer and Controller. We will also provide our second quarter 2019 outlook and our prepared remarks will be followed by Q&A session. On today's call, we will discuss certain non-GAAP financial measures that we believe are important in evaluating our performance. More details on these non-GAAP measures, the most comparable GAAP measures and a reconciliation of the two, can be found in our press release posted on our website. As a reminder, certain statements made during this call will be forward-looking statements which are subject to risks, uncertainties and other factors that could cause actual results for Teladoc Health to defer materially from those expressed or implied by the forward-looking statements. For additional information, please refer to our cautionary statements in the earnings press release and our filings with the SEC available on our website. At this time, I would like to turn the call over to Jason.

Thanks, Valerie, and thank you everyone for joining us this afternoon. I'm very pleased with our strong start to 2019 and extremely enthusiastic about our prospects for the remainder of the year. We met or exceeded all our financial and operating expectations in the first quarter. In comparison to our Q1 2018, total revenue grew 43% to $128.6 million including 23% organic growth when you'll exclude Advance Medical. Visit volume of 1.06 million visits increase 75% or 29% excluding Advance Medical. U.S. paid membership grew through 26.7 million members adding 3.9 million new members in the quarter versus 1.2 million new members in the first quarter of 2018 as we saw especially strong growth among new and existing health plan clients. And adjusted EBITDA came in within our expected range at 1.2 million. Our robust first quarter growth underscores the increasing diversification of our business across products channels and geographies, and our enterprise-wide commitment to operational excellence. Let me spend a few minutes on our very strong visit volume. It's worth noting that this is a first quarter in which we've crossed the million visits threshold and I couldn’t be proud of our team and our physicians who make this possible. The same primary factors I identified in our last call drove our first quarter volume. As we would realize the benefits of our diversification strategy, the impact of our surround sound campaigns and tailwinds from mainstream adoption trends, all of which offset a weaker flu season. Compared to last year's epidemic flu levels, this season was marked by a slow start followed by a modest lift later in the quarter resulting in overall flu visits declining by 32% year-over-year. Despite this headwind, we were able to deliver 29% organic visit growth. As we significantly expand the breadth of our clinical capabilities and continue to increase the effectiveness of our surround sound engagement efforts, our visit growth becomes even more predictable, resulting in a Q1 annualized utilization rate of 11%, which was slightly ahead of last year. Among our clinical specialties, behavioral health continues to be a strong driver of growth, with continued momentum in both our DTC and B2B channels. As a result of this strong adoption, we expect behavioral health total revenue growth to exceed 50% for the full-year. Additionally, as we enter mental health awareness month in May, I'm particularly gratified by the fact that total behavioral health visit volume in the quarter increased by over 100% versus last year, a strong testament to the value of this much needed service. Switching to our pipeline for 2019 and beyond, the U.S. health plan market continues to present one of the greatest potential areas for growth in terms of population visit volume and breadth of products and services. I recently have the opportunity to spend a few days with leaders from across the healthcare landscape including the C-suite of many large health plans in health systems and I was incredibly encouraged by the intensity of focus on virtual care as a key component of product, medical delivery and consumer strategies. As traditional players wrestle with how to make virtual care at the front order of the healthcare system, it's becoming increasingly clear to me that Teladoc Health is uniquely positioned to equip them to achieve their goals. Due to the broad scope of our clinical services, our ability to address the widest array of consumer healthcare needs to a single intuitive interface, and importantly our proven ability to drive consumer adoption. On growth of over 3 million paid members in Q1 2019 through the health plan channel is proof of our continued success. As we've said in the past, strong growth in this channel can actually have a dampening effect on our average PMPM and overall utilization rates initially. We typically see utilization rates grow over time as we deploy our engagement strategies to these large populations. You'll see in our quarterly metrics that this is entirely due to mix and as a case of us being the victims of our own success. Dave will further delve into these dynamics when he reviews our financials. On the international front, we have continued to execute on our strategy of positioning Teladoc as the only global virtual care solution, while maintaining focus where we see the greatest opportunity to capitalize on our first mover advantage. In the first quarter, we took several steps to accelerate this leadership position. The European market is a good example of this where we're seeing excellent organic growth and have successfully closed several cross sales in the first quarter. Additionally, we recently announced the acquisition of Paris-based MedecinDirect that expands our European footprint in a market where regulatory and reimbursement conditions are increasingly favorable toward virtual care. MedecinDirect has a well established and highly complementary client base of leading insurance partners that can now benefit from access to a much broader spectrum of clinical services through Teladoc Health. Finally, we announced the launch of Teladoc Telemedicine services in Canada, a growth initiative we highlighted on the February call. This first of its kind offering provide Canadians with 24x7 access to convenient and high quality medical care, regardless of their location across Canada or the U.S. Market reception has been very positive and our first client is scheduled to go live in the third quarter of 2019. In summary, our pipeline of new business opportunities across all our channels has never been stronger. We continue to see positive trends in the global regulatory environment, leading to a promising picture for the 2019 selling season and beyond. Before I turn the call over to Gabe, I'd like to briefly cover the recently released CMS rule since this has been a key topic as we head into the 2020 year for Medicare Advantage. CMS is very much behind the inclusion of Telemedicine to increase accessibility to medical care and to lower costs. It's important to note that while the government has estimated savings from Telemedicine in the ruling, it did not prescribe pricing for reimbursement. Pricing for services will be negotiated directly between virtual care providers like us and the health plans. We're in active discussions with Medicare Advantage plans spanning both existing and prospective clients, and we expect to have information on how we'll be serving this important market in the back half of this year. Now, I'd like to turn over to Gabe to review our financials for the quarter and our second quarter guidance.

Thank you, Jason and good afternoon everyone. I'd like to echo Jason's comments regarding our strong start to 2019 and I will now review Teladoc Health's first quarter financial performance in more detail. Let me start with a discussion of revenue. Total revenue increased 43% to $128.6 million for the first quarter as compared to a year ago. On an organic basis, revenue increased by 23% for the first quarter of 2019. Revenue from subscription access fees of $106 million increased 48% compared to a year ago and accounted for 82% of our total revenue in the quarter. Visit fee revenue for the quarter increased to $22.6 million representing growth of 26% compared to the prior year and constituted the remaining 18% of total revenue. The U.S. subscription access fee revenue of 81 million continuous to represent about three quarter of total subscription revenue, while international subscription revenue of 25 million accounts for the balance. Turning to membership, we ended the quarter with 26.7 million U.S. paid members, up 28% to a year ago. As a reminder, our definition of members includes just U.S. paid members that are associated with a PMPM or paid U.S. membership and does not include visit fee access only. In addition, visit fee access reflected expansion within our current client base and was available to 10.2 million individuals at the end of the quarter. Even with the increasing health plan members as Jason discussed, we saw the first quarter 2019 PMPM increased to a $1.03 from a $1 at year-ago or a $1.02 on a pro forma basis when adjusting for the impact from advance medical. On a sequential quarterly basis, the PMPM was reduced from a $1.16 as a result of the member mix impact from the new health plan members. The broad membership of our health plan channel clients allow us to provide our services at our most competitive rates. It is important to keep in mind the opportunity that our health plan clients and other large populations provide, as members utilize our services and experience our surround sound engagement which drives visit volume increases overtime. Further, as we deliver meaningful saving to our clients, we generally see our relationships expand enabling us to offer additional services, which also increases utilization. As Jason mentioned, we have an excellent quarter with respect to visit volume with 1,063,000 visits, an increase with 75% compared to a year-ago. When adjusting for the impact of Advance Medical, visit volume for the quarter increased by 29% as compared to the prior year. Visits from our U.S. paid membership increased to 718,000m which represents annualized utilization of 11% a 10 basis point increase over the last year's first quarter. Taking a closer look at our visits from U.S. paid members during the quarter, approximately 51% of them or 365,000 were paid visits, and the other 353,000 were from our visits included members. International visits totaled 282,000 in the quarter and we completed 63,000 visits for individuals with visit fee only access. To wrap-up my commentary on revenue, U.S. paid memberships visits generated $18.2 million in the quarter a 28% increase over the first quarter of 2018. As a reminder this line includes revenue from general medical visits as well as other specialty visits primarily comprised of expert medical and commercial behavioral health services. Gross margins for the quarter were in line with our expectations at 65.3% compared to the 70% in the first quarter of last year. The year-over-year decline in gross margin percentage reflects a mix shift in revenue and the midyear 2018 acquisition of Advance Medical. Terms of gross margin dollars we generated $83.9 million in the first quarter compared to $62.8 million a year ago, representing a 34% increase. Operating expense in the quarter totaled $106.8 million, an increase of 30% from the $81.9 million in the first quarter of last year. When non-cash charges such as depreciation and amortization, stock compensation, as well as one-time acquisition related costs are eliminated, adjusted operating expenses are 82.6 million or 64% of total revenue, compared to 64.2 million or 72% of first quarter 2018 revenue. These adjustments better reflect our improved operating leverage including synergies and members choosing digital communication through our app or the web. EBITDA was a loss of $13.3 million for the first quarter of 2019 as compared to a loss of 10.8 million for the same period last year. Adjusted EBITDA increased to a positive $1.2 million for the quarter, which compares favorably to the adjusted EBITDA loss of 1.4 million from last year's first quarter, reflecting our aforementioned ability to generate improved operating leverage. Concluding my commentary of the income statement, our net loss for the quarter was $30.2 million compared to a loss of 23.9 million last year. On a per share basis, our net loss was $0.43 for the first quarter of 2019 compared to $0.39 in the prior year. Turning to the balance sheet, we ended the quarter with $479.7 million in cash, cash equivalents and short-term investments, an increase of approximately $1 million from the beginning of the year. Our total debt as of March 31, 2019 was $562.5 million, which consists of our two convertible note issuances. The 275 million 3% convertible notes that mature at the end of 2022 and 287.5 million 1.375% notes that mature during 2025. I'll conclude my commentary with our expectations for the second quarter and the full year. For the second quarter of 2019, we expect total revenue to be between $128 million and $131 million and EBITDA loss to be between $13 million and $15 million, adjusted EBITDA to be between positive $5 million to $7 million. Total U.S. paid membership to be approximately 27 million to 28 million and visit fee only access to be available to approximately 10 million individuals. We expect total visits to be between 775,000 and 875,000 and net loss per share to be between $0.42 and $0.44 per share based on 72.4 million weighted average shares outstanding. For the full year 2019, we affirm our previous expectations of total revenue between $535 million and $545 million and EBITDA between $40 million and $50 million, adjusted EBITDA between positive $25 million and $35 million, total U.S. paid membership of approximately 27 million to 29 million members, and visit fee only access to be available through approximately 10 million individuals. We expect total visits between $3.6 million and $3.9 million, net loss per share to be between $1.52 and $1.66 per share based on $71.9 million weighted average shares outstanding. And as we said before, we expect to be cash flow positive for the first time in 2019. Let me now turn the call back to Jason for his closing remarks.

Thanks, Gabe. Before we open the call for questions, I wanted to provide a brief update on our CFO search. This remains a high priority and we're seeing some great candidates although our process is not yet concluded. I'm confident in Gabe and the finance team which gives us the time we need to find the right step for our organization to drive us forward. I'll be sure to keep you updated as we have news to announce. As I said at the beginning of the call, I'm very pleased with the quarter results. And we'd like to thank the Teladoc team around the world for their continued commitment to our mission and to living our values. Our opportunities have never been greater as we execute on our strategic plan and deliver value for our clients and members. I look forward to continuing to share updates with you throughout the year. And with that, we will open the call for questions.

[Operator Instructions] Your first question comes from Lisa Gill with JP Morgan. Your line is open.

Thanks. It's actually Mike Minchak for Lisa. Maybe just to start off, given that it's been a topic that's generated a lot of questions in our end. Just wondering, if you could talk a little bit about the NCQA accreditation, can you talk about what that process entails? And what, any feedback you might have gotten from NCQA regarding the recent extension?

Sure, Mike. Thanks for the question. I'd start by saying we've got a good relationship with NCQA. We've been first certified and accredited for years, dating back to 2013. We are in the middle of this process. There's been much I would say, do about nothing with respect to the date moving by two weeks. That's just part of the process, as they go through their review process. We're highly respectful of that process and we expect to be reaccredited.

Got it. Thanks for that. And then just wondering, if you could talk a little bit more about the selling season and the pipeline for new business? How does this compare this year relative to the same point in time last year? And are you seeing greater interest in sort of the comprehensive solution with customers looking to bring on more than one of your offerings? And then, have you seen any interest from current or prospective customers in alternative models relative to the traditional subscription access fee model?

Yes, so the first question or the first part of that question is exactly what we're seeing. Similar fee volume last year, but much more concentration, much higher concentration of comprehensive solutions sort of the fully integrated solution as the subject of the RFP, as opposed to last year which was much more characterized by one or two of our clinical services that were forbid or as part of the RFP process. So, we're seeing bigger opportunities that include a much array of our clinical capabilities. We're not really seeing much in the way of difference relative to financial models. Obviously, we're still early in the year and so, the RFP is going generally dictate, what the financial model looks like. It usually gets deeper end to the process before you start having those pricing and financial structuring discussions, but I don’t see any that significant move toward alternative payment structures.

Your next question comes from the line of Jamie Stockton with Wells Fargo. Your line is open.

Maybe just a quick more specific one on the Medicare Advantage opportunity, I think Jason in your comments you said, you've saw a like we'd see some divisions more in the second half of the year. I guess maybe one. Do you think like they would relatively be confined maybe more to the third quarter when we see a lot of the decision making? And then the other question on the Medicare Advantage opportunity, I guess, I would throughout there is. If we think about the landscape of MA plan, do you think that Tela Health is a benefit that the majority will be folding in kind of for the 2020 plan year? Or is this something that will kind of span over the next 2 or 3 years?

I would say a couple of things. One, with respect to the decisions by the MA plans, yes, that's probably -- we're probably going to see the concentration of that in Q3. Some of them will make the decisions before the bids are due in June. Others will put essentially a place holder in there in the bids while they finalize their selection of who they're going to partner with and I are now with the details of that. Obviously, we have a head start with respect to our almost 40 health plans with whom we already work. So, we expect them to move overall faster. We are actively in discussions with many MA plans both existing clients as well as prospects. I think to your question about. Will the majority include virtual care for 2020? Or is that going to stretch over a more years? I'm probably more realistic about the pace of adoption of the health plans with respect to anything much less virtual care for in MA population. I do think that we've sort of primed the pump with all of our work with the commercial plans and obviously a lot of those commercial plans also have MA plans, but I would expect it to be a gradual rollout over the course of the couple maybe three years.

Your next question is from Sean Wieland with Piper Jaffray. Your line is open.

Can you give us an update some of the larger opportunities you've been working on TRICARE, United? What the expectation is for rollout there?

Yes, I wish I could give you more information on TRICARE where as always at the mercy of the federal government with respect to their timing. We're delivering service for them and operationally delivering excellent results as well as great member experience. We are actively working to try to speed that along, but there's really only so much we can do. Our relationship with Optum obviously who's the prime contractor there continues to be excellent. With respect to United, we continue to have a great relationship with United. As I said before, we're their virtual care provider for several of United's populations. I'm very happy to report that we've reached agreement to expand to a much larger population. The rollout plans haven't been made public. So, there is limited information I can provide at this time, but I'm extremely excited by this expansion of our relationship.

Your next question is from Ryan Daniels with William Blair. Your line is open.

I have one on the benefits design front. I think one of your competitors in the mental health plan announced kind of a Virtual First type strategy where they're actually lowering planned premiums for membership who go into that. I'm curious, if you're seeing any similar conversation either in the pipeline or with your customers where you can actually leverage your Virtual First strategy to lower medical costs overall and get people to a right point-of-care and perhaps offer a lower premium and attract members accordingly?

Yes, absolutely, Ryan, that's exactly what we're seeing. With the majority of our health plans, we're having some level of discussion around Virtual First plan designs. And most of those plans are looking at it as a lever to reduce premium by. Number one, resolving patient tissues the first time in a more cost-effective setting by virtual setting; and number two, by using virtual care to better utilize all the rest of the tools in the health plan arsenal including things like center of excellence programs and cured network programs and the most optimal curing of the formulary in addition to getting people earlier into care management, disease management programs, etc. So when we talk to large health plans and these are coming from the medical economics groups which tend to be among the most conservative groups there are, they're looking at anywhere double digit decreases in premiums that could result from these virtual centric plan designs.

Okay, that's very helpful. And then one pretty specific one on the income statement, it looks like you're seeing some really good leverage in the sales expense line, certainly more than we thought. I think it was up under 18% year over year despite the strong revenue growth. Any color there behind kind of what's driving your leverage in that line in particular?

Hi, this is Gabe. Just when you look at our sales expense, you're absolutely correct. As we deploy our troops, we've had lots of success in winning new clients and really working within the headcount that we have on board. So, we track that very closely in terms of quotas and productivity and are really seeing the rewards with that as we continue to be very successful on the sales front.

I think, Ryan, we have seen larger clients coming on, so we get -- we tend to get greater productivity in terms of big bites and that can help to drive the efficiencies in that area.

Your next question is from Stephanie Demko with Citi. Your line is open.

Hi, guys, thank you for taking my question. Just riding on the back of the Cincinnati Children's announcement, could you give us an update on the provider channel and any possible metrics you can share such as share pipeline or competitive win rate?

Yes, thanks Stephanie. We're really excited about the Cincinnati Children's relationship and we think that's going to be a breakthrough relative to pediatric care with obviously a marquee organization. The provider channel continues to grow incredibly quickly. It continues to be one of our fastest growing customer channels. We are continuing to see very, very strong win rates. We talked about that last year and we continue to see the success in that. What we're also seeing is the expansion of our capabilities that we rolled out at HIMSS this year, which enables the hospital to design specific workflows for different clinical use cases, it is really valuable. And specifically, we're seeing the hospitals come to us asking for a broader array of capabilities, as they look to virtualize more of their clinical service lines. So, we think that there's opportunity to continue to grow the hospitals with whom we work, but also the scope of the products and services we sell into those hospital systems.

Very helpful. And then just one other one pivoting to the behavioral health, given a strong growth you talked about in the channel. What are your thoughts and divers still for expanding into further demographics you got in the more eucentric version of it right now?

Sorry, try not to go too deep into buy versus build on any given part of our business. I think quite frankly, at this point, we're seeing very, very strong results in organic growth, both in the B2B and the B2C channel. And so, we feel very good about our set of capabilities. It's not to say we would never tuck-in, a smaller asset that might deliver an additional capability that we thought we could leverage into those channels. But the organic growth both in terms of membership, revenue as well as really importantly visit volume is very strong.

Perfect. And safe to say that there has been a little impact on the YouTube controversy?

Yes, I would say virtually none.

Your next question is from Sean Dodge with Jefferies. Your line is open.

Maybe on CVS, I realized that's another one that's a bit outside your control. But you're live in '19 states now looks like it's taking a bit longer than expected to make available in the remaining. Are there -- but there's some regulatory or technical issues you've all in encountered there, anything else you can share about what's holding back the pace of that rollout so far?

Yes, Sean, you're exactly right. It's an area it's -- as I look at the quarter, it's the one area where I expect, I'm a little disappointed I expected to get a couple of states rolling out in the first quarter and we saw that spillover and not roll out in that quarter. Having said that, there are no technical issues, there are no regulatory issues that are standing in the way. It simply a question of the cadence at which CVS decides to make that rollout happen. We continue to have a great relationship there. I have regular C-level conversations with them and the both with CVS and with the Aetna relationship, we continue to see that become more strategic, more collaborative, and quite frankly never stronger, so I think it's just an art effect of them sort of going through the machinations of their rollout.

And then, on the MedecinDirect acquisition, is there anything you can share on annual revenue or EBITDA contributions from them?

Sean, it's very small, it's immaterial on both front. And so, we're not going to give specific details, but I would call it, very, very small. Essentially, what we're buying there is a local market presence and relationships with about 30 insurance companies in France. To their credit, they really got out ahead of the regulatory change in the French market, and they created these relationships and structures ahead of their being real imbursement for their services. Now, we're just -- we've just seen the regulatory change which does opened up that market and so, we think that together we can be the beneficiary of all the ground work that they've laid. So, it's very, very smaller revenue now, but we're excited about the opportunity there.

Your next question is from Richard Close with Canaccord Genuity. Your line is open.

So, Jason, you continue to sound pretty bullish here and I think on the last call you've said something about feeling that the business trends you were provided confidence in the 20% to 30% organic growth target, both in '19 and 2020. Yes, obviously, you had some normalization this quarter to 23%. So just curious, what your thoughts are about 2019 and 2020 whether you can reaffirm those targets?

Yes, absolutely, Richard. I 100% behind that, I feel very good about where we are. Obviously, we reaffirmed our guidance for this year. We're only I think 62 days after we gave our last quarterly report. So, I think we still continue to take a fairly conservative view to our guidance, but I also feel given when I know about the prospects for the back half of this year and what I'm looking at relative to pipeline and discussions we're having with prospects and clients, I feel very good about that 20% to 30% for 2020 as well.

Okay. And then, I guess a follow-up to Sean's question on TRICARE and United. Based on the guidance I guess for visits the only membership that's staying around 10 million. It seems like you don’t have any TRICARE really in the guidance for the remainder of the year. Is that correct?

That's correct.

Okay. And then the same thing with the United's population you've just mentioned that's not in the guidance?

That's correct. So while let me just clarify. We do have for United, our both revenue expectations and cost expectations. Those are built into our projections and our guidance, what we haven't included is any membership guidance because the rollout hasn't been communicated and we have to be very respectful how these are United clients it's their rollout plan and so we have to be sure that we're 100% in sync with them we haven't included any membership in our guidance.

So would it be fair to say that the revenue that's in your guidance is haircut quite a bit from that population.

I would say we've taken a very conservative view relative to our expectations there.

Your next question is from Ana Gupte with SVB Leerink. Your line is open.

Hey thanks, good evening. Following up on that question, if you look at you know the 2020 impact of the Medicare Advantage potential revenue and United. You know the 22-ish million members growing for MA. United, you're saying it's larger than expected contracting and I'm not sure how much it is, but I'm assuming it's something to do with the commercial market that they have millions of members. And even if you look at this Jason as a two to three year, adoption story with a typical commercial pricing, PMPM and per visit, and even if the utilization is you know, whatever 9-10% in the next one to three years. We can come up with something that is between those two, like you know in the low double digits percentage growth at least and you could assume more, if you depend on the share gain. I mean, is that a fair way to think about it, as we all start to have to model, what the potential of these contracts is and that's ultimately what's going to drive your stock? 2020 is going to be what's going to move the needle now?

So, we've always been very, very careful about not getting over our skies. I think you're thinking about the opportunities in front of us the right way. We're careful not to quantify those until we're ready to quantify them and build them into our guidance. Obviously, we do the work internally, but you're exactly right relative to the macro trends, the specific opportunities with large clients as well as the regulatory changes. MA is a big catalyst. I fully expect Medicare fee for service to follow in suit over the next couple of years. So, said another way, I never felt better about the prospects for the business and the fact that virtual care has moved into the mainstream and so we're starting to see the next wave of adoption which makes me confident in sort of reaffirming my expectations around that 20 to 30% organic growth.

Okay helpful. Then you know the follow-up I had one that is, right now, you have yourself, you as the largest player at least in terms of the network strength be it Amwell and MDLive, Doctor on Demand. There's been more than just you know our franchise saying that health plans will be the catalyst for some of these big disruptive technologies to get adopted. We have Humana now with Doctor on Demand, it looks like at least in the commercial market Anson has a strategic relationship with Amwell, Cigna and Healthcare drove us forth with MDLive. You have it right now with CVS, I am not sure United is open architecture or not. Do you see each of you aligning with a particular large health plan is the way this goes in terms of what the share gains looks like for all of these opportunities going forward?

I guess I'd characterize it first by saying, we have around 40 health plans as our clients, and so, we're certainly not limited to even a few plans in terms of aligning. We see ourselves neutral, quite frankly. And based on our current track record of success, where we are seeing takeaway wins across multiple channels, not only health plans. And the fact that we continue to distance ourselves from the pack relative to the expanse of our clinical services, the engagement levels that we get, our global footprint and the scale of our business. I think we have the opportunity to continue to grow both with new clients, but with expansion within existing clients and by increasing the penetration relative to utilization and the scope of services that we offer. It's one of the things I've always liked about this business is that there are so many levers for growth, and as a leader where, I would say uniquely positioned to be able to capitalize on those opportunities.

Your next question is from Matthew Gillmor with Robert Baird. Your line is open.

I wanted to try a follow-up on the United and I appreciate it if you can really tell us much more than you've already said. But can you give us any sense in terms of the population types that will be covered this commercial or government? And then any indication with respect to the pricing model whether it's PMPM or visit fee?

I really can't, Matt. I appreciate the question and why you're asking. I think more will become clear as we get closer to the launch date. Again, we want to be very respectful of United as our client and their communications timeline and strategy. And so we are we have moved into the implementation phase of our relationship and I'm really excited about that. And again, I think more will become clear as we get closer to the launch date.

Fair enough. And then following up with the discussion you had with Ryan on the Virtual First benefit design. I was curious, if your thinking has changed with respect to the contracting model you have with the physician network under Virtual First. And is there any need have a little bit more influence with respect to primary care doctors through employment? Or does the current contracting model still work for Virtual First offering?

Yes, it's a good question, Matt. We've been moving toward what we call sort of a concentric circles model of the network where at the core, we will likely have physicians who are more closely aligned with the organization, doing spending a larger concentration of their time, doing work for Teladoc and our membership, and becoming more highly trained on how to optimally become what we call now, the virtual list and you might recall that we launched a fellowship program with Jefferson University Hospital specifically focused creating the virtual list of the future. And then as you move out from that core, we will continue to always have physicians who are much more transactional and episodically available for our members in the most of efficient way to deliver that on a means that is very convenient and responsive for the consumers needs.

Your next question is from Sandy Draper of SunTrust. Your line is open.

Thank you very much. Most of my questions have been asked, but maybe just one sort of follow-up on the international market and I'm not sure how much the international market is Advance Medical on sort of the typical selling season likely we're for the U.S., but just sort of thoughts on how that selling season is going and any differences they are seeing? Is it just being part of a large organization, broader offerings? Just sort of how things are going for them versus how was the year-ago? I guess, that was maybe right before that sort of right before you've bought them?

Yes, sure Sandy. I'm very, very excited and about our international opportunities and growth. As you call out actually, their selling seasons is totally different than the U.S. There is no January centric a bolus of membership that comes on. It is smooth over the course of the year with no real concentration. What we're most excited about is the adoption of the full virtual suite of services by the international clients. I would actually say in many cases, they are ahead of the U.S. clients with respect to embracing virtual care across the full continuum services. And that's because in many cases their private health insurance companies who are looking to differentiate themselves when they sit on top of a nationalized healthcare system. And we have many examples where we're being successful in cross selling the full suite of capabilities that we're, you know, the clients who were only availing themselves of one or two of our service lines. So, we're going to see new wins as well as expansion of populations and broadening of our solutions set among clients, really across the landscape, but I would say especially in the European market. And then lastly, we've announced the launch of our Canadian Telemedicine program. We have our first client lined up to go live in the third quarter. And again just to reiterate, that's a unique program because it's cross border between Canada and the U.S. For the Canadian population as they come south they can still get a seamless experience. It's not two programs it's a by side by side rather it's one seamless program.

Your next question is from Donald Hooker with KeyBanc. Your line is open.

My question maybe more detailed question on financial statements. I guess thinking about the gross margins obviously you took a dip. I assume a big part of that you talked about in the past is Advance Medical. So is that -- is this quarter sort of the low order mark there for gross margins? Should that sort of start to walk up a little bit during the year and stabilize?

Yes, Don. This is Gabe. That's exactly correct. What we typically experienced is in our first quarter and our fourth quarter of the year tend to be our lowest margin percent quarters, as we have a higher concentration of visit activity. And then when you do look at the year-over-year comparison in gross margin percentage for the first quarter of 2018 versus 2019, it's exactly that Advance Medical which we acquired mid-year last year.

Maybe just a sort of a follow-up question on the Medicare Advantage opportunity for 2020 and beyond, what are you incurring? Can you maybe describe what you're doing to prepare for that and anything specific? I mean you're already lined up with 40 health plans you mentioned, are there any specific services that you needed for that population? Are there any incremental expenses you're incurring now in preparation for that?

Yes, there are -- I think we called out four different areas of investment on the last quarterly call and MA was one of them. And so, specifically focused on regulatory compliance, which there's a whole set of things you have to do in order to make sure you're compliant with Medicare regs. Second is network construction and there's a little bit of an overlap between network and regulatory because there are some regulatory requirements relative to the physicians. Third is in product and just making sure that we're sort of optimizing the product for the MA population. And fourth is optimizing our surround sound engagement strategies for that population because as we do with all different with all populations when we go into a new customer channel or segment of the market we want to make sure that we are optimizing our communications to yield the most return for our investment on surround sound. And so, we're doing some testing and some market research relative to that.

Your next question is from Jailendra Singh with Credit Suisse. Your line is open.

Thanks a lot, hi everyone. Can you help us understand the revenue and EBITDA ramp from first half to second half in 2019? If I look at your revenue and EBITDA, you guys reported in Q1 and include even the high-end of the guidance for 2Q, it would still require some decent ramp in second half to get to the full-year guidance. Just give some color like what are you assuming for second half ramp there?

So, I'll give you maybe sort of macro view, and we're obviously not going to give third quarter or fourth quarter guidance right now, but Gabe can sort of fill in a little bit of color commentary. I would say, we are well aware of what the ramp looks like. If you look at the second quarter that's always a lower visit volume and therefore a lower visit revenue quarter. And so, you'll see our subscription revenue increased as we continue to onboard new members and new clients. That continues into the third quarter and we have pretty good line of sight into what that looks like and where that growth comes from. And in the fourth quarter of course, you get the double bump the continued growth of the subscription revenue, the subscription revenue as well as a significant increase in fourth quarter visit volume and therefore visit revenue. And we have, again, I would say very good line of sight. Last quarter, I think we said north of 95% visibility. I'm not going to get more granular than that and start giving our visibility in ones and twos, but we continue to have improved visibility into the revenue for the full year. And that's based on contracts that are already signed, as well as late stage pipeline deals that we see. Gape, if you want to add anything, and maybe talk about the corresponding impacts on EBITDA.

Yes, and that's exactly correct, Jason. I mean, just as you see the P&L sort of ramping throughout the year, as we see access fees increasing, as we've been saying that we've been less centric on one, one, and we'll continue to see that growth throughout the year. We'll have that phenomena and then obviously in the fourth quarter, as visits will kick in, will also see increases in revenue associated with that. From an EBITDA standpoint, you'll see similar dynamics and even more so from an adjusted EBITDA standpoint, as we do anticipate that sort of sequentially grow throughout the year, as we're looking at 2019 right now.

Okay and then the one follow-up. Can you provide any update on the Aetna contract renewal? When do you expect to have final update there?

I think I've learned my lesson not to handicap exactly when we're going to have large clients signed contracts. But I would say that, number one, as I mentioned earlier, we've never had a stronger relationship with that and then we have now is more collaborative than it's ever been. It's more strategic than it's ever been. And we're seeing the results of it in our shared success together. I'm very confident in that relationship and have great confidence that that's going to continue to be a strong relationship for several years going forward. I will do myself the favor of not locking myself into a timeline with respect to when it will have been on paper for that, but I feel very good about it and really have no concerns there.

We have time for two more questions. Your next question is from Charles Rhyee with Cowen. Your lines open.

Most of my have been asked, but just couple quick clarification, Jason. On the UNH contract that you've discuss earlier, you mentioned that you're not giving a membership number. But in the guidance, does that reflect the larger population being contemplated? Or that is contemplated in the new agreement?

Sorry, I'm not sure I understand that, but we have -- as I said, what I would call fairly conservative revenue expectations. We have, I would say, robust projections relative to what our costs are likely to be over the course of this year. Both of those are built into our guidance, but we didn't include any membership in our guidance relative to our membership.

Okay, so in other words. When you first gave the guidance, it was sort of what you were expected originally, but since that time we've seen an expansion in sort of the in the population size that's not necessarily contemplated yet in the guidance. Is that fair?

No, I don’t think I've said that. I've said, we are expanding to a much larger population than we have today and it is what we contemplated and what we've been working on for quite some time.

And then I guess just one more. Earlier, you've talked about the confidence in the NCQA certification. Is there anything specific about that because you've been through it a couple of times that you feel good about at this point in terms of what they are looking for a specifically, maybe if you can just remind us so what are the sort of the key metrics they tend to look at when kind of doing it?

I know better than they speak for their process. They are the experts on their process, and although obviously, I made aware of what's going, I'm not a credentialer, so I don’t try out the comment on the specific processes there. I am -- I do feel good about what our credentialing processes are and I'm aware enough of the process that we've been going through with NCQA that my expectation is that we will receive our reaccreditation.

Our last question comes from Matt Hewitt with Craig-Hallum Capital. Your line is open.

Maybe first and I've realized you're still in the development stage here. But regarding the children's or the pediatric platform, maybe what are some of the nuances for developing that type of a platform versus one geared more towards adults? And once you've got that set, how quickly do you anticipate that being adopted by other pediatric facilities the country?

Yes, the Cincinnati Children's is a pretty unique and amazing organization. They take care of patients throughout all 50 states and in 89 countries around the world. So, we are really excited about launching a pediatric virtual care platform with them. We think that will open up access for children not only across the country but around the world to have access to the really amazing specialists and care that's delivered by Cincinnati Children. So, this is a great example of sort of the hub and spoke model if you will where the hub is just a tremendous organization with great expertise and we can provide the platform that enables them to continue to make those capabilities available.

As part of that platform, do you anticipate some of your other specialized services like behavioral health and what not being included as part of that platform?

I think it's too soon to tell that would -- certainly, my aspiration would be that we can help to bolster the clinical capabilities there, but we're still working on what the implementation plan looks like. And my guess with this as well as with most of our services is, we're just sort of scratching the surface in terms of what the opportunity is and it will expand overtime.

That concludes the Q&A portion of today's call. I'll now turn things back over to the presenters for any closing remarks.

I just want to thanks everybody very, very excited about the results of the first quarter and even more excited about our prospects for the rest of '19 and beyond. So with that, I think we'll wrap up the call. Thank you.

This concludes today's conference call. You may now disconnect.