Teladoc Health, Inc. (TDOC) Q2 2019 Earnings Report, Transcript and Summary

Welcome to Teladoc's Second Quarter 2019 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following managements prepared remarks. [Operator Instructions] It is now my pleasure to turn the floor over to Adam Vandervoort, Chief Legal Officer. You may begin.

Thank you, and good afternoon. Today, after the market closed, we issued a press release announcing our second quarter 2019 financial results. This press release is available in the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Jason Gorevic, our Chief Executive Officer; and Mala Murthy, our Chief Financial Officer. During this call, we will provide our third quarter and full year outlook and our prepared remarks will be followed by a question-and-answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health's performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC all of which are available on our website. I now turn the call over to Jason.

Thanks, Adam, and thank you everyone for joining us this afternoon. I'm incredibly excited to start off the call today by making two highly anticipated introductions. The first is to Mala Murthy who joined us at the end of June as our Chief Financial Officer. Many of you have had a chance to speak with Mala since she came on board. But as a refresher, Mala joined us most recently from American Express and brings with her an accomplished track record of success across a diverse set of leading public companies and industries. I'm pleased to say that she has hit the ground running and is already having an impact with the team. The second introduction is to our new Chief Operating Officer, David Sides. We're very excited to have David come on board as he brings a unique combination of strong technical, commercial and strategic skills that are perfectly suited to our profitable growth trajectory. As a former CEO with deep health care tech and public company experience, David understands well the broader strategic health care landscape and comes in with a clear view of the exciting opportunities ahead of Teladoc Health. David and his family will be relocating to the New York area later this summer. Our search process to fill both of these roles was a thorough one, as we held our standards high for both the right functional capabilities as well as the appropriate mission-oriented cultural fit. I know I speak for the entire Teladoc Health team, when I say we're very pleased to have both Mala and David join the company and I look forward to introducing many of you to them in person in the coming months. Before we dig into the second quarter, I'd be remiss if I didn't take this opportunity to thank Peter McClennen and Gabe Cappucci for their leadership during this transition period. Under their stewardship, we operated seamlessly continuing to deliver for our members, clients and shareholders. Lastly, I'd like to thank Valerie Haertel for her oversight of Investor Relations during this transitional period and wish her well in her future endeavors. Turning to our results for the second quarter. We saw the momentum from the first quarter continue with particular strength in revenue and visit volumes, both coming in at the high-end of our expectations. In comparison to Q2, 2018, total revenue grew 38% to $130.3 million, including 24% organic growth when you exclude Advance Medical. Visit volume of 908,000 visits increased 70% or 46% excluding Advance Medical. U.S. paid membership grew to 26.8 million members, adding 100,000 new members in the quarter and 4.3 million new members when compared to the 22.5 million members in the second quarter of 2018. This maintains our consistent track record of growing membership seven of the last eight quarters. And adjusted EBITDA came in within our expected range at $6.3 million. Drilling down a bit deeper into visits, I'm particularly pleased to see utilization increase more than 100 basis points, as we continue to realize the benefits of our diversification strategy. We are uniquely able to capitalize on the growing macro consumer adoption tailwinds, both domestically and abroad with our international populations and associated visits included seeing some of the fastest rates of growth across our total book of business. Domestically, I'm pleased to see strong utilization in our pay-for-performance deals and robust growth across all our clinical specialties persisting in Q2. As an example, behavioral health stands out as one of the strongest drivers of visit growth. During the quarter, we set several single-day high watermarks for our B2B service in terms of number of visits with members coming to us for an increasing number of conditions. On better health in the second quarter, the team continued to improve member retention metrics through the launch of member experience enhancements, which we expect to be sustainable over time. These outstanding results provide proof that our portfolio of solutions is extremely well positioned to address the massive unmet global need in the mental health arena. In terms of our selling season, the excellent momentum we continue to see across all dimensions speaks to the long-term benefits of our diversified growth strategy. Overall, RFP volume continued to accelerate this quarter remaining well above second quarter of 2018. The team is seeing wins across all our channels and products. We are seeing increasing success in selling multiple products to our clients and our bookings year-to-date for deals with multiple products continues to accelerate. In our employer business, we are seeing robust activity both with new and existing clients. We have several new Fortune 500 logos in late-stage contracting, many of which are for multiple products. This also extends to our existing client base reflecting a healthy appetite to add a combination of additional products and populations. In our health plan business, we are also seeing very strong growth both in terms of new distribution as well as penetration of existing relationships. This area continues to diversify with wins in new lines of business, populations and geographies both commercial and government programs. In this strategic growth channel, we recently expanded our relationship with a major Blues plan and continued to increase penetration into our largest client's books of business, where our sales velocity is healthy and on track with expectations. Another exciting development from the second quarter was our announcement in June of our strategic partnership with Vida Health, an early-stage company that provides virtual chronic disease management programs to members of large payer and employer group populations across the U.S. This minority investment is a great example of our stated build buy or partner strategy, accelerating our path to market with new products through selective deployment of capital. As we identified Vida, as a potential partner and got to know them through this process it became clear that their multi-condition coach-led model and overlapping key client base made them the right partner to enable us to deliver on our long-term strategic plan to offer chronic care solutions to our members. In 2020, we will deliver an integrated virtual care experience across platforms supporting acute complex and chronic care needs and addressing the mental health and physical health challenges that often go hand in hand. Before I turn the call over to Mala for a more detailed review of our second quarter financial results, I want to provide an update on some of our strategic investments. Our expansion into Canada is progressing on schedule with the product launch in the second quarter and the signing of our first client a TPA channel partner that will afford us significant access to the Canadian market. Here in the U.S., our integration work with United and the development of Medicare capabilities are both also progressing on schedule and I'm optimistic about the revenue impact these initiatives will have in 2020 and beyond. Finally, we're encouraged by the recent CVS announcement regarding MinuteClinic virtual visits expansion to eight additional states as well as the broader HealthHUB expansion. We're actively engaging with CVS Health leadership on their enterprise virtual care strategy, including potential applications of our wide range of services, as well as joint development areas in connection with their HealthHUB strategy. With that, I'll turn the call over to Mala.

Thank you, Jason, and good afternoon, everyone. I'm thrilled to have joined the Teladoc team and have been impressed with the energy and commitment of the leadership team as well as the broader Teladoc community. I'm inspired by our mission to transform the way people access and experience health care and our prospects for growth. I hope that my extensive experience in global financial leadership will add value to Teladoc. I'd like to echo Jason's comments regarding our continued strong execution of our 2019 objective and I will now review Teladoc Health's second quarter financial performance in more detail. Let me start our discussion with revenue. Total revenue increased 38% to $130.3 million for the second quarter as compared to a year ago. On an organic basis, revenue increased by 24% for the second quarter of 2019 consistent with our expectations. Revenue from global subscription access fees of $111.3 million, increased 39% compared to a year ago and accounted for 85% of our total revenue in the quarter. Additionally, U.S. subscription access fee revenue of $85.6 million continues to represent about three quarters of global subscription revenue, while international subscription revenue of $25.7 million account for the balance. Looking at the drivers of subscription access fees, we ended the quarter with 26.8 million U.S. paid members, up 19% compared to a year ago. As Jason said in his remarks, this reflects expansion in membership in seven out of the last eight quarters. Membership growth in the quarter was lower than expected as a result of a large expansion population from an existing health plan client that shifted its rollout from the second to the third quarter of 2019. 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-only access. We saw the second quarter 2019 PMPM increase to $1.06 from $1 a year ago, or $1.05 on a pro forma basis, when adjusting for the impact from Advance Medical. On a sequential quarterly basis, the PMPM increased from $1.03. As we have previously indicated, we typically experience a dampening effect on PMPM, when we onboard a large number of new health plan members as was reflected in our sequential quarterly trending in the first quarter of 2019. Visit fee revenue for the quarter increased to $19 million, representing growth of 29% compared to the prior year and constituted the remaining 15% of global revenue. As a reminder, our visit fee revenue is driven by our U.S. paid membership visits as well as individuals with visit-fee-only access. U.S. paid membership visits generated $15.1 million in the quarter, a 28% increase over the second quarter of 2018. This line includes revenue from general medical visits as well as other specialty visits primarily comprised of expert medical and commercial behavioral health services. The balance of visit fee revenue is primarily comprised of our visit-fee-only access. Looking at the drivers of visit fee revenue. As Jason mentioned, we had an excellent quarter with respect to visit volume with 908,000 visits an increase of 70% compared to a year ago. When adjusting for the impact of Advance Medical, visit volume for the quarter increased by 46% as compared to the prior year. Visits from our U.S. paid membership grew 40% to 610,000, which represents an annualized utilization rate of 9.1%, a 105 basis point increase over last year's second quarter. Approximately, 48% of our U.S. paid membership visits or 291,000 were paid visits and the other 319,000 were from our visits-included members. International visits totaled 244,000 in the quarter. To round out my discussion of visits we completed 54,000 visits for individuals with visit-fee-only access, a growth of 47% over last year's second quarter. We had 9.7 million individuals with visit-fee-only access at the end of the quarter down slightly from the previous quarter within our existing client base. Gross margins for the quarter were in line with our expectations at 68% compared to the 70.7% in the second quarter of last year. The year-over-year net decline in gross margin percentage primarily reflects product mix shift including the impact of the May 2018 acquisition of Advance Medical. As a reminder, our gross margins typically experience a sequential increase in Q2 as a result of seasonality. In terms of gross margin dollars, we generated $88.6 million in the second quarter compared to $66.9 million a year ago, representing a 33% increase. Operating expense in the quarter totaled $110.7 million, an increase of 30% from the $85 million in the second 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 $82.3 million or 63% of total revenue compared to $64.2 million or 68% of second quarter 2018 revenue. This 500 basis point improvement in the quarter relative to the prior year reflects our improved operating leverage including synergies while maintaining our marketing spend. EBITDA was a loss of $12.2 million for the second quarter of 2019 as compared to a loss of $10.1 million for the same period last year. Adjusted EBITDA increased to a positive $6.3 million for the quarter, which compares favorably to the adjusted EBITDA of $2.7 million from last year's second quarter reflecting our aforementioned ability to generate improved operating leverage. Concluding my commentary of the income statement. Our net loss in the quarter was $29.3 million compared to a loss of $25.1 million last year. On a per-share basis, our net loss was $0.41 for the second quarter of 2019 compared to $0.40 in the prior year. Turning to the balance sheet. We ended the quarter with $472.6 million in cash, cash equivalents and short-term investments as we have maintained our strong liquidity position while continuing to invest strategically in the business during the quarter. Our total debt as of June 30, 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 the $287.5 million 1.38 percentage notes that mature during 2025. I'll conclude my commentary with our expectations for the third quarter and the full year. For the third quarter of 2019, we expect total revenue to be between $135 million to $138 million, an EBITDA loss to be between $10.5 million to a loss of $12.5 million, adjusted EBITDA to be between positive $7 million to $9 million, total U.S. paid membership to be approximately 28.5 million to 29.5 million and visit-fee-only access to be available to approximately 10 million individuals. We expect total visits to be between 800,000 and 900,000 in the quarter and net loss per share to be between a loss of $0.40 and $0.42 per share, based on 72.3 million weighted average shares outstanding. For the full year 2019 our updated expectations are as follows: total revenue for the year between $538 million and $545 million; an EBITDA loss between $39 million and $45 million; adjusted EBITDA between positive $27 million and $33 million; total U.S. paid membership of approximately 29 million to 30 million members; and visit-fee-only access to be available to approximately 10 million individuals; we expect total visits between 3.7 million and 4 million; net loss per share to be between a loss of $1.52 to $1.60 per share, based on 72 million weighted average shares outstanding; and as we have said before, we expect to be operating cash flow positive for the first time in 2019. I look forward to getting to know you all over the course of the coming weeks and months. Let me now turn the call back to Jason for his closing remarks.

Thank you, Mala. As we conclude the call, I couldn't be more pleased about our momentum across the full breadth of our business. Clients globally see increasing value as utilization continues to grow across channels and populations and increasingly embrace the strategic value Teladoc Health's unique offering can provide. Looking to the back half of the year, we remain confident in our ability to deliver within our range, with this broad-based strength serving to buffer any new learnings as we implement large complex health plan business. Earlier this month, we gathered for our annual leadership meeting and I was struck by the energy and passion amongst our global leadership team. Driven by both external macro adoption forces, as well as the increasing strategic nature of their conversations with clients, the feedback from the team was resoundingly reaffirming of our global growth strategies and the quality of our operational execution. Their hard work and commitment are instrumental in our success and ensuring that we keep our promises. As always, thank you for your continued interest in Teladoc Health and our story. And with that, we'll open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Lisa Gill from JPMorgan. Your line is open.

Thanks very much. Jason, it's that time of the year to talk about the selling season. I appreciated the comments you gave on the call, but I'm just wondering if you can put some things into context. So talking about RFPs being up versus last year, a way to maybe quantify that. I know you talked about winning on multiple products and seeing a lot of engagement with existing clients. Anything else that you can just maybe give us? I know that you don't always like to give us a ton of color around the selling season. But as we think about this going into 2020 if you could just help to maybe frame some of this would be really helpful.

Sure, Lisa. Thank you for the question and I'm happy to give a little bit more color. I won't break with tradition, but I'll give you a little bit more. I talked about multiproduct sales and integrated offerings. At this point, this year we're at about four times the number of multiproduct or the volume of multiproduct bookings that we had last year at this time. So I think that really speaks to the attraction of the full scope of our offering. Similarly, with respect to RFPs, RFP requests for the full integrated offering of our solutions are up about 75% relative to last year. So I think that, both of those reinforce the strategy that we've laid out about a comprehensive offering and the commentary we've given over the last few quarters about the market moving in that direction. So, hopefully, that gives you a little bit more color on the selling season. I guess, the last thing I would say is we're seeing strength across all of our channels among all of our customers. So it is true among both large employers and the smaller employer and broker community. It's also true among health plans. It's true among hospitals and health systems and we're seeing it both domestically and internationally.

That's helpful. I always want more. And my follow-up would just be around United. You talked about it being on schedule. Can you just remind us what you anticipate for 2019? And you said, it will also go into 2020. Just want to understand what we're going to see come online in the back half of 2019.

Yes. So we are deep in implementation and launch planning. The teams are working actively together, both technically, operationally and in terms of marketing and communication. We will have some impact that we expect in 2019. The majority of the impact, of course, given the fact that it will launch in the back half of the year will be in 2020. But right now, we're all systems go, although, we're still not able to sort of size the opportunity for you.

Okay. Thank you.

Thanks, Lisa.

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

Good evening. Thanks for taking my questions. I guess, maybe the first one, just to follow up on your comments about the multiple products and the strength there. Can you give us some sense of the order? Is that second most common thing that people are attaching behavioral? Is it second opinion? If you could give us some color there that would be great.

Yeah. Right now, we're seeing expert second opinion or expert medical opinion as sort of the number two. But we're seeing the combined offering of general medical with behavioral health or general medical with behavioral health and expert services as the most rapidly growing set of combinations. So, a full integrated offering, so to speak. Behavioral health RFPs are up significantly. In fact, we've seen a 200% year-over-year increase in behavioral health RFPs through the first half of the year. So, I think the commentary in my prepared remarks about the growth in the adoption of behavioral health is not only about our growth in visit volume, but it's also about the tenor of the market. We were just at the AHIP Institute and behavioral health is one of the biggest topics of conversation and areas of focus for the health plans. We're also hearing the same thing from the employers.

Okay. That's great. And then maybe with David coming on board, he's obviously got somewhat of an international background. You've dropped global multiple times in your commentary. Can you talk about will his focus be disproportionately international? Just any color there would be great.

Yeah. I wouldn't say disproportionately international. I would say appropriately proportionally international. So, certainly, as we were going through the search, it was a significant plus to find someone who had international experience. As you know, Jamie, it's rare to find someone in the U.S. in the health care arena who has global experience. And so David's experience, both domestically and internationally, both technically operationally and commercially made him a great candidate. And we think he'll have an impact both here in the U.S. and abroad.

Okay. Thank you.

Thanks, Jamie.

Our next question comes from the line of Stephanie Damko from Citi. Your line is open.

Hey, guys. Thank you for taking my question. I just want to talk a little bit about the strong behavioral health growth that you guys had talked about before, and so as your thoughts on buy versus build to expand the channel and the further demographics.

Yeah. Thanks Stephanie. Behavioral health has been really strong in both the B2B arena as well as our better health direct-to-consumer business. Both are growing incredibly rapidly. And we see both, the population growing as well as visit volume and visits per user growing. On the behavioral health side, we feel really good about the fact that we're increasing the member tenure and retention. We've always talked about three major levers or metrics on that business: customer acquisition cost, member tenure or duration and lifetime value. And all three of those continue to go in the right direction. With respect to our B2B offering, we're seeing significantly greater adoption among employers, and really I would say outpaced growth in visit volume. That's very encouraging. And as you know, the visit pattern for that population tends to be multiple visits as opposed to episodic like our general medical visits are. With respect to build versus buy, we feel like we have a very strong offering there. If we were to go out and find a partner there or a strategic asset, it would probably be feature-oriented as opposed to going after a new demographic, because I think we have a good set of capabilities to go after the sort of target demographic at this point.

So, could we see the BetterHelp asset maybe evolving a little bit from more of a Gen Z product to a broader offering?

Yeah. I mean we're seeing the population who engages with BetterHelp expand pretty consistently. So, if you look at the distribution of the demographics it has expanded from what it was a year or two or three ago as the BetterHelp team has continued to seek new channels for customer acquisition.

That's it for health. Just one quick housekeeping one, could you kind of give us an update on the BetterHelp growth trajectory for the quarter?

So, we don't generally break out BetterHelp by itself. What we've said historically was that our -- or at the beginning of the year, we said we expect our behavioral health business to grow by more than 50% this year, and we are very much on target to do that.

All right. Well, thank you so much, and welcome to the main team members.

Thank you.

Our next question comes from the line of Sean Wieland from Piper Jaffray. Your line is open.

Hi. Thanks. On your visit-fee-only business, it looks like the membership was a bit lighter, but the visits were quite a bit stronger. And just wanted -- I know it's not hugely impactful to the total revenue, but just wanted to see if you can call out anything there.

Yes. I'll start, and if Mala has anything I missed, she can add some color. In that segment, there are big populations and so we see natural expansion and contraction in those populations with hiring with membership, et cetera. Obviously, the size of the membership doesn't have any impact on our revenue, because there's no subscription fee associated with it. I think you point out a good thing Sean, which is membership or population has decreased and visits volume has increased pretty significantly. I think that that is attributed to where we rollout our engagement sciences like with the Aetna fully insured population we're increasing utilization so to speak. And where we act more like a consultant to our clients like in the FEP population, we're seeing significant growth in visit volume there. Those have also gone hand-in-hand with expansion of the services that we offer, meaning rollout of behavioral health and dermatology along with general medical. So we think all of that is very positive. And as we said we're a little less sensitive to the population. Mala, I don't know…

Yeah. I think you've captured the highlights. It's a small part of our overall visit volume as you saw in our prepared remarks. The members -- the individual base is there's some natural attrition in it, nothing more than that. And I would say we are really pleased with the momentum on that overall.

All right. Thank you. And then in the behavioral business you mentioned improved member retention metrics. Can you maybe put any numbers around that specifically in behavioral? And then any commentary in general around member retention across the broader business.

No. I mean I was really speaking about the BetterHelp business. I'm not going to quantify the improvement that we've seen. But we consistently do test and control populations in order to figure out what member features and member experience components drive better member retention. And we have found some things that have been very successful and expanded those to the full population. Member retention isn't really the same kind of metric for our broader population. I guess, maybe what I would say Sean is, we're seeing consistent visit patterns to what we saw last year. So in the first quarter we were about 50/50 for general medical visits in terms of new users versus returning existing registrants; and in the second quarter about 60/40 where it's 60% of the visits are coming from repeat users and 40% from new users. That's almost identical to what we saw last year. I think the good news there is that we're both seeing adoption and repeat utilization from our existing members, but we're also bringing in a substantial number of new users. And that creates that sort of flywheel that builds on itself.

Thank you very much.

Thanks Sean.

Our next question comes from the line of Ryan Daniels from William Blair. Your line is open.

Hey guys, thanks for taking the question. Jason one for you. You talked about the volume of multiproduct bookings. I think up about 4x year-over-year. And I'm hoping to get a little bit more clarity on what that means from a average contract size. I know that will clearly vary based on who the contract's with and the size of perhaps the employer group. But just in general, what's the average uptick in the sales amount for the larger contracts or multiproduct contracts?

So, Ryan it's a good question. I think what you're getting at, is it going to drive up our average PMPM if we're selling multiple products into that population? Is that right?

Yeah. That's a fair way to look at it.

Yeah. So the answer is it will, but it depends. But the magnitude is it depends on what the product combination is, right. So average deal size in and of itself is overall up as we look at our work as are pipeline and bookings. So, average deal size is up versus last year. Average PMPM we see as being in line to up. And the magnitude of it being up is really dependent, on which product combination you're talking about right? So behavioral health has a smaller incremental PMPM than Expert Medical Services for example.

Okay. Okay. That's helpful color. And then as my follow-up, just any update on Virtual First. I mean, you kind of talked about that a little bit or alluded to it in some of your contents or prepared comments, but just curious how that's rolling out and what demand for that specific solution looks like going forward? Thanks.

Yeah. Thanks, Ryan. Virtual First is very exciting. We're having high level discussions with big plans and employers across the country who are trying to figure out what a virtual primary care strategy looks like, what a Virtual First strategy looks like, what a virtual-centric plan design looks like, how they incorporate bricks and clicks, how they take advantage of our capabilities in a virtual Center of Excellence model. And the whiteboard sessions are starting to solidify into real plans around plan designs, implementations and rollouts. So we feel good about it. I'm not going to size what that's going to look like for 2020. I think it will be a ramp over the next several years. But I do think that there will be some meaningful proofs of concepts over the 2020 plan year.

Okay. Thanks again.

Our next question comes from the line of Richard Close from Canaccord Genuity. Your line is open.

Great. Thanks for the questions. Congratulations and welcome Mala. Jason, I was wondering if you could talk a little bit about the growth in Best Doctors in Advance Medical or Advance Medical. It's been about a year now. Both those growth rates were, obviously, below the core growth. You talked about second opinion having a high attachment rate, it sounds like in this multiproduct. But can you talk about directionally, have you been able to accelerate the growth in both those businesses?

Yeah. Richard, thanks for the question. When we look at the Best Doctors business, I don't even think about it as a Best Doctors business anymore. We're fully integrated in terms of our go-to-market strategy, our operations and our selling and RFP process. And so I don't really pull those apart anymore. We feel good about the growth of our expert second opinion business. But just as an example with Best Doctors, that's what took us into the Canadian market, which gave us the platform on which to roll out Canadian telemedicine, and then -- because it's with similar clients. So we're selling that it's -- cross-selling that into existing legacy Best Doctors' clients who were demanding it. So there are, I would say, revenue synergies both ways on that business. And then if you look at the Advance Medical business that has revenue synergies on the legacy Best Doctors business, because we've been out in, especially the U.K., but also in other parts of Europe selling the full set of Advance Medical capabilities into the legacy Best Doctors' clients. So I would say qualitatively, we're very pleased with the growth across the legacy set of clients and capabilities, but we see it as a full portfolio rather than individual pieces.

Okay. That's helpful. With respect to Vida Health, I was wondering if you could just dive into that a little bit deeper, how you see that rolling out. I don't know if you want to share economics or anything like that but just exactly how is the combination or integration going to work? And how should we just think about that?

Yeah We're really excited about Vida. We've talked for a long time about going after the chronic care market offering remote or virtual chronic care services as part of our full portfolio of services, so that we can really take care of the end-to-end continuum of care. And Vida really is a strong platform to do that. I've said multiple times that I'm less interested in single-condition point solutions and more interested in platforms that are multi-condition to go after the chronic care market. And Vida really presents that. They're early stage still and so we felt like it was the right strategy to go with a minority investment and a commercial relationship. We expect to do the integration over the remainder of this year and the beginning of next year, so that we can go to market with a seamless partnership. And we expect to see the fruits of that in 2020.

I will point out this is another example of us being very consistent with our partnership strategy and our buy strategy. We've said it before that there are certain areas that we are focused on and Vida is a great example of sort of being consistent to that.

Okay. Thank you.

Thanks, Richard.

Our next question comes from the line of Matthew Gillmor from Baird. Your line is open.

Hey, thanks for the question. Following-up on some of the selling season comments. Jason you've mentioned the big increase with RFPs that included the full integration. Does that limit the number of telehealth vendors that are qualified to respond to those RFPs, so you'd expect your win rate to improve over time, or are there enough vendors with integrated offerings at this point where that competitive set looks about the same on these RFPs?

The answer is yes. It certainly works in our favor. We're seeing better win rates, I think as we indicated bigger deal size. And I think bigger deal size comes along with what we talked about with several Fortune 500 companies coming to us. The more sophisticated, the more strategic and the broader their view of virtual care, the more likely they are to select us as really the only player who can offer that full set of capabilities. So it definitely plays in our favor.

Got it. And then on the membership metric and sort of how that ties into the revenue guide. I think Mala had mentioned there was a payer that was pushed from 2Q into 3Q that explains sort of the sequencing of the membership. So maybe just help us understand kind of what drove that. I assume that was a client issue. And then it didn't seem to impact the revenue at all so just kind of give us a sense for sort of why that didn't impact the revenue if there's something that offset it?

Yeah. So, frequently when we roll out these very large payers; number one, they don't roll out all at once. They usually roll out in stages. And number two, the bigger they are, the more likely there is for a little bit of shifting in the launch dates. It did impact our membership, but as you point out, it really didn't impact our revenue. In fact, we were at the high end of the range. I think that really speaks to the diversification of our revenue model, the different customer channels and the strength that we're seeing across all of those channels. We had this situation last year with respect to the TRICARE business and we didn't miss a beat with respect to hitting our numbers. Again, we saw this -- a little bit it's a shift of one quarter, so it's not a massive shift. But I think it really does speak to the strength of our broad-based set of solutions and the diversification of our business.

Yeah. The thing I'll add to what Jason said is, we have talked a little bit about how not all of our contracts start in 1/1 as they used to, right? So you will see sort of the on-boarding of clients' revenue through the year. And that's -- as we exit the year into 2020, that should give us some wind in our sales.

Got it. Thank you.

Thanks Matt.

Our next question comes from the line of Donald Hooker from KeyBanc. Your line is open.

Great. So, maybe just a few last items. Obviously a lot of questions have been asked. I mean maybe just an update on TRICARE and maybe the pending Aetna renewal. Kind of any kind of confidence or anything incremental that give us some confidence around that?

Yes. So with respect to Aetna as I've said before, we have a great relationship I would say, an improving relationship and increasingly strategic relationship with both the Aetna side of the house and the CVS side of the house. And increasingly we're having strategic discussions where everybody is in the room together. So I have every expectation that we will be partners with Aetna and CVS for years to come. With respect to the TRICARE business, really no significant change in terms of when the expansion is there, it's -- I think we've executed well on the pilot. And now it's out of our hands in terms of if and when that rolls out larger. My expectation is that it will but I certainly can't control that buyer.

Super. And maybe just one last one, the other area I guess maybe unless I missed it I don't think it was touched on. But the provider, the hospital -- the direct-to-hospital business had been a big grower in prior years. Has that started to sort of stabilize out? Has that market been penetrated? Where do you see that going from here?

No. It really -- it didn't make it into the prepared remarks only because we're time-limited at some point and we've had so much strength in all the various channels of our business. We talked about a fair amount last quarter with the Cincinnati Children's rollout. No it's growing really well. We continue to see strong success there. We see hospitals continuing to embrace virtual care across the clinical service lines of their business and we see excellent opportunity there. I think bringing on David with his background among the providers and working for a large portion of his career at Cerner, I think it's just another way that we reinforce our strength in that market.

Got you. Thank you very much.

Our next question comes from the line of Mohan Naidu from Oppenheimer. Your line is open.

Thanks for taking my question. Jason, one on your investments in product roadmap. Are you looking at any potentially AI-driven solution say for Triage or maybe enhanced interaction that members have with your platform that could overall improve your offering?

Yes. So thanks Mohan. We rolled out our virtual assistant the Teladoc Health virtual assistant last year and that's continued to expand. That's essentially a AI-driven natural language processing tool that enables a consumer to interact and get guided to the right line of care from us or the right service line from us. That's particularly important where we have integrated offerings with multiple clinical service lines, so that the consumer doesn't need to know where they are selecting, but rather they just have to answer some questions and get automatically directed in that way. We continue to look at the AI diagnostic tools. We obviously work with IBM Watson on our Oncology Insights program. We see AI today as a tool to assist the physician, I would call it augmented intelligence rather than artificial intelligence. So augmenting the physician's diagnostic capabilities and resources, but not replacing the physician at this point. Most of the things that we've looked at and we pay a lot of attention to the market we think are still too probabilistic not definitive enough and not user-friendly enough. And that's been most of the feedback in the market thus far. But certainly we keep our ear to the market and make sure that we see just about everything out there in case we come across something that we believe has legs.

Thanks for that color. Maybe one quick follow-up on the UnitedHealth implementations. Do you have lives in your guidance, I guess the membership -- in the membership guidance that you're expecting in second half?

So we do not have United, included in our membership guidance. Obviously we are incredibly respectful of United in terms of their rollout and their communication and so we didn't want to get ahead of our skis and include that in the membership guidance. But just to be clear, we do have the revenues and the cost for the rest of the financials in our overall guidance.

Okay. Thank you so much.

Thanks Mohan.

Our next question comes from the line of Allen Lutz from Bank of America.

Thanks for taking the question. Jason you mentioned behavioral health RFPs were up about 200% year-over-year. How does that compare with the RFP volume growth last year? And then is your win rate improving year-over-year?

It's a good question. I don't have the year-over-year from 2017 to 2018 for behavioral health RFP volume so I'd have to circle back with you on that one. Certainly something we have the data, I just don't have it in front of me. It was certainly up last year relative to the year before. I just don't have the magnitude. And then the win rate I would say across the board our win rate is improving. As I said it's one of those things where you look for areas of strength and areas where maybe we could be doing better. And in fact across all of our major customer channels we're seeing improvements year-over-year. We're seeing strong both RFP volume and strong win rates.

Great. And as you think about the partnership with CVS, can you talk about what the marketing strategy is for that? And can you talk about, how the telemedicine offering should be integrated with MinuteClinic basically what the go-to-market strategy is for that?

Yes. The -- we're pleased as I said in my prepared remarks to see really the first time that CVS has publicly promoted the virtual care service. And they did that with a press release and then there were some articles written about it. They have not really yet begun the significant marketing, direct-to-consumer marketing of the virtual visits. And I don't really have a time line for when they're going to do that. The way that the deal is structured, they are responsible for the marketing and communications around that program specifically it's branded -- it's private labeled for them. And obviously that means they're in control of the marketing and promotion. With respect to the integration with the MinuteClinics, I think it's going to evolve over time. So, the early structure uses our physicians. The relationship contemplates using their nurse practitioners on our platform in addition to our physicians. So, there's really a seamless workforce that uses their resources and our resources over time. I think the bigger opportunity comes down the road and Troy Brennan talked about this at our Investor Day when they can virtually bring in our specialists into maybe the evolved health hubs rather than the traditional MinuteClinics in order to treat the chronically ill and supplement the nurse practitioners that they have on-site so that they can take advantage of a remote workforce without necessarily having to staff them on site in those health hubs. So, we're really excited about that opportunity as well as thinking bigger about what can be done in a bricks-and-clicks environment between the CVS physical locations and the Aetna-insured population.

Great. Thank you.

Thanks Allen.

Our next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is open.

Good afternoon. Thank you for taking the questions. Most of mine have been asked, but I'll maybe hit you with this one. And I realize that you've been focused on driving topline growth and expanding into new markets both from a solution standpoint and geographically. But I noticed some -- a little bit more commentary about profitability this quarter. And I'm wondering if maybe Mala and David some of their experiences and skill sets will allow you to maybe find incremental leverage as they come on board and kind of get more engaged with the overarching platform? Thank you.

So let me start with sort of the bigger picture and then Mala can give a little bit more commentary on our path to profitability. I would say first and foremost, we still believe that there is a massive opportunity in front of us. We have a virtually unlimited market opportunity and we're by far the leader. And so, we're going to continue to focus first on growth and expanding the role and presence of virtual care in the health care system. Having said that, we also have consistently made progress with respect to the financial performance of the company, first focusing on getting to adjusted EBITDA positive; second getting to cash flow positive. And we are and our board is very focused on making continued financial progress in terms of the bottom line and expense side of the business. Maybe Mala, you want to give a little more color?

Yes. So what I would say is listen, we are on the path and focused on getting to and delivering strong adjusted EBITDA. This quarter was a nice progress on that relative to the last quarter. And as we have said, we expect to be cash flow positive this year. We are pretty focused on that as well. And I would say the way to get there if I were to think of the levers, it's about making the right investments with efficiency in driving the topline and the revenue growth globally, making sure that we are managing the growth margins appropriately as a portfolio. And the third thing I would say is we have demonstrated the record and we will continue to focus on how we can get at operating leverage. So it's the balancing of all of those levers, revenue growth, margins, investments, and how we can get at the expense leverage in my view which will drive the adjusted EBITDA and the cash flow that we are really focused on.

Understood. Thank you, very much.

Thanks Matt.

Our next question comes from the line of Stan Berenshteyn from SunTrust. Your line is open.

Thanks for squeezing me in here. Maybe just a quick question on Rite Aid and Amwell. They recently announced a partnership I guess similar to the one you have with CVS. I was just curious, if you could comment on whether you participated in RFP for that and if you had any comments on how that offering compares to your partnership with CVS? Thanks.

Yes. So Stan, I read something yesterday maybe about a Rite Aid and InTouch Health partnership, but I haven't read about anything with Amwell. So I can't speak to a...

It was InTouch

So I won't say what we've competed in or not competed in. My understanding is that that's a -- more of a physical location and kiosk strategy. And so we were not involved in that process.

Got it. Thank you.

Thanks Stan.

Our next question comes from the line of Steve Halper from Cantor Fitzgerald. Your line is open.

I just wanted to ask first some commentary around your Medicare, obviously, big opportunity. The plans presumably put all their benefit packages together. How did you fare during that process with the plans? And what's the outlook for 2020 contribution?

Yes. Thanks Steve. We continue to work with the plans. A lot of the plans put -- placed solders in their bids. We're continuing to work with them. And what we've said is we think that we'll be able to give commentary when we report in October as by that point, we will be sort of the decisions will generally have been made. I won't say they'll all be made, but generally have been made for the January 1 2020 rollout. In the meantime, we continue to have productive discussions and bids with our both our existing clients in the health plan space as well as new clients who we're going after in the Medicare Advantage space. So, I feel good about it. I've also said consistently that I don't think this is going to be a big bang where all 20 million members come online for virtual care January 1st, 2020. That never really happens. So, I think it will be a multiyear-phased rollout across the MA population.

Great. Thank you.

Thanks Steve.

Our next question comes from the line of Daniel Grosslight from SVB Leerink. Your line is open.

Hi, thanks for taking the question. I was just curious as you see more plans adopting telehealth are you seeing them really incorporating more shared savings into their pricing models or is it your typical PMPM plus visit fee?

Yes, I wouldn't say that we're seeing a preponderance of shared savings at this point. I think there's a possibility that we see more of that as we move toward the Virtual First environment or a virtual primary care environment where we're playing a materially different role. But at this point, we only have a few what I would call pay-for-performance contracts. We tend to perform incredibly well in those. So, actually I like those contracts. But we don't have a ton of them.

Got it. Thank you.

Our next question comes from the line of David Windley from Jefferies. Your line is open.

Hi thanks for taking my question. It might be a version of the prior question but I was just thinking about visits per paid member and the opportunity to increase that and capture -- essentially turn nonusers into users of virtual. And I think the restructuring of your Aetna compensation was intended to drive some of that. I wondered if that has been successful if you can provide any metrics that would compare how that visit per member metric might look in a structure like that versus the more traditional PMPM structure?

Yes. Our Aetna contract has performed very well. It was at our expectations or maybe slightly above last year which is really the first year of the restructured contract. And this year it's up again. I would say more generally speaking our utilization rates for the second quarter is up about 105 basis points over last year. And so that really speaks -- we define visits over population as utilization rate. And so when you annualize our second quarter results, we were up about 105 basis points over the second quarter annualized last year. So, I think that's probably the best way to measure visits per user. And we see consistently improving results there. You might recall that in the first quarter we were only up about 10 basis points as we were up against a tough comparable in the flu season and we also had just onboarded over three million new members in the health plan space. So, it's nice to see that expand to 105 basis points in the second quarter.

I'm sorry Jason so that's an overall statement not a net-net specific statement, correct?

That's correct. Yes, that's about our whole book of U.S. paid members.

Yes. And would you expect that utilization rate -- I mean I guess going back to -- does a more highly visit-incented maybe shared savings if that's the right phrase structure drive faster utilization increases than a traditional model?

We've performed -- I'm not going to give specific Aetna utilization rates. What I would say is that we've seen very strong results in our pay-for-performance contracts. And generally speaking, those have grown their utilization rates faster than our general book of business. So, certainly when we are -- when we have greater incentive to drive utilization and we can spend against that using our engagement sciences we tend to drive better results. So, I think the answer to your question is yes, but I would look at it as our whole pay-for-performance block of business rather than a single client.

Got it. Understand. Thank you.

Our next question comes from the line of Charles Rhyee from Cowen. Your line is open.

Yes, thanks for squeezing me in here. I guess can I ask about the guidance here for the full year? Presumably as we think about adjusted EBITDA when we think about the third quarter range is that fair to think that we're -- given where the revenue number is set for the guidance are we -- is that right to think where is the onboarding cost as we've had the sort of mid-year starts on some customers particularly maybe the one that we talked about earlier -- that was talked about earlier that was delayed that was pushed out into 3Q? And just to confirm has that client been on-boarded? Thanks.

So the way, I would think about it is if you look at our adjusted EBITDA for the quarter in Q2, and you look at the ramp that we have in revenue for the back half of the year, and you see what it is in Q3 and Q4. I would look at those two together and you will understand how we have got to the guidance we have gotten to for Q3 and also for the full year.

So then the pickup in the fourth quarter is really that – so, I mean, it's right to think that we are having onboarded costs that are rolling off as we collect more in the fourth quarter. But when we think about the – is it more in the gross margin in the COGS would you say, or is it more in some of the other OpEx lines as we're modeling out? How is the best way we should think about that?

Yep. So the on-boarding cost I would think generally is in our advertising and marketing. That's where we would generally have a lot of our on-boarding cost and that has been factored into our guidance, as we've thought about the EBITDA for the rest of the year. And so what I would say to you is, think of the revenue ramp that we have in the back half. Our gross margin expectations are similar to what we have said before. And then think about how that flows through into the EBITDA guidance for Q3 and Q4. I don't want to get more specific than that.

That's helpful. And Jason, just one last question for you, you talked earlier in your comments about more interest in sort of visit included type contracts, any – is there maybe not in the total book but as you think about the selling season currently is that more than half, or is that maybe kind of like how much of new businesses are clients looking at that kind of model versus the more PMPM-plus visit?

It's customer channel-specific. So at the smaller end of our market, we see visits included. In the international markets we see visits included. Health plans don't really want to go visits included, nor do very large employers. So – and then mostly on a DTC basis, its visits included. So it's very much channel-specific. And we're not seeing so much change in the characteristics of those different customer channels.

Okay. Great. Thank you.

Thanks, Charles.

Our next question comes from the line of Jailendra Singh from Credit Suisse. Your line is open.

Thanks a lot. Hello, everyone. Quick clarification on United contract. You did say that the revenue from that contract is included in your guidance for second half. Do you expect that contract is it the annual run rate in second half, or is it more of a ramp which continues through 2020?

So I would view that as a ramp. We're going to – we expect to start and launch that this year. But as with any new client, especially in the health plan space utilization and revenue grow over time. And so I would expect that to ramp. So I wouldn't call our fourth quarter run rate a full annualized expectation.

Okay. And then I also want to better understand your long-term pricing expectations. At your last Investor Day, you talked about a target of $0.05 to $0.10 expansion on your pricing. Clearly, you also mentioned that signing up these new members, new clients they have negative impact on pricing, but then you see positive benefit from up-selling and cross-selling your services. Help us understand has it been – has there been any change in your long-term pricing expectations based on what you're seen this year or from last few quarters?

No. No, real change in our outlook and I think our step-up of $0.03 sequentially is a good example of that where you did see a dampening in the first quarter but then in the second quarter where we added 100,000 members to our total U.S. paid membership, you saw the sequential step-up of $0.03. And then you'll continue to see a little bit of dampening when we onboard significantly large populations. But I think also we gave some numbers in the first quarter, where if you subtract that large population of health plan members you would see exactly that same trend. So, absent significant mix changes, which we love if they come-in and in very large clients you should expect to see that similar trajectory.

Okay. And last thing just one follow-up, there was discussion around Advance Medical impact. I mean, should we expect any impact from that in – on your organic growth trends expectations for second half of 2019 depending on how Advance Medical is doing? Because that will be in your organic growth numbers for second half.

Yeah. Jailendra, what I would say to you is we are really pleased with the momentum and the progress on Advance Medical. And I would say still think of us from an organic growth perspective overall in the 20% to 30% that we have talked about before. So, no, change to that outlook.

Okay. Thanks a lot.

And there are no further questions at this time. I will turn the call back over to Jason Gorevic for any closing remarks.

Thanks so much everybody for tuning into the call and the great questions. Welcome to the new team members David and Mala. And we're really excited about the performance in the second quarter and even more excited about the future looking forward. So with that I think we'll end the call.

And this concludes today's conference call. You may now disconnect.