Teladoc Health, Inc. (TDOC) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon. Thank you for attending today's Teladoc 2022 First Quarter Earnings Conference Call. My name is Nate, and I will be your moderator for today's call. All lines have been muted during the presentation portion of the call with an opportunity to questions at the end. [Operator Instructions], I'd like to now pass the conference over to our host, Patrick Feeley, with Teladoc. Patrick, please go ahead.

Thank you and good afternoon. Today, after the market closed, we issued a press release announcing our first quarter 2022 financial results. This press release and the accompanying slide presentation are available on the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Jason Gorevic, Chief Executive Officer; and Mala Murthy, Chief Financial Officer. During this call, we will also provide our second quarter and full year 2022 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 would now like to turn the call over to Jason.

Thanks, Patrick. Good afternoon and thank you for joining us. Well, I'm pleased to report that we met our guidance for Q1 revenue and adjusted EBITDA. As you saw in our earnings release this afternoon, we revised down our revenue and adjusted EBITDA outlook for the full year. Although I'll spend most of my prepared comments discussing how the market dynamics we are currently seeing in the direct-to-consumer mental health and chronic care markets have influenced our revised outlook for 2022, I do think it's important to do so in the context of our broader business. Coming out of the first quarter, Teladoc continues to be the leading brand in the digital health space. Our unmatched scale, solid fundamentals and strong balance sheet with over $830 million in cash leaves us well positioned to build upon our market leadership by delivering innovative new solutions to transform the way consumers interact with the healthcare system. We remain confident in and committed to our whole-person care strategy. And our interactions with clients and prospects confirm that it is the future of digital health. As the industry matures, we're seeing our most progressive clients embracing our integrated approach for their healthcare needs. I'll speak to that momentum later in my remarks. But what's notable is that we continue to see growth across all our services even if the level of growth in some areas is lower than our prior expectations. As you think about the road ahead for Teladoc Health, we remain committed to making necessary ongoing investments and delivering on innovation because the market is moving fast. Achieving full integration of our member experience and delivering several last-mile enhancements to our Primary360 offering remain high on that list. We're certainly disappointed to lower guidance today. However, we continue to believe we're the best positioned company in healthcare and technology to transform the healthcare experience. With that, let me spend some time walking through what led us to reassess our outlook for the balance of 2022, starting with our direct-to-consumer mental health service, BetterHelp. Over the past several weeks, we've seen lower-than-expected yield on marketing spend for BetterHelp, which is a reversal of the trends we experienced exiting 2021 and in the early part of 2022. One example of this is paid search advertising, where we've seen a notable increase in rates for keywords associated with online therapy. We believe the biggest driver of this dynamic is smaller private competitors pursuing what we think are low- or no-return customer acquisition strategies in an attempt to establish market share. Some of those same providers are also exploiting the temporary suspension of certain regulations associated with the national health emergency concerning the prescription of controlled substances. We believe these strategies are unsustainable in the long-term. This dynamic is likely to persist at least throughout the remainder of this year, however, resulting in growth and margin contribution from BetterHelp that is below our expectation in February. The good news is that unlike smaller market participants, we operate at a scale that allows us to continue investing in the direct-to-consumer market to drive both strong growth and returns. And we can drive growth while remaining disciplined in our member acquisition strategy. Furthermore, our push to diversify customer acquisition channels in recent years has left us better positioned to operate within this environment. No single channel accounts for more than 25% of newly acquired members for BetterHelp. So for example, we are less reliant on paid search as a source of new members than in the past. While the dynamics in the direct-to-consumer market were only a modest drag on our first quarter revenue, given the persistency of these trends over the past several weeks and the broader economic backdrop, we've incorporated this updated view into our forward outlook, including an assumed 10% lower revenue yield per dollar of ad spend for the full year. To be clear, we continue to expect strong growth and margin contribution from BetterHelp, albeit below our prior expectations. Our revised revenue guidance range for 2022 assumes BetterHelp will grow in the upper half of our long-term target range for mental health revenue growth of 30% to 40% per year. In chronic care, we have more clarity on the cadence of onboardings from the large health plan client that we discussed last quarter. We remain on track for population launches with this client and other recently signed deals over the course of 2022. However, we're also seeing our chronic care sales pipeline developed more slowly than anticipated. Last October, we discussed two trends in the marketplace that we saw leading to an elongated selling cycle. The first was in the employer market, where we saw benefit managers focused on COVID and return to work, which we felt was contributing to a longer decision-making process. The second was a large pipeline of health plan deals that were simply harder to predict when it comes to timing given the size and complexity of those clients. At the beginning of this year, we were encouraged by very strong fourth quarter bookings and a robust late-stage pipeline. However, as we progressed through the first part of the year, we're seeing clear signs of the slower bookings pace continuing. In addition to the factors we discussed last fall, we're seeing clients inundated with a number of new smaller point solutions, which has created noise in the marketplace. While in the near term we expect this noise to persist. We believe our broad integrated approach to virtual and digital care delivery is a competitive advantage that positions Teladoc to be the long-term winner in the space. In the meantime, we are in the process of taking a closer look at some of these forces that are impacting the near-term conversion of pipeline to revenue, and we'll continue to make adjustments as necessary to address them. So while the pipeline is large and as of the end of the first quarter, the late-stage pipeline has grown significantly as compared to the first quarter of last year, we're not seeing deals progress at the pace that we expected. It's still somewhat early in the selling season, but based on how the pipeline has developed over the first four months of the year, we felt it was prudent to update our forecast. Our revised 2022 guidance assumes chronic care revenue growth on a percentage basis in the low to mid-teens. When comparing the impact to guidance from the items we've just discussed, approximately three quarters of the reduction to our 2022 revenue outlook is driven by lower expected growth at BetterHelp with the remainder primarily attributed to the lower expected revenue from our suite of chronic care products. For adjusted EBITDA, approximately two thirds of the reduction is driven by lower yield on advertising spend from BetterHelp. The remainder of the revision is driven primarily by our lower chronic care revenue outlook as well as a modest increase in our assumption for wage growth due to higher inflation as we grow our headcount in technology and development. As a result of these updates, we now expect revenue of $2.4 billion to $2.5 billion and adjusted EBITDA of $240 million to $265 million for fiscal year 2022. We believe these ranges appropriately capture the reasonable risks and potential upside. We are not providing today any guidance with respect to periods after 2022, and we're evaluating whether there will be effects to our long-term revenue growth outlook. As I said at the top of the call, despite the change in our 2022 outlook, we remain confident in our position as the leader in the digital health space. Our key competitive advantage is our market-leading depth and breadth of capabilities. And those capabilities underpin our strategy to bring broad integrated solutions to the market that meet the full set of needs for clients and members. During the first quarter, we continue to make progress against that whole-person strategy. A key linchpin of our ability to deliver upon the promise of whole-person virtual care is our market-leading virtual primary care product, Primary360. Primary360 is designed to act as the front door to care for our members. It opens pathways to Teladoc's own ecosystem of digital and virtual solutions and coordinates care with third-party providers within a health plan or employer's network when needed. We continue to be excited about the momentum we're seeing in Primary360. Last quarter, we talked about a growing pipeline of Primary360 deals. And over the past two months, we've made important progress moving deals through the pipeline. We've seen particularly strong interest from our health plan clients, many of whom are looking to combine Primary360 with our whole-person suite of telehealth, mental health and chronic condition support to create Virtual First care models for their members. I expect to have additional notable Primary360 deals to announce as we progress through the rest of the year as health plans and employers look to provide their populations with innovative solutions that make primary care more convenient and accessible. We also recently announced an important new partnership with Northwell Health, unseating an incumbent competitor in the process. Many of you in the New York metro area are familiar with Northwell as New York's largest health care provider with 22 hospitals and over 800 outpatient facilities. Northwell's virtual enterprise strategy will leverage our single integrated platform that spans consumer and provider-to-provider applications both within the 4 walls of Northwell's facilities for high-acuity and emergency care and directly into the patient's home. Northwell will also leverage our partnership with Microsoft to streamline clinical collaboration and communication among Northwell clinicians. This deal underscores the value of our Microsoft relationship and demonstrates the power of our integrated platform, which allows clients to operate within one platform for all their virtual care use cases. With that, I'll turn the call over to Mala for a review of the first quarter and our guidance.

Thank you, Jason. And good afternoon, everyone. During the first quarter, total revenue increased 25% year-over-year, to $565 million substantially all of that growth was organic. We ended the quarter with U.S. paid membership of 54.3 million members, an increase of 680,000 members over the fourth quarter. Individuals with visit fee only access was 25.2 million at the end of the first quarter, representing an increase of 950,000 individuals. The total number of our unique members enrolled in one or more of our chronic care programs was 731,000 as of the first quarter, an increase of 78,000 enrollees over the prior year's quarter. 27% of our chronic care members are now enrolled in more than one program, up from 15% in the first quarter of 2021. This helped drive total chronic care program enrollment to over 900,000, an increase of more than 140,000 or 19% over the prior year. Average U.S. revenue per member per month was $2.52 in the first quarter, up 21% from $2.09 in the prior year's quarter. Visit fee revenue for the first quarter of $68 million increased 12% year-over-year. During the first quarter, we provided 4.5 million visits through our network of clinicians, up 35% over the prior year's quarter. The biggest contributor to this growth was strength in mental health utilization. Adjusted EBITDA was $54.5 million in the first quarter compared to $56.6 million in the prior year's first quarter and at the high end of our guidance range. As a reminder, our first quarter 2021 adjusted EBITDA included a $6.9 million benefit related to purchase accounting adjustments. As discussed on last quarter's call, it's typical for us to see a ramp-up in advertising spend and a lower margin in the first quarter as we take advantage of lower media pricing following the conclusion of the more expensive holiday season, and that was the case this year. It's important to note that in 2021, this seasonality was less pronounced due to a weaker advertising market during the onset of the pandemic. Net loss per share in the first quarter was $41.58 compared to a net loss per share of $1.31 in the first quarter of last year. Net loss per share in the first quarter includes a non-cash goodwill impairment charge of $41.11 per share or $6.6 billion. The goodwill impairment was triggered by the sustained decline in Teladoc Health share price with the valuation and size of the impairment charge driven by a combination of recent market-based factors, such as an increased discount rate and decreased market multiples for a relevant peer group of high-growth digital health care companies as well as updates to our forecasted cash flows consistent with the revised guidance disclosed today. Also included in net loss per share was stock-based compensation expense of $0.38 per share and amortization of acquired intangibles of $0.31 per share. We ended the quarter with $839 million in cash and short term investments on the balance sheet. Now turning to forward guidance. For the full year 2022, we expect revenue to be in the range of $2.4 billion to $2.5 billion, representing growth of 18% to 23% over the prior year. We expect total U.S. paid membership of 54 million to 56 million members, representing growth of 1% to 5% year-over-year with the remainder of revenue growth driven by expanding revenue per member. We expect total visits in 2022 to be between 18.5 million and 19.5 million visits representing growth of 20% to 27% over the prior year. We expect adjusted EBITDA in 2022 to be in the range of $240 million to $265 million representing an adjusted EBITDA margin of 10% of 10.6% compared to a 12% margin in 2021 after normalizing for last year’s purchase price accounting benefit. As discussed the decline in consolidated margin is primarily a function of lower expected results for BetterHelp and our suite of chronic care products and a modest increase in expected wage rate inflation. For the second quarter of 2022, we expect revenue of $580 million to $600 million, representing growth of 15% to 19% over the prior year’s quarter, as discussed on our last earnings call, in contrast to prior years, we continue to expect the cadence of new chronic care enrollees to be more heavily weighted to the back half of the year. We expect total U.S. paid membership in the second quarter of 54 million to 55 million. Total second quarter visits are expected to be between 4.4 million and 4.6 million visits representing year over year growth of 20% to 26%. We expect second quarter adjusted EBITDA to be in the range of 39 to $49 million. The lower expected sequential adjusted EBITDA in the second quarter is primarily a function of a lower contribution from direct-to-consumer mental health, and increased engagement spending in support of new chronic care population launches. With that, I will turn the call back to Jason for closing remarks.

Thanks, Mala. We hold ourselves to a high standard. And there's no question we're disappointed with our revised outlook today. However, as I mentioned earlier, we remain highly confident that our whole person integrated approach is the right one. The depth and breadth of our integrated product offering is unmatched. As the clear leader in the industry, we believe that only comprehensive integrated solutions like ours can truly deliver upon the promise of better outcomes, a better experience and more efficient care for clients and consumers. We've methodically built the broadest set of virtual and digital health capabilities available in the market today. And we'll continue to innovate and build upon those capabilities to expand our lead and execute against the tremendous opportunity ahead. With that, we'll open the call for questions operator?

Absolutely. [Operator Instructions] Our first question is from Lisa Gill with JPMorgan. Lisa Your line is open. You can go ahead.

Thanks very much. And thanks for the detail. I'll keep my question to discipline area, Jason, but I might have multiple parts here. I just really want to understand a little bit better on what's happening in the mental health area. You talked about the last few weeks where customer acquisition costs, paid searches being much higher. Is this all one, driven based on competition? Two, you talked a little bit about higher wages, but what are we seeing as far as demand and competition for clinicians? And then thirdly, if I look at the revised EBITDA and the margins being down roughly 300 basis points versus what your expectations were before, are you spending even more incrementally when we think about that customer acquisition cost on the mental health side as I -- I know you and Mala called out that two thirds of the impact is coming from BetterHelp.

Yeah. So I'll talk the competitive landscape and the environment and what we're seeing in the BetterHelp business. Mala can talk to the overall margin outlook and our outlook for '22 adjusted EBITDA. When I look at the direct-to-consumer mental health business, we are seeing lower-than-expected yield on marketing spend over the past several weeks. It's really -- as I look at January and February, we saw the cost per new acquired member trending in line with our prior expectations, which is a decline from December. But that turned around against us in March, and we began to see increases in cost per acquisition and a corresponding decline in revenue yield on our advertising dollar. There were two primary channels that drove that: number one is paid search, and number two is paid social media. I would say that we strongly attribute that to smaller private competitors who have been recently well funded with a rash of venture capital money flowing into that space and making what we would consider to be economically irrational decisions. The good news for us is that we're able to pull back on that without decimating the business. And as you heard from my comments, we still expect sort of the high end of our range in terms of growth for BetterHelp. And I'll give you an example. In paid search, our CPA was up 20% in March versus January and February, and paid search represents somewhere between 20% and 25% and of our newly acquired members in the first quarter. So the second part that I referenced in my prepared remarks actually ironically relates to an article I saw in the Journal today that you may have seen about CVS and Walgreens were using to fill prescriptions for Adderall and other controlled substances from some direct-to-consumer telehealth, specifically mental telehealth, companies. Obviously, we don't do that. And we believe -- we know that some companies are exploiting the temporary suspension of the regulations that prohibit the prescription of controlled substances during the national health emergency. For better or for worse, that puts us at a bit of a competitive disadvantage relative to those who do. We don't think either of those practices either bidding up the search auctions or prescribing controlled substances is a sustainable practice. And we're going to continue to focus on running a long-term profitable growth business. Maybe just one more comment on BetterHelp, and then Mala can talk about overall outlook on adjusted EBITDA. Lisa, you asked about wage inflation and access or availability of clinicians for BetterHelp. Neither one of those is a constraint on our growth that led to our change in the outlook for the rest of this year. Really, it's those two things: it's the increase in customer acquisition and the -- facing competitors who are exploiting those suspensions in the regulations.

Yeah. And Lisa, to your question -- let me address the profit question overall and as it relates to BetterHelp as well. So as we talked about in our prepared remarks, approximately two thirds of the revision in the guidance we have made to adjusted EBITDA is driven by BetterHelp. The remaining -- the one third is driven by chronic care as well as a modest increase in wage inflation. And so for BetterHelp, the reduction is really about -- in margin is about lower than expected yield. We talked about the CPA increase of 10%. So that is driving the reduced margin. To be clear, as we said, the margins for BetterHelp are still attractive as -- vis-à-vis the enterprise margins. The one thing I would say directly to the question you asked, if you think about BetterHelp ad spend and marketing spend and you think about the increase in CPA, what it means from a -- how it's flowing through our financials is it's similar in spend. It just means less revenue because of the lower yield.

Thank you, Lisa. Our next question goes to Ryan Daniels with William Blair. Ryan, your line is open. You can go ahead.

Yeah, guys. Thanks for taking the questions. I guess my follow-up would be regarding to the other form of weakness in the chronic care management. I'm hoping you can dive into that a little bit more. And I guess my curiosity is somewhat similar to the funding we've seen in that space with a lot more on-site health care providers that also offer telehealth, some of the navigation companies combining resources to provide telehealth with their solutions. Is it becoming a more competitive market as well? Is that part of the noise? Or is it really more difficulty in getting the attention of larger employers as they deal with return to work such that you think this is truly more of a transitory headwind for that segment? Thanks.

Yeah. Thanks, Ryan. Appreciate the question. I'll go through the various dynamics that we're seeing in the chronic care market that we believe are elongating the sales cycle. And I'll just reiterate what I said before, and we continue to see a larger pipeline of later stage deals that are, unfortunately for us, taking long to get to close. So back in October, we talked about a few trends. Certainly, benefit managers distracted by COVID and return to work, we believe that, that is continuing. Also, on the positive side for us, we exited 2021 with a record quarter of bookings in the fourth quarter and a very strong late-stage pipeline that persisted into the first quarter. As we moved through the first few months of the year, we're just not seeing those deals get to closure as the sales process continues to elongate. There is some of that, that is competitive noise because of more competitors that are essentially, I would say, giving the buyer more things to think about and consider. I also believe very strongly that if I step back, we're a little bit caught in the middle in terms of the time line. So I think we are in a transition phase from buyers buying individual point solutions to buying true integrated whole-person, multi-condition offerings. We also historically, as organizations -- as our legacy organizations, Livongo competed head-to-head with single point solutions against various point solutions in the market but not really on the basis of multi-condition, full whole-person care solutions. And over the last 12-plus months, we've been working on integrating the Livongo products into our whole-person care experience. And admittedly, we're not done with that yet. We are deep into that process, and we have line of sight to the finish line, but we don't have proof points behind it because we're not finished with it. We're getting great feedback. And what we're seeing, and I think as evidenced by the fact that in the first quarter, 78% of our sales were multiproduct sales. The market is responding really well to it. And I think the other evidence of that is the strength of our Primary360 product and the reception we're getting to that. But we're still early in that process. So we're convinced that that's the right strategy. And we're committed to completing the integration, really delivering a unified multidimensional, multi-condition solution to the market. And we're going to continue to invest in that. So while in the near term, we're disappointed with our performance and the outlook for the rest of this year, we do remain confident in our strategy and our position in the market. In the meantime, we are taking a closer look at some of the dynamics that are impacting the conversion of our pipeline, and we’re going to continue to make adjustments as necessary to address them.

Thank you, Ryan. Our next question goes to Sandy Draper with Guggenheim. Sandy, your line is open. You can go ahead.

Thanks very much. And maybe, Jason, just sort of a related question to Ryan. One of the things I've been trying to think through is in this wage inflation environment. As I think about human resources, people trying to attract talent, they may be having to pay higher wages, higher bonuses, signing bonuses, et cetera. Do you have any sense, is that impacting maybe people's willingness to -- as you said, the long-term, it may make a lot of sense to do these larger bundled buys, but there's a dollar cost upfront. And do you think there's a sense of, in this environment, people not wanting to add on additional services because they're saying, we're going to have to pay out cash to people in order to get them on board or higher? I'm just trying to understand if you think that's a dynamic that's happening out there in the marketplace. Thanks.

Yeah. Thanks, Sandy. I understand the question. I don't think that's a primary driver of people making -- of employers not making a decision. It is possible that, that will drive employers to make more purchase decisions through their health plans. One of the areas that I think we're seeing is that HR departments are getting squeezed because there's so much going on with respect to return to office, dealing with the great resignation and all of the hiring and allocating resources to talent acquisition and retention that we may end up seeing more employers buying these solutions through their health plan. I do think that, that is overall beneficial for us because we're seeing significant traction for these products with the health plans who then we have to make a second sales through that health plan into their self-insured employers. So we’re early in the year to see that pipeline develop. So it’s a little too soon for me to say that that’s -- to say that with certainty. But if I’m reading the tea leaves, that would be my bias.

Thank you, Sandy. Our next question goes is Sean Dodge with RBC Capital Markets. Sean, your line is open. You can go ahead.

Thanks, good afternoon. Going back to BetterHelp. Jason, I know you've all been talking about experimenting with some different models there designed to help improve retention or longevity on the platform. I think you've talked before about flexible models you use, where people can ramp up and down based on how much they want to use without having to churn off. Are there any updates you can provide around those? And as you test these, how effective are you finding them to be in? And maybe when do you expect to launch some of these kind of more larger scale? Thanks.

Yeah. Thanks, Sean. We do see a consistent improvement in the BetterHelp metrics and the BetterHelp business, unfortunately, in the last six weeks with the exception of customer acquisition cost. Specifically, I would say, LTV is up modestly. Retention has been stable to improving over the last couple of years. Conversion rates on leads and visits to our registration pages have been stable. Brand awareness is strong, and we really have the leading brand in the space. And we do continue to innovate around things like group therapy, which enable a one-to-many relationship between therapists and consumers. And every quarter, we test literally dozens of new tactics, product features, pricing structures. And I think that's one of the things that has continued to help drive that business forward with the tremendous growth that it's had. We also do continue to expect significant growth out of that business. We're still projecting growth in that business in the high 30s percentage-wise. So I do feel like we're getting good yield out of our efforts to continue to refine the product and optimize it. Unfortunately, in this circumstance, it doesn't overcome the change in the environment for consumer advertising. And we continue to take a disciplined approach to that. So we are not going to overspend our way through that and follow the lead of irrational competition.

Yeah. I would also add, the scale that we operate in, the scale at which the BetterHelp business operates in, that continues to grow. And we continue to expand on the diversity of the acquisition channels we have. So the operating metrics that Jason talked about, the diversity of the channels we have, all of those are still very much intact. As we said in our prepared remarks, this is a business that's growing in the high-30s. So again, very robust growth. There are the trends that we are seeing over the last few weeks since February that is certainly making us come to you with revised guidance relative to the earlier expectations of growth that we had.

Thank you, Sean. Our next question goes to Richard Close with Cannacord Genuity. Richard, your line is open. You can go ahead.

Yeah, thanks for the questions. Maybe to dive into Ryan's question a little bit more on the chronic side. Was there any impact with respect becoming the preferred vendor at Express Scripts with respect to the lowered guidance on the chronic side? And also on the chronic, you mentioned point solutions. Is it something where since you don't have the full integration of all the solutions on chronic with the whole-person health that that's definitely leading to people not -- or are you not being able to close those deals?

Yes. So Richard, thanks for the question. With respect to Omada and Express, we really don't see a significant impact from that at all. I would say no to the question, is that the source of the challenge there. With respect to our outlook, as is typically the case, our guidance incorporates a little bit of in-year revenue, a modest amount of in-year revenue contribution from deals that we expect to sign and launch within the current year. Our prior guidance assumed a low-single digit percentage point contribution from in-year revenue, meaning deals that we signed and launched within the same year. We felt that, that guidance range adequately captured the downside risk from a relatively modest contribution to the overall revenue. But we're seeing that pipeline just move more slowly than anticipated. So we've removed the significant majority of that from our outlook. As I think about that in the sort of grand scheme, as I said, it represents about quarter of the overall reduction in our outlook for revenue. I'm honestly not sure if we would have even -- if we would have made any reduction or modification to our outlook if it weren't consequent or commensurate with the change in our outlook for BetterHelp.

Yeah. I mean I would also add from a profit perspective, as you see, it has a slightly -- it carries -- punches more weight from a profit perspective. If it were only that, we have cost levers, expense control levers that we would still have managed within and -- within the original guidance we gave.

And then, Richard, with respect to the maturity or where we are in terms of the integration of the chronic care solutions into our whole-person strategy, we are seeing incredibly strong -- we do a lot of market research, and we're in the middle of another study. We're seeing very, very strong response to that whole-person approach. But like I said, because it's still sort of on the verge of being finished with the integration, we don't have the proof points behind it. So people are waiting and anxious to see and the early adopters are buying, but we haven’t yet hit the bulk of the market in terms of those who are waiting to see the impact that it will have. And I’m very, very confident in that impact. And we’re starting to see, like I said, with large health plans we’re buying in order to offer it to their large self-insured clients.

Thank you, Richard. Our next question goes to Stephanie Davis with SVB Securities. Stephanie, your line is open. You can go ahead.

Hey, guys. Thank you for taking my question. Jason, I know you've been asked this a bunch, but I'd love your strategic thoughts on the DTC cost arc because the two quarters you've ever missed both were DTC-driven. Is this solution going to be anything D2C strategy-related like the extra calls or wing of the private side funding? Or is it going to be less DTC entirely and more on accelerating the mix shift towards the B2B business? And with that in mind, what kind of leverage could you pull to accelerate that?

Levers to accelerate the B2B business? Yeah. No, I think -- look, I think as you've seen from us, the significant majority of our investment in terms of R&D is going into our whole-person approach of integrating the products and services as well as where we focused our M&A dollars and put our balance sheet to work is on the B2B side of the business. We love the BetterHelp business and the growth that it generates. And we also know that over the long term, the gross margins on the B2B business tend to be higher, and that is a long-term sticky business. So there's no question that we expect to see the fruits of our investment in the whole-person approach and the integration and the data platform work that we're doing yield benefits in the B2B market. And I have a lot of confidence to that based on the feedback that we get from our clients and prospects. We're just -- again, we're sort of on the journey to get there, and this is a big year of integration. And I expect to come out the other side of it with a significant opportunity based on an unmatched set of products in the markets.

Yeah. And I would add, Stephanie, the dynamics in terms of the size of the opportunity, the addressable market, that's still unchanged, right, whether it be in any of the different conditions that we plan; Primary360, where we are seeing strong resonance as we go out and sell to clients, all of that is unchanged. What we are doing is, as we’ve talked about the different areas that we are spending, investing in from an R&D perspective, from a T&D perspective, it’s important that we actually continue to stay focused on it. And we’ve always said those are going to drive long-term sustainable revenue growth. And I do think it’s important that we continue to execute on it, focus on it. And as we always have done, we will continue to drive operating leverage in terms of expense controls and discipline in the business as we have always done.

Thank you, Stephanie. Our next question goes to Daniel Grosslight with Citi. Daniel, your line is open. You can go ahead.

Hi, guys. Thanks for taking the question. Given it seems that BetterHelp and chronic care pressures will persist for the remainder of the year, I'm curious how you're thinking about the quarterly cadence of margin expansion in the latter half of the year. I just looked at the midpoint of the guidance. It implies that the second half EBITDA margins will increase from around 7.5% in 2Q to around 12% for that second half. Can you?

Yeah. It's a great question, Daniel. The way we are thinking about the progression of the margins is, again, while we have taken down our overall revenue guidance for the year, we still do expect the revenue to ramp through the year, right? So that is one of the drivers of margin expansion. The second thing is, as we have talked about on the last earnings call on the DTC side of the business in BetterHelp we did -- as is normal for us, we are heavying up on the ad spend early in the year in Q1 and in the first part of the year. And the benefit of that is that is sort of a gift that keeps giving through the year as we get members and we keep those members, we retain those members and as we increase the LTV of those members. So that sort of -- think of it as an increasing impact financially as we go through the year. And then the last thing I would say is, the fact that we are expanding margins as we go from the beginning of the year towards the end of the year is something that is entirely consistent what we've done every year. And as we think about the enrollment ramp and the fact that we are bringing on enrollees on the chronic care side as we go through the year, that is also something that is going to contribute to the expansion in adjusted EBITDA margins as we go through the year. So what I would say to you is, the way we have thought about and the drivers of margin progression as we go through the year, those -- when we came out in February with our earlier guidance and the way we are thinking about it now very much the same drivers, albeit the reduction in the revenue guidance.

Thank you, Daniel. Our next question is Charles Rhyee with Cowen. Charles, your line is open. You can go ahead.

Yeah, thanks for taking the question. Maybe to follow up on that, Mala. You talked about the components, and I know you don't want to talk past really 2022, but it sounds like what you're saying is that other than maybe a lower starting point here, the components for margin expansion is still largely intact. Can you remind us then maybe from the Analyst Day when you guys gave the sort of the 100 to 150 basis points of margin expansion sort of long-term, what sort of the components were? Perhaps, what were you expecting from chronic care versus better help within those? So as we think about the revised outlook here and we kind of take up or higher DTC costs, is this kind of range that you were projecting beforehand still sort of in the ballpark? Maybe help us out because it sounds like what you're saying is the long-term thesis in terms of margin levers is still there. Thanks.

Yeah. Charles, thanks. We are not in a position to provide an outlook beyond the guidance that we just gave, just given the rapidly evolving environment for virtual care, right? We've talked about the dynamics that have emerged over the last several weeks. And so we are in the process of reevaluating how these various dynamics discussed in the remarks that we just gave and we've addressed in our Q&A, how they affect our longer-term growth outlook. And we will give you all an update after we have completed our evaluation. What I will say is, with all of that said, we are confident from a long-term perspective in our strategy and positioning in the market, similar to what consistent with what Jason said a few minutes ago. I don’t want to go into more details than that at this moment just given how much things have evolved.

Thank you, Charles. Our next question is to Jessica Tassan with Piper Sandler. Jessica, your line is open. You can go ahead.

Hi, thanks so much for taking the question. So just as we think about the 30% to 40% growth in behavioral, can you help us understand how much of that anticipated growth is membership-driven? And how much is pricing-driven? Thanks.

We typically do not go into the details. You’re talking about BetterHelp. We typically will not go into the details of how much of it is membership-driven versus pricing-driven. That’s a level of detail that we have not disclosed in the past.

Thank you, Jessica. Our next question goes to Allen Lutz with Bank of America. Allen, your line is open. You can go ahead.

I guess to go back to BetterHelp again, as you think about the advertising that you spent in the first quarter and you think about advertising as a percent of revenue, how should we think about that trending in the second quarter? And then over the course of the year, is that something that's going to kind of continue to creep up? Or is 1Q kind of a peak level there based on what's embedded in the guide? Thanks.

So what we are -- what we have embedded in our full year forecast, Allen, as we've talked about, is a 10% increase in our cost of acquisition for the year. I would say, I don't want to go into a more detailed phasing of that as we go through the year. The only thing I would remind you of is things are -- the market is evolving. It is. There are various dynamics as we talked about. But typically, what we would say is we heavy up on advertising as we -- in the early part of the year. And what we have said in the past is if you think about 4Q and we go into the holiday season, in a typical year, 2020 was a non-normal year. But in an average typical year, we do tend to see much higher advertising costs and we sort of pull back because, again, we run the BetterHelp business in a highly ROI-driven way. So you should expect to see similar type of dynamics playing out as we go through the year.

Thank you, Allen. Our next question goes to George Hill with Deutsche Bank. George, your line is open. You can go ahead.

Yeah. Good evening, guys. And thanks for taking the question. I guess, Jason, I want to come back to the market dynamics that you talked about, about the employer market seemingly taking a pause and looking for somebody who can bring to bear kind of an entire suite solutions. I think you called it the whole-person solution. And I guess my question is two parts. One is do you feel like that -- this is enough of a hiccup in the market that could impact the selling season for new business into 2023? And competitively, are you seeing a different group of competitors, whether it's one-off solutions that are trying to compete with you guys on a telemedicine basis? Or are you seeing the MCOs, and somebody else referenced everyone was earlier, trying to cobble together their own suite of third-party solutions to compete against you guys? So I'm trying to understand, like is the competitive dynamic shifting in a different way? So I guess it's kind of sales season, your breadth, competitive dynamic. Thank you.

Yeah. George, I think it's too soon to tell what the impact will be on the selling season for 2023 business. What I can tell you is that we've seen a lot of very strong managed care opportunities move through our pipeline to the very late stages of that. The big health plans are embracing our services for multiple services, and we're contracting with them to be available for their large self-insured clients, which is a pipeline that will begin to develop now and then mature over the course of the summer into the really early fourth quarter. I think the other part that is very encouraging to me is the reception that we're getting to Primary360. Primary360, Mala and I have always said, was going to be a very modest contributor to 2022 but then would ramp in '23 and '24 to become much more significant. I would say that it's progressing with our sales faster than both Mala and I had expected. We're seeing good traction with very large opportunities, who are embracing that solution. And that -- we believe very strongly that that’s going to be an on-ramp as we talked about in November for our chronic care solutions. So when we talk about 78% of our sales being multiproduct sales, that’s a self-reinforcing phenomenon where we get to multiple products, and therefore, multiple on-ramps to the full suite.

Thank you, George. Our next question goes to Stan Berenshteyn with Wells Fargo. Stan, your line is open. You can go ahead.

Thanks for taking the questions. I guess on the direct-to-consumer mental health side, Jason, just to understand the comments you're making. So your business is being adversely impacted because you aren't getting patients that potentially seem to be seeking controlled substances when they're initiating a web search. And I understand that your business, you're not prescribing these medicines. So I guess my question is, why would someone who is suitable for BetterHelp instead end up signing up for these other competitors that you're discussing?

Because they provide both online therapy and controlled substances. So it's a broader net. And it just provides access to a population who may make -- may be making decisions between multiple options. Again, we believe that that's a temporary issue because I believe that the prohibition will be reinstated on prescribing controlled substances is likely to be reinstated or it would take an actual change in the regulations. And again, I think that is a companion issue, where the bigger issue for us is the increase in the price of advertising in paid search and social.

Thanks, Stan. Our next question goes to Elizabeth Anderson with Evercore. Elizabeth, your line is open. You can go ahead. Elizabeth your line is open. You can go ahead. Since we're not getting any audio from Elizabeth, we will move on to the next question. Our next question is from Cindy Motz with Goldman Sachs. Cindy, your line is open. You can go ahead.

Hi, thanks for taking my question. I just wanted to get back to, I think it was Sandy's question, just if maybe some of this is not overriding like recessionary fears from some of your clients maybe in the chronic care segment, maybe watching wage inflation and different things pulling back a little. And then even with BetterHelp, when you think about it, maybe people are looking for a way to get whatever they can for a cheaper price at this point. So whether it is those macro situations just because, I guess, the customer acquisition costs were supposedly coming down with BetterHelp. I know everything sounded very strong six weeks ago, and then here we are. And so just -- also to -- any way you could help us think about the margins -- the segment margins at all in relation to each other? You said, Mala, that the margins were still attractive with like BetterHelp, so I assume they are in chronic. But that would help us just to have sort of a long-term view about whether this is something macro-driven and temporary. Thanks.

Yeah. Cindy, it is certainly possible that there are macro effects. We don't have evidence of it, and so we're not going to sit here and tell you that, that is definitely the source of a slowdown in the cadence of opportunities moving through our pipeline and getting to close. On the BetterHelp side, again, we don't have clear evidence that recession or inflation or consumer sensitivity to pricing is the driver. We do have evidence of increasing ad costs that really changed between January and February and then as we moved into March, increased significantly. And it's been that way on a sustained basis since the beginning of March. So the -- we can only point to the things that we have clear evidence of and state with confidence. And I wouldn't disagree. That is a hypothesis. And quite frankly, we're working on trying to figure out how we test that hypothesis, among others.

And Cindy, on your margin question, just a couple of comments. If I think about 1Q and gross margin and how that trended on a year-on-year basis, if you were to normalize for the purchase price accounting benefits, our gross margins were essentially flat year-over-year. And so I would say, if I think about our margin progression, as I said, I will not go beyond 2022 for all the reasons I mentioned. We are reevaluating across the board. But I will say that we will -- as I have said before, we will look to maintain expense controls. We'll make the right investments that get us to long-term sustainable growth from a revenue standpoint. And I've always said that revenue scaling ultimately is the thing that will drive our long-term margin expansion. And as we increasingly go into value-based care arrangements, et cetera, we will also look to increase our gross profit dollars and our adjusted EBITDA profit dollars. All of that thinking is -- still holds. We do not break out the margins for different parts of our business since we report as one.

Thank you, Cindy. This concludes today's Teladoc 2022 Q1 earnings conference call. Thank you for your participation. You can now disconnect your lines.