STOCK | 1/22/21 FRESH LOOK

TELADOC HEALTH GREEN YELLOW RED INC. LIGHT LIGHT LIGHT (TICKER: TDOC) LBIR Recommendation

Stock Price: $245.0 (1/22/21) Company Size: $37.9B Author: Janice Quek

Company Rank: 555 Sector: Healthcare Industry: Diversified Patient Care

Teladoc provides a platform of solutions for virtual access to a comprehensive range of healthcare needs.

IN THIS FRESH LOOK WE’LL COVER: u Summary of the Business Teladoc offers its users access to the largest range of ä healthcare services available. Majority of its revenue Grab-and-Go

are paid subscription from its members. THESIS u Recent Developments The pandemic accelerated demand for services, leading to impressive results in the last An investment in Teladoc is a play on few quarters. The near-term outlook is also very demand for telehealth services. The positive. company provides users remote u Competitive Environment access to a broad range of healthcare Teladoc is one of the top players in the industry, needs through its platform. Teladoc is well-positioned to capitalize on the growth of the a leading player in the industry and industry. The landscape is however becoming its continued success will depend on more competitive. its service value and ability to grow its membership base. u Conclusions/Recommendations Favorable market trends and good execution suggest sustained growth for the company, and we rate it a Green Light.

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0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

Data as of 1/22/21 unless specified

Enterprise Revenue Fwd $1,088M 37.9B Market Cap: 35.8B Value: (TTM): ($867.1M) Fwd (TTM) 17.89x YTD Return: 22.7% RSI: 61.7 Price/Sales: (21.86x) Gross Margin Revenue Growth 62.72% 96.7% ROIC (TTM): -3.7% (TTM): (FWD, YoY): 200-day 52-Week High: 253.0 52-Week Low 93.56 199.50 Moving Avg.

EBITDA -23.14M CFO 79.5M FCF 58.8M

Insider Transactions: Insiders sold 277,603 shares in the last three months

practitioners are broadening the range of SUMMARY OF BUSINESS û services offered virtually, while insurance companies and healthcare plans have added Teladoc provides a platform of solutions for coverage over time. The Covid-19 pandemic virtual access to a comprehensive range of accelerated demand for telehealth services. A healthcare needs of more than 450 medical Mckinsey study revealed that consumer subspecialties from non-urgent, episodic adoption rose from 11% of U.S. patients in 2019 conditions to chronic, complex medical to 46% as of April 2020. Providers moved to scale conditions. The company generates revenue their telehealth offerings quickly during the primarily from subscription access fees to its pandemic, which resulted in the number of platform and per telehealth visit fees. patients using these services growing 50 to 175 times. It is estimated that because of the Massive opportunity ahead as more healthcare pandemic, an estimated $250 billion of services move to virtual healthcare services can be virtualized in the U.S. According to another report produced by Adoption of telehealth services have grown Markets and Markets, the global telehealth and steadily in the last 5-10 years as patients become telemedicine market is projected to grow rapidly more comfortable consulting remotely. At the at a CAGR of 37.7% between 2020 and 2025. same time, healthcare institutions and medical Broad suite of healthcare services and cost savings pull users to Teladoc; targeted LB•LOGIC While a potential $250 billion of health services can be virtualized, the messages encourage greater use of services Markets and Markets report estimated that about $38.7 billion was spent on telehealth Telehealth services have demonstrated services in 2020 globally. This reflects how underserved the industry currently is and improved convenience and access to care, the growth runway ahead. increased efficiency, and better patient outcomes. Patients unable to reach the right healthcare providers for their medical

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conditions due to geographic limitations or firms, hospitals and health systems, CVS (of poorly resourced health systems are now able to which it has a direct-to-consumer partnership), consult with the appropriate medical specialists. and individuals which makes up its more than Telehealth is still at its early stages, but Teladoc 51.5 million members. Teladoc also serves is already ahead of the industry with its Medicaid and Medicare Advantage populations. unrivalled suite of solutions for a full range of healthcare services, covering basic primary care At its current reach and scale, Teladoc is able to to specialty and complex care for complicated offer healthcare to its members at cost savings of and chronic medical conditions. It also includes $472 on average per general medical visit, mental healthcare in its list of services – an area compared to receiving healthcare in other which has has been gaining momentum. settings. This is supportive of the case for virtual Teladoc’s services are offered through its highly healthcare, especially at a time of increasing scalable proprietary platform where patients can healthcare costs. To strengthen awareness of reach the right provider quickly at Teladoc solutions and encourage adoption of any time at a median response time of less than more of its services, the company has been using ten minutes in 2019. It has a broad portfolio of predictive analytics and modeling as well as consumer brands that delivers the services in behaviorial data to engage members with the more than 175 countries worldwide in more than “right personalized messages in the right micro 40 languages, delivering a projected 10 million moments of their day-to-day lives”. This has visits each year by the end of 2020. Teladoc’s been effective at expanding penetration among clients comprise some of the largest health plans existing clients, and driving membership and in the U.S. (Aetna, United Healthcare etc), more revenue growth for the company. than 70 global insurance and financial services

Source: Investor Presentation

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

Financial and Operational Metrics quickly as it scales. Teladoc is however still net income negative even on a non-GAAP basis, Teladoc has grown rapidly since its IPO, at a which is not expected to turn positive for the five-year revenue CAGR of 66.3%. While much next 1-2 years. of its growth is organic, the company has also been actively acquiring other healthcare firms to expand its services and membership base. For LB•LOGIC A significant weigh on example, revenue grew 32.4% YoY in FY19, Teladoc’s profitability thus far is general and administrative expenses (~28% of total which would have been 24.4% growth excluding sales, excluding acquisition expenses). As its acquisitions. It has about 51.5 million paid the company grows, this component will members today, facilitating 7.6 million visits most easily benefit from operating efficiencies and reduce as a percentage of year to date in 2020. As telehealth gains traction, total sales. Teladoc has also been able to improve profitability. The company achieved positive adjusted EBITDA in 2018 and positive operating cash flow in 2019, expanding both metrics

Source: Investor Presentation

LB•LOGIC Having most of its revenue û RECENT DEVELOPMENTS generation based on subscriptions gives its Teladoc demonstrated sustained strong topline performance high visibility. The pandemic resulted in a bump in performance in Q3, driven by broad momentum subscription revenue, suggesting that across the entire business. Pandemic restrictions many clients might be seeing telehealth and social distancing measures had created the coverage as a long-term feature. initial surge in demand for virtual healthcare consultations, but the compelling value

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

proposition and convenience of Teladoc’s Profitability improved from the strong volume services have led to continued adoption by its and sales growth. Teladoc announced adjusted clients and members. The company reported EBITDA of $39.5 million, up from $9 million in record revenues of $289 million in Q3, up 109% Q3FY19, resulting in a margin increase of 7 YoY, of which approximately 90% of its growth percentage points year-over-year. Management was organic. A meaningful portion of healthcare did caveat that the outperformance was due to consultations were for non-infectious diseases, lower advertising and marketing spend in Q3 giving us confidence of another indication that that was postponed for Q4. Excluding demand could continue even after the pandemic transaction costs from its Livongo merger, ends. Teladoc also saw a robust pipeline of new Teladoc’s net loss improved slightly to $19.9 opportunities ahead from existing channels, million this quarter from a net loss of $20.3 upcoming products and from both its domestic million last year. Teladoc also reported positive and international markets. Recent industry free cash flow of $32.5 million, up from $13.37 developments such as the Centers for Medicare million last year. and Medicaid Services (CMS) announcing that most Medicare Advantage plans will offer telehealth benefits also continue to provide a LB•LOGIC A key growth strategy for favorable growth environment for Teladoc. Teladoc is acquiring other healthcare firms. While the company is free cash flow positive, cash generation is still at low Financial and Operating Results levels, and Teladoc has about $1.3 billion in long-term debt. Management will need to Teladoc announced total revenue of $288.9 be prudent with acquisitions, balancing growth investments through M&A with million in Q3, driven by strong access fees what it can realistically grow organically. revenue, which made up 78% of total revenue during the quarter and grew 90% on a year- on-year basis. Visit fee revenue was $51 million, Updates on Company Expansion plans increasing 171% from Q3 of FY19. Volume growth was strong, and Teladoc reported over The most significant development during the 2.8 million virtual visits, more than triple the quarter was Teladoc’s merger with Livongo, an volume from the same period last year. In Applied Health Signals company that harnesses particular, it saw steady momentum and broad- technology to support patients with chronic based acceleration in non-infectious disease- medical conditions. Bringing Teladoc and related visits for medical conditions such as Livongo together will extend Teladoc’s end-to- hypertension, back pain, anxiety and end virtual care platform in a new area. depression. New membership also increased Management estimates that there is less than a robustly, rising more than 80% YoY. The 25% overlap in the customer base between two company ended the quarter with 51.5 million companies, providing Teladoc new paid members, a growth of 47% from Q3FY19, opportunities to cross-sell its services. while there were 21.8 million individuals with visit-fee-only access. Other developments announced by Teladoc include new partnerships forged internationally with large companies such as Telefonica, one of

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

the biggest telecom providers in Europe and healthcare business to Teladoc. He started at Latin America, and a financial institution in the Oxford Health, and has also worked in leading Nordic region. These partnerships will also companies in the industry including WellPoint provide new membership opportunities for Inc (Anthem Inc) and Empire BlueCross Teladoc as they open up new geographies for the BlueShield. Jason graduated from the University company. of Pennsylvania with a B.A. in International Relations. Outlook and Estimates Teladoc was founded in 2002 in , Texas, by Teladoc’s management provided a highly Byron Brooks and Michael Gorton. It started the positive outlook for the company, as current business offering patients the ability to remotely bookings velocity and favorable trends give it consult with state-licensed doctors at any time. confidence for strong performance in the near Teladoc launched nationally in 2005 with Gorton term. Bookings are expected to be at least double as both Chairman and CEO. The company the third quarter in Q4, and while acquisition reached around 1.0mn members by the end of plans were not revealed, Teladoc expects 2007, with large employers such as AT&T organic growth in the 30%-40% range in FY21. providing the service to employees as a health As such, management revised Q4 guidance benefit. In 2009, Jason Gorevic was appointed upwards, projecting total revenue in the range of CEO. Under his leadership, Teladoc expanded $294 to $304 million, or a growth of 93% YoY at quickly to become a top player in the industry, mid point of the range. It also estimated that making multiple acquisitions to grow its virtual visits would total 2.8-3 million in Q4, membership and service portfolio. The slightly ahead of Q3. Q4 adjusted EBITDA is catalyzed growth in 2014, projected in the range of $21 to $24 million, up as several insurance companies began signing from $15 million in Q4FY19. with Teladoc. Teladoc became a public company in 2015. It is headquartered in Purchase, New Teladoc’s full year revenue is also now shifted York. upward to the range $1.005 billion to $1.015 billion from its previous range of $980 to $995 million. New revenue guidance reflects growth û COMPETITIVE ENVIRONMENT of about 82.5% YoY at the midpoint. Adjusted EBITDA guidance was $97 to $100 million, a Teladoc operates in an increasingly competitive 200% improvement from FY19. It also expects landscape intensified by the pandemic. operating cash flow to grow consistent to Although telehealth is still in the early stages, adjusted EBITDA in FY21. shelter-in-place restrictions and capacity constraints at healthcare facilities due to Covid- 19 globally accelerated progress towards virtual û COMPANY MANAGEMENT consultations, putting pressure on the healthcare industry to quickly stand up these new Jason Gorevic is the current CEO of Teladoc capabilities to remain in business. Telehealth Health. He joined the company in 2009, and pure-plays sought to expand their service brings many years of experience in the offerings, healthcare and insurance plans started

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

including telehealth in their coverage list, and large healthcare service providers also started LB•LOGIC Teladoc’s lead against branching into the telemedicine space. For appears to have increased example, Anthem Inc a health insurance substantially on a revenue basis in FY20. provider offers LiveHealth Online, a We believe the pandemic is a contributing factor and Teladoc’s success in widening telemedicine platform. Many have done this this lead is a testament to the company’s through acquisitions and partnerships. Health execution. insurance provider Humana announced in July 2020 that it would invest $100 million in telehealth start-up Heal for it to expand into new 67.3 million in its investors’ report. Note that markets. Ping An’s business also includes its medical drugs marketplace (Health mall). Teladoc and American Well, both based in America, follow behind Ping An Good Doctor in market share. LB•LOGIC Healthcare and insurance We expect Ping An to stay in the Chinese plans are not limiting their telehealth service coverage to one provider, opening market. up more competition for Teladoc. However, its broad range of healthcare The top players are reporting strong momentum services and large network of practitioners is a compelling reason for patients who in their business, fueled by the large greenfield want more choice with their consultations, opportunity. Less than 50% of people under especially if they have multiple medical employer-sponsored plans in the U.S. are conditions to attend to. We can also expect Teladoc members, and an even lower percentage Teladoc to continue aggressively expanding its service portfolio to remain (~20%) of those under government plans like competitive. Medicare Advantage are members. Teladoc’s management estimates that even among existing clients, approximately 65 million people are not on a telehealth service subscription. In the industry, Teladoc is performing well and Some of Teladoc’s competitors include Ping An maintains its leading position, driven by a Good Doctor, Doctors on Demand, American robust pipeline of potential members, Well Corporation, and MDLive. Ping An Good expanding services, and strong client retention Doctor held an estimated 40% market share in rates in the 90+%. Users also report a high level 2019, the largest player in the telehealth space of overall satisfaction in using the Teladoc with 192.8 million registered users. Based in platform, compared to peers. China, it reported a monthly active user count of

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

Source: Investor Presentation

LB•LOGIC Although telehealth is gaining

traction quickly, the industry still faces certain barriers to adoption. These include inadequate reimbursement guidelines for users, limited services on some platforms, poor technical skills among patients (especially with older ones who need more medical care), and overall lack of awareness. In order to stand out and gain on peers, Teladoc will need to address these obstacles, and work towards changing habits of its patients.

û TREND ANALYSIS: VALUATION Teladoc’s stock price and valuation rose in 2020 forward P/S of 17.8x, we think that the stock’s due to a surge in demand for telehealth services. valuation is reasonable, when compared to peers The company reported strong performance in and there is potential for multiple expansion if the last few quarters and a robust outlook. At a Teladoc can sustain its high growth in FY21.

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

Current FY Revenue Fwd Gross Revenue Growth Forecast Forward P/E Forward P/S Margin (%) Forecast (%) (Millions USD)

Teledoc Health Inc. (TDOC) 96.70% 1,088 66.7 - 17.89

American Well Corp (AMWL) 60.20% 238.6 37.9 - 25.46

GoodRx Holdings Inc. 40.40% 545.1 93.5 136.15 22.13 (GDRX)

Anthem Inc. (ANTM) 16.70% 120,379 21.6 12.58 0.61

CVS Health Corp (CVS) 4.35% 267,947 17.7 9.77 0.36

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

catalyst to demand for telehealth services, we CONCLUSION / û believe user adoption can sustain even after the RECOMMENDATION pandemic ends, as new habits of digital use Teladoc has the makings of a strong develop from our extended time working and investment. Its business is in an industry still communicating virtualy. From a financial in its early stages of market penetration, and standpoint, Teladoc’s profitability is also the opportunity is substantial. Competitively, improving and positive adjusted EBITDA and Teladoc is a leading player in the industry, cash flow are good indicators of a steady well-positioned to maintain and grow its growth ahead. We rate TDOC a “GREEN LIGHT”. market share. Although Covid-19 was a n Stock Chart for Teladoc Health Inc. (TDOC)

n Performance Data 2014 2015 2016 2017 2018 2019 RETURN ON INVESTED CAPITAL (%) -36.0% -41.5% -31.1% -20.5% -8.8% -6.8% GROSS MARGIN (%) 71.9% 66.5% 67.3% 65.4% 60.7% 59.6% EARNINGS (MILLIONS USD) -17.04 -58.02 -74.22 -106.78 -97.08 -98.9 YoY Earnings Growth (%) -183.1% -240.6% -27.9% -43.9% 9.1% -1.8% REVENUE (MILLIONS USD) 43.53 77.38 123.16 233.28 417.91 553.31 YoY Revenue Growth (%) 118.7 77.8 59.2% 89.4% 79.1% 32.4%

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK n Valuation Data 2014 2015 2016 2017 2018 2019 SHARE PRICE (USD) - 19.17 16.65 35.05 48.19 84.0 SHARES OUTSTANDING (MILLIONS) - 38.5 46.2 61.5 70.5 72.8 MARKET CAP (MILLIONS USD) - 692 762 2,144 3,495 6,092 PRICE/SALES RATIO - 4.6 5.7 8.3 7.8 10.9

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EQUITY 0.94 STOCK: TDOC | 1/22/21 FRESH LOOK

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