Our view: Given the upcoming Nov. 18 analyst day, we had expected 3Q to be a non-event and were surprised when management provided a positive preliminary outlook for ’22 revenue ($2.6B, or ~29% growth) and made some very direct and in our view compelling remarks around the trend in BetterHelp CACs, which has been one of the primary debates around the stock. 3Q results were better than expected, driven by (we suspect) the continued outperformance of BetterHelp and slightly offset by a weaker Livongo. Management also slightly tightened ’21 guidance ranges.
Key points:
Our investment thesis heading into the print: Virtual health has gone mainstream, and while there has been a lot of shifting across the competitive landscape, TDOC remains the dominant vendor with a meaningful and durable moat. Its longer-term revenue growth algorithm is evolving (less contribution from member adds going forward and more now from member monetization), but the end result should be the same —we see it sustaining 30%+ organic growth for the next several years.
Has this quarter impacted our thesis? Yes, what we learned today was incrementally positive. With the Nov. 18 analyst day just around the corner, we had expected the company to defer answering any of the bigger questions until then but were pleasantly surprised when management provided a better-than-expected preliminary ’22 revenue outlook as well as positive comments around CAC trends in the DTC BetterHelp business. That said, there are still key debates investors will be focusing on into that event: (1) How much is BetterHelp currently contributing and can it continue to profitably grow? (2) How many new paid members will TDOC add? (3) How quickly will Primary360 ramp? (4) Can TDOC re-accelerate LVGO in ’23 and beyond?
Key takeaways: Helpful items from the call and our follow-up with management include: (1) a $2.6B preliminary revenue outlook for ’22implying ~29% growth; consensus was $2.59B, but we think expectations were actually much lower; (2) DTC behavioral health continues to outperform (i.e., is growing more quickly than the 50% it initially discussed), but it stopped short of quantifying how much and said directly, “cost of customer acquisition has continued to come down consistently”; (3) standalone chronic care is expected to grow 25–35% in 2022, which is well below the 60% reflected in the merger proxy, but we think already widely anticipated; (4) its late-stage pipeline is currently 2x larger than at this time last year; (5) 70% of bookings this year were for multi-product deals vs. 50% in 2020; and (6) guidance for ’21 was updated, but no meaningful movements—most of the ranges were just tightened slightly.
3Q results better than expected. TDOC reported revenue and adj EBITDA of $522M and $67.4M, respectively, both ahead of consensus of $517M and $64.4M and RBCe $518M and $64.2M. Upside was driven (we suspect) by a stronger BetterHelp performance, slightly offset by a weaker Livongo performance.