Teladoc Health, Inc.

Ladies and gentlemen, thank you for joining us and welcome to the Teladoc Health Q2 26 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Michael Minchak. Michael, please go ahead.

Thank you and good afternoon. Today, after the market closed, we issued a press release announcing our second quarter 2026 financial results. This press release and the accompanying slide presentation are available in the investor relations section of the TeladocHealth.com website. On this call to discuss the results will be Chuck Divita, Chief Executive Officer. During this call, we will also discuss our 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 our 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. During this call, we will make forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, without limitation, statements regarding our 2026 financial outlook, the timing, availability, and market response of new products and services, including Teladoc I, expected BetterHelp insurance revenue and exit run rate, expected cash pay trends, provider network capacity, advertising and marketing spending and efficiency, the timing and impact of our BetterHelp insurance rollout, and the expected benefits of the actions we are taking. Such statements are based on management's current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statement in today's earnings release and the risk factors in our most recent Form 10-K and Form 10-Q for this quarter, including risks relating specifically to each of our reporting segments. I would now like to turn the call over to Chuck.

Thanks, Mike. Let's begin with the healthcare landscape that we operate in. The industry continues to evolve with changes in client needs and expectations and meaningful shifts in how consumers access care. These changes reinforce our confidence in the strategic priorities we previously outlined and will continue to shape how we innovate, where we invest, how we allocate resources, and where we focus the organization to drive long-term value. Against this backdrop, we have seen continued progress in the second quarter, strengthening our position as the global leader in virtual care while building on this foundation for sustainable financial performance. Our second quarter results were within our guidance ranges on a consolidated basis and reflected distinct dynamics across our two segments. In integrated care, we again delivered solid performance with revenue and adjusted EBITDA both above the midpoint of our guidance ranges. And our ongoing focus on innovation was underscored by the recent launch of Teladoc One, our new connected care model that brings together the full breadth of our clinical and technical capabilities to deliver outcomes for each individual and across populations for our clients. Within BetterHelp, our top priority remains the scaling of insurance and in-network services, and for the quarter, insurance-related revenue was near the high end of our expected range. Additionally, we established a baseline national footprint for insurance during the quarter, ahead of our prior expected rollout schedule, launching all remaining states in the U.S. Adjusted EBITDA for the segment tracked closely to the midpoint of our guidance range, although segment revenue came in at the lower end of the range due to lower cash pay revenue. As I will explain in more detail in a moment, through mid-May, operating trends at BetterHelp remain generally consistent with the assumptions and the guidance provided with our first quarter results on April 29th. However, as we move through the rest of May and into June, the increasing speed of consumer movement towards insurance Provider capacity and network constraints against this increased demand and a more accelerated decline in cash pay users and other factors became more pronounced and persistent than the assumptions underlying our prior outlook. These developments led us to reassess our plans and priorities and accordingly revise our BetterHelp revenue outlook. Before spending more time on BetterHelp, let me first make some comments on our integrated care segment. We've established a leading position by providing a broad range of virtual care services to support physical health and mental well-being. Healthcare continues to be significantly impacted by rising costs, burden of chronic illness, access issues, and other concerns, and we believe our scale, clinical approach, and extensive platform position us well against this market backdrop. And we've been accelerating innovation in our products, services, and capabilities to further capitalize on our strengths, lean into this market opportunity, and deliver greater value to our clients. We conduct millions of visits annually in this segment, and earlier this year brought new innovations to our flagship 24-7 care service. The enhanced offering addresses more conditions, provides specialist support to treating clinicians, and includes other value-added features to make these visits more impactful and connected engagement points. and we've advanced technology and capability innovations to support our integrated patient care model. This includes Teladoc Health Pulse, our new intelligence engine which brings together unique, multidimensional data and advanced AI models to power clinical insights, guide targeted actions, optimize experiences and to surface these insights and other actionable information directly at the point of care for appropriate action by our clinical team. We've been building one of the most extensive integrated practices in virtual care, broadening and deepening our clinical model, and investing in purpose-built technology to support it, and working to bring this all together in a comprehensive new solution that we believe clearly differentiates us, including by orienting around the care and needs of the individual, and not a fragmented product category, as is prevalent across the market today. Last week, we introduced this new approach called Teladoc One, which we view as the most comprehensive offering ever brought to market by the company. It is a new care model that delivers a predictive and adaptive experience designed around an individual's healthcare journey rather than a specific or singular condition. And for clients, Teladoc One provides the ability to address needs across populations with accountability for both clinical performance and total cost of care impact. At its core, Teladoc One leverages the full extent of our clinical capabilities delivered through a unified, multidisciplinary care team spanning clinicians, specialists, therapists, coaches, and dieticians, and complemented by AI-enabled capabilities through Pulse to efficiently support care teams, enable timely and effective interventions, enhance engagement, and help people stay on track with their care plans between clinical interactions. and the care model is designed to help coordinate care across settings, including with the individual's local care provider when applicable, and to help ensure care needs are addressed timely and consistently. With broad availability beginning January 2027, we will initially apply this care model to populations impacted by cardiometabolic health conditions, a major driver of health care costs and market focus for us. Over time, We also see opportunities to extend the model across additional populations, further expanding value for clients and market potential. We believe that the addition of Teladoc One to our portfolio and our continued focus on innovation and delivering differentiated solutions to clients will further leverage the strengths and potential of our integrated care segment. Let me turn back to BetterHelp to provide a more detailed update on the business, our priorities for the remainder of 2026, and our updated outlook as we continue to focus on rapidly scaling insurance in the U.S. and pivoting the business more towards an in-network model. As we have previously discussed, the U.S. cash pay market has been under continued pressure and the principal reason we began building an insurance covered in-network offering. The BetterHelp Revenue Growth Outlook provided with our first quarter results assumed we would achieve the dual goals of scaling insurance while at the same time Stabilizing and growing overall BetterHelp segment revenues as we progress through the year. We expected that the combination of strong growth of insurance sessions and growth of cash pay users in non-US markets would increasingly offset the impact of expected declines in US cash pay users, including the movement of potential cash pay users towards insurance and lower planned advertising spending levels compared to the prior year. Operating information available to us through April including cash pay user trends, advertising and customer acquisition cost factors, insurance session growth, and insurance provider network expansion were within the assumptions underlying our outlook at the time of our first quarter earnings call. And results continue to be generally consistent and reflective of those assumptions through mid-May, including insurance user gains largely offsetting declines in US cash pay users. After that point, Certain changes in the business became more pronounced and persistent than we had anticipated. And as we moved through the second half of May and into June, three related developments became increasingly clear to us. First, consumer demand for insurance versus cash pay increased faster than expected and reflective of sustained high levels of consumer preference for insurance. Approximately 70% of potential users indicating a preference for insurance and as much as 80% in certain markets. Second, high preference and demand for insurance caused a greater and faster shift away from cash pay acquisition than we had modeled, including potential users who previously might have entered through the cash pay pathway, increasingly shifting towards insurance or otherwise converting to paying users at a lower rate. The decline in cash pay users and cash pay revenue therefore accelerated beyond the decline incorporated in our prior outlook. Third, while insurance provider capacity continued to increase, it did not expand at the same pace as the increase in demand. Although we had credentialed thousands of providers for the network, available capacity also depends on provider availability for the applicable state and payer, as well as clinical need, appointment time and length. Higher demand, therefore, exceeded the capacity available to convert this into a greater number of paying users, completed sessions, and revenue. As a result, cash pay revenue declined faster than anticipated, while insurance revenue could not increase at a level sufficient to offset the cash pay decline. The insurance business grew well, and revenue was in line with our expected range. However, because the pace and geographic construct of the demand for insurance exceeded available capacity, overall BetterHelp revenue was pressured as the transition away from cash pay accelerated. Business patterns can fluctuate over short periods, including during the state-by-state insurance rollout and factors such as varying indications of consumer behavior, provider network requirements, and payer mix considerations. But as we moved through June, we concluded that these developments likely represented sustained changes in the business rather than short-term variability, and that assumptions supporting our prior four-year BetterHelp segment revenue expectations are no longer representative of the business outlook as we transition more towards an in-network model. Additionally, seeing sustained high levels of consumer preference for insurance and given the strategic importance of insurance to better health, we accelerated national insurance availability during the quarter and ahead of our earlier expectation to roll out over the remainder of 2026. The additional 20 states launched comprised nearly one-third of the U.S. population and therefore were essential to moving to a national capability for insurance. We believe the national rollout will provide a more representative view of consumer behavior and operating requirements, as well as further enable the evolution of BetterHelp's advertising and marketing approach towards a more insurance-oriented model over time. Early indications from this emerging national footprint further demonstrated that insurance preference and market-specific capacity requirements were developing differently and more rapidly across the broader footprint as compared to the earlier state-by-state rollout approach. The developments I just covered caused us to conclude that our prior revenue assumptions had to be adjusted, and we made several strategic decisions in response. Those decisions and resulting actions will place further pressure on cash pay revenue, but we believe they are the appropriate actions to strengthen the business and build a durable insurance position over the longer term. First, we are highly focused on expanding insurance network capacity. including a greater ability to support and adapt capacity on a market-by-market basis in response to demand dynamics. This includes initiatives to support accelerated provider recruitment, activation, and long-term retention as well as enhancements to the insurance platform to support productivity, capacity, and user experience. We've made considerable progress in building the insurance offering including establishing a baseline national footprint a year after launching our first state. We have contracted for over 150 million in-network lives and credentialed more than 8,000 mental health professionals for the network at this point. Insurance coverage sessions have grown substantially over the rollout, with over 20,000 sessions completed last week alone, representing an estimated annualized revenue run rate on that basis of over $110 million, up from over $75 million at the time of our first quarter earnings call and more than double the level from the fourth quarter 2025 earnings call held in February. Second, we are evolving BetterHelp's historical direct-to-consumer cash pay advertising and marketing approach to more prominently reflect insurance objectives. This includes better aligning the expected demand generation of advertising spending levels with available provider capacity, as well as moving from state-level insurance marketing to more national strategies. We believe these and other changes can improve marketing efficiency and user conversion economics over time, and as insurance becomes a higher mix of our revenue. As a result of these actions, we now expect advertising spending in 2026 to be lower than our prior plans, and as we continue to focus on supporting overall margin objectives for the business. While reduced advertising spending will have a negative impact on cash pay user acquisition, we believe this evolving approach better aligns us with the growing part of the U.S. market in network services with lesser orientation on the declining U.S. cash pay market. Third, we are reducing near-term emphasis on markets outside the U.S., including associated resource allocation and reduction in advertising levels. This is not expected to be a permanent shift as we continue to see meaningful opportunities outside the U.S. longer term given the large addressable market and significant unmet need However, given the importance of the US insurance market to BetterHelp, we believe the highest return use of our product, engineering, operational, and marketing resources in the near term is supporting our insurance initiatives in the US. We are also reprioritizing certain other previously planned initiatives to support this effort as well. Our updated guidance leads to a BetterHelp segment revenue range of $770 million to $830 million for 2026. Relative to our expectations at the time of the first quarter earnings call, this new range reflects cash pay revenue declining faster than anticipated due to the factors and actions I mentioned. We are reaffirming our expectation for 2026 insurance revenue of $90 million to $105 million. While the actions we are taking and planned initiatives to address more insurance demand will take time to implement and drive impact, We remain encouraged by the momentum we are seeing and expect these and other moves to further strengthen the insurance business in 2026 and position it for continued strong insurance revenue growth in 2027. With respect to BetterHelp's adjusted to EBITDA margin, we continue to expect a range of 3.0% to 4.6% for the full year and have aligned our actions to support our ability to invest in the insurance opportunity ahead. While the business dynamics are different than we previously anticipated and presenting more challenges as we make this business model transition at BetterHelp, we are also encouraged by the progress being made towards building out our insurance position and the opportunity ahead in the insurance market. We believe the actions we are taking are focused on the right areas to make BetterHelp a stronger and more durable business over time. Now let me cover our results for the second quarter. Consolidated revenue was $607 million and adjusted EBITDA was $66 million, representing a 10.8% margin on a consolidated basis. Net loss per share was 21 cents and includes the following pre-tax per share amounts. Amortization of intangible assets of 49 cents and stock-based compensation of 5 cents. Free cash flow for the quarter was $36 million and and we ended the second quarter with $774 million in cash and cash equivalents on the balance sheet. Net debt to trailing adjusted EBITDA was 0.8 times and 3.6 times on gross debt basis. Turning to segment results, second quarter integrated care revenue was $394 million, an increase of 0.7% over the prior year and in the upper half of our guidance range. Factors that contributed to the year-over-year revenue increase included international, which was again up by double digits this quarter, boosted by a 30% increase in revenue from hybrid care models, and to a lesser extent, higher chronic care enrollment and visit revenue growth in the segment. In aggregate, these factors more than offset the headwind from lower subscription revenue we've spoken about previously. Approximately 60 basis points of year-over-year growth came from acquisitions. We finished the quarter with 100.3 million US integrated care members, slightly above the high end of our guidance range. We've modestly raised our full year outlook by roughly 1 million lives at the midpoint based on results seen thus far. Our full year range still contemplates some slight moderation as our health plan clients deal with potential changes to their underlying enrollment levels. Chronic care program enrollment was 1.27 million at quarter end, up approximately 6% sequentially and 14% higher year over year, driven largely by continued client adoption of multi-condition bundles, which in turn expand the potential enrollee population. Second quarter integrated care adjusted EBITDA was $65 million, up 13.6% over the prior year period, and represented a 16.5% margin. This was above the high end of our guidance range and up approximately 190 basis points from the second quarter of 2025. Adjusted EBITDA performance was driven by the revenue upside versus our midpoint, as well as disciplined cost management, which more than offset mix-related gross margin pressure from the shift to visit-based arrangements. BetterHelp's second quarter revenue was $213 million, 11.6% lower than the prior year period, and down 2.6% sequentially. Insurance revenue of $22 million was near the high end of our expectation, and up approximately $9 million sequentially. This was offset by a greater than expected decline in the cash pay business, including the result of deliberate actions we took during the quarter, including reduced advertising spending as we prioritized the acceleration of the insurance rollout and the achievement of profitability objectives. Average paying users in total declined 11% from the prior year's quarter to 346,000 and were down 4% sequentially, while insurance users increased by over 70% sequentially and reflecting a growing part of BetterHelp's business. BetterHelp suggested EBITDA for the quarter was $0.5 million, a 0.2% margin, just slightly below the midpoint of the guidance range. This was impacted by lower cash pay revenue and additional investments to support the scaling of insurance, including the accelerated nationwide rollout. These items were somewhat offset by a 17% decline in advertising and marketing expense versus the second quarter of 2025. Now turning to guidance. We expect 2026 consolidated revenue of $2.36 billion to $2.45 billion, a 5% reduction at the midpoint versus the prior range, primarily attributable to the updated BetterHelp cash pay outlook. We expect adjusted EBITDA of $271 million to $303 million, up slightly at the midpoint versus the prior range, and representing approximately 85 basis points of margin expansion versus 2025. Our free cash flow guidance remains unchanged at $130 million to $170 million. We now expect four-year stock-based compensation expense to be below $50 million, which would represent a decline of over 35% from 2025 and 75% lower than 2023 levels. And we now project net loss per share of $1 to 75 cents. Note that our cash flow and net loss per share guidance ranges do not incorporate any potential impact from changes in our current debt structure. For the third quarter, we expect consolidated revenue in the range of $569 million to $609 million and adjusted EBITDA in the range of $62 million to $74 million. Moving to the segments, for integrated care, we expect 2026 revenue growth of 0.8% to 2.4%. There were several factors that contributed to the updated range, including the deferral of a previously expected contract implementation in 2026 to 2027 at the client's request, and a lower relative forecast for FX, where we now expect the tailwind to be approximately 10 to 15 basis points below our prior expectation. We continue to expect international revenue growth in the high single digits on an organic constant currency basis. Our full year integrated care adjusted EBITDA margin guidance of 15.6% to 16.4% is up 40 basis points at the midpoint versus our prior guidance range and represents an increase of approximately 85 basis points over 2025. We are guiding the third quarter integrated care revenue flat to up 3% year over year, which includes roughly 25 basis points of contribution from prior acquisitions. and adjusted EBITDA margin in the range of 15.7% to 17.2%. Looking at the cadence for the balance of the year for integrated care, we expect the third quarter to fourth quarter ramp to be slightly greater versus 2025. This includes typical seasonality with respect to fluid infectious disease visits and impact of in-year implementations on the fourth quarter. Adjusted EBITDA is expected to benefit from continued execution of cost savings and productivity initiatives. Moving to BetterHelp, based on the factors and actions described earlier, we now expect 2026 segment revenue to decline 19.0% to 12.7% versus 2025, reflecting a greater decline in cash pay revenue. We expect insurance revenue in the range of $90 million to $105 million. While the total segment revenue range is wider, we believe it is appropriate based on the uncertainties inherent in cash pay and ongoing business model transition. Key swing factors include the timing and progress of insurance network capacity and platform related initiatives, growth and mix of insurance covered sessions, advertising and marketing spend levels, customer acquisition cost trends and user conversion efficiency and user retention. We are reaffirming our adjusted EBITDA margin guidance at 3.0% to 4.6%. This range contemplates mix impacts, investments to support insurance initiatives, and reduction in advertising and marketing expense in the mid to high 20% range, more aligned with the insurance priorities mentioned earlier. For the third quarter, we are guiding to better help revenue down 24.2% to down 12.3%. Insurance revenue is expected to be in the range of $25 million to $31 million in the quarter, up 29% sequentially at the midpoint. We expect an adjusted EBITDA margin of 0.5% to 2.5%, which is generally consistent with the prior year period at the midpoint. Looking ahead to the fourth quarter, we expect continued sequential growth in insurance revenue. And based on the third quarter insurance revenue range, if fourth quarter results are consistent with the midpoint of the implied fourth quarter range, that would equate to an annualized insurance revenue exit run rate approaching $140 million. Cash pay revenue in the fourth quarter is expected to be impacted by the actions we are taking to align with and support insurance objectives, as well as lower advertising and marketing spending due to holiday ad pricing dynamics. As a result, and similar to prior years, we expect the fourth quarter to see the highest adjusted EBITDA of the year. In closing, we have made meaningful progress on key initiatives that support our strategic priorities. While there is more work ahead, The team remains focused on discipline execution and delivering results with urgency. We remain confident in our strategy and we are taking deliberate actions that we believe will strengthen the durability of our business, improve long-term performance, and create sustainable value for shareholders. With that, we are now ready for questions.