1. Teladoc Health (TDOC) -- Adios
Teladoc Health reported its quarterly results this week. To be candid, I found them to be putrid to a point where I exited my position entirely. I wanted to briefly explore the results, explain what I saw in the company in the first place that made me want to own it, and what changed so abruptly.
Teladoc reported first quarter revenue that slightly missed expectations but was essentially in line -- this didn’t bother me all that much. On the adjusted EBITDA front, it actually slightly outperformed and the large net loss cited by many was really just fueled by a $6 billion write-down of the value of its Livongo purchase. This wasn’t cash-related and was inevitable considering how far Teladoc's stock had fallen.
From a profitability perspective, all key margin lines surprisingly contracted sequentially and year-over-year (YoY). Adjusted EBITDA margin (which investors are told to focus on) sharply contracted by 430 basis points sequentially and 290 basis points YoY. Nothing improved.
If this profit contraction was merely a blip on the radar, it wouldn’t gravely concern me. That, however, doesn’t seem to be the case. Teladoc’s adjusted EBITDA outlook for 2022 came in at $252 million which was a full 28% below analyst expectations. The guide implies a 10.2% margin for the year vs. previous margin guidance of 14.6% offered by management. Quite the miss.
Furthermore, CEO Jason Gorevic and CFO Mala Murthy both assured investors in February's Q4 2021 earnings call that BetterHelp (its D2C mental health branch) was doing just fine. Analysts were quite worried about competitive challenges cited by BetterHelp's competition, but leadership said these obstacles were not impacting Teladoc in the least. It was seemingly, supposedly immune. Leadership told us that its churn and customer acquisition cost (CAC) were both falling while lifetime value (LTV) rose despite its competition suffering from the opposite. It also told us that BetterHelp revenue would be margin accretive. Here’s a February 22nd quote from Jason:
“Having other virtual mental health vendors out there not performing at our level casts a negative shadow. To be honest, we simply outperform in this market. We are seeing all BetterHelp metrics make a tremendous amount of progress.” — Teladoc Health CEO Jason Gorevic
Fast forward to this week, and leadership blamed poor company results on these same competitive pressures. It used an article in the Wall Street journal with some anecdotal evidence on Adderall prescribing that I honestly found laughable and offensive.
This vastly disappointing segment update came shortly after management told us how confident it was about BetterHelp this year. To be precise, this re-assurance came February 22nd -- just weeks before this past quarter ended. Considering this, you’d think management would have been able to accurately guide Q1 BetterHelp expectations as it should have largely been a function of describing the past. Apparently not. I guess things completely changed in the time from its Q4 2021 call and the end of calendar Q1 2022.
This poor performance prompted the company to lower its revenue outlook by roughly 6% and prompted me to lose trust in management. As a public market investor, candid & trustworthy leadership teams are a must for me -- I no longer see this team as candid or trustworthy
It’s no secret that Teladoc has struggled to successfully integrate Livongo, and that made me far more reliant on BetterHelp’s success to remain bullish. This surprising and frustrating hiccup made that reliance far too precarious. I am not saying Teladoc can’t figure things out eventually, but I now see that as a lower probability event. I would rather focus my time and capital on other fundamentally thriving holdings.
So what drew me to the company in the first place?
The promise of whole-person virtual care. Telehealth has become widely commoditized from a point-solution perspective, but nobody matched the depth Teladoc offered throughout primary, chronic and mental care in a virtual setting. This allowed Teladoc to bundle and cross-sell solutions to raise its LTV and justify more spend on lucrative, low hanging market share. Adding Livongo’s remote-monitoring capabilities made me even more confident in its ability to stand out. This edge just did not manifest itself in a strong investment; the facts abruptly changed, so I changed my mind.
2. The Trade Desk (TTD)-- Ad Perceptions Survey & a Case Study
a) Ad Perceptions Survey
The Trade Desk shared an interesting survey of 150 advertisers with spend ranging from $20-$100 million on their 2022 up-front advertising plans. Here were the highlights:
- 35% of advertisers plan to raise their Connected TV (CTV) (AKA streaming) spend during up-fronts with 23% planning to keep spend flat.
- 95% of advertisers expect the scatter market (all non-up-front inventory) pricing to be “moderately high or very high.”
- CTV spend industry-wide is poised to grow at a 39% clip in 2022 to reach $29 billion. No slowdown here.
- 53% of CTV advertisers now expect live sports to be part of their CTV campaigns.
- (Netflix really could use some live sports content)
- 73% of publishers enjoy cross-selling other impressions to CTV advertisers that purchase live sports impressions.
The continued growth after a historically strong 2021 is an encouraging sign reiterating what we already knew: CTV is a rapidly growing freight train -- don’t stand in the tracks when the train is coming. CTV, which is encouragingly The Trade Desk’s largest revenue segment, should also get another large boost over the next 2 years as a result of Netflix finally deciding to embrace an Ad Video on Demand (AVoD) strategy. As a reminder, Google 3rd party cookie and Apple tracking policies do not impact the CTV signaling environment. At this vertical grows, so does The Trade Desk’s competitive moat vs. mega-caps.
b) Colgate-Palmolive CTV Case Study
Within a CTV campaign run through The Trade Desk’s platform, Colgate’s incremental reach grew by 19%. For a company doing north of $17 billion in annual sales, 19% incremental marketing reach is a massively lucrative driver not only of sales, but also profitability as Colgate gets more out of each marketing dollar within CTV vs. other channels. It’s amazing how much better granular, data driven targeting is vs. purchasing large blocks of linear impressions within up-fronts. The Trade Desk’s measurement tools freed Colgate to control ad-load frequency within CTV which had been a key barrier to its entrance up until this point. Its consumers had been getting annoyed with the sheer frequency of some ads within streaming. The Trade Desk fixed this.
The company -- according to Colgate’s head of programmatic media Jim Giacchetti -- was so pleasantly surprised by the success that it decided to make CTV a permanent piece of its marketing strategy. Colgate has now moved to purchasing both CTV and linear impressions through The Trade Desk’s platform. Another large, happy customer.
Click here for my TTD Deep Dive.
3. CrowdStrike (CRWD) -- Case Study
CrowdStrike released a case study on how its platform was working for the Illinois State Treasurer. The Treasury department had been struggling with bloated server needs, false positives and high costs. It re-vamped its tech-stack including on-boarding CrowdStrike’s Falcon platform.
The Falcon platform solved these issues from the previous vendor and delivered a sub 1-year payback period thanks to asset-lightening agent consolidation CrowdStrike facilitates. This is important. CrowdStrike’s offering is generally more expensive than its competitors. The only way it can get away with charging more is by providing incrementally more value. This is one sign (of many) of that being the case.
4. Revolve Group (RVLV) -- Proxy
Revolve Group’s executives continue to be very modestly paid. Co-CEOs Mike Karanikolas and Michael Mente both made around $450,000 in total compensation (including stock and option compensation) which actually fell slightly YoY.
This company has always been extremely disciplined with stock based compensation and options packages, and this is just another sign of that continuing. CFO Jesse Timmermans did make about $1 million in options during 2021 but there’s nothing of note aside from that. Board members barely made six figures in total consideration -- what a pleasant change from other public company compensation practices.