Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Teladoc 2Q 2016 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After speakers' remarks there will be a question-and-answer session. [Operator Instructions]. I will now turn the call over to Adam Vandervoort, Teladoc's Chief Legal Officer. You may begin your conference.

Thank you and good afternoon. I'm Adam Vandervoort, Teladoc's Chief Legal Officer. Teladoc intends to avail itself of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward-looking statements, within the meaning of that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Teladoc's actual results to differ materially from those expressed or implied by the forward-looking statements. For additional information on the risks facing Teladoc, please refer to our filings with the SEC. I'll now turn the call over to Jason Gorevic, President and Chief Executive Officer of Teladoc. Jason?

Thanks Adam. Welcome everyone on the call and thank you for joining us this afternoon to review our second quarter 2016 results. The second quarter saw continued strong year-over-year momentum in our business, with revenue of $26.5 million, an increase of 45%; membership of 15.4 million members, an increase of 34%, and visits of over 199,000 visits this quarter, an increase of 59%. Adjusted EBITDA loss was $10.5 million, an improvement of approximately 27% year-over-year and 12% sequentially. Doing a little bit of Mark's banter [ph] I'd like to start with our adjusted EBITDA for the quarter. We have said consistently that this would be the quarter in which our bottom line results begin to improve, and that we expect this trend to continue for the next six quarters, en route to EBITDA breakeven in the fourth quarter of 2017. Consistent with this, our second quarter losses were reduced by $1.4 million versus the first quarter of this year, as we have begun to realize leverage from the scale of our operations. Next, I'd like to highlight yet another strong quarter with respect to visit volume. With visits increasing at nearly twice the rate of membership growth, we continue to deliver more value for our clients every quarter. As we have discussed before, seasonality causes our visit volume to be lower in the second and third calendar quarters, and higher in the first and fourth quarters. In spite of being in the seasonal low, we delivered nearly 200,000 visits, making good on our promise of industry leading consumer engagement. During the second quarter, we also saw continued new client momentum, with wins across multiple market segments. Teladoc has been selected by Tenet Healthcare to be the telehealth solution for the Valley Baptist Hospital in Texas. We have also been selected…

Thank you, Jason. On the call today, I will review our second quarter financial results in greater detail, and then I will provide an update on our outlook for the remainder of this year. Revenue in the quarter was $26.5 million, that's an increase of 45% year-over-year. Subscription access fees accounted for $21.5 million or 81% of total revenue. The 42% year-over-year increase from subscription access fees was driven by a 34% increase in our membership base, which stood at 15.4 million members as of June 30, 2016. It's important to note that a 100% of this 2016 growth in membership and revenues was organic. We also experienced increases in our average PMPM fees from $0.45 in the second quarter of 2015 to $0.47 per member per month this quarter. Consistent with the discussion we had during first quarter review, we continue to see strengthening per member per month fees compared to last year. While this quarter's per member per month was equal to Q1, we believe our per member per month fees will grow to exceed $0.52 by the end of this year. One of the challenges in the second quarter in our direct-to-consumer behavioral health business, was to exceed our objective, to demonstrate greater than 35% quarter-over-quarter revenue growth. The key component to retail customer acquisition is digital marketing and the required advertising spent in this channel became increasingly more expensive on properties, like Facebook and Google. We have been working hard to generate greater yield from our targeted marketing campaigns. Additionally, we have been very busy on the product development front, as we continue to create innovative ways to capture new members. Finally, we have developed new price plans, in order to ensure we maintain our strong margin profile. It is important to remember that this channel…

Thanks Mark. I am very proud of our accomplishments in the second quarter, as we continue to demonstrate greater utilization and deliver significant value for our customers. However, we hold ourselves to a very high standard, and I am disappointed that we didn't deliver on a 100% of our objectives. With that said, I feel very good about our prospects for the remainder of this year and for 2017. With that, we will open the line for questions. Operator?

Jason, I just want to make sure that we noted; the 2016 net loss per share is expected to be between a loss of $1.47 and a loss of $1.50 per share. Thanks.

Operator?

[Operator Instructions]. The first question is from Ryan Daniels from William Blair.

Yeah guys. Good afternoon and thanks for taking the question. Jason, maybe I will start with one for you; in regards to the client lives that are being pushed into January 2017, I appreciate that's just a timing issue and not a client loss. But maybe you can give a little color on why they decided to delay that, and maybe if you have seen that level of client delays in the past?

Yeah. Thanks Ryan. Unfortunately, I have more insight into what goes on inside the health plans than I'd probably care to recall. The health plans are large and complex operations and they are constantly doing resource trade-offs among various projects; and in both of these cases, the clients are enthusiastic about rolling out the product, but because of various competing priorities internally, it took them a little longer to operationalize their side of it. For us it’s a 60 to 90 day process to bring a health plan up. But unfortunately, we can't control the operations within the health plan. So we have seen this in the past. Unfortunately, it's the large health plans where this happens, and those are the ones that have this kind of an impact. But we are full steam ahead with both of the clients for 2017 implementations, and unfortunately for us, they happen -- they sort of coincided and happened at the same time.

Okay. That's fair. And again, I appreciate the timing. And then, in regards to the behavioral market, can you just talk a little bit more about, in your view, what drove the uptick in marketing costs? Is that election related already with ads starting to come up, and then number two, given the lower yield, are you just effectively projecting that lower yield continuing, or do you have some work to do to meet your new revenue guidance, as it relates to the behavioral side?

Yeah so, I will take the advertising market, and then I will turn it to Mark for the projections going forward. You have probably seen the very strong results that have been posted by Facebook and Google. Both of those channels significantly increased their ad pricing, and that flowed through to us and impacted us directly. Now we have done, what I would say, is three things to address the issue; we are continually adapting our business, given the environment. So one is, we are continuing to diversify the marketing channels into other channels, both for advertising as well as sort of contextual sign-up opportunities for people who are likely to be in the process of something that would make them likely to need counseling. Two is to do a lot of work on price optimization, in order to optimize the revenue per member that we get, as we see an increasing advertising cost, we want to make sure that we are optimizing revenue, so that we get a higher revenue per member. And then, the third one is, a fair amount of product development, so that we retain our members longer. So obviously, a subscription based model, the longer we retain a member as being active, the greater value they have to us. Mark, do you want to talk about the projections going forward?

Yeah. Ryan, what we did is, obviously we trimmed some of the figures coming from behavioral. The costs that we incur with Facebook and Google are based on a very dynamic auction based pricing for all of the current advertising. So we believe that pricing was going to remain high, especially if there is demand in the latter part of the year, as we approach the election. So that led to again, some of the trimming of the numbers.

Okay. And then, one final one, a quick follow-up there; where was the behavioral weakness, what revenue line did that show? And is that in the access fee line, because you are charging a fee for those -- so its access?

That's correct. Yeah. Subscription access.

Okay. Thanks guys. I will hop back in the queue.

Thanks Ryan.

The next question is from Nina Deka from Piper Jaffray.

Hey guys, thanks for taking the question. I was wondering if you could provide some insight on your growth strategy in the provider segment? For example, is your platform revolving to allow for white labeling, and also are members within the provider segment able to set up appointments with their own doctors or do you see a plan for that down the road?

Thanks Nina. We have a team specifically focused on product development just for the provider segment. They have been working very closely with some of our clients and sort of co-product development. We are seeing today, a lot of demand for platform as a service, where we sell them the technology platform. And then, they buy from us, a range of operational and physician network capabilities, all the way from them doing everything themselves to our full turnkey solution, where we provide the network, the operations and the technology. We do enable specific matching of the physician and the patient, so we have had that capability in our platform for many years, where we do, what we call the private network. Specifically in this case, we use the systems, providers, and if we have attribution, we match the patient to their very own physician. And then of course, we are going to roll to a coverage group or to the whole Teladoc network, depending on the rules that we build into our queuing system. So, we are seeing very strong demand in the provider segment. I'd say, we have made a huge amount of progress there, over the course of the last year, which is really when we stood up that dedicated unit.

Okay, great. Thank you.

The next question is from Mohan Naidu from Oppenheimer.

All right. Thanks for taking my questions. Jason, going back to the two large prospect delays, were they expected to go live in midyear or can you give us little bit more details on when they were supposed to go live and when do you guys realize that it's going to be moved on to 2017?

Yeah. Both of them were scheduled to go live early third quarter, and really, we only learned about it over the course of the last few weeks, as we started to get to the final stages of implementation, and they pushed out into 2017.

Okay. Mark, on the revenue guidance, can you help us understand how much of the cut came from these two client delays versus the expectation of increasing visits coming from visit included members?

The reduction for our revenue for the remainder of the year was principally from the behavioral health unit, and when I say principally, it's probably a 70-30 split. There is no reduction from revenue for the actual visits to be completed, that's coming at the numbers we expected for the year, slightly higher actually. So the offset there, to close the gap, was really a combination of some of these delayed, and other subscription access fees that didn't come to fruition in the second quarter.

Okay. So about 70% from the DTC, the behavioral?

Correct.

Okay. Thank you very much.

The next question is from George Hill from Deutsche Bank.

Good afternoon guys and thanks for taking the question. I am going to ask these two questions, I think they have been touched on a little bit different ways. Mark, did you give, what I would call the visit capitation rate in the quarter, or what percent of the visits were delivered under kind of that all you can [ph] model, and is that something you would share?

Yeah. We just started in this quarter and we are going to continue to illustrate that for the remainder of this year and going forward. The visits this year or in this quarter, 64% fell under the paid visits. The remaining 36% over the visits included model, obviously that percentage and the number of visits under the paid model will be increasing, beginning the start of the third quarter when we began consolidating HealthiestYou.

Got it. Okay. And then Mohan was kind of going down this question, but I was going to ask it; is there anything unique about the members that are being pushed out to the start of the next year, because if I did like a six month analysis kind of number of members, guided down by times of average member per month times expected utilization. The math didn't seem to add up, but you said it's -- you said the mix is weighted more towards behavioral -- so I think I asked that question then answered it myself. I guess, the last thing I would end with is, you gave a little bit of indication about selling season into 2017, where you talked a little bit about pricing environment, and do you expect the pricing environment generally stable into 2017?

Yeah. We think its stable and in fact, as we make a bigger push into the smaller end of the market with the HealthiestYou acquisition, we actually think we have some pricing expansion opportunities in that end of the market. But generally speaking, I would say that its stable.

Okay. I will hop back in the queue. Thanks.

The next question is from Steve Halper from FBR.

Yeah hi. Just to clarify, the behavioral health revenues are included in the subscription access percentage?

That's correct.

Yes, that's correct, Steve.

Okay. So what of the 64% paid visits -- what percentage of those are under the higher pricing, right? Because aren't you rolling in higher prices per visit?

The $45 price increase.

Yeah. The greatest percentage, in excess of 80% of the visits are still at $40 today. There is legacy contracts from the acquired businesses that we picked up through AmeriDoc and Consult-A-Doc. One or two specific clients, a large airline and a few other clients that still have legacy contracts that provide for $30 visit fees, through the end of 2017. Those $30 tend to offset the $45 visit fees that we began collecting at the beginning of this year. Clearly, those will begin rolling off and the impact of the higher priced $45 visits as well as the specialty visits, will bring our average realized revenue per visit above $40 very shortly.

Great, thank you. Could you just go through the impact on the paid and non-paid visits after considering the HealthiestYou acquisition?

Pro forma for that acquisition, there is going to be a greater percentage of included visits. Therefore, the current paid visits percentage is going to and expected to decrease, as a result of those far higher per member per month subscription fees coming in, and those began on July 1.

Okay. And you said something around 40%, is 40% sort of the run rate of sort of non-paid visits?

That was the rate at the end of Q2. That rate is expected to climb. And we will see a -- most likely a 10% increase in visits coming into the visits included model.

Thank you.

The next question is from Charles Rhyee from Cowen and Company.

Thanks for taking the question. Jason, if I can go back a little bit on the direct-to-consumer advertising costs; and I might have missed it a little bit when you were answering an earlier question; without that advertising, you said it led to less revenue. Is the decision not to make that spend tied to -- trying to hit our breakeven EBITDA targets, or how necessary was that advertising for some of the missed revenue that we saw in the quarter?

Yeah. Thanks for asking that. We are constantly balancing between growth and making good on our commitment to march to profitability. And so, we always try to be good stewards of capital and make sure that the dollars that we are spending will yield positive results for us. And so, we make those trade-off decisions all the time. We don't have perfect information on the yield that will come from our advertising spend in any quarter, but we do try to be disciplined in our spend rather than chasing, so to speak.

And so this is just general advertising to consumers, like Facebook or Google, so that maybe, someone in HR sees it or somebody who is running a small business might say, hey, this is something we should look at? Or is this targeted to people who -- so this is just de novo prospects?

Well Charles, this is specifically the advertising we are talking about, is advertising for our direct-to-consumer behavioral health business. So this is trying to convert consumers into paying customers of our direct-to-consumer behavioral product.

Okay, thanks. That's helpful. If I am looking at the implied per visit fees, it looks like it steps up based on the revenue per visit guidance. Am I looking at that correctly? And just -- is that just, as we think about behavioral health still ramping up?

You certainly have a combination of behavioral health visits coming in and you also have just a slight mix shift, as a result of the busier cold and flu seasons, you are going to certainly have a few more paid visits coming in. So it’s a combination of the two, and that's what we'd expect through the rest of the quarter.

Okay. So that's just more a function of seasonality than anything, is what you are saying?

Exactly. And we said earlier that those -- I was just going to add Charles, we said earlier that we have got -- today, 36% of those visits come from those capitated or visits included models, and then we suggest that at the end of the year, that number would grow about 10% to 40% of total visits.

Okay, that's all. Then just one last clarification on the health plans that are moving out to 2017. Jason, you referred to my one point as prospects, but its right to think -- these are signed clients that we are just waiting to onboard them?

Yeah. These are closed deals. We are just -- we had hoped to implement, as I said early in the third quarter, that's where the mutual agreement was. But we can't control the internal operations of these large health plans. And so, they push out to 2017. I guess, stepping back, I am disappointed that that's going to impact our revenue for the year. But for the first half of the year, we still delivered 54% year-over-year revenue growth, and the business is healthy across multiple dimensions. So the timing is unfortunate, but I don't think that that should provide a commentary on the health of the business.

And one last question, with the closure of HealthiestYou, what was the discussions like going back to your legacy Teladoc customers, since the deal is closed and since you had the call a few weeks back. What kind of dialog have you already begun with those clients about adding on new services? Thanks and I will stop there.

Sure. So we have started exposing our existing clients to the HealthiestYou functionality, and we have a long list of clients who are asking for those capabilities. I think the breadth of technologies and consumer engagement tools that HealthiestYou has assembled, really resonates with clients. And so, we are sort of taking this approach of taking -- first order of business is to make sure that we have our whole team in the under a 1,000 market, selling the HealthiestYou product. Second, looking to upsell that product to our existing customer base in the small end of the market. And third, to bring those capabilities to our larger enterprise clients.

Okay, great. Thanks a lot.

The next question is from Lisa Gill from JP Morgan.

Thanks. It's actually Mike Minchak in for Lisa. I was wondering if you could go back to your commentary on the size of the DTC business? I think you said that the business was expected to go from $5 million in 2015 to $11 million this year. Do I have those numbers right, and is that $11 million your updated forecast in light of the shortfall this quarter? And then I think you also talked about adjusting some of your pricing in the direct-to-consumer segment, can you provide any color on that, and is there any early read on whether new pricing is having any impact on demand?

Yeah Mike. So this is Mark. The DTC business did in fact complete 2015 with $5 million in revenue and we are now adjusting our expectations to $11 million this year. Year-to-date that business is just under $5 million in revenue today, and again, we will continue to see based on existing subscriptions, well, continue to see that grow, and we believe we are very confident that we will reach that $11 million mark.

And then the impact of the pricing strategy changes?

The impact of pricing strategy, as Jason had noted, will both help retention and by bringing on those clients that we believe are going to be longer term subscribers, we have a mix today of anywhere between $140 and $280 subscribers on a monthly basis, principally based on when they actually subscribe to the service. There are some subscribers that have been with us on a month-to-month basis for over 18 months now, and then others of course, those who had joined most recently, are paying a subscription access fee of $280 a month, on a monthly basis.

Got it. Thanks for the comment. And maybe just one follow-up, so total visits and utilization rate continue to look strong; can you talk about what the key drivers are there? Are you starting to see any impact from customers adjusting plan designs and copay structures to incentivize patient fees, telehealth versus other more expensive care settings?

Certainly, we are seeing some of that. But I would say, to be honest, the biggest impact is our continuing evolution to more sophisticated consumer engagement strategies. This year, we have used a lot more digital targeted communications, social media and other ways to specifically target our members, in order to have much greater frequency of messaging to them. So that when they actually need the service, we are top of mind for them. That's a change and an upgrade since Stephany Verstraete joined us as Chief Marketing Officer, at the beginning of this year. And I think, it's really bearing fruit for us. And you see that, we saw strong engagement utilization in the first quarter, and we see that trend continue in the second quarter, in spite of the seasonally low quarter.

Thanks for the comments.

Thanks Mike.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.