Adam Vandervoort - Chief Legal Officer Jason Gorevic - President & Chief Executive Officer Mark Hirschhorn - Chief Operating Officer & Chief Financial Officer.

Sean Wieland - Piper Jaffray Lisa Gill - JPMorgan Sandy Draper - SunTrust Jamie Stockton - Wells Fargo Ryan Daniels - William Blair Mohan Naidu - Oppenheimer Richard Close - Canaccord Genuity Charles Rhyee - Cowen Matthew Hewitt - Craig-Hallum Capital Matt Gillmor - Robert W.

Baird Donald Hooker - KeyBanc Steven Wardell - Chardan Capital Markets Steven Halper - Cantor Fitzgerald.

Welcome to Teladoc's Second Quarter 2017 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode, and the floor will be opened to your questions following management's prepared remarks.

[Operator Instructions] It is now my pleasure to turn the floor over to Adam Vandervoort, Chief Legal Officer, you may begin..

Thank you, and good afternoon, everyone. We look forward to discussing our second quarter 2017 results with you today. Joining me for Teladoc’s conference call are Jason Gorevic, our President and Chief Executive Officer; and Mark Hirschhorn, our Chief Operating Officer and Chief Financial Officer.

Today, after the market closed, we issued a news release announcing our second quarter 2017 results and filed our Form 10-Q. The release and filings are available in the Investor Relations section of teladoc.com. As a reminder, Teledoc 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 in that law. These forward-looking statements are subject to risks, uncertainties and other factors that could cause Teledoc's actual results to defer materially from those expressed or implied by the forward-looking statements.

For additional information on the risks stating Teledoc, please refer to our filings with the SEC. We'll start today's call with brief prepared remarks, followed by Q&A. Today's call will also contain certain non-GAAP financial measures, which we believe are important in evaluating our performance.

For more details on these measures, the most comparable GAAP measures and a reconciliation of the two, please refer to the press release posted on teladoc.com. I now turn the call over to Jason..

Adventist Health comprising 19 hospitals across the western United States; Washington Health System in western Pennsylvania; and CareMount, the largest independent multi-specialty group in New York State.

Increasing our client roster reflects the strength of our solutions versus our competitors, in addition to the tremendous flexibility of our solution for the hospital market.

Teledoc's vision is to health providers build healthier communities and improved patient outcomes, which is clearly resonating with clients, and I'm very pleased that we have been able to work with existing constituents in the market to improve the overall healthcare delivery system.

We were also pleased by the contributions from our behavioral health offering, in which revenue more than doubled year-over-year to reach approximately 6.9 million in the second quarter. We fully expect to maintain this growth trajectory throughout 2017.

Now I would like to address the company's tremendous opportunities that come with the completion of the Best Doctors merger. As you all know, we successfully closed the Best Doctors transaction on July 14, ahead of the schedule that we laid out in our initial announcement.

Since then we have been hard at work sharing our future vision with our clients and partners, planning for the integration of the two companies and identifying and prioritizing the many changeable growth opportunities in both the short and longer term.

First I would like to share our evolving vision for Teledoc, given the strong capabilities that Best Doctors brings to the organization.

With clinical capabilities that span the entire healthcare continuum, Teledoc will soon represent the first stop for many consumers around the world looking to resolve their healthcare issues in the most efficient, high quality and cost-effective manner.

Regardless of their need ranging from cost to cardiac conditions, Teledoc will have the ability to help solve their concerns.

By providing a single interface and intelligent guidance due to full spectrum of clinical capabilities, tools information and guidance in the Teledoc portfolio, we will transform how the consumer accesses the healthcare system, providing greater convenience, better outcomes and unmatched value.

This vision clearly resonates with our clients, members and partners. I have been through many acquisitions, but I never had clients so immediately excited and so quick to grasp the potential opportunities created by combining two organizations.

They literally can't wait for us to deliver the fully integrated offering, and they are telling us that this is a game changer. Next I would like to give a brief update on the integration of the two companies. I'm incredibly pleased with the progress that we have made in a very short time.

In July, we held a leadership meeting that brought together the top 60 people from the combined organization for two days, with a focus on aligning around the common vision and set of priorities and tackling some of the large cross-functional integration efforts.

The session was amazingly productive with all participants energized around realizing our potential.

We have a strong roadmap for multi-phased implementation of an integrated approach to operational, product and go-to-market strategies that focuses on achieving a greater vision while capturing near-term growth opportunities such as those presented by cross-selling the Best Doctors’ products to the small employer and health plan markets, where Teledoc already has a very strong foot print.

Lastly, I want to highlight how I've been struck by the similarity of the Best Doctors and Teledoc management cultures. Again, I've never seen an integration effort in which all participants were so collaborative from day 1, and I think it’s a testament to the maturity and mission orientation of the two management teams.

Both organizations truly believe we have the opportunity to make an enormous impact on the healthcare system and transform how people get care, and the common culture flows from that goal. Before I turn the call over to Mark, I would like to provide an update on the legal and regulatory fronts.

Texas Bill 1107 having passed both House and the Senate unanimously, was signed into law by Governor Abbott on May 27. The new law makes it clear that a patient-physician relationship may be established using telemedicine and brings to a close our six-year legal fight with the Texas Medical Board.

We're extremely proud of all of our employees and the numerous constituents that we worked with to enact this new law. Teledoc spearhead the effort to provide the people of Texas with a clear and legal path to quality, affordable and accessible healthcare. We also continue to see great progress across the nation.

New Jersey, Illinois, Minnesota, Arizona, Montana and other states recently acted telehealth-friendly legislation. As you can see, we have a lot of existing things going on right now at Teledoc.

I'm very pleased with the results we delivered in the second quarter and I have every reason to believe that we're track to reach our year-end objectives, where we continue to target the fourth quarter to achieve positive adjusted EBITDA.

We will continue to execute on our growth strategy of extending our industry leadership and successfully cross sell new and innovative solutions, such as the Best Doctors portfolios of services, to existing members and prospects.

Having just completed the most exciting quarter in the company's history, one marked with record financial performance and historic piece of legislation and the company's most significant acquisition and the strengthening of our balance sheet, the public profile of Teledoc is getting stronger every quarter.

I've never been more optimistic about the opportunity ahead of us. And as we celebrate Teledoc’s 15-year anniversary, I'm proud of our employees, how continue to keep our promises to our members, our clients and our investors. With that, I'll turn the call over to Mark to review our second quarter results in greater detail. .

Thanks, Jason, and good afternoon, everyone. We will start with revenue, where we recorded $44.6 million, representing 68% growth over the prior period. Organic revenue growth was approximately 50% over the same period last year.

Subscription access fees accounted for $37.5 million or 84% of our total revenue and grew over 74% year-over-year, reflecting overall membership expansion and significant contributions from the growth in direct-to-consumer behavioral health services.

Consistent with the past several quarters trend we continue to experience strong growth from our health plan partners, our DTC offerings and continued expansion in our core distribution channels targeting small to mid-size employers who embrace bundled, visits-included contracts with higher PEPM rates.

Our average per-employee per-month fee, or PEPM, across our business was $0.61 compared to $0.47 in the prior year period, a 30% year-over-year increase reflecting the positive impact from the increased visits included subscription mix, I just noted. Subscription access fees grew 9% sequentially from Q1 of this year.

Our visit fee revenue for the quarter grew 44% year-over-year to $7.1 million. 100% of this growth is organic. Turning to total visits, we completed approximately 309,000 visits in the quarter or growth of 55%. As we always expect visit volumes to peak in the first and fourth quarters, we were pleased with our second quarter volume.

This equates to a quarterly annualized utilization rate of 6.1% and an 84 basis point increase over the same period in 2016. I would like to spend a minute or two on the very positive trends developing within our gross margins. Over the past two years, we’ve launched new versions of our mobile apps in addition to several significant enhancements.

These innovations have generated greater member interest in Teladoc, and in particular as resulted in the meaningful shift from telephonic visit requests to mobile requests.

This behavior change, in addition to the revenue mix of 84% subscription-based revenue help Teladoc generate stronger margins as our cost of service declines when our members leverage our technology. Our gross margin for the quarter was 77.5%, the strongest quarter ever recorded by the company and an increase from the 74% we recorded a year ago.

Our total operating expenses in the first quarter were $46 million, which increased 43% over the prior year. Sequentially, operating expenses increased by approximately 3 million, with much of that increase in absolute dollar terms attributable to acquisition related costs and stock compensation costs.

Other modest increases we’re seeing in sales and technology to support our 68% revenue growth. As we have throughout the past several years, we will continue to invest in our infrastructure with a focus on value creation and scale. We intent to harmonize our three member service locations in Lewisville, Texas; Phoenix, Arizona and Boston.

We will better serve our members with fully redundant cross-trained colleague that can assist members with all aspects of our service offerings. While we have recently launched several multi-disciplinary integration efforts, we are creating a few exciting operating models that will inevitably benefit members and shareholders alike.

The company’s adjusted EBITDA improved to loss of $5.1 million compared to a loss of $10.5 million in the same period last year. We are very pleased with our progression towards positive adjusted EBITDA for the fourth quarter of this year. Our net loss in the quarter was $15.4 million, compared to $14.9 million in the same period last year.

Net loss per share was $0.28 compared to a net loss of $0.38 in the same period last year, reflecting our higher share count in the current period.

Our weighted average common shares outstanding were 54.6 million shares in this period compared to 38.7 million shares in the same period last year, reflecting the issuance of 7.9 million shares from our follow-on offering in January of this year, in addition to the 7 million shares issued for the acquisition of HealthiestYou in July 2016.

Turning to our balance sheet. We ended the quarter with over $400 million in cash in short-term investments, reflecting the proceeds from our $275 million convertible offering this past June.

Our financial statements reflect debt of approximately $200 million, net of the debt issuance cost of $12 million from our convertible notes, reflecting the classification of approximately $62 million that represents the computed equity component of the notes.

This amount will be amortized over the 5.5-year life of the debt, but weighted average cost of our debt is now approximately 5% annually.

Our Silicon Valley Bank debt balance remained constant at $42.4 million; however, in July, in connection with the closing of our $175 million senior secured debt, we used a portion of our new debt facilities to pay off the entire SVB bank debt.

Pro forma for the effective the debt issuances and the acquisitions of Best Doctors and after paying all of the respective transaction fees, the company has more than $150 million of cash at June 30 of this year.

We believe our strength and capital position affords us tremendous flexibility to manage the business requirements for the next several years. Now, I would like to provide our outlook for the third quarter of this year, which includes the results of Best Doctors from July 14, the date we closed on the acquisition.

We now expect total revenue between $67 million and $68 million for the quarter; EBITDA loss between $16 million and $17 million; adjusted EBITDA loss between $2 million and $3 million; and total membership of approximately 22 million to 22.5 million members; total visits should come in between 275,000 and 300,000 visits; and net loss per share based on 56.5 million weighted average shares outstanding is expected to range from $0.56 to $0.58.

For the full year 2017, we now expect total revenue between $230 million and $235 million; an EBITDA loss between $46 million and $48 million; and adjusted EBITDA loss between $15 million and $17 million, in which we expect to achieve adjusted EBITDA positive results in the fourth quarter of this year; total membership of approximately 22.5 million to 23 million members; total visits between 1.4 million and 1.45 million visits; and a net loss per share based on 55.1 million weighted average shares outstanding is expected to range from the loss of $1.52 to a loss of $1.55 per share.

Finally I wanted to mention that we will be hosting an Analysts Day in New York in mid-November. We will use this day as an opportunity to do deeper dive into the combined Teledoc and Best Doctor businesses as well as to give you a chance to get to know a number of our senior leaders.

We are finalizing the exact date, and we will provide more details later in the summer. And with that, operator, please open the call for questions..

[Operator Instructions] Your first question comes from the line of Sean Wieland with Piper Jaffray. Your line is now open. .

Thanks and congrats on getting the transaction done.

My question is on if you can just help us out with how are you going to fold the Best Doctors acquisition into the model? You gave us the numbers, but specifically, I think that the membership number that you guided to is that inclusive now of the Best Doctors acquisition? Are you going to ramp the Best Doctors visits in.

So first off on an operating metrics perspective and then on a financial basis, like interest expense that kind of things going forward?.

Sure. Thanks, Sean. It’s Mark. We will end up incorporating the Best Doctors’ metrics for membership in the U.S.

that is similarly to find to our membership today when every one of our 20-plus million members is a paying member, right, either a health plan or an employer is paying Teledoc for access to our services for membership in the United States for employer membership that Best Doctors had. We're going to be adding that membership.

However, for membership that comes through health plans as well as international membership, will be providing for that dollar breakout, but we will not be including those individuals that are covered in our total membership number. So you will have domestic and you will have international as well as some U.S.

health plan and workers’ comp revenues, but that will not be included in the actual membership number. .

Okay, is it same go for visits too?.

Visits will also be broken out, correct. .

Okay.

And then going down to interest expense and acquisition-related expense built into your guidance for Q3?.

Yes, that’s all build into the guidance and that’s all been consolidated under the one entity. All of those costs, both interest elimination of other costs and new costs for issuances, of stock compensation and the like is all covered in the guidance for the remaining part of the year.

We’ll be laying out the complete format, Sean, in November at the Analyst day. .

Okay, thanks. And then just one. Jason, you mentioned the A word, and media reports out that Amazon once again into this business.

I know they are a customer of yours through your comments, but what are your thoughts on that?.

Yeah, so exactly, I talked about them as a customer, not as a competitor. So look, I would start by saying they are not the first large technology-oriented company to potentially be interested or express interest in this space. As you know, Google tried to enter this area. Verizon tried to enter this area.

It is as I think we've demonstrated, not as easy as it looks.

And I would say that while I would expect them to get into areas where they have clear capabilities to leverage their logistics and distribution capabilities, for example, with a pharmaceutical distribution and/or medical supply distribution, the remote delivery of care, building doctor networks, dealing with the 50-state regulatory environment is pretty far a field from what they do.

So I'm not - honestly, I just don’t lose flip about them as a competitor, and even if they do decide to get into this space, it's going to be many years before they have any real footprint. So I just - again, I don’t consider that to be a significant drag..

Okay, thanks for that..

Your next question comes from the line of Lisa Gill with JPMorgan. Your line is open..

First, I want to congratulate you not only on the quarter but, Mark, I will be happy -- Jason and Mark, happy to never talk about the Texas Medical Board again with an investor. I’m so happy that we’re just moving forward to that.

But, Jason, if we could just maybe start with the 2018 selling season, my guess would be you’re probably right in the heart of it right now with both your health plan relationships as well as within employers.

Can you maybe just give us any highlights in the early parts as we start to think about 2018?.

Yes, Lisa, thanks again for the congrats on Texas. We couldn’t be more happy. So I would say we are in the middle, as you say, of a very strong selling season. Across all of our market segments, we’re seeing really good receptivity to our whole portfolio of products.

And in fact the announcement of the Best Doctors acquisition has improved a lot of the discussions that we’re sort of mid-cycle as clients start to see the possibility of what we can bring them in the future in an integrated model.

The other thing I think I would say is that we're seeing more very large opportunities during this selling season than we've seen in previous selling seasons.

So, of course, I'm happy that we are seeing strength from the small group market all the way up through the health plan market, but the defining characteristic of where we are in this pipeline versus the same line last year is more large opportunities. .

And when you say large opportunities, are you talking specifically larger in player opportunities or larger health plan? I mean is there a one segment that you see as more prevalent right now than the other?.

It is really across - well, obviously not in the small group market but across both health plans and employers, we’re seeing more very large opportunities..

And then, Jason, if I could just understand one comment that you made around Amazon, I understand that you have a relationship with them and you are their telehealth provider. But in following your company now for the last several years, it's really getting people to know and understand what telehealth is and the benefit that's out there.

Do you see a potential opportunity to maybe partner with Amazon? I mean, I think almost everyone visits Amazon at some point in their day, so could you see a potential opportunity there where you are almost like a reseller where they push it back out to Teledoc?.

Absolutely. I think we are more likely a -- they are more likely a distribution channel for us than they are a direct competitor. .

That's helpful. Again, congratulations. Thanks, guys..

Your next question comes from the line of Sandy Draper with SunTrust. Your line is open..

A Couple of questions. Mark, can you guys remind me first in terms of the mix of the revenue model U.S. versus international? I know it's different. I'm just trying to remember which one is PMPM and which one is the other, just trying to think about sort of following up on Sean’s question about how the revenue is going to flow in..

Yes. So overall, Sandy, we are going to expect about 15% of our consolidated revenues to come from international. Actually, res, we got again the per-member-per-month fees from our enterprise, our commercial clients, the employer clients in the U.S. is going to be laid out separate and distinct from the non-U.S. clients.

Generally, or I’d say the majority of all of the non-U.S. revenue is coming from large insurers and financial institutions that are providing the Best Doctors benefit to their membership. It is quite frankly very different in its composition to any employer-type contracts that both the Best Doctors entity and Teladoc has entered into in the U.S..

And then the next question is sort of a oxidant in the spectrum from the big A. One of your competitors on the pure telehealth side looks like sort of trying to make some ways and Texas is offering a $10 special for telehealth.

I know that’s more of a B2C model, but is there any thought about meaning to respond or anybody trying to go after prices away to attract business?.

Absolutely not. We would never chase price like that. We don’t think we need to.

If we know that that’s not sustainable and it’s - as if I had to analyze it, I would probably say that they feel like they’re not going to have to give away too many visits since they launch the promotion for a limited amount of time in the middle of - at the beginning of August, right, not exactly peak season.

So I think that that’s something that will be a press release and we’ll never hear about it again..

That makes sense. And then the final question. And I still don’t know how that quite characterize, but to me pretty clearly you guys are moving beyond just being a basic telehealth provider. And to be broader sort of healthcare cost containment, better practice for employers in managed health plans, that’s helpful.

But I’m just trying to thinking without trying to give your card away, are there certain walls you’re not willing across? I would assume you don’t want to go into bricks-and-mortar. But clearly, with the two recent acquisitions, you’re moving beyond just deliver it being a basic telehealth provider.

So I’m curious, Jason, if you have thoughts about, “Okay, these are barriers that we’re not going to across, but beyond that we’re willing to think outside the box? Thanks..

So you’re exactly right. We have no intention of getting into brick-and-mortar care. We do believe that it’s important for us to be able to resolve the consumers’ issues. And for us, we’re not just simply and information provider. We want to help the consumer resolve their issues.

We may go into things that increase the stickiness and the frequency of interaction with our app or with our services so that we can funnel someone to a more active interaction when it’s appropriate.

And I think you’ll see us develop new services that leverage the receptive capabilities of Best Doctors with their sort of high-end specialty care and Teladoc’s volume transaction processing and services.

So that could look like things around chronic care management post discharge, adherence and follow-up visits for the hospital systems, things like that. So it’s a long answer to I think a good question, but I think it gives you a little more of the direction of where we are going.

And again, as Mark said, we will try to provide some more details about the longer-term vision when we host the analyst day in November..

Your next question comes from the line of Jamie Stockton with Wells Fargo. Your line is open..

I guess, maybe the first one, Mark, just to save you guys a bunch of questions offline, what's the explicit Best Doctors’ contribution within guidance I guess maybe for revenue and the member number?.

Sure. The member number is under 1 million members. Again, this is just U.S. employee membership for revenue. For Best Doctors, we have guided between 20 million and 26 million for quarters 3 and quarters 4. For quarter 3, we have the full quarter, except for the first two weeks of July, as we closed on July 14.

So we have got somewhere in the range of about $22 million, and then in the Q4, we are also in the range of about $25 million, $26 million..

And then you called out the very strong gross margin during the quarter and how you are seeing out more requests coming via the app, which makes me wonder whether we are getting any closer to the day when you guys can pull back on the advertising and marketing spend to drive awareness and somehow drive more awareness through the app.

If you can get it on people [indiscernible], you have to send them something in the mail to make them aware that they’ve got the benefit, stuff like that.

So I know that you guys talked about it a little bit on the call last quarter, but just any updated thoughts on what's going on there and whether or not we’re any closer an inflection where awareness could be driven at a much lower costs?.

I think you are starting to see that, Jamie. If you look at the mix of our marketing spend, it has shifted over the course of this year versus last year to much more digital and much less direct mail.

So we still are in a place where we have do consumer engagement, but our consumer engagement is shifting to electronic, and that’s part of what's driving the higher use of the app. Because, of course, when we market digitally, we are not marketing -- while we are marketing people to move to digital channels to interact with us.

So I think we are seeing the benefit of that and we get higher yield from that because it's both lower cost and more targeted..

Maybe one more question, Jason, just your thoughts on - I saw this Medicare Telehealth Parity Act of 2017, which works like a reasonable plan for getting Medicare to fully reimburse for telehealth over a number of year.

Are we any closer on that front to a fix? Or is there just some good ideas on the board but not the kind of momentum in DC that you would like to see yet?.

I think I would call it a long, gradual march. We continue to see positive steps, sort of one bill at a time that chip away at the barriers to larger-scale telehealth adoption and reimbursement, but I haven’t yet seen a silver bullet come through in something that I think is going to change the game over night.

So I'm optimistic that we continue to move in the right direction, and of course, all that states that we mentioned that have past positive telehealth legislation are good indicator of that, but I don’t see anything that I look at today that I think is going to a create a C change. .

Your next question comes from the line of Ryan Daniels with William Blair. Your line is open. .

A couple of follow-up here.

First, in regards to, Jason, the larger opportunities both among employers and health plans, is that due to greenfield opportunities opening up for different providers that either who were not really adaptors or one of the legislative landscape to improve, or is it more a function of potential market share shifts with those entities not happy with their current vendor?.

The answer is both, Ryan. We're seeing large opportunities both from organizations who have not yet adopted telehealth as well as those who have adopted and been dissatisfied with what they are getting from another player. .

Okay, that’s helpful. And then you talked about kind of the future of the organization in this integrated model across the care continuum that’s generating a lot of interest in the customer base.

I'm curious if that’s something that you promise this selling season for a 1/1/2018 start? Or is this something that is going to take longer so we probably won’t see the benefit of that integrated model manifesting in the numbers totaling early in the year 2019?.

So we will deliver for our common customers, meaning those have both Best Doctors and Teledoc historically, a combined interface, an integrated interface where the consumer can interact for both sets of products through a single app, through a single web interface and through a single call center. That will be available for January 1.

Have been said that, the most full vision for the consumer coming to us with a broad array of healthcare needs and Teledoc acting as there guide to our wide array of products and services won't come online in its full form until some time in the middle of 2018.

So progress and meaningful value, January 1; but realizing the fuller vision, middle of '18. .

Okay, that’s helpful. And then a final one for Mark and then I will get out. Just in regards to the guidance, I know the old membership guidance of 21.5 million to 23 million. I think it’s now 22.5 million to 23 million.

So is there any nuance if the higher end where you’re not taking that up, despite those doctors coming in with over a million numbers?.

Ryan, the one metrics where I think we didn’t exceed the top end of the scale was in membership and that it started off somewhat lower in Q1.

Even though we continue to generate the strength on the top line of revenue, it's coming in with a mixture of both the smaller and mid-size clients paying that for higher per member per month as well as the contribution from our behavioral side.

So I think the gap in the membership will begin to narrow that down as we continue to work through what we believe is going to come on throughout the next two quarters, but we’ll refine that a little bit more, especially when we provide for year-end guidance after Q3 and then when we look into '18.

But it is getting somewhat more -- there is a little bit more of a contribution from the behavioral side, which as you know was about 15,000 existing subscribers paying somewhere around $200 a month. The impact there is significant, but the requirement roll the model up from purely a subscriber base is no longer a 100% accurate. .

Okay.

So put simply, the revenue outlook is largely unchanged, or unchanged for the core business, but the composition in that revenue is just a little different?.

That's precisely right..

Okay. All right, great. Thanks, guys. I appreciate the color. .

Your next question comes from the line of Mohan Naidu with Oppenheimer. Your line is open..

Jason, maybe a quick one around the competitive landscape.

What do you think about potential implications of EHR companies trying to open up telehealth platforms and trying to increase physicians to do telehealth for their own physicians? What are the barriers there to deal with?.

We are seeing very, very strong momentum in the provider market. We are -- our close rates are probably right now highest in that market.

And what is dramatically different is a pure technology solution that enables someone to interact between a member and a physician or patient or physician is a small portion of the total solution that we offer to a provider. And that is very, very evident as we go through the sales process and the client needs exploration with our hospital systems.

And we see many, many times that the providers are considering an option that's offered by their EMR vendor and it falls well short of our solution. So at this point, that is not a meaningful threat. Obviously, we continue to monitor that, but we are very successful right now with respect to the provider market..

Okay.

And in those contracts is it typical for providers to have at least the first path or trying to do their visits or regular hours or something like that before it falls into your network?.

Yes, I would say most of our providers have some portion of their network being used, but I would say 80% to 90% of the provider contracts have us providing some level of either first-tier or second-tier provider network service. .

That’s great.

Any quick update on Aetna’s contract? I think renewal is coming up pretty soon, any early discussions around that?.

Yes, we’re right at the tail end of that, and we’ll provide an update. On the next quarterly call, I would expect that we’ll be able to give you a definitive update..

Thank you very much. .

Yes. And just to are there any concerns? All very positive, I have zero concerns around that renewal..

That’s great to hear. Thanks a lot, Jason. .

Your next question comes from the line of Richard Close with Canaccord Genuity. Your line is open..

I wonder if you could just comment on the utilization rates in your thoughts in terms of the improvements that you’ve made there and expectations as we have in the second half of the year..

Yes, absolutely. I’m glad you asked. I’m really pleased with our utilization rates in the quarter and we talked about what the annualized utilization rate in the quarter is and how it compares to last year.

Just to give a little bit more context, if you annualize the first half utilization rate, it’s about 6.9% annualized utilization, which is up 110 basis points over last year same period, so very, very strong progress there. And as I said earlier, I think a lot of that is due to the greater sophistication in our digital consumer engagement strategies.

We are really seeing the benefit of highly targeted communications, multi-channel marketing using digital channels ranging from search to social and everything in between, and then layering on top of that a very targeted direct mail campaigns that continue to build awareness.

So we’re really pleased with how that’s progress, and we have multiple examples within the company where we’ve targeted specific populations where we thought we had opportunity to increase utilization, and we’ve seen the direct results of that. .

And then with respect to how you’re looking at the second half, it would be like similar improvements in terms of 100-plus basis points as you look in third and fourth quarter? Or do you expect that to moderate some or accelerate?.

Yes, we expect that to accelerate.

Richard, we obviously have a plan to accelerate spend to generate additional utilization at certain clients, and then overall, we are very confident that the third and fourth quarter will replicate those of the second half of each of the respective years that we’ve been witnessing and investing in this accelerated utilization.

Q1’s utilization was very strong and we expect to see an improvement obviously in this fourth quarter, where we’re projecting obviously tremendous increased in visits and that will be coming from existing clients..

Okay. Jason, you talked I think last conference call about new service areas. I don’t remember you bring the net up this call. Maybe your efforts have changed a little bit with the Best Doctors acquisition and integration there.

But maybe if you could update us with respect to any new service areas you guys are looking at and update from the first quarter?.

Sure. So first I would say that the new reliance of business that we rolled out, dermatology, behavioral health, sexual health, to tobacco cessation, are seeing good penetration in our existing book of business. So we continue to see growth among those different product lines.

And then as we now look to integrate Best Doctors, our priority is in doing that and creating this fully integrated suite of products and services all through a single interface in a very intuitive user experience, and we are going to book -- its our efforts primarily on that over the course of the next 6 to 12 months before we then look to launch additional clinical services.

I do think, as I said earlier, it’s likely that our next set of capabilities will come around more chronic care management and probably post-discharge follow-up care for the hospital market..

Your next question comes from the line of Charles Rhyee with Cowen. Your line is open..

Mark or Jason, I think I missed before. You talked about we are seeing a shift sort of away from the top pharma visits more to mobile, [indiscernible] digital.

I think it was a breakdown of what the mix of visits were between mobile video versus telephone, and desktop?.

We didn’t give the breakdown, but the breakdown for the second quarter was -- let me see where we were -- we had about 55% of our visits were requested through the mobile app or the website through digital..

That’s the first quarter we have had a more - that we went over 50% through digital channels versus through the phone..

It’s interesting.

And so when we think about the margin profile there, can you give us maybe some directional between sort of what the gross margins on sort of telephone visit offering to deal with the cost for call center support, et cetera, versus the digital, so we can get a sense on as we think about this mix shift, how margins could trend?.

Well, again, we started seeing some of that reflected in this past Q2, that’s helped to bring our margins to a level that’s higher than even we predicted as a result of this trend. I think we have spoken in the past that we see anywhere between 5% and 10% increase in the delivery of the visit.

So on a unit economics basis, it's becoming far more profitable to use and to leverage the digital assets in order to initiate the visit. Clearly there are a number of clients that will still rely heavily on the phone, but we don’t expect that 55% to grow very rapidly over the next several years.

We expected continue decline, and obviously our service delivery and other areas as well is benefiting from scale. So we will continue to see increasing margins on the unit economics side. .

Okay, that’s helpful. And just a follow-up on. Jason, at the beginning you were talking about with Best Doctors you're envisioning sort of Teledoc as this first-stop as patients enter into healthcare system.

Can you talk about how you invasion them? How does then Teledoc also integrate into that patients, their physical healthcare ecosystem? So there are other doctors, there are other healthcare providers, how should we start thinking about that kind of integration into the broader healthcare system. Thanks. .

Certainly, Charles. So more and more we're seeing opportunities for us to integrate across their healthcare delivery channels. Obviously with their health plans, we do that quite a bit, and that enables us to bring in quite a bit of clinical data.

We're now grabbing medication history through SureScripts in order to understand what medications they’ve been on obviously looking for any interactions that might be the case, but also understanding history dosage and the complexity of what they are dealing with on a daily basis.

The Best Doctors acquisition, of course, gives us a platform which is billed to collect medical record. So they do that as a matter of course as part of doing an expert second opinion and more and more where you’re working with providers across the country.

We very rapidly become a place where we're -- we view ourselves as being part of that healthcare ecosystem and sort of a digital or virtual channel into it.

In many cases, we're going to be the one delivering the care, but in some cases we're going to be able to help facilitate it delivered by someone else either in a virtual manner or helping to get somebody to a physical site. And that plays out.

As we do research with consumers and our partners and clients, there is a lot of enthusiasm around that vision. .

Great, and thanks. And maybe just one last follow-up is that how is the provider part of the business going? I might have missed if you made a mention of that in terms of your moving to the provider market. Thanks. .

The provider market is going extremely well for us. Our platform-as-a-service offering resonates with clients. It’s very flexible to be able to meet their needs. It is clearly differentiated based on leveraging our operational capability as well as our consumer engagement capabilities.

Our clients are very, very impressed with our quality initiatives and are asking us to help them with there telehealth quality, quality management programs. And I think I said earlier, that’s probably the segment in which we see the highest close ratio just based on the value proposition that we have there. .

Your next question comes from Matthew Hewitt with Craig-Hallum Capital. Your line is open. .

Just a couple of questions from me following up a little bit on the gross margin obviously, and you've talked about this a lot, but strong up-tick. You’re talking about some of the drivers through that up-tick.

But as we think about the next couple of quarters, you’re going to have I think a little bit of an off with the BD, Best Doctors, coming on board.

How quickly do you anticipate being able to get that back up to Q2’s level? Are there some immediate levers that let you close the transaction that you can implement to help Best Doctors gross margin?.

Yes, the Best Doctors gross margin was within striking distance of the traditional or historical Teledoc gross margin. There has already been some synergies identified as we’re working on the integration of the operations, finance and HR departments.

First and foremost, those are the things that we will get completed prior to the end of this year and more of the commercial-facing aspects of the company will have full integration throughout '18.

But we have identified service delivery as well as a number of other things that will enable us -- even starting at the top with the pricing that will enable us to ensure that the margin profile overall is far closer to Teledoc's historical profile..

Okay, great.

And then one more on balance sheet items, and I'm sorry if I missed this early, but can we get a current balance sheet of cash, debt and then how much is left or how much you have outstanding in the convert?.

Sure. So we have a little over $150 million in cash as of June 30th. In a few pro forma, the debts a $450 million. On the balance sheet, it will be represented as slightly less than that because of the equity-linked component on the convert. There’s about $62 million that came off the face value of that $275 million issuance.

But you should think of that as $450 million of debt. We have a caring cost of about 5%. And again that equity component, that's $52 million is going to be amortized over a 5.5 years life of that convert. You asked debt cash….

Yes, that was it. That answers the question. So thanks very much. I appreciate the help..

Your next question comes from the line of Matt Gillmor with Robert W. Baird. Your line is open..

I just had two clarifications. So the first one and I wanted to ask for the Best Doctors membership and how that folds in. I wasn’t quite following Mark's comments, but does the membership guidance you are providing for the third quarter of 22 million to 22.5 million, does that include the U.S.

Best Doctors members? Are you -- is that just Teledoc on standalone basis and you are saying that the U.S.

portion of Best Doctors will be broken out separately in the future?.

So that includes the U.S.

portion of Best Doctors, and in conjunction with the year-end numbers and what we're going to profile at Analyst Day, we're going to ensure that the definition of a member continues to be represented with employer and health plan lives, where individuals or identified as paying members on a per member per month or per employee per month basis.

External to the U.S., significantly all of that revenue is coming from financial and insurance companies, where membership is not a true indicator nor a metric that we’re going to include to align with what we have in the U.S..

And then following up on some of Jason’s comments, you mentioned that larger organizations are in the market during the selling season.

Do you have any view of sort of what’s causing those organizations to look to telehealth? Is this just a buy-in in terms of value prop or is there something more specific driving that activity?.

Yes. I would say it’s a few things. One is the maturation of the market. Two, they’re really seeing the success that we’ve had in driving value for other players. And then three, as I said earlier, some of the opportunities we’re seeing our clients who went another direction with another player, the first time around.

But I believe in the opportunity but aren’t getting the value from their incumbent and they’re looking for us to provide that value. So it’s a combination of things. But guiding part of it is our consistent demonstration of growth success and the value that we provide for our clients. .

Your next question comes from Donald Hooker with KeyBanc. Your line is open..

Just for my understanding, the sharp increase in PEPM subscription fees year-over-year was very notable.

I assume a lot of that mix, right, from the HealthiestYou, if I understand correctly?.

Yes, you should think about that 50% of that is being generated from mix, which is exactly right. Selling more to those higher per member per month small and medium size business, and the other contribution is really coming from our increased in the top line of our behavioral revenues..

And then the other sort of a side question. Since the call is going to go on for a while, I would just ask one last one, a bigger-picture question. I was always curious about the relationship that Best Doctors has with IBM, Watson and using our artificial intelligence around sort of some of these patient visits.

I mean, where are we with that? Are we still really early with that? Can you provide maybe kind of an update on that and how you think about artificial intelligence in your business?.

a, a better diagnoses; b, a better treatment plan; and c, if there is a clinical trial available, match to that clinical trial. And so, yes, we’re early days in the development of that product, but the early results have been good and we see a lot of interest from both existing clients as well as prospects in that new product..

Just to be clear, that’s used regularly.

I mean, I know the product is new, but the plan is, is to use that pretty regularly in the Best Doctors business over the next couple years?.

It’s a buy-up option. So in the event that the client wants to purchase the Watson oncology service on top of their Best Doctors product suite or the base service, it's an additional option for them..

Your next question comes from Steven Wardell with Chardan Capital Markets. Your line is open..

I'm wondering is there an opportunity to drive higher engagement at Best Doctors? And would that be using the same kinds of programs that Teledoc is currently using? Or would Best Doctors require new kinds of engagement programs because it’s a different products?.

No, you are exactly right there. The unified products we believe we can leverage our common engagement strategies. Best Doctors had fairly limited experience with really engaging consumers and hadn’t done anything really with respect to digital engagement they’ve been focused on direct mail efforts.

We are already launching efforts to some of our common clients to do integrated engagement strategies to measure how much we can move the needle on that engagement. So we have already kicked that off, and we are very optimistic about that..

Can you just give us some examples of digital versus non-digital engagement strategy just to help us?.

Sure.

Through digital channels, we can get a lot of data that helps us to target the consumer based on either their behavior, their search history, content that they have included in their social media profile, regular search information as well as their history, and that enables us to really do very targeted communications through multiple channels and bring the whole surround-sound engagement to life for the consumer.

So we may be in your Facebook feed, we may be in your Google feed, we may be in your web-based email, and you are going to think as a targeted member that we advertise all the time.

In fact we don’t advertise sort of all the time and everywhere, we are just good at targeting where we think we can get the highest yield, and that is driving significantly better results than we have seen before..

Your next question comes from the line of Steven Halper with Cantor Fitzgerald. Your line is open..

Just a housekeeping item.

Implied in your -- what level of amortization-related expense is implied in the guidance for the second half of the year, as well as what level of acquisition costs or merger-related cost should we assume?.

Steve, we’re amortizing the $62 million equity component of our debt of the convertible piece.

We also obviously have -- I would basically direct you to notes 3 on the 10-Q we just filed and note 9, so the detail will be in there, and there is a couple of million dollars obviously as continued integration costs that we’ll break out for people in conjunction with external consultants and other costs that will again be identified outside of adjusted EBITDA.

.

So the amortization related to the acquisition, that’ll be in the 10-Q?.

That’s correct. .

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