Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the Talkspace Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Talkspace.

Good morning and welcome to Talkspace's earnings conference call for the third quarter of 2022. I am Jeannine Feyen, Director of Communications. I hope you've had the opportunity to access the press release we posted on the Talkspace IR website and the presentation of our earnings results. We'll use this presentation to walk you through today's remarks. Leading today's call are Douglas Braunstein, Chairman of the Board; Dr. Jon Cohen, newly appointed CEO; and Jennifer Fulk, Chief Financial Officer. Management will offer their prepared remarks and we'll then take your questions. Certain measures we'll discuss on this call are expressed on a non-GAAP basis and have been adjusted to exclude the impact of one-off items. Reconciliations of these non-GAAP measures are included in our earnings release and on our website, talkspace.com. I also want to remind you that we will be discussing forward-looking information today which may include forecasts, targets and other statements regarding our plans, goals, strategic priorities and anticipated financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. Important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. For more information, please review our Safe Harbor disclaimer on Slide 2. And now, I'll turn the call over to Douglas Braunstein.

Thanks, Jeannine and thank you all for joining us today to discuss our third-quarter 2022 results. Before we dive into the quarter, I'm very pleased to welcome Dr. Jon Cohen to Talkspace as our new Chief Executive Officer. Jon joined the Board in September and previously served as Executive Chairman and CEO of BioReference Laboratories, one of the nation's largest commercial laboratories, where he built and scaled Scarlet Health, the country's largest digital at-home blood draw solution which is now a covered service for over 83 million people. Jon is a visionary leader with a 30-year track record in healthcare and brings a wealth of experience and relationships, including deep payer connections, government experience, hospital and physician practice management, operating excellence and scaling technology-driven digital healthcare delivery technologies. Our Board and company are extremely excited to have Jon leading Talkspace forward in its mission and I look forward to working with him as I continue my role as Chairman.

Thank you, Doug and thanks to all of you again for joining us today. I am thrilled to join Talkspace's talented team at a time of great need for high-quality, affordable and personalized mental health services. First, I would like to thank Doug for his leadership over the past 12 months. He steered the company during a difficult transition and has executed seamlessly, making progress across all business areas. During Doug's tenure, the B2B business scaled significantly, the B2C media spend efficiency improved dramatically and the size and productivity of our clinical network also increased. Importantly, he instilled operational and financial discipline throughout the organization and his efforts have laid the foundation for Talkspace's future success. When I joined the Board in September, I was excited to be part of such an innovative mission-driven company like Talkspace. And as a new member of the Board, I've gained a deep appreciation for the fundamental strength of the Talkspace brand, its differentiated technology platform, our leading position with payers and clinicians and the firm's culture and talented employees. I have taken on the CEO role because I believe that we have an enormous opportunity ahead of us. Demand for Talkspace services continues to increase and user engagement has never been stronger. We have a robust product offering, a leading footprint in our B2B business and a sizable network of tenured clinicians which provides us the opportunity to bring meaningful value to our members, payers and enterprise partners. Over the coming weeks, I'll be listening and learning from our employees, clinicians, partners and investors. I am personally committed to expanding access to mental health care and have the greatest degree of confidence in the long-term growth opportunities for Talkspace. I expect to further address our strategic and financial priorities in our future earnings calls. And with that, let me turn it back to Doug.

Thanks again, Jon, and I am truly excited to work with you as you lead the company forward. Jon is joining a newly strengthened leadership team at Talkspace. During the quarter, we hired Catlin Watson as our new Chief Marketing Officer; Andrea Cooper as our Head of HR; Richie Nagoran as Head of the Clinical Network and we named Steve Dietze as the Head of our product organization. These executives are already having an impact on our organization and it's a testament to the fact that we continue to attract exceptional talent to Talkspace, given its important mission. Importantly, we believe this quarter's performance demonstrates we're delivering on several milestones in our strategic and business transformation that Jennifer and I have spoken about during our prior earnings calls. So moving on to our quarterly performance on Page 3. Specifically, you see that B2B revenue in Q3 was up over 65% year-on-year on a comparable basis, excluding prior period adjustments in the third quarter of 2021 and a 15% quarter-on-quarter growth, driven by a meaningful increase in the number of sessions and active users. B2B revenue, for the first time, represented most of the company's revenue in the quarter. Our focus on growing our B2B business is delivering what we believe are meaningful improvements across most metrics. We added significantly to our covered lives this quarter. We delivered on record daily sessions. We added to our DTE customer base and we continue to generate a significant flow of B2B users through what was our traditional consumer-only channel. Importantly, the 9 million lives we added in the quarter came onto the platform in the second half of September. Given the timing of these new lives, it had a modest revenue impact on the third quarter. We are also in advanced discussions regarding additional covered lives in Q4. We continue to expand our enterprise franchise which grew 62% year-over-year and 10% sequentially as we launched 10 new accounts and we're able to renew some of our legacy contracts on more favorable terms. As a result of these efforts, we expect our B2B business to be an even greater share of overall company revenues in the coming quarters, driven by growth in this business channel and our continued investment. As you can also see on Slide 3, B2C revenues declined quarter-on-quarter by 18% as we managed our advertising spend down for the fourth sequential quarter. As expected, we're also now recognizing the full impact of lower renewals from prior cohorts on current quarter performance. We expect this trend to continue at least through Q4, where declines in revenue may exceed our planned reduction in advertising spend. So if you turn to Slide 4, you'll see on this slide we continue to make real progress on the 4 key initiatives I outlined in our prior quarterly call and have clearly prioritized our internal resources around these initiatives. So first, it starts with growing our B2B business. I've already discussed a number of the financial metrics and KPIs that highlight our progress during Q3 for the B2B business. So let me also highlight a number of important product changes we've executed on this past quarter that are driving these metrics. During the quarter, we enabled members to select their optimal coverage plan which led to higher utilization. As we mentioned last quarter, our managed behavioral healthcare cohorts are particularly sticky and we expect monthly utilization to improve as these cohorts mature. We also managed to fulfill demand in a more timely and efficient fashion by leveraging our asynchronous capabilities which have also contributed to higher conversion, better engagement and better margins. We introduced our matching availability function for video members at the end of the quarter which allows a member to choose a therapist by session availability according to that member's schedule. Again, we're seeing improvements in conversion based on this new feature. In the third quarter, we were also able to fully automate our e-commerce funnel, unifying the B2B and the B2C consumer experience through that channel. We'll be introducing additional product enhancements in future quarters, including making the transition from EAP to MBH more seamless for the member and the provider which we believe will also increase engagement. Importantly, while these product enhancements require very little additional investment, many of these can drive utilization, conversion and retention across our entire covered lives platform. Last, on the DTE side, we're also making changes to our product to enable HR executives to better optimize their entire behavioral health care spend. External research continues to suggest that behavioral health care needs for employees continue to be a top priority for HR executives and we believe our product suite offers a range of alternatives, including tax-based self-guided tools to address the company's needs. Our next priority is moving the company towards cash flow breakeven and that means an enhanced focus on efficiency. I'd say, like many companies today, in our third quarter, we underwent a thorough review of our cost base. As a result, we implemented headcount reductions and organizational changes at the beginning of Q4. So for example, we unified our marketing efforts for B2B, B2C and B2B2C across the company under our new Chief Marketing Officer. This created significant efficiencies in headcount and also allows us going forward to optimize our marketing and our brand spend more effectively across the full membership platform. Besides expense controls which remain a priority across the business, we're continuing to make progress on revenue cycle management capabilities and our customer service operations. We expect that both of these efforts will improve our cash flow generation continuing into 2023. Separately, we also expect to take some additional efficiency steps in Q4 which will further reduce our operating expenses throughout 2023. We expect that as a result of these actions, our operating expense run rate will be reduced by approximately $4 million per quarter, excluding the impact of further marketing spend reductions. You'll see a portion of this reduced run rate, excluding severance costs, reflected in a more contained EBITDA loss in Q4 but the full effects of these changes will be realized in 2023. Third. Our clinical network remains a top priority for the company as we meet growing B2B demand. We expanded our network again in Q3, the second consecutive quarter of gains in our network. We did this by improving our platform and enhancing our recruiting, training and retention efforts for our independent contractors. We've added several new products and design features and we continue to add those through Q4 and into 2023 and we expect that that should further enhance our network's engagement with our platform. As we discussed on our second-quarter call, we took significant action through the third quarter to improve the quality, engagement and clinical efficiency of our NPP network. As a result, while this network has been reduced, we've significantly improved the engagement of our remaining MPPs with members and we're now once again adding selectively to this network. These actions also helped to improve gross margins in the quarter. Under our new Head of Networks leadership, we've also reorganized our internal resources to more efficiently manage the network, taking out excess costs as well as improving operating performance. Finally, we continue to optimize our B2C business. As I mentioned, we reduced advertising spend again this quarter, specifically by scaling back our performance marketing and emphasizing organic traffic. Our organic traffic increased double digits sequentially, driven by our Google Search engine optimization efforts as well as editorial content production. Paid conversion, one of our areas of focus, also modestly improved during the quarter as we optimized our media mix to higher conversion channels. Despite these efforts, CAC increased modestly sequentially for the first time in several quarters, driven largely by higher cost per paid visitor. In light of these fundamentals, we took a number of additional steps to reduce headcount and bring down our external vendor costs. These actions contribute to an important part of our overall operating savings going forward. So if I step back across the business, we're pleased with the progress we've made this quarter to balance growth in our areas of focus while taking specific actions to improve cash flow. I'm particularly excited about the new leadership of the company as we head into 2023 and expect they'll continue to make progress on all of these initiatives. We believe, given the investments we've made this year that the company has the balance sheet resources it needs to reach profitability while continuing to deliver on its mission to provide high-quality behavioral health care. And with that, I'll turn the discussion over to Jennifer.

Thank you, Doug, and good morning, everyone. Consistent with prior quarters, I'll speak to sequential trends as we believe this view provides useful context to the progress we are making against our operational and strategic initiatives. I will also provide you with a few directional insights relevant to the key areas of our financials as it relates to Q4 in 2023. Starting with Slide 5. During the third quarter, total revenue was $29.3 million, down 2% sequentially. This is driven by strong momentum in the B2B payer business and in DTE, offset by further softening in the B2C business which we had anticipated. B2B revenue was $16.8 million, up 15% sequentially, driven primarily by a higher number of sessions completed by behavioral health and EAP members, as well as progress in our DTE business, including new accounts and improved terms on renewing accounts. B2C revenue was $12.5 million, down 18% from the second quarter. The decline was driven by a lower number of customer acquisitions in the period and fewer renewals from smaller existing cohorts. As we indicated in our last earnings call, we believe the macroeconomic conditions remain a headwind for our out-of-pocket B2C members. As we build our coverage in the payer footprint nationally, we believe these conditions will provide additional incentives for members to leverage their health benefits to cover the cost of therapy through our platform. We see early signs of that today as we drive B2B conversion through our consumer offerings. We believe we are positioned well competitively to take advantage of this trend. Moving to gross profit. In the third quarter, gross profit was slightly up versus the prior quarter at $14.6 million. The gross margin at 49.8% increased approximately 100 basis points from Q2. This was driven primarily by efficiencies resulting from the reductions in our full-time therapist network early in the third quarter, partially offset by the revenue mix towards B2B. As I've noted on prior calls, our B2B business gross margins are lower than our B2C business gross margins but have higher contribution margins for the company and we continue to work on product enhancements to improve margins over time. Turning to Slide 6. Third quarter 2022 GAAP operating expenses were approximately $34 million, down 3% from the prior quarter. Excluding stock-based compensation and nonrecurring items, Q3 expenses were approximately $30 million compared to $32 million in the prior quarter, driven by lower media and G&A expenses. As Doug mentioned earlier, in the fourth quarter, we initiated meaningful reductions to our operating expense base of approximately $4 million per quarter which we expect to realize partially starting in Q4. I believe this is an important effort for the company and we will continue to focus on operating efficiencies going forward. The third quarter net loss was $18 million, adjusted EBITDA loss narrowed to $15.5 million, an improvement of $1.5 million compared to the second quarter, driven primarily by a reduction in operating costs. We do expect adjusted EBITDA loss to continue to narrow in Q4, driven by the partial impact of our operating efficiency measures. We continue to maintain a strong balance sheet with approximately $153 million of cash on hand as of September 30 which we believe will be sufficient for the company to reach profitability while continuing to deploy resources toward initiatives that will drive revenue growth. Moving to Slide 7. This provides additional detail for our B2B business. Third quarter B2B revenues were up 15% from the second quarter. This strong performance was driven by a 16% increase in the number of sessions as the penetration rate across our member base and the level of customer engagement both reached an all-time high. As Doug noted, we added 9 million lives in the second half of September. Given the timing, this had only a modest impact on our third quarter revenue but will contribute in fold to fourth quarter performance. In October, we have seen continued strong session growth based on new lives, higher engagement through our product changes and better B2B conversion. While we expect that trend to continue, we do traditionally experience a seasonal slowdown towards the end of the quarter as our providers take time off for the holidays. This can reduce the number of sessions built in our last month of the quarter which may negatively impact trend line performance in the short term. DTE revenue was up 10% as we added 10 additional accounts and we renewed some expiring contracts on more favorable terms. While these account wins are taking longer, particularly with the macro environment challenges, we have several large accounts initiating benefits in 2023. Turning to Slide 8 to review our B2C performance. B2C revenues were down 18% sequentially in Q3. Performance was driven by an 11% decline in active members, primarily from lower renewals in the quarter and we expect this trend to continue into the fourth quarter. We also reduced our media spend again in the third quarter as we continue to actively manage for efficiency and acquisitions of both B2C and B2B members. I want to highlight a number of levers we believe we have to improve our cash flow over the coming quarters before opening up for questions. First, we remain enthusiastic about the fundamentals in the B2B business and the revenue growth demonstrated by our Q3 results. We continue to believe this to be our largest and most profitable growth opportunity going forward. Second, the important steps that we have taken to reduce our cost base will have a significant impact on cash flow in 2023. Third, many operating expense investments in systems, processes and controls that we made in 2022 should benefit from operating leverage in the business going forward. And finally, we continue to be disciplined in how we deploy our resources, prioritizing our most compelling and profitable growth initiatives. And with that, we will open the call for questions. Thank you.

We'll go first to Charles Rhyee at Cowen.

It's Steve Braun on for Charles. So I just wanted to go to the customer acquisition costs. I think you had mentioned that the tax has increased modestly on cost per paid visitor. So I guess, like, can you give us some color on your expectations for customer acquisition costs heading into the fourth quarter, given some of the bigger companies have reported weaker spending environment?

Yes. Traditionally, in the fourth quarter, due to the holiday season, customer acquisition costs tend to rise. This has historically been the case for us and likely for others as well. Therefore, we expect some additional modest pressure on total acquisition costs this quarter. However, we also plan to continue reducing our overall ad spending. We anticipate that this will be the fifth consecutive quarter of decreased ad spend, combined with a declining renewal base from prior customer acquisitions, resulting in at least one more quarter of revenue pressure in our B2C segment that will outpace the reductions in advertising costs. Despite this, we are still finding opportunities to improve our situation. We have significantly increased our organic traffic, and although it’s not reflected in our reported figures, we are attracting many B2B customers through traditional B2C channels. If we took that into account, our customer acquisition costs would actually continue to decrease. Our main goal is to ensure that the B2C business reaches a stand-alone cash flow breakeven point, while also reaping additional benefits from customer acquisitions in B2B through the consumer channel.

We'll go next to Ryan Daniels at William Blair.

Jack for Ryan Daniels. To start off, can you provide any additional insights on the elasticity of the end market? Specifically, in relation to the inflationary environment, are you noticing any changes in demand, particularly on the DTC side? If you are observing any pressure, is it primarily affecting the DTC side compared to the B2B segment that members often account for, which has costs covered by the benefit?

Yes. So part and parcel, it's a great question. Part and parcel of the large pelagic shift to move our members from an out-of-pocket direct-to-consumer cost into insured products was our anticipation that, over time, it is far better to service our members through an insurance product or an EAP product or a direct-to-employer product. And we are seeing that shift play out in real time in both the dramatic acceleration we think we've now experienced for several quarters in the number of members using our insured products. We think building out our covered lives gives us an even greater opportunity set to do that shift. And as I just mentioned on the prior call, what we're doing is we're making it easier through this direct-to-consumer channel to actually find out that you're covered by insurance and pay through insurance. And you'll actually see it over the next several months. You'll see even more website design changes that encourage people to actually seek their care through either EAP or their traditional health care, health insurance benefits. We're doing that because we think there's going to be ongoing pressure on the consumer in part but we're actually doing that because we think we have a very meaningful competitive advantage relative to almost all of their digital platforms in terms of how many lives we actually cover through insurance. And so that's a significant competitive advantage for us that offers the identical quality of care but it's a far lower out-of-pocket experience for a consumer.

Just a quick follow-up. I know last quarter, a headwind that impacted results was the W-2 clinical inefficiencies. I'm just curious if those efficiencies you noted last quarter impacted results again this quarter or the fiscal quarter. And then, 2, if you could provide any color on the progress of changes you're implementing for that network? And then any update on the hiring of the full-time clinicians. That would be appreciated. I believe you touched on this too but I just wanted to clarify.

We mentioned in our second quarter call that we had planned a series of actions in Q3 aimed at significantly enhancing engagement with our W-2 network members. We implemented those actions, and although our W-2 workforce is smaller now, it has become much more efficient and engaged. This has led to a slight increase in our reported margin for the quarter. We expect the benefits of these changes to fully materialize in Q4 since some actions took time to implement during Q3. Additionally, we have made substantial improvements to our platform, our recruiting practices, training, and the attractiveness of our platform for independent contractors. While we reduced the headcount for W-2s, our total numbers have actually increased due to strong success in recruiting independent contractors. In Q4, we believe that with the right processes and management systems in place, we will start adding selectively to our national providers in the W-2 network, especially in states with high demand where full-time clinicians can quickly meet our efficiency standards. Overall, we have been making numerous changes to the platform and product investments over the past few quarters that are now starting to yield positive results for our network.

We'll go next to Daniel Grosslight at Citi.

Given the selling season for next year is largely over, I'm curious if you can provide a little more color on how we should think about enterprise and health plan adds for 2023 and where you're seeing the greatest sources of strength in the B2B segment.

Let me break it down for you, Daniel. In the B2B segment, we have the EAP and MVH sales processes that continue throughout the year. We saw strong growth in covered lives in Q3 and are well on our way to adding even more in Q4. Currently, the discussions and backlog for significant opportunities to add lives throughout 2023 are at a high point. One of the challenges we face is ensuring that the systems for large national and regional payers integrate smoothly with ours, which can often take months or even quarters from the initial agreement to having the first live implementation. This is not a seasonal business, and we believe our pipeline and backlog have never been stronger. Regarding the DTE business, the selling cycle has lengthened. We expect several large accounts to start in January, and conversations with HR executives remain strong. For small and mid-cap companies, the selling cycle is usually not annual and often involves adding benefits throughout the year, giving us a solid pipeline. Larger companies tend to follow a more annual rhythm, and the current economic conditions are making things tougher for them. However, this situation may create a longer-term opportunity for our products, as we have an efficient offering that optimizes existing behavioral health care spending among EAP, insurance, and our added benefits, gaining traction with both HR executives and CFOs. On the DTE side, the selling cycle may remain slower, but we believe our product mix is well-suited for a more challenging economic environment.

And if I look just at the B2C side, I get the slowdown in active member growth. But if I look at ARPU or really PMPMs there, they sell the timing issues here but they sell around 8.5-ish percent sequentially in 3Q versus basically flat in 2Q and up in 1Q. So I'm just curious if you're seeing some weakness in ARPU, ARPU as consumers scale back and spending, maybe they're doing less buy-ups of video sessions, et cetera. And what's causing that weakness in the DTC hire?

I wouldn’t read too much into the decline in ARPU due to consumer weakness. I believe this trend will be more reflective of 2023 for direct-to-consumer businesses. While some of the decline in ARPU mix is attributable to changes we made in our product offerings, which slightly decreased ARPU but improved our gross margin, I wouldn't generalize the Q3 results too much in terms of consumer spending behavior.

We'll take our next question from Stephanie Davis at SVB Securities.

I was hoping to kick off my question. I just hear about Jon. Your top priority is to join the organization and kind of for you given your diagnostics background and what stands out as the biggest opportunity from the new vantage point.

Thank you, Stephanie. We have encountered a series of significant events recently. Over the past few months, we've witnessed a lot. Regarding your question, I see a tremendous opportunity in the mental health and behavioral health market, which is enormous. It’s challenging to quantify its potential accurately. Additionally, the E&P market is also experiencing substantial growth, especially among large companies. The team here has been exceptional; I have yet to meet everyone, but their dedication to the organization is impressive. Importantly, the Board is fully engaged and committed to our success. It's inspiring to see their support as I step into this role. What’s unique is that this is not just a startup; the organization has a decade of experience and significant brand recognition. Studies show that a considerable percentage of the American population seeks therapy, which is a substantial figure. Combining this with my background in digital health and experience in building the Scarlet Health platform and BioReference, which covers 80 million lives, creates a remarkable opportunity. I never anticipated this would happen three months ago, and I am genuinely excited. There is still much work ahead, and Doug and the team have made incredible progress over the last year. They've set the stage for me. Thank you again for your question, Stephanie. I'm not sure if that fully addresses your inquiry.

No, that's helpful. I would guess my follow-up to that is about your mix of B2B and B2C background from your time at BioReference and Quest. When I think about where your focus will be, will it primarily be on the B2B side, the B2C side, or a balance between both considering what you mentioned about the brand?

I believe the significant opportunity lies in B2B. While B2C exists, I see it as not necessarily being in competition with B2B. The focus should be on delivering consultative mental health services to the largest number of individuals in any way possible. It appears that partnering with large employers in B2B is a more effective method of providing necessary services than approaching it through B2C. My concern with B2C is that whenever financial considerations are introduced, they often deter people from using a service. Therefore, the objective should be to lower the barriers, which are often financial, so that more individuals will access the service. My emphasis isn’t on choosing between B2C and B2B but rather on maximizing the reach of our platform. The most promising channel, in my view, lies with large clients, B2B EAP programs, and direct employers. I plan to focus on both, but I will definitely lean more towards the B2B experience because I believe that’s where the future lies.

And that does conclude our question-and-answer session. At this time, I would like to turn the conference back over to management for any concluding remarks.

So thank you, operator, and I want to thank everyone for their participation. We look forward to engaging directly with our investors over the next several days. And again, I want to conclude where I began which is the Board and the company are really excited about the opportunity for Jon and Jennifer and the team to lead our company forward. I think we've made real progress over the last 12 months and we're looking forward to the opportunity to continue to demonstrate that progress for our investors. So thank you again for your participation this morning.

And this concludes today's conference call. Again, thank you for your participation. You may now disconnect.