Earnings Call Transcript - TALK Q4 2021

Operator, Operator

Thank you for standing by and welcome to the Talkspace Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. As a reminder, today’s conference call may be recorded. I’ll now turn the conference over to your Mr. Mike Lovell, Director of Investor Relations. Please go ahead, sir.

Mike Lovell, Director of Investor Relations

Good evening everyone. Thanks for joining Talkspace’s first annual earnings call. I hope you've had the opportunity to access the press release. We've also added a presentation to our earnings materials that you should see on Talkspace's IR site. We use the presentation to walk you through today's remarks. We will begin with comments from Chairman and Interim Chief Executive Officer, Doug Braunstein, followed by Chief Financial Officer, Jennifer Fulk. Both are available for questions following their prepared remarks. 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, including 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 two. And now, I'll turn the call over to Doug, who will begin on slide three.

Doug Braunstein, Chairman and Interim CEO

Thanks Mike and welcome to Talkspace. Thank you all for joining us today to discuss both our fourth quarter and our full year 2021 results. I'm going to begin with a snapshot of summary financial performance on page three. But I want to spend the majority of my time discussing the progress we've made in the past three months, since we outlined our operational and execution priorities during our third quarter earnings call. You can see on slide three, the 2021 full year revenue grew 49% year-over-year, driven by significant growth in our B2B business as demonstrated by the significant rise in B2B sessions, which more than doubled in 2021, as well as a continued shift towards higher subscription tiers in our B2C business, which drove an increase in ARPU. This was partially offset by a decline in B2C active users at the end of the period, which reflects our decision to reduce media spend in the fourth quarter, in order to more effectively optimize B2C returns. As we highlighted at the JPMorgan Conference in January, the B2B channel has increasingly been the driver of growth in our business as we grow the number of eligible MBH and EAP lives, focus on initiatives to increase penetration in that membership base, and continue to grow our enterprise accounts. Our B2B business covered approximately 69 million eligible lives as of December 31st, up 75% from the prior year period, driven by new client wins, including Cigna and regions. We expect to continue to add covered lives in the first quarter of 2022. We recently expanded our partnership with Optum in Q1 by adding a meaningful number of lives to our existing coverage. And we're planning to go live with a new large national insurer by the end of the quarter. Importantly, we retained all of our significant customers as we began calendar year 2022. We've also more than doubled the number of enterprise customers in 2021, adding notable clients such as Blackstone, Expensify, and West Virginia University. The recurring portion of our B2B business continues to increase and the strong momentum continues into 2022. We launched more enterprise accounts in January than in any other month in the company's history, while we also continue to shift our focus to larger enterprises throughout the course of the year. If you turn to slide four, you'll note that the fourth quarter actual results have been updated since our estimates in January. Well, Jennifer will dive deeply into the details in the quarter, which involve some ongoing adjustments to our reserves in B2B. I do want to note two items. First, reported revenue for the quarter ended slightly above the high end of our guidance, reflecting modestly better than anticipated underlying performance in our B2B business, combined with the year-end favorable reserve allowance on receivables related to our prior period. Second, as we noted in our preliminary release in January, B2C revenues declined in the quarter, as we strive to optimize capital returns in our consumer business. A reduction in advertising spend modestly outpaced the decline in revenues, improving our quarterly contribution. I would say while we're in the early innings of our efforts here, we're starting to see signs of stabilization in a number of important metrics, like conversion and retention. So if you turn to slide five, you'll note that we identified these operational priorities in our third quarter call, and they're all listed here on this page. But before I go through some of the specific actions we've taken since November 15th, I'd note that we believe we've made substantive progress across the organization in the past three months, adding targeted resources to accelerate growth, prioritize projects, and at the same time, we've begun to implement processes that establish the operational financial discipline we talked about. While some of our early actions will improve our performance financially quickly, the bulk of our work will take time to impact our financial performance. But we believe that many of the operational issues we're addressing have clear solutions and we believe we have both the resources and the team to address those issues swiftly. As a result, we remain optimistic that against the backdrop of our strong brand, our mission-driven and talented team, our unique product solutions, and the ongoing macro environment that we serve that increasingly recognizes the need for accessible, high-quality behavioral care, we can build significant shareholder value over time. Looking more closely at our priorities, I want to take each in turn. First, we believe there's a significant opportunity to take advantage of the synergies between B2C and B2B, unifying the customer acquisition funnel, leveraging the company's robust website traffic and brand awareness in the B2B space and simplifying the process to submit claims for all of our members. We've implemented a number of changes in the funnel that we expect to drive improvements in our B2B2C conversion rate. This means increasing the number of customers that visit our consumer website that ultimately use Talkspace as part of their insurance benefits. An upgraded version of the unified funnel is expected to be released by the end of this quarter. We've also recently launched Superbills, a feature that helps our members to expedite reimbursements for mental health service claims, particularly for out-of-network claims. We expect this initiative to further strengthen conversion and retention rates across our customer base over time. Second, we've recently introduced several changes to increase our network's capacity and enhance Talkspace’s value proposition for our clinicians. For example, we're actively assisting therapists today and adding licenses across several states to help alleviate regional provider shortages. In the state of Washington, for example, where there's been significant statewide shortages in experienced therapists, we've meaningfully increased our clinical capacity in the first quarter, directly as a result of the actions we took to improve licensing. We've also redesigned our providers’ compensation, improving the Talkspace value proposition for our therapists, as well as increased training. Both of these actions are expected to improve engagement and assist in recruiting therapists to our platform. Again, we are beginning to see early signs of improvement in therapists’ retention and satisfaction as a result of these changes. Third, we're investing incremental resources to fully capture the large and growing demand from our health plan and enterprise partners. We've added meaningfully to our DTE sales organization in the first quarter, and we continue to expect to expand the team throughout the year. We've also allocated more marketing resources to the B2B side with the aim of driving both penetration and utilization for our covered lives. Fourth, we continue to focus on optimizing capital deployment for our consumer business. This includes reducing the media spend in the back half of the fourth quarter while also more closely managing our refunds and discounts. We've also observed stabilization in our customer retention, driven in part by the recent efforts to unify the funnel and improve the onboarding experience in clinical tools for our providers. Fifth, we've been focusing our efforts to develop several new products. This includes bundled offerings to better serve our enterprise customers' needs, including offering a range from self-help to therapy and psychiatry. We've also introduced live video sessions as part of our initial patient evaluation process. We're finding that this is improving the therapist-patient fit, and early reactions to this change are quite promising. We've enriched our self-help content beyond couples therapy and improved the user interface for those patients. It offers more value in services that we can provide to our enterprise customers. Sixth and finally, we continue to focus on optimizing cash flow over time. As I mentioned on our prior call, we believe we have ample cash resources to invest in enhancements, upgrades, expand our capabilities, and ultimately deliver on operating leverage over time. But we've taken some specific actions. For example, we've already begun to implement a new billing and claims management system, which we expect will meaningfully reduce reserves and increase cash collections from our B2B business over time. We built out a full financial accounting and reporting team to improve both our reporting, our controls, and ultimately to become a better allocator of shareholder capital. We've implemented a pricing committee to optimize our B2B customer mix and improve returns. And as I discussed before, we're optimizing our advertising spend across the B2C platform in order to improve contribution there as well. We believe that all of these initiatives allow us to leverage our platform and our cost base, enhance our cash flow over time, and drive stronger competitive and financial performance. With that, I'll turn the call over to Jennifer to provide more details on our operating and financial performance. Jennifer, over to you.

Jennifer Fulk, CFO

Thank you, Doug and good evening everyone. Much of my discussion will be presented on a sequential basis comparing the fourth quarter 2021 results to the third quarter 2021. We believe this presentation is most useful to understand the business performance, given the shift in the revenue mix, the initiatives we started to implement in November, and the rapidly changing competitive landscape. Starting with slide six, fourth quarter revenue was $29.2 million, up 11% sequentially, on a reported basis from the third quarter. B2B revenue was $12.7 million, up 64% on a reported basis from the third quarter, attributable to approximately 18% growth in the underlying revenue from both an increase in B2B sessions and DTE customers. The remaining growth was due to changes in revenue reserves related to prior periods. When we normalize for these adjustments, B2B revenue would have been $10.1 million and $11.9 million in Q3 and Q4 respectively. Our B2C revenue declined 12% in the quarter to $16.5 million, driven by a lower number of active users as we reduced our advertising spend by 15% sequentially, offset in part by an improved mix in consumer plans. Our fourth quarter gross profit grew 13% sequentially to $16 million, with a gross margin of 54.7%, up sequentially, primarily due to lower revenue reserve on B2B receivables versus the third quarter. Absent these adjustments related to prior periods, fourth quarter margin would have been 53.5%, impacted by an increasing shift in revenue toward B2B and a greater number of full-time therapists. Turning to slide seven, GAAP operating expenses in the fourth quarter were $44.5 million compared to $39.4 million in the third quarter. Our GAAP cost base grew by $5 million quarter to quarter, mainly due to higher stock-based compensation and non-recurring items. Excluding these, fourth quarter operating expenses were down by approximately $1.5 million sequentially. This was driven by lower media spend, partially offset by higher employee-related expenses, due to increased headcount, increased competition for talent, and professional services fees. The fourth quarter net loss was $21.1 million and adjusted EBITDA loss was $17.6 million. Our cash balance as of December 31 was $198 million. Excluding one-time items, our cash balance would have been approximately $200 million at the end of the quarter. Turning to Slide 8 for a closer look at our B2B performance. As I mentioned earlier, B2B revenue for the quarter grew 18% on a normalized basis, which reflects an increase in the number of sessions, as well as significant growth in our DTE customer base in the quarter. We ended the quarter with approximately 69 million eligible lives, an increase of 22% versus the prior quarter, with a solid pipeline of additional lives going into 2022. As Doug noted, we see a significant opportunity to grow our B2B franchise, expanding our relationships with existing health plan partners, as well as launching coverage with new players. The number of completed EAP and MBH sessions was up 14% sequentially in Q4, driven by modestly improved utilization of our services. While the number of active B2B users at the end of the period declined 1.5% to 31,800, as of December 31, this is due to a decline in therapist activity during the holiday season. We have already seen a rebound in January in Active B2B users. We added 19 enterprise customers in the fourth quarter and grew DTE revenue more than 19% quarter-over-quarter. This recurring revenue is more than 40% of our B2B business and as Doug mentioned, we have launched several new accounts already this quarter. Turning to Slide 9 for a closer look at our B2C performance, revenue declined 12% sequentially, driven by a 15% decline in active users, partially offset by an increase in ARPU as our members continued to migrate towards higher subscription tiers. We spent less money on media in line with the expectations we outlined last quarter. Advertising spending was down 15% sequentially as we work to optimize capital returns in our consumer business. The reduction in advertising spend outpaced the revenue decline, modestly improving our quarterly contribution. Turning to our conclusion on Slide 10, as we discussed during our third quarter earnings call and reiterated last month at the JPMorgan Conference, we're taking tangible steps to improve performance. This includes unifying the B2B and B2C funnels to improve conversion, strengthening our clinical network to drive utilization and retention, optimizing our B2C returns, and expanding our product suite. While the initiatives outlined today will take some time to materialize in our reported results, we believe those will drive growth and profitability over time and we look forward to keeping you updated on our future progress. With that, we'll open the call for questions.

Operator, Operator

Thank you. Our first question comes from Ryan Daniels of William Blair. Your line is open. Please make sure your phone is on unmute.

Unidentified Analyst, Analyst

Hi, sorry. Can you hear me?

Doug Braunstein, Chairman and Interim CEO

Yes.

Unidentified Analyst, Analyst

Hello. Hi, this is Nick in for Ryan. Thanks for taking my question. I guess, just to start, if you can provide a little bit of an update on the W2 workforce transition. I know, I think we asked in the past if there’s, kind of, a timeline you guys are going out if you have gotten any changes there. I’d appreciate that.

Jennifer Fulk, CFO

Thanks for the question, Nick. We haven't provided a specific timeline, but I can share the progress we've made in the last few months. We did hire W2 employees overall for the fourth quarter, and we've made progress on some operational initiatives related to that. As Doug mentioned earlier, we're focusing on enhancing productivity and capacity within the network. At this point, we don't have a specific plan for the network as a whole, but we do have operational efforts underway to improve its capacity and utilization.

Unidentified Analyst, Analyst

Okay. Thanks for that. And then I guess, you've mentioned in the past, you need to do a better job kind of bundling product offerings. I'm wondering how you're tracking there? And is there any other metric other than just, kind of, like ARPU that you guys are tracking, like multi-bookings or something like that you guys are tracking you can update us with?

Jennifer Fulk, CFO

Yeah. So we did have a few advancements and we have initiatives with regard to bundling our product offering and I would say that has gotten traction with our peers. We mentioned the progress that we made both with regard to enterprise clients as well as expanding live within our peer accounts. I would attribute a lot of that success to us bundling our services across our self-help platform as well as our therapy and our psychiatry services. Outside of that, I don't have anything other specific to recognize as far as the portfolio combination.

Unidentified Analyst, Analyst

Okay, great. I appreciate that. I'll hop back. Thanks.

Operator, Operator

Thank you. Our next question comes from Charles Rhyee with Cowen. Your line is open.

Charles Rhyee, Analyst

Thanks for taking the question. Doug, could you elaborate on optimizing media spend? We can see a direct correlation between media spending and membership growth. Can you provide some examples of what optimizing involves and what specific actions you are taking in this area?

Doug Braunstein, Chairman and Interim CEO

Yeah. Jennifer, do you want to…

Jennifer Fulk, CFO

Yeah, yeah. I’ll start, Charles. Thanks for the question. So in our third quarter call and then at JPMorgan, we talked about our rising cost of acquisition and that primarily being driven by a decline in conversion. Our stabilization of conversion was really positive to see in the fourth quarter. On top of that, we've made specific efforts as we look to optimize the spending channel, so specifically as you ask related to analytics and working with a third-party to better understand the ROIs of our spending channels as well as investment in a marketing agency to better make sure that we're spending and optimizing, getting the most efficient ad spend from those dollars.

Doug Braunstein, Chairman and Interim CEO

I would like to emphasize what both Jennifer and I mentioned regarding the unification of the funnel. By improving access and the user experience for our covered lives and insured lives on our website, we are positively influencing customer acquisition costs, lifetime value, and other key metrics. This approach transforms a potential website visit that might lead someone to choose not to pay out-of-pocket into a viable alternative. Additionally, for those who are paying out-of-pocket, the super bill function we recently launched is in its early stages, but it provides another opportunity to enhance customer duration and retention. Overall, the specific optimizations Jennifer discussed, along with the unification of the funnel, are focused on improving the economics of our media spending.

Charles Rhyee, Analyst

Good. That's helpful, and maybe if I could just follow-up. Your competitors – one of your largest competitors here in this space talked about that, they're seeing media spend or sort of those kind of costs, they're seeing it kind of down a little bit from a year ago. Can you give us a sense of what you're seeing in terms of cost for media spending right now, and in sort of, what do you expect here for, at least maybe for the first part of the year?

Jennifer Fulk, CFO

So, regarding the first point, Charles, I wouldn't say that the increase in advertising costs has been a major issue for us as we move into the fourth quarter and beyond. The more significant factor has been related to our conversion, particularly in terms of our media spending, which we've reduced in the fourth quarter. We plan to maintain that same level of spending as we focus on prioritizing investments outside of media, such as in our talent, processes, and infrastructure, to enhance our operations and product to allow for scaling.

Charles Rhyee, Analyst

Thanks.

Doug Braunstein, Chairman and Interim CEO

Yes, to clarify, Charles, our main economic driver is conversion. At this point, the marginal cost of advertising is not the primary factor. The focus is on driving conversion and retention. As Jennifer mentioned, we will optimize our spending and leverage improved analytics and methodologies. Ultimately, the key to our value lies in conversion and retention.

Charles Rhyee, Analyst

That's great. I have one last follow-up before I jump back in. I believe Talkspace has gained significant awareness thanks to some strong spokespeople. I wanted to know if you currently have any high-profile spokespeople representing the company and if there are any changes in strategy for that moving forward. Thanks.

Doug Braunstein, Chairman and Interim CEO

Yes. I will say that we continue to have excellent brand recognition, and we are actively investing in it. This not only supports our B2C business but is also becoming increasingly vital for expanding our B2B efforts and reaching the millions of lives we serve. That is crucial. While we won't comment on specific spokespeople, we recently launched a new series of advertisements, and you can certainly find the Michael Phelps ad on YouTube, which is outstanding.

Charles Rhyee, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next question comes from Daniel Grosslight with Citi. Your line is open.

Anna Kruszenski, Analyst

Hi, guys. This is Anna Kruszenski on for Daniel. Thanks for taking the question. First, I had a question on how membership duration is trending, and how that varies between the B2C and B2B channels. I think in the past, you guys have said that the average duration was about five months on the platform. I'm just curious if that still holds and how that compares to your numbers? Thanks.

Jennifer Fulk, CFO

Yes, Anna. Thanks for the question. We observe in our current data for our B2C business that the average duration is about four months. In the B2B business,

Doug Braunstein, Chairman and Interim CEO

I just want to clarify that we haven't seen a decline in that. We're noting that it has remained consistent at around that level for quite some time now.

Jennifer Fulk, CFO

That's right. And as we look to the B2B business, the equivalent of duration we would call utilization, and I would say at our current rates, we're much less than what we see in the B2C business, and that is why it is such a significant opportunity for us. So as we work on efforts across the platform, both on conversion, which is penetration in our B2B business, as well as retention, which is equivalent to utilization and duration in the B2B business. Those efforts will pay off as we look to increase that duration of our members.

Anna Kruszenski, Analyst

Okay. Got you. Thank you. And then as a follow-up on that, you guys are noting like a higher mix of video visits in the B2C channel last quarter, which has led to ARPU uplift. I was wondering if the average durations of the video visits was also about four months like that?

Jennifer Fulk, CFO

We don't measure duration as far as what kind of modality our members choose. So our comments on higher mix, so higher selection of the more premium subscription areas include asynchronous communication, as well as the video sessions.

Anna Kruszenski, Analyst

Okay. That’s it. Thank you. That’s helpful.

Operator, Operator

Thank you. Our next question comes from Stephanie Davis with SVB. Your line is open.

Joy Zhang, Analyst

Hi. This is Joy Zhang on for Stephanie. Thank you for taking my question. Given that you had a departure in your C-suite of someone who's heading the shift towards B2B, how should we think about the growth outlook for the B2B business compared with the projections you provided when you came public? Thanks.

Doug Braunstein, Chairman and Interim CEO

Yeah. I'm not going to comment on the projections provided by the prior management. I will say that, as you know, the first two quarters with the prior management were misses in estimates. What I will comment on is that as I mentioned on our call in January, December was our strongest month for DTE signups. It has actually been exceeded in the month of January. We added covered lives in December, in January, and we continue to do so in February. We have added resources in the first quarter to our B2B business. We've added marketing spend in our B2B business, and we've also added a whole series of control functions, pricing discipline, and billing discipline to optimize – to ultimately optimize not only our revenue, but the cash generation from those businesses. So I would say today, our B2B business is stronger than it was on November 15, and we expect it to continue to gain momentum through the course of 2022. We have not and we are not, for the moment, providing any guidance around where those businesses will be. In part because, as I said at my opening comments, and Jennifer said, while we're making lots of changes, many of those things will take time to come to fruition, but where we believe confident that the changes we’re making will ultimately strengthen the business. So that's how we feel about it today. We feel better today than we did on November 15.

Joy Zhang, Analyst

Maybe just a follow-up…

Doug Braunstein, Chairman and Interim CEO

Sure. Sure.

Jennifer Fulk, CFO

Go ahead.

Joy Zhang, Analyst

Maybe just a follow-up. We've seen some high-profile transactions in health Talkspace in the past few months. So maybe can you just walk us through the value of being a standalone company versus being acquired by maybe a large payer or provider?

Doug Braunstein, Chairman and Interim CEO

I would say we're focused as a management team on optimizing the value of the company to our shareholders. As the chairman of the board, I would say that we always have the interest of optimizing value in whatever fashion creates the most value for our shareholders. Right now the things under our control are to run the business better, to grow our B2B franchise, to optimize our B2C business, to improve our network, to increase and improve our controls and financial rigor and discipline and cash flow generation. And so those are the things we're focused on and we think that's going to deliver a lot of value over time and we will remain open to any paths that get us to value.

Joy Zhang, Analyst

That's very helpful. Thank you.

Operator, Operator

Thank you. Doug Braunstein: Okay, that's our, unless I'm mistaken. I think that's our last question. So thank you to everyone for the excellent questions, and for participating in the fourth quarter and year-end call. Jennifer, Mike, and I look forward to speaking one-on-one with our shareholders regarding our upcoming performance in 2022. So thanks very much everyone. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.