Earnings Call Transcript - TALK Q1 2024

Operator, Operator

Thank you for your patience. My name is Benjamin, and I will be your conference operator today. I would like to welcome everyone to the Talkspace First Quarter 2024 Earnings Conference Call. I will now hand the call over to Jeannine Feyen, Director of Communications. Please proceed.

Jeannine Feyen, Director of Communications

Good morning, and welcome to Talkspace's Earnings Conference Call for the First Quarter of 2024. I hope you've had the opportunity to access the press release we posted on Talkspace's IR website and the presentation of our earnings results. We'll use the presentation to walk you through today's remarks. Leading today's call are our CEO, Dr. Jon Cohen; and our CFO, Jennifer Fulk. 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 on our most recent SEC reports and today's earnings press release. For more information, please review our safe harbor disclaimer on Slide 2. Now I will turn it over to Dr. Jon Cohen.

Jon Cohen, CEO

Thanks, Jeannine, and thank you all for joining us today. We began 2024 with another strong set of results, driven by continued execution across the business. This quarter, we delivered revenue of $45.4 million, up 36% year-over-year, and an adjusted EBITDA of $800,000, which marks our first quarter of profitability in the 13-year history of the company. This is a testament to the focus and dedication of our team. The continued momentum in our top line and our continuous rigorous focus on our cost structure provide a strong base to build upon, and we are confident in our ability to maintain profitable growth going forward. Let me cover our progress in the first quarter by strategic priority. First, in our payor category, revenue grew 92% year-over-year. This growth is the result of our focused efforts to expand our covered lives, increase capture rates, and increased utilization. Our expansion into Anthem commercial lives, which we announced last November, contributed to our strong revenue growth in the quarter and is progressing as expected. We also continue to see favorable member acquisition metrics from our marketing investments and our product work to enhance both capture rate and utilization. In addition, we have entered into strategic conversations with other payors regarding value-based arrangements. The Talkspace platform was built to continuously improve quality and increase efficacy in the delivery of mental health care, and our ability to measure these parameters and report them is a competitive advantage as we discuss value-based arrangements. Medicare, as we mentioned, is a significant opportunity with 65 million lives. We expect to go live in multiple states later this month within traditional Medicare, representing more than 10 million lives at launch. The reception from payors has been very positive, and we are in advanced discussions to expand within their Medicare Advantage networks. We continue to expect to be in-network with Medicare in all 50 states by the end of the year, further cementing our position as the behavioral health company with the most covered lives across the United States. With Medicare, we will continue to lead as the platform advancing affordable behavioral health care. We've also expanded our brand and referral partnerships significantly in 2024. Notable collaborations include our new partnership with Thirty Madison, a specialty telemedicine company operating Keeps, Cove, and Nurx, and an expansion of our provider directories on Zocdoc and Health Grades. Additionally, we launched our Health Collective marketplace, offering members access to a comprehensive and growing suite of whole health digital providers and services. This platform will provide members with clinically vetted and curated resources and member benefits across the entire health spectrum with the goal of expanding accessibility to high-quality and holistic care. Some of those first partners include Oura, Evernow, Conceive, and FitOn. Moving to direct-to-enterprise. We are encouraged by the early progress of our offering in New York City and Baltimore launched in Q4. Results in the first months around engagement and effectiveness indicate that we are reaching diverse populations, as well as previously underserved communities. Many thousands of kids have already received help from their Talkspace therapists, and we know that our suicide risk alerts are working as intended. We also know of several occurrences where therapist intervention for teens in crisis has made a dramatic impact on their lives. We are very proud of the impact we are already having on these students. These two partnerships, the first of their kind, exemplify our commitment to addressing the teen mental health crisis. We believe providing teens with access to quality care through a platform that meets them where they are will drive better outcomes for all. The reception and inbound interest we have received from other public health entities as a result of these initiatives has been high. On the employer side of our DTE category, while we did have a number of renewals and new wins in Q1, we also experienced headwinds with respect to account attrition. This was in part due to businesses continuing to review their budgets in the current inflationary environment, as well as increased competition. We believe our ability to demonstrate value for employers is a meaningful differentiator. And last month, we released our ROI calculator aimed at doing just that. This independently validated tool provides enterprises with the ability to measure the impact of offering virtual mental health services and validates potential enterprise savings in three areas: medical savings, time savings with respect to employee commute, and absenteeism savings related to the number of workdays missed by employees due to depression. We are also investing in new technology and digital capabilities to further enhance the offerings and features of our platform for the DTE category, specifically focused on the teens market. I'd like to call out that our platform remains attractive to partners for their members because of the comprehensive nature including psychiatry and therapy across all stages of life, including teens, couples, and seniors, with multiple modalities, leading with text-based therapy and live video and audio so that their members can use Talkspace from anywhere, anytime for any need that comes up. We are excited about our growing DTE pipeline, particularly when it comes to the teens vertical and look forward to sharing more throughout the year. Moving to our provider network. We continue to build out our network of providers, and ended the quarter with over 5,600 therapists, up 6% sequentially. We continue to see strong demand to join the Talkspace network and believe this is a testament to the investments we continue to make in our platform to enhance the provider experience and deliver exceptional clinical outcomes. These outcomes were recently highlighted in a study published in the Journal of the American Medical Association. Using machine learning, researchers from Talkspace and Lyssn analyzed more than 20 million de-identified messages between therapists and their clients to find that the more supportive, empathetic, and warm the therapist was, the stronger the patient's outcomes and the higher the satisfaction with therapy overall. This supports what we know, that the higher the quality of the relationship with the provider, the better the members' experience and outcomes. We also continue to focus on the innovation of our platform for the benefit of both our members and providers. During the quarter, we launched an AI capability that generates a comprehensive, succinct summary for the provider, a Smart Note, which reduces the administrative burden on clinicians. The initial response from our providers has been exceptionally positive, and we estimate that it is eliminating up to four hours per week of administrative work for our full-time providers, optimizing the time they could spend on therapy with members. The AI team is working on multiple other features to improve the therapist workflow and enhance our ability to deliver better clinical care. While we are committed to continuing to invest in new tools such as these, we will, of course, do so in a clinically led, responsible, and secure manner that protects the privacy and data integrity of our members. Investments such as these not only expand provider productivity but also improve the member experience and are emblematic of our commitment to innovation and operational excellence. In addition to these new AI initiatives, we will continue to make technology enhancements supporting payor capture rate and utilization and investment in DTE digital capabilities to increase the value proposition of Talkspace's offerings. Before I turn the call over to Jennifer, I'd like to note that May is Mental Health Awareness Month, and we join others across the industry to underscore the importance of self-care and making quality mental health care more accessible. This month, we have unveiled a new brand identity on our corporate and investor websites. Our new brand is a bold, design-forward look and feel that captures the company's core beliefs that therapy and mental health support should be a routine, positive part of anyone's life, and that everyone deserves access to high-quality mental health services. It is my belief that complete health is both physical health and mental health. Just as everyone should have access to a primary care physician, everyone should have access to a mental health therapist. You will see that our Mental Health Awareness Month campaign encourages people to talk it out through therapy. The campaign features our own members telling their stories of the pivotal and profound insights they gained while working with their Talkspace therapists. You will also see our new TV Spot teaching the relationship between the therapist and member and highlighting a key differentiator for us, which is that our therapists have, on average, over ten years of experience. With that, I'll turn the call over to Jennifer.

Jennifer Fulk, CFO

Thank you, Jon, and good morning, everyone. We are pleased with our first quarter 2024 results, which reflect continued strengthening of financial performance as a result of execution across our company priorities. My comments today will be based primarily on the first quarter results on a year-over-year basis, unless otherwise noted. I will cover highlights from our financial results and then give more details on our outlook. Total revenue for the first quarter was $45.4 million, a 36% increase from a year ago. Adjusted EBITDA was approximately $800,000 in the first quarter, marking our first quarter of profitability on this basis. Moving to results by category. Payor revenue was $28.5 million, a 92% increase versus the prior year period. Payor sessions completed by behavioral health and EAP members grew 14% sequentially and 65% year-over-year to 284,000. Unique payor members completing sessions grew sequentially by 9% and year-over-year by 39% to 86,000. As Jon previously highlighted, the first quarter benefited significantly from the December launch of the 18 million incremental covered commercial lives. In addition, compared to the same period last year, there was an 11% growth in the same basis capture rate and a 19% improvement in the utilization of sessions per member. These gains were primarily driven by continued upper funnel marketing and media optimization as well as enhancements across the product. In the direct-to-enterprise category, first quarter revenue was $9.9 million, up 14% from last year and 11% sequentially, primarily due to progress in our recent teen launches last quarter. As Jon noted, these new launches were partially offset by attrition of legacy accounts. In the consumer category, where members pay out of pocket, revenue was $7 million for the first quarter. This was a 14% sequential decline and a 29% year-over-year decrease. The decline primarily stemmed from the substantial increase in covered lives during the fourth quarter, which allowed more members to qualify for coverage, thereby reducing their need to pay out of pocket. While this shift has impacted consumer category revenues, it aligns with our strategic focus on increasing coverage, drives higher conversion rates and creates greater long-term value from payor members. Moving to gross profit. Our first quarter gross profit increased 30% versus the prior year to $21.7 million. Gross margin for the first quarter was 47.8%, lower than last year as expected due to further net revenue mix shift towards the payor category, which has lower gross margins than DTE and consumer categories. Turning to operating expenses. Our GAAP operating expenses for the first quarter were reduced 9% year-over-year to $23.4 million. Excluding stock-based compensation, our Q1 expenses amounted to approximately $21.2 million, reflecting a reduction of $2.3 million compared to the same period last year. Over the past several quarters, we've made significant strides in optimizing our cost structure. This includes enhancing organizational efficiencies across all departments, which has improved our operational agility and reduced overhead costs. Additionally, we have strategically invested in our marketing initiatives to align with our growth objectives, focusing on high ROI activities that enhance brand visibility and member acquisition. We have also invested in scaling our platform capabilities, enhancing its robustness and scalability to better accommodate growth and expand our service offerings efficiently. These improvements reflect our ongoing commitment to fostering a lean and responsive operational framework, supporting sustained growth and operational excellence. Moving to profitability, GAAP net loss was $1.5 million, a $7.3 million improvement versus the same period a year ago. Adjusted EBITDA was $800,000, an improvement of $7.2 million year-over-year. Adjusted EBITDA in the first quarter did benefit from a few immaterial nonoperating accounting items. However, excluding these items, we would still have achieved a positive adjusted EBITDA in the quarter. Turning to the balance sheet. We had $120 million in cash and cash equivalents at the end of the first quarter, down $3.6 million sequentially from Q4 and driven primarily by the payment of corporate employee bonuses from 2023. Finally, we remain confident in the financial guidance we established during our fourth quarter commentary and continue to expect revenue between $185 million and $195 million and adjusted EBITDA between $4 million and $8 million for the full year. We remain enthusiastic about our payor business as we continue to bring on more covered lives through both commercial plans, government, and Medicare. And in DTE, we are encouraged by the ongoing value of our employer pipeline and our potential to expand within the teens vertical, supported by the early positive impact from our initiatives in New York and Baltimore. The timing of converting and implementing these prospects to revenue-generating clients remains quite variable quarter-to-quarter, and as a result, we now expect adjusted EBITDA to be more heavily weighted towards the second half of the year. To summarize, today's discussion reinforces our enthusiasm for the strategic direction of both our payor and DTE categories. The growing demand for affordable, accessible, and high-quality mental health care, coupled with the significant operational advancements we've achieved in recent quarters bolsters our confidence in the long-term profitability and sustainability of our business.

Operator, Operator

And your first question comes from Charles Rhyee with TD Cowen.

Charles Rhyee, Analyst

I wanted to ask about the Medicare opportunity as we think about next year. And perhaps, how would you expect that kind of rollout to occur? And then secondly, how much of this opportunity have you already perhaps contemplated in the long-term guidance that you gave last quarter?

Jon Cohen, CEO

So, Charles. As we mentioned, we plan to launch in around 11 states shortly. By the end of the year, we aim to have coverage in all 50 states for standard Medicare. We're also in advanced discussions with Medicare Advantage Plans to expand our offerings, with a roughly equal split of about 32 million to 33 million on both sides of Medicare. We have a well-developed strategy for entering the Medicare market. Since this is relatively new for most, due to the lack of significant national providers for individuals over 65, it will be an evolving process as we learn how to enroll Medicare patients and inform them about our services. As for the guidance.

Jennifer Fulk, CFO

Yes. I'll touch on that, Charles. So our long-term guidance had several levers. I would describe Medicare expansion and the covered lives that come with it as a component of that. So remember, our long-term guidance was really weighted on both payor, specifically in the long-term payor growth in that same basis capture rate and in utilization within the lives that we have, as well as the direct-to-enterprise category. So those two factors really weigh in. But across those two categories, we had a number of levers, Medicare being one.

Charles Rhyee, Analyst

Okay. I guess the way I was asking the question was more like, given sort of the opportunity here, and when I look at the guide, it seems like maybe perhaps you haven't put that much in for Medicare per se. Would that be a fair assumption?

Jon Cohen, CEO

Yes, I think that would be a fair assumption. We are adding millions of lives and there's a significant opportunity since 25% of Medicare patients experience depression, loneliness, or have a mental health diagnosis. We understand that the potential is substantial. I like to draw a parallel to our experience with schools when we began providing services to teens; it took us some time to establish our strategy, but we eventually succeeded. I believe we will see a similar outcome in the Medicare sector.

Charles Rhyee, Analyst

Great. Just to clarify, Jennifer, you mentioned that adjusted EBITDA is expected to be more weighted towards the second half of the year. Is this related to the ramp-up in New York City and Baltimore, and what is causing that second half weighting?

Jennifer Fulk, CFO

Yes. As we issued guidance for the year, we mentioned two key factors: growth in payors, particularly from the covered lives, and an encouraging increase in those covered lives that we added in December of '23 during the first quarter, especially early on. Additionally, we stated that our guidance for the year would depend on the maturation and contribution of our direct-to-enterprise pipeline, which we anticipated would be variable from quarter to quarter. So that's the context for that.

Operator, Operator

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

Ryan Daniels, Analyst

I know you don't guide to this specifically, but how should we think about gross margins going forward? I know it's down from mix shift and it has been. But just kind of for the remainder of the year, how should we think about this?

Jennifer Fulk, CFO

Yes, Jack. I'll return to our original guidance. I realize I didn't mention it earlier, but we still expect revenue growth to be between 23% and 30%, and we anticipate that gross profit will grow at a slower pace since the payor category is making up a larger percentage of our top line, as seen in the first quarter. Therefore, we currently do not have any changes to that guidance.

Jack Senft, Analyst

Understood. And just a quick follow-up. I know in your prepared remarks, you guys mentioned some headwinds with respect to account attrition, and that the main drivers were really inflation and then increase in competition. Can you just dive a bit deeper on the competitive front and generally kind of what you're seeing there?

Jon Cohen, CEO

Yes. First, I want to highlight that revenue for DTE increased by 14% this quarter, accounting for both new wins and attrition. There are several factors contributing to attrition. It's important to note that we shouldn't pinpoint any single cause; competition is one factor, but there are also product-related issues, both internationally and nationally. We're witnessing budgetary constraints from some employers. Additionally, some employers that have tested mental health benefits have, for various reasons, decided to discontinue them. There’s also the fact that many individuals are aware that they have access to Talkspace through their payors and behavioral health benefits, which can influence them to opt for that instead of maintaining a DTE relationship. Furthermore, some employers may find that utilization is not what they expected. The point I'm making is that there are multiple aspects that companies consider when assessing their mental health benefits, making it more complex than simply one issue or another.

Operator, Operator

And your next question comes from the line of Stephanie Davis with Barclays.

Stephanie Davis, Analyst

When we saw you in March, you did talk about this B2B member retention increasing quite a bit given some changes in duration on the platform as you go on a more covered benefit. Can you talk about the durability of these duration increases and how the addition of some of these newer populations, that maybe we don't have as much data on, could potentially impact that?

Jon Cohen, CEO

Sure. I'll give it back to Jennifer in a second. But we know we continue to see a strong amount of evidence that the people who are on the payor side, who are not consumers, who are coming through the Behavioral Health benefits are absolutely staying on the platform longer than consumers. That data is very clear. And I don't know what we're going to give relative to specifics, but we do have seen increases in people on the platform relative to the length of time and the number of sessions that they do.

Jennifer Fulk, CFO

I'll refer back to the metrics we provide; we are clearly making progress on all fronts. The number of covered lives has remained consistent, and there has also been growth in the number of members completing sessions on the platform. We're seeing increases in total sessions, which is influenced by utilization. All these metrics are trending positively. Additionally, we have a clear view of further opportunities for improvement, particularly at the top of the funnel, as well as within various product features. Jon highlighted some of these features. We believe we have the right teams in place, a focus on these initiatives, and several effective strategies to enhance the process, decrease friction throughout the funnel, and boost both the capture rate and utilization of that capture rate. Regarding Medicare, this is a new category and represents a significant market opportunity for us. We are maintaining a cautiously optimistic outlook but will be experimenting with various approaches to determine what resonates with that demographic as we introduce these new members for the remainder of the year.

Stephanie Davis, Analyst

I know you mentioned that it isn't a major factor in your guidance, but how are you planning to structure the rollout for these new populations? What assumptions are you making as you ramp up to this?

Jon Cohen, CEO

On the commercial? On the Medicare or commercial?

Stephanie Davis, Analyst

On the Medicare side, we are considering that it's a new population, so we are unsure about the utilization and durability. What assumptions are you making?

Jon Cohen, CEO

As Jennifer mentioned, we are taking a cautious approach regarding our expectations for uptake as we start testing the various methods I've mentioned earlier. We have a comprehensive go-to-market strategy that includes several components, focusing both on marketing initiatives and direct outreach to Medicare patients. We have invested considerable time in planning this, and it has also been quite a journey to set up our systems for billing Medicare while addressing the complexities of secondary payors. The initial launch aimed at attracting Medicare patients will, to start, serve as a trial. We have the capacity to quickly experiment with what works and what doesn't, similar to our approach with schools. However, I cannot specify the exact outcomes at this moment. We are aware of the platforms that these patients utilize, including their preferred social media channels. We understand their preferences for communication methods, such as video versus texting, for various reasons. Additionally, many of them are quite tech-savvy. All of this information has influenced our strategy for entering the market.

Jennifer Fulk, CFO

Yes. And maybe I'll just add real quick because it's important to everything else we do. On day one, what we do get is just the synergy with our broad marketing media messages and with our brands. So now if you're a Medicare patient, if you see an ad, or if you just come to talkspace.com, looking for where your insurance team might have benefits that cover therapy, you will now see that when you put in Medicare, you are covered. So on day one, we get the benefit of capture rate just from that broader size of our covered lives expanding.

Stephanie Davis, Analyst

All right. Super helpful. And last one out of me. Just a quick question on the kind of the shift from DTE to payor coverage. How are you thinking about your cost structure as you do this? Is there a way to repurpose some of the folks on the DTE side? Or is this something that just maybe declines in importance a bit as you focus more on the payor side of the house?

Ryan Daniels, Analyst

I would say that we have made significant personnel changes in the past year relative to the size of our commercial operation. We have restructured it with new leadership and team members, some of whom have been with us for nearly a year. Currently, I believe the organization is well-positioned to pursue opportunities in the DTE segment, which includes employers, colleges, universities, teens, city states, and counties. There remains a substantial opportunity on the DTE side, and we are not just focusing on employers. I believe our commercial organization is now configured to effectively address all these opportunities, supported by a strong pipeline we have built. Therefore, I do not anticipate any further changes to the current structure of the DTE organization.

Operator, Operator

That concludes our Q&A session. I will now turn the conference back over to Jon Cohen for closing remarks.

Jon Cohen, CEO

Thank you. In closing, I want to reiterate our unique position in the market, reflected in our sustained momentum over the last six quarters. Comprehensive offerings and modalities are built to serve all demographics from teens to the elderly. Enhanced by innovation, we believe our capabilities continue to set industry standards. This quarter's results underscore our commitment to our mission of expanding mental health care access. Thank you again for joining us this morning.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.