Earnings Call Transcript - TALK Q4 2024

Operator, Operator

Ladies and gentlemen, thank you for your patience. My name is Christa, and I will be your conference operator today. I would like to welcome everyone to the Talkspace Third Quarter 2024 Earnings Conference Call. Thank you. I will now hand the conference over to Jeannine Feyen, Director of Communications. You may begin.

Jeannine Feyen, Director of Communications

Good morning, and welcome to Talkspace's Earnings Conference Call for the Third 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, Ian Harris. 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. Now I will turn it over to Dr. Jon Cohen.

Jon Cohen, CEO

Thanks, Jeannine. Good morning and thank you for joining us for our third quarter 2024 call, which reflects our continued strength in our business and progress on our strategic initiatives. For the third quarter, revenue increased 23% year-over-year to $47.4 million, and we delivered our third consecutive profitable quarter with adjusted EBITDA coming in at $2.4 million. We built on momentum from earlier in the year, working to further solidify our position as a trusted behavioral health provider addressing the nation's massive need for accessible and affordable mental health therapy. Our largest revenue category, payor, grew 45% year-over-year as we continue to strengthen our relationships with key payor partners and efficiently market our covered services. As a pure-play behavioral health provider focused on clinical excellence at scale, our approach to addressing the behavioral health crisis continues to resonate with the payor community. We've earned the respect of the payors with our commitment to research that proves the efficacy of our methods and defines best practices in virtual care and they trust us to connect their members with highly qualified, vetted mental health providers without delay. Our competitive position in the payor space allowed us to grow our total covered lives to nearly 160 million people, an increase of 40% year-over-year, and our total sessions to 316,000, an increase of 38% year-over-year. In the third quarter, we continued to make progress on our goal to be in-network for all Medicare beneficiaries. As of this month, we are now CMS-approved in approximately 40 states and live in 30 states, including Texas, Florida, California, and New York, therefore providing access to the majority of the senior population in the U.S. Our team is working diligently to complete necessary final state approvals and launch our services in the remaining 20 states so that we can begin to test our go-to-market strategies more broadly. In addition to traditional Medicare, we are pleased to report expansion into Medicare Advantage with our October 1 launch announcement into the nation's largest Medicare Advantage plan, furthering our reach to another 7 million plus lives. Reaching seniors will be a focus for us, and as a start, we just announced our partnership with Wisdo, an AI-driven social health platform focused on curing social isolation. This partnership will allow us to reach even more new Medicare Advantage plans and to focus on challenges that seniors may face, most specifically, loneliness. In addition to seniors, we are launching our initiative to offer Talkspace to all active military personnel and their dependents, a population with a significant need for mental health solutions. Recent studies suggest that 23% of active military are living with depression, and 11% of active military have attempted suicide or have suicidal ideations, and these numbers are growing. In addition, military families and their spouses report an elevated need for mental health support, given that over 30% of military deployments and separations are a month or longer, and a significant number of military children have a treatable mental health condition. We launched TRICARE East in August, covering 6 million active duty and retired military lives, as well as their partners and dependents. We expect to be in-network nationally for the remaining TRICARE beneficiaries in early 2025. Building on this launch, we have entered into a new Direct to Enterprise pilot program with the U.S. Navy, where we will provide Talkspace access to six naval bases across the U.S., representing more than 25,000 sailors and their dependents 13 years and older. The opportunity to support the mental health of our military and their families is an honor that is profoundly inspiring to our providers and deeply appreciated by our organization as a whole. With the addition of Medicare, military, and several other large regional plans, we expect to be a network for approximately 200 million lives in 2025, about two-thirds of the U.S. insured population. Our priority is to unlock the potential of this enormous opportunity by focusing our efforts to first, increase the number of people who recognize and try Talkspace as their therapy option, and second, keep them engaged and on the platform for subsequent sessions under our providers' care to improve their long-term outcomes. We will accomplish this by first, continuing to optimize our marketing efforts, second, making significant technology improvements to the patient journey and therapist experience, and third, increasing outside referrals. To elaborate further, our core marketing focus will continue to be about driving awareness, engagement, and activation of these 200 million covered lives. Our efforts are specifically designed to improve the capture rate engagement to ensure that people are aware that Talkspace is available to them at little or no direct out-of-pocket costs. Two, we are laser-focused on continuing to improve every step of the member journey, including enhancing user-friendly processes for determining coverage eligibility, therapist matching, registration, verification, and intake. These improvements include further innovation in the product design to get people to their second and subsequent sessions, improve methods to establish better rapport between the member and the therapist, provide better visibility for the patient on how to achieve improved clinical outcomes, and improving the tools our therapists use to understand how they can meet their professional and financial goals. These product improvements in the patient journey will be a strong factor in optimizing performance in 2025 and beyond. Three, developing partnerships that refer patients to us because of our national footprint of high-quality clinicians and in-network status. To that end, last month we announced our launch of Amazon Health Services as the first behavioral health company within the Amazon Health Conditions Program. This collaboration makes it easier for millions of people across the U.S. to discover their behavioral health benefits while shopping on Amazon. When people search Amazon for mental health-related topics or services, they can now discover an easy way to check their eligibility for therapy and psychiatry services if they choose. Customers can also visit the Amazon Health webpage to see if their insurance covers Talkspace and explore Talkspace's various offerings. Eligible individuals will be guided to Talkspace's website to complete the enrollment process, get paired with licensed therapists in their state, and schedule online therapy or psychiatry sessions through audio, video, or live chat, or message asynchronously with their therapist. We're excited about what this means for the discoverability of Talkspace and look forward to similar programs with other potential partners. With the addition of seniors and military and our experience with teens and teachers, we have become an easy solution for primary care physicians to refer these high-need populations and will continue to pursue these additional types of partners. Moving to our Direct to Enterprise segment, we grew revenue in the quarter 17% year-over-year to $9.4 million, driven by our teens initiatives, including our teen space program with New York City, which just celebrated its one-year anniversary. The results of the teen space program with New York City have been excellent, where we are reaching thousands of teens in neighborhoods traditionally hard to penetrate, meeting the needs of a very diverse group of teens and significantly improving clinical results. We also expanded our specialized support for teens with the September 4th launch of our new peer-to-peer community called Teamspace Community. This product is built into the existing platform that allows teens to talk and share in a safe forum and connect with other teens anonymously. Our successful partnership with the nation's largest city has led to significant interest in our offering from other municipalities and school districts that are interested in applying our teen model to their populations. The demand for these programs remains strong as we recently signed seven new school districts across the country. Our DTE pipeline remains strong, and we are pleased with the new deal activity in the quarter. On the employer side, we saw a number of new wins in the third quarter, including a partnership with the Professional Tennis Players Association. Talkspace will serve as the PTPA's exclusive mental health technology partner, granting players, their families, and their support teams 24/7 access to Talkspace. There's a lot to be proud of at Talkspace right now, and I want to close out my comments by expressing my gratitude to our exceptional team. Their dedication and determination to make mental health care accessible to all continues to drive our success. I am pleased to share that Talkspace has been recognized as one of Crain’s 2024 best places to work in New York City for the second year in a row, serving as a testament to the positive and supportive culture we've built together. As we move forward, I'm confident that with our talented team, strong financial position, and innovative approach, Talkspace is well-positioned to continue leading the transformation of mental health care delivery. Thank you all for your continued support and belief in our mission. With that, I'll turn the call over to Ian to review our third-quarter results.

Ian Harris, CFO

Thank you, Jon, and good morning, everyone. My comments today will be based primarily on a year-over-year basis unless otherwise noted. Total revenue for the third quarter was $47.4 million, a 23% increase from a year ago. Adjusted EBITDA was approximately $2.4 million in the third quarter, an improvement of $5.2 million from a year ago, and an increase of approximately 100% sequentially. This also marks our third consecutive quarter of profitability on an adjusted EBITDA basis. Moving to results by revenue category. Payor, our largest segment, accounted for revenue of $32 million, a 45% increase versus the prior year period. Payor sessions completed by behavioral health and EAP members grew 6% sequentially and 38% year-over-year to approximately 316,000. Unique active Payor members completing a session grew by 24% year-on-year to just over 93,000. Additionally, we experienced a 12% year-on-year improvement in the number of sessions completed per active member, which was driven by some of the early successes we're seeing in the product enhancements that Jon touched on earlier, which are aimed at increasing member retention and engagement. In the Direct to Enterprise category, third-quarter revenue was $9.4 million, up 17% from last year, driven by routine contracts such as New York City, as well as several recent wins across schools, municipalities, and employers. Sequentially, DTE revenue was down 2% as a result of certain contract expirations from earlier in the year, which we discussed in the last two quarters. In Q3, we grew net ARR, and as Jon mentioned, we see good momentum overall in our Direct to Enterprise pipeline. In the Consumer category, where members pay out of pocket, revenue was $6 million in the third quarter. This was an 8% sequential decline and a 30% decline year-over-year, which is in line with our expectations and a result of our strength in Payor growth. This decline is driven by our efforts to optimize both traffic conversion and checkout mix towards the highest long-term return on ad spend in our Payor segment. Moving to gross profit. Our third-quarter gross profit increased 15% versus the prior year period to $21.6 million. Gross margin for the third quarter was 45.6%, in line with last quarter and lower than last year as expected due to the further net revenue mix shift towards Payor. Turning to operating expenses. Our GAAP operating expenses for the third quarter decreased 10% year-over-year to $21.5 million. Excluding stock-based compensation and certain nonrecurring items, our Q3 operating expenses amount to approximately $19.3 million, a reduction of $2.4 million or 11% versus the same period last year. As mentioned on our last call, we initiated a number of cost optimization initiatives earlier in the year, which benefited the third quarter. These savings provide us additional flexibility to reinvest into strategic growth initiatives, as well as product improvements benefiting both our members and our providers. One example of this is our AI smart notes, which we launched last quarter. This new feature drove a 3% increase in efficiency, where providers were able to conduct more sessions during the same working hours. Scaling new features like these will continue to be an area of focus, which allows our network to operate at high volumes while supporting our providers' administrative burdens, thereby reducing costs and increasing productivity. Moving to profitability. GAAP net profit was $1.9 million versus a loss of $4.4 million a year ago. Adjusted EBITDA was $2.4 million, an improvement of $5.2 million year-over-year driven by higher revenue and gross profit with a lower cost base of normalized OpEx compared to the same period a year ago. Turning to the balance sheet. We ended the quarter with $119 million in cash and cash equivalents, up from $115 million the prior quarter. Finally, we reaffirmed our 2024 financial guidance, which as a reminder, calls for $185 million to $195 million in revenue and adjusted EBITDA between $4 million and $8 million for the full year. With that, we can open up the call for questions.

Operator, Operator

Your first question comes from Stephanie Davis with Barclays.

Stephanie Davis, Analyst

Hey, guys. Congrats on the quarter and thanks for taking my question. Good morning? I really wanted to dig in a little bit into that Amazon partnership, because I'm good, but that win is better. So I was hoping you'd give us some color around maybe any associated investments in marketing or affiliate fees needed to branch on the platform and maybe how we could think about the halo effect, your activation rate as a result.

Jon Cohen, CEO

Sure. So, we had been in discussions with them for a while. Being the only behavioral health partner on the health conditions platform is a very important deal for both them and us relative to exposing Amazon shoppers to mental health services and products. What we've seen is, we're very excited and very happy with early results. Obviously, we're not disclosing specifics, except that I can tell you that it's been a very positive launch thus far, I guess it's four to five weeks into it. This program works by allowing users to search for services on Amazon, where we come up, and then users can check eligibility before proceeding through the process. From a strategic lens, this partnership is about increasing the number of behavioral health sessions. Our marketing and referral initiatives are designed to optimize our advertising marketing efforts, improve the journey for patients, and the therapist's journey through the product.

Stephanie Davis, Analyst

Well, maybe one of the things we could take in is I assume when you would be ramping up the amount of lives you’re reaching, you would maybe see some impact to your utilization rate, but it actually held up pretty strong in the quarter. So how much of that is from something like the Amazon partnership where there's more awareness? How quickly could that improve in future quarters? Anything like that would be helpful. And maybe as a follow-up, any further color, you talked about this is the first of many partnerships that come. What direction do you want to go in with that?

Ian Harris, CFO

Hey Stephanie, this is Ian, good morning. On the first piece, just a reminder, we announced the partnership at the very end of September. I think it was the 27th of September, so there was minimal to no impact in the Q3 results we put out. I would view this more just from a strategic lens. It's a testament to the quality of our network, our brand, and our national coverage. I view it as validation of the moat we've created for ourselves. When it comes to referral and driving awareness, they will help drive brand awareness given their size and volume, and ultimately will be driving very high intent users of Talkspace to us in a way that's in network.

Jon Cohen, CEO

Further relations. This goes under what I call the capture rate, more than I would say utilization across the platform once we get somebody, but it really is part of the bigger strategy of eventually 200 million covered lives and how we increase people's awareness.

Ian Harris, CFO

Alright, awesome to hear. Thank you, guys. Congrats again.

Jon Cohen, CEO

You, Stephanie, and just you want to know about other partnerships, Amazon is one. We've talked about Doctalk. There are other large channels like this that we are definitely pursuing.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi guys, this is Adam on for Charles. You've seen over $4 million in EBITDA year-to-date, and we see the guidance for entry but it was reiterated in the $4 million to $8 million range. Given the trajectory you're on, can you talk about what would get you to the top end versus the bottom end of that range?

Ian Harris, CFO

Thanks for the question. While we don't give quarterly guidance, I understand the ask. I'll help you out on sort of both components of our guidance. As it relates to revenue looking towards our sequential quarter-over-quarter revenue growth rates over the last few quarters in 2024 as a framework is the best guidance I can give. For EBITDA, you're exactly right year-to-date where we stand. We expect to land at the high end of the range. A lot of that is driven by the OpEx initiatives we've implemented recently, which have already shown success and will continue to benefit us in Q4. The growth we've seen in Payor segment in Q2 and Q3 has come from driving further capture rate within our existing base of covered lives. I hope that's helpful guidance. For 2024, I’m looking at actual growth and then a re-acceleration on the top line in 2025.

Unidentified Analyst, Analyst

Yes, that's very helpful. Thank you for all the color. I'm also wondering if you can talk about how you're seeing the trajectory of the B2C business and whether there's a steady state you'd expect to hit there at some point, understanding that B2B is the core for the enterprise going forward. How are you seeing the conversion of B2C members to B2B members contribute to B2B growth? Or is it more of a drop-off of B2C members without converting to B2B?

Jon Cohen, CEO

No, we don't see it as cannibalizing our consumer business. What's happening is more people are moving toward the insurance model being fee-for-service because they don’t have to pay for it. You’re seeing a natural decrease in the percentage. We’ve discussed this before; there will always be a consumer market. There will always be people with high deductibles or those who choose to pay out of pocket for whatever personal reasons.

Ian Harris, CFO

I would say that the step downs we saw in 2023 and ‘24 in consumer were completely in line with our strategy to lead with an in-network marketing message. We’re not quite there, but we’re getting close to approaching a steady state.

Operator, Operator

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

Unidentified Analyst, Analyst

Hey, guys, this is Jackson on for Ryan. Jon, in your prepared remarks, you mentioned that the core marketing focus will continue to be about driving awareness. How should we think about customer acquisition costs going forward for the remainder of the year and into 2025?

Ian Harris, CFO

We've actually done a great job avoiding anticipated inflation in customer acquisition costs given the election year. Our marketing team is dynamic, and we’re in a great position in terms of our scale. When we want to test something new, whether it's new content or new channels, we can quickly set up statistically significant tests. It's a very nimble operation, and they've done a great job keeping our CAC low.

Jon Cohen, CEO

Additionally, there are multiple subcategories that go into acquisition costs. Each population—military, Medicare, teens—require different strategies. We’re careful not to generalize too broadly.

Unidentified Analyst, Analyst

I appreciate the color there. When it comes to growing the capture rate, is there a differing strategy when it comes to the different populations you're bringing on?

Jon Cohen, CEO

Absolutely. The go-to-market strategy varies significantly across Medicare seniors and military populations, based on what we know about their preferences and behaviors. We're continuously working to optimize our approach according to those specific needs.

Operator, Operator

Your next question comes from the line of Ryan McDonald with Needham.

Ryan McDonald, Analyst

Hi. Thanks for taking my questions. Maybe to start on the DTE segment, as you look at the pipeline and how it's developing into year-end and into next year, what's the mix between the employer channel versus more of the municipal and district channel?

Jon Cohen, CEO

Most of the ESSER funding you probably know is running out or has expired. We don't distinguish that much between employers versus municipalities. Our sales force approaches both, and there are multiple strategies again on DTE. There’s another category in there, which we refer to as associations of large groups that belong to something that aren’t necessarily employed by them.

Ryan McDonald, Analyst

That's helpful color, Jon, I really appreciate it. As a follow-up on the payor channel, are you starting to get into discussions around value-based care contracting? What metrics are your payor partners looking to track?

Jon Cohen, CEO

Yes, the answer is yes. We've signed some new value-based contracts. The metrics we're discussing include metrics such as time to initial evaluation, full evaluation, and appointment timelines. These metrics are structured around what we've been doing for some time, so they’re not an issue.

Operator, Operator

And ladies and gentlemen, that does conclude our question and answer session. And with that, that does conclude today's conference call. Thank you for your participation. And you may now disconnect.