Earnings Call Transcript
Teladoc Health, Inc. (TDOC)
Earnings Call Transcript - TDOC Q2 2023
Operator, Operator
Hello, and welcome to the Teladoc Second Quarter 2023 Earnings Conference Call. My name is Alex, and I will be coordinating today’s call. I will now hand it over to your host, Patrick Feeley, Head of Investor Relations. Please go ahead.
Patrick Feeley, Head of Investor Relations
Thank you, and good afternoon. Today after the market closed, we issued a press release announcing our second quarter 2023 financial results. This press release and the accompanying slide presentation are available on the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Jason Gorevic, Chief Executive Officer; and Mala Murthy, Chief Financial Officer. During this call, we will also discuss our third quarter full year 2023 outlook and our prepared remarks will be followed by a question-and-answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health’s performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement on our press release and our filings with the SEC, all of which are available on our website. I would now like to turn the call over to Jason.
Jason Gorevic, CEO
Thank you, Patrick, and thanks everyone for joining us. This afternoon, we are pleased to report a strong second quarter with results that met or exceeded all of our financial and operating guidance. It's a reflection of the strength and stability we've seen across the business and why we're raising the low end of our revenue and adjusted EBITDA guidance for the rest of the year. In my remarks today, I'll start with a brief recap of the quarter, but then I'll also want to touch on some of the themes and market trends we've seen through the first half of the year from continuing economic uncertainty and the growing demand for whole person care to the changing discussion around weight loss drugs and, of course, the explosion of interest in AI. But let's begin with Q2 results. Consolidated revenue grew 10% on a year-over-year basis last quarter and 4% sequentially to $652 million. Our consolidated adjusted EBITDA of $72 million exceeded the high end of our expectations, and both the Integrated Care and BetterHelp segments had a strong quarter. Revenue from our Integrated Care segment grew 5% year-over-year to $360 million. Compared to the first quarter, revenue grew 3% sequentially, driven in large part by higher enrollment in our chronic care program. At the halfway point, we remain on track for our full year enrollment targets, which is one of the factors giving us the confidence to raise the bottom end of our guidance range. Within the Integrated Care segment, we're seeing growth across all our chronic care programs year to date. In particular, more clients are taking advantage of our digital diabetes prevention program as they expand their portfolio of solutions within our whole person suite. Today, more than one in every three of our chronic care members is now enrolled in multiple programs. It's an example of the ongoing shift in the market towards whole person strategies as more and more clients recognize the value and effectiveness of a holistic approach to care. As a company, Teladoc Health remains our industry's clear leader in this shift to a whole person approach. And we're going to keep driving more growth, expanding our offerings, and delivering exceptional value to our clients and members. BetterHelp also continues to set itself apart as the leading player in its category. We're happy to report strong performance in the second quarter, with segment revenue growing 18% year-over-year, which was executed against our expectations. This reflects both our ability to successfully execute against our strategies and the continued demand for our mental health services. We've also seen stable customer acquisition costs through the first half of the year. This stability combined with consistently strong gross margin performance meant that our margins improved significantly over Q2 last year, a result which was also consistent with our forecast. Consumer demand has proven resilient through the first half of the year, even with the financial pressures that many households are facing. But given the uncertainty in the broader economy, we're continuing to incorporate a more cautious outlook at the low end of our guidance range. Regardless, we'll continue to provide exceptional value to our BetterHelp members. Those are the main headlines from the quarter. Now I'll take a few minutes to talk about some of the themes we're seeing in the marketplace and what we're hearing from our clients. First, the role of virtual care continues to grow. A recent market survey commissioned by Teladoc Health tells us three out of every four employers expect to spend more on virtual care over the next three years. This represents significant opportunities for our business. It also validates our approach. Over half of the employers we surveyed said they plan to implement a whole person virtual care strategy over the next three years as they move toward consolidating vendors. And half of the employers said they're interested in health plans that incentivize virtual care. These trends combined with the fact that consumers are looking for more convenient and affordable options mean that comprehensive virtual care will be the first stop for more people on their care journeys, and we'll keep leading the way. Clients are also talking to us about challenges of managing the cost of GLP-1 drugs. These drugs were originally designed to treat diabetes, but have since been found to help patients lose weight. Employers in health plans want to meet rising consumer demand, but in a way that doesn't break the bank. Right now, roughly four out of every five of our clients believe that virtual care programs can help them manage access to these high-cost medications. As a result, we're seeing growing interest in our provider-based care programs, especially our recently announced weight management program scheduled to launch later this year. This program gives patients access to personalized care plans developed in collaboration with a Teladoc Health physician. And because we know drugs aren't enough on their own, the program is based on a broader strategy with tailored support to help patients lose weight. It's more effective, and it helps our clients manage the runaway costs of GLP-1 medication. We also continue to hear concerns about overall economic uncertainty. As access to capital has become tighter, some startups are struggling, and companies of all sizes are being forced to do more with less. This is yet another factor causing more clients to explore vendor consolidation because they want a strong, stable partner who can drive innovation and deliver real value over the long term. This means working with a partner that has a solid financial foundation. At Teladoc Health, we're providing high-quality care and continuing to innovate, all while generating strong free cash flow. As the healthcare landscape continues to evolve, we will keep making investments and leveraging technology to drive better outcomes for our members, clinicians, and clients. Which brings me to another key theme this year, AI. At Teladoc Health, we use AI across our business, leveraging more than 60 proprietary AI models to strengthen our products and create a better experience for our members. For example, our proprietary virtual care queuing system allows us to facilitate tens of thousands of visits every day, connecting patients with the right providers in real time. It's a complex problem to solve at scale and one that requires taking into account provider licensing, availability, geography, specialty, and patient preferences. AI is helping us to grow and become more efficient at the same time. The same is true for BetterHelp. When it comes to mental health, finding the right provider can make all the difference. So, we use AI to optimize member-therapist matching based on over 100 different criteria. On average, we're matching a patient with a provider every 30 seconds, something no one else in the industry can say. Besides making life better for patients and providers, it's also helping to drive our strong gross margin performance and competitive advantage. Finally, AI allows us to deliver personalized content and insights to our members, helping them change their behavior in a sustainable way. We provide customized next best actions on a massive scale driving better outcomes at lower costs. Because if you want to have a real impact, a one-size-fits-all approach isn't good enough. So we're already taking advantage of AI across our business. And now, we're going even further. Last week, we announced that we're expanding our partnership with Microsoft to bring Microsoft's OpenAI services and Nuance DAX’s capabilities onto the Teladoc platform. Our goal is to automate more of the clinical documentation during virtual exams, making visits more efficient, improving the quality of medical data, and letting providers focus on what they do best, caring for patients. We're also exploring ways to use generative AI to improve the experience of our members. So that's what we're focused on right now, expanding our competitive advantage, making our business more efficient to drive higher margins, and generating more value for our clients and our members. It puts us in a very strong position today and will allow us to keep setting the pace and delivering strong results for years to come. With that, I'll turn the call over to Mala to review the second quarter and share our forward guidance.
Mala Murthy, CFO
Thank you, Jason, and good afternoon, everyone. Second quarter consolidated revenue of $652 million increased 10% year-over-year or 4% sequentially as compared to the first quarter. Second quarter adjusted EBITDA was $72 million, representing a margin of 11.1%. Turning to segment results. Integrated Care segment revenue increased 5% year-over-year to $360 million in the quarter and grew 3% sequentially. On a year-over-year basis, Integrated Care segment revenue growth was relatively balanced across the portfolio. On a sequential basis, new chronic care program enrollment growth of 45,000 was the largest driver of segment revenue growth over the first quarter. Total chronic care program enrollment was 1.07 million at the end of the second quarter, an increase of 7% year-over-year and 4% over the first quarter. Second quarter Integrated Care adjusted EBITDA was $38 million, representing nearly 30% growth and a 200 basis point margin expansion over the prior year second quarter. The Integrated Care segment added 1 million members sequentially, ending at 85.9 million US members. Average Integrated Care revenue per US member of $1.41 was down $0.02 over the prior year second quarter, driven by the impact of 6 million new telemedicine member additions over the last 12 months. As compared to the first quarter, average revenue per US member increased $0.02. Turning to BetterHelp. Revenue increased 18% year-over-year to $292 million in the second quarter, driven primarily by membership growth. Second quarter BetterHelp adjusted EBITDA was $34 million, resulting in a margin of 11.7%, in line with our expectations. This represents a 360 basis point increase over last year's second quarter and a 540 basis point improvement over the first quarter. A result of both a more stable customer acquisition environment and improved gross margins. Consolidated net loss per share in the second quarter was $0.40 compared to a net loss per share of $19.22 in the second quarter of 2022. Net loss per share in the second quarter includes stock-based compensation expense of $0.34 per share, amortization of acquired intangibles of $0.32 per share, and restructuring charges of $0.05 per share, primarily related to office-based rationalization. Second quarter free cash flow was $65 million compared to $48 million in the second quarter of 2022. We ended the quarter with $959 million in cash and short-term investments on the balance sheet. Now turning to forward guidance. For the full year, we now expect revenue to be in the range of $2.6 billion to $2.675 billion, an increase of $25 million at the low end. This outlook contemplates high single-digit percentage growth in our Integrated Care segment versus our prior expectation for mid to high single-digit growth and low double-digit to mid-teen percentage growth in our BetterHelp segment. We now expect consolidated adjusted EBITDA for the full year to be in the range of $300 million to $325 million, an increase of $15 million on the low end. We now expect full-year 2023 adjusted EBITDA margins to increase approximately 75 to 125 basis points for the Integrated Care segment versus our prior expectations for flat to 50 basis points margin improvement. We continue to anticipate an increase of 100 to 300 basis points for the BetterHelp segment. We now expect full-year free cash flow of approximately $150 million. For the third quarter, we expect revenue of $650 million to $675 million, representing growth of 6% to 10% year-over-year. We expect adjusted EBITDA in the range of $72 million to $82 million. For the third quarter, we expect year-over-year revenue growth for each of the segments roughly in line with overall consolidated revenue growth. We expect Integrated Care segment margin to exceed BetterHelp segment margins in the third quarter. Finally, we expect total Integrated Care segment US membership of approximately 86 million members.
Jason Gorevic, CEO
Thanks, Mala. Before we take your questions, I want to share that last week Mala and I had the pleasure of addressing more than 200 of our key clients at our annual forum event in Boston. It was great to spend time with so many employers, health plans, hospital systems, and governments from around the world. We discussed many of the themes that I just talked about, including GLP-1s, AI, and how Teladoc Health is becoming the way more people get more of their care. And I was happy to see many of our clients see us not just as a vendor, but as a true partner in innovation. So I'm pleased with our first half performance and look forward to providing updates on our progress throughout the year. With that, we'll open the call for questions. Operator?
Operator, Operator
Thank you. Our first question for today comes from Sandy Draper of Guggenheim. Your line is now open. Please go ahead.
Sandy Draper, Analyst
Thank you very much, and congratulations on another solid quarter. My question is for you, Mala. The significant change that caught my attention was your comment about the improvement in free cash flow, which is now projected to be $150 million instead of the previously anticipated $100 million. I would like to understand what is driving this improvement, as EBITDA has risen slightly but not significantly. Where are the cash benefits coming from, and what lower cash expenditures are contributing to this change? This marks a 50% increase based on quick calculations, which is quite substantial.
Mala Murthy, CFO
Yes. Thank you, Sandy, for the question. Look, we are really pleased with our free cash flow performance of the business through the first half of the year. You're seeing that in our results. Our prior outlook, as you said, called for over $100 million of free cash flow, we have now opted and we expect to generate over $150 million. If I step back and talk about the drivers of it, part of that is improved visibility into the operating performance of our business. Our adjusted EBITDA guidance reflects that as well with the low end of the range up $25 million versus our initial expectation. Part of it is also a reflection of better CapEx expectations. You'll see this quarter, for example, that our capitalized software costs have come down by nearly $9 million quarter-over-quarter, sequentially. So that improvement is in part due to completion of projects, including the launch of the unified consumer app earlier this year, and we are pleased to see that trend. And, frankly, finally, free cash flow is also a little harder to predict because there is a significant timing component to it. So naturally, as we are halfway through the year, we have a little more visibility on the timing of when things may land than we did at the start of the year. So if I were to summarize what the key drivers are of the cash flow expectations, revised cash flow expectations. It is, we are seeing better adjusted EBITDA. We are taking the lower end of the range off the table, as we said in our guidance. We continue to see good cost control and efficiencies when it comes to capital spending. And as we move through the year, we generally have more visibility on the timing of the cash flows, especially since, as I just said, the timing component when it comes to cash flows is large.
Jason Gorevic, CEO
And then Sandy, I would just add, I think Mala did an excellent job of going through the drivers of our cash flow. If I step back and talk about the importance of our free cash flow, more and more, we are speaking with the CFOs of our clients who have concerns about the financial strength of their vendors and partners. And they want greater visibility into the financial stability, the free cash flow or cash drain of their partners. And it becomes a very positive discussion, we welcome when our commercial team comes to us and says, 'Hey, can you get on the phone with the CFO of our clients', because when we can walk them through what our balance sheet looks like and the very strong free cash flow performance that we have, it really becomes a positive for us.
Sandy Draper, Analyst
Great. Thanks.
Operator, Operator
Thank you. Our next question comes from Jailendra Singh of Truist Securities. Your line is now open. Please go ahead.
Jailendra Singh, Analyst
Thank you. And thanks for taking my questions. I actually want to go back to your comments around gross margin trends at BetterHelp. It seems like those came in much better than expectations. Can you provide a little bit more color, the key drivers there? What specific trends outperformed compared to expectations? How are you thinking about gross margin trends at BetterHelp for the rest of the year?
Mala Murthy, CFO
Yes, Jailendra, thank you for the question. Yes, as you said, we are seeing strong gross margin performance overall, we are seeing that across the business, both on the Integrated Care side and the BetterHelp side. Specific to BetterHelp, look, over the course of 2022 we talked about improvements in BetterHelp gross margins. We have done a number of things, we've actually taken a number of initiatives to improve therapist productivity ranging from group sessions, group therapy sessions to more digital interactions. And all of that is resulting certainly in the trends that we are seeing in our gross margin improvement for BetterHelp. I would say that's really the key driver of the gross margin expansion that we are seeing overall therapist productivity improvements.
Jailendra Singh, Analyst
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from Lisa Gill of JPMorgan. Your line is now open. Please go ahead.
Lisa Gill, Analyst
Thanks very much. Good afternoon. Jason, I want to go back to your comments talking about weight loss programs, and I know you spent time with your clients last week. As I think about those programs, is there an opportunity for both direct to consumer as well as direct to the employer? And how do you view that? So are we thinking about that as an addition to who you're adding in these chronic programs? Are we thinking of this as incremental? I know it's going to start in the third quarter, but I just want to try to frame how big a potential opportunity this could be. And, again, just understand if there's also a direct to consumer opportunity here.
Jason Gorevic, CEO
Thank you, Lisa, for the question. The GLP-1 medications and weight management solutions are currently a significant focus for our employer and health plan clients. We are particularly concentrating on our updated weight management program, which emphasizes provider-based care in the B2B market. Employers are expressing considerable concern about expenses, especially since one large mid-sized employer with 5,000 employees reported a $100,000 increase in GLP-1 costs in just one month. Other employers are experiencing a quadruple increase in these medication costs over a year, which is a major issue for them in relation to overall care costs. At the same time, they are looking to weigh these costs against the benefits of these medications for weight management and for individuals with diabetes. Currently, our primary focus is on the B2B market, but I would not rule out the possibility of moving into the direct-to-consumer space in the future. However, for now, our attention is directed at the B2B market, and we expect to see positive outcomes from this focus in 2024.
Operator, Operator
Thank you. Our next question comes from Daniel Grosslight of Citi. Your line is now open. Please go ahead.
Daniel Grosslight, Analyst
Hi, guys. Thanks for taking the question and congrats on the quarter. I'd like to dig in a bit more into the BetterHelp guide. So at the high end of the 2023 guidance, it implies a step down in year-over-year growth from around 20% in the first half of this year to around 11-ish percent in the second half. Given the stability in tax, I'm curious what's causing the step down. Is it just general conservatism given the macro backdrop? Or is there some structural change in that business that would cause that to slow to kind of the low double digits?
Mala Murthy, CFO
Thank you, Daniel, for your question. There is no structural change. To provide some insight into the dynamics of the business, the lower growth this quarter is partially due to the planned timing of ad spending throughout the year, which differs from last year. Previously, over half of the ad spend for BetterHelp occurred in the second half of the year. This year, however, the plan is for more than half of the ad spend to take place in the first half. Last year, we spent more in the third quarter than the second quarter, reflecting in BetterHelp's margins, which declined from the first to the third quarter before rebounding in the fourth. This year, ad spending is more evenly distributed across the first three quarters, contrasting with the significant increase seen during the same period last year. Consequently, this means that the revenue contribution will also be more evenly spread throughout the quarters compared to last year. This difference in ad spending timing compared to the previous year results in different revenue comparisons, leading to the deceleration in revenue growth in the second half compared to the first half. This has been communicated since the beginning of the year when we set our guidance, and it is now reflected in the actual numbers as we move into the second half.
Operator, Operator
Thank you. Our next question comes from Sean Dodge of RBC. Sean, your line is now open. Please go ahead.
Sean Dodge, Analyst
All right. Great. Thanks. Maybe just with all the recent payer commentary around growth in behavioral health utilization. Jason, are there any updates you can give us on what you're seeing with your enterprise or B2B mental health offerings? You mentioned lots of interest in whole person care. I guess, how integral is mental health in those conversations? And then maybe anything you can share to help understand the integrated care? How meaningful contributor this is? How fast it's been growing? Thanks.
Jason Gorevic, CEO
We continue to observe very strong demand for our mental health programs. Overall, this demand aligns with our other products and services. Currently, over three quarters of our sales involve multiple products, with mental health being the most commonly included second product. It plays a crucial role in our chronic care programs, which are experiencing significant growth and positive results. We firmly believe that our strength in mental health allows us to offer a comprehensive solution rather than just isolated services. Additionally, mental health remains a vital component of our primary 360 initiative, which has also shown impressive growth, albeit starting from a small base. In summary, there is robust demand for mental health services, which continues to be a priority for health plans, employers, and consumers, as evidenced by the performance of our BetterHelp business.
Sean Dodge, Analyst
Okay. Thanks again.
Operator, Operator
Thank you. Our next question comes from Jessica Tassan from Piper Sadler. Your line is now open. Please go ahead.
Jessica Tassan, Analyst
Thank you guys so much for taking the question and congratulations on the great quarter. So, on the integrated weight management and diabetes solution, is there incremental price versus prior iterations of those products? And then just curious to know if you all are going to market with any kind of case studies or clinical evidence just supporting the validity of the Teladoc solution versus maybe any possible alternatives. Thanks.
Jason Gorevic, CEO
Yeah. So obviously, our weight management solution that includes provider-based care is just being introduced in the third quarter. It does sell at a modest premium with the provider-based care as a component of it. Obviously, provider-based care isn't unique to our weight management solution. We had previously rolled that out as part of our diabetes and hypertension programs. And we believe very strongly that we are uniquely positioned to bring this to market in a virtual chronic care management program. I feel strongly that those are supporting our overall success in our selling season relative to chronic care solutions, as well as the enrollment gains that we saw in the second quarter. It's early, Jess, to be able to bring clinical studies to market. Obviously, we're just launching the provider-based care and weight management in the third quarter. So we don't have results from clinical studies yet. But certainly, we always rely on measuring and demonstrating improved outcomes. And as soon as we have adequate data to be able to demonstrate that in the weight management program, we will bring that to market as well.
Operator, Operator
Thank you. Our next question comes from Richard Close of Canaccord Genuity. Richard, your line is now open. Please go ahead.
Richard Close, Analyst
Thank you. Congratulations on a strong quarter. I know international is relatively small part of the business, but Jason, maybe if you can give us an update there. It looked like growth is accelerating somewhat from the first quarter to the second quarter? And any update would be helpful.
Jason Gorevic, CEO
Yes, we are pleased with the results and the growth of our international segment across several aspects. We are seeing strong sales of our technology to hospitals and health systems abroad, as well as successful engagements with governments. Notably, we have achieved success in the UK and Canada with nationalized healthcare systems, which are relatively new endeavors for us over the last couple of years. We recognize a significant opportunity within these nationalized healthcare systems and have been diligently adapting our solutions and developing the necessary sales capabilities to engage effectively. Overall, we feel very optimistic about the international growth and are focused on maximizing opportunities globally, not just domestically.
Operator, Operator
Thank you. Our next question comes from George Hill of Deutsche Bank. Your line is now open. Please go ahead.
George Hill, Analyst
Yeah. Good morning, guys. Thanks for taking the question, and I'll say thanks to Lisa Gill for leaving me the selling season question for 2024. I guess as you guys think about the kind of the sales outlook for 2024. Jason, can you talk about whether you guys are focused more on the cross-sell of products like the diabetes product, the weight management product, or do you still kind of see an opportunity to add a lot of new lives to the integrated care business? I'm just kind of trying to think about focused on 2024.
Jason Gorevic, CEO
Yes. I appreciate the question, George. I would say generally speaking, we're pleased with the selling season through the first half. I would say it's in line to slightly ahead of our expectations for the first half of the year. I would say it's been especially strong in the health plan part of the market. And of course, the employer market tends to make decisions in the back half of the year. Multi-product sales continues to be a key, with over three-quarters of our deals being multi-product sales. We are seeing more clients go, what I would call, all in with Teladoc, where they buy our entire suite of services. And we signed deals in the first half to bring the full suite of chronic care solutions, telemedicine, primary 360, and mental health to health plan clients. If I think about cross-sell versus new logos, we're certainly continuing to see our land and expand strategy pay dividends for us with about 75% of our bookings in the first half being cross-sell and upsell. Now upsell, of course, may be additional populations within an existing client. So that could result in additional lives. So I don't want to preclude those. But as I think about our overall opportunity with 85 million, 86 million members, I would say that our biggest opportunity is to continue to penetrate those populations with more products. Having said that, over the last 12 months, we've added 6 million new members to the Integrated Care segment, which is, I would say, very strong growth.
George Hill, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Charles Rhyee of TD Cowen. Charles, your line is now open. Please go ahead.
Charles Rhyee, Analyst
Thank you for taking my question. Jason, I'd like to revisit your comment about GLP-1. You mentioned that your clients are facing challenges regarding costs, and we've noted that many employers are implementing more stringent prior authorization requirements to confirm diabetes diagnoses, among other things. Is there a way you can ensure compliance in your delivery to make sure that these medications reach the right patients? Additionally, do you offer anything unique compared to a standard health plan with a broad network of physicians?
Jason Gorevic, CEO
Yes, Charles, I appreciate the question. And the answer is absolutely yes. Our new provider-based care programs are an evolution of our existing weight management and prediabetes solutions. Of course, those are native digital programs. And so, we're adding on the provider-based care, meaning the ability to both prescribe as well as titrate those medications through a physician-based delivery mechanism and working with our existing coaches. So if you think about the difference between our solution and someone going to their local physician in their market, the local physician is limited to simply a prescription. We're working with our health plans and our employer clients to make sure that we are bringing the full scope of our services, the digital solutions, the coaches as well as the physicians with the goal of ensuring that the people who are appropriate and in need of these medications get them and that we're engaging them with all of those other behavior and lifestyle changes, including registered dieticians and nutritionists, including coaching relative to activity and exercise. And the goal of making sure that the people who don't really need to be on them for a long term are ultimately getting the right support so that eventually they can move off of those medications and live a healthier life while at the same time maintaining a healthier weight. So from our perspective, our clients are coming to us looking for exactly that: a broader, more comprehensive solution than what they are finding in the general marketplace.
Operator, Operator
Thank you. Our next question comes from Ryan Daniels of William Blair. Your line is now open. Please go ahead.
Ryan Daniels, Analyst
Yeah. Thanks for taking my question. Jason, one for you. You talked a few times about some of the noise in the end market with your smaller competitors, maybe not having the balance sheet and capital to give their clients comfort that they're going to be sustainable entities. I'm curious, number one, if you'll just leverage that to gain organic market share? Or number two, are there opportunities for M&A either to expand the client base or perhaps get some unique products in the market at a more favorable valuation? Thanks.
Jason Gorevic, CEO
Thank you, Ryan. We plan to use our financial strength to drive organic growth. When our clients or potential clients compare our financials to those of smaller competitors, the difference is clear, and it often leads to decisions in our favor. We are beginning to see a normalization in valuations among private companies, particularly those struggling to secure additional rounds of funding due to increased capital costs and profitability expectations. It's essential for us to align these opportunities with our strategic objectives, ensuring there is both a strategic reason and a solid financial basis for proceeding. We always aim to be opportunistic and continue to broaden the range of our clinical solutions to fulfill the goal of whole-person virtual care. I believe the current market conditions will likely provide advantages for us in both areas.
Operator, Operator
Thank you. Our next question comes from Scott Schoenhaus from KeyBanc. Scott, your line is now open. Please go ahead.
Scott Schoenhaus, Analyst
Hi, team. Thanks for taking my question. So following up on the breakout in margins between Integrated Care and BetterHelp for 3Q, you noted that you expect Integrated Care margins to be actually above BetterHelp. Could you give us more color here? It's a pretty nice acceleration from 2Q levels. What's driving this? Is this higher PMPM associated with the accelerating chronic care and that mix shift? Or is there something else that we should be aware of? Thanks.
Mala Murthy, CFO
Thank you, Scott, for the question. Regarding margin expansion, there are several key factors. First, we are seeing the impact of our Integrated Care revenue, particularly from chronic care, positively affecting our margins. Additionally, we are experiencing some modest benefits on the Integrated Care side due to productivity gains from our employed physicians contributing to our gross margins. Furthermore, we are maintaining good cost control across the business in areas like general and administrative expenses, as well as technology and development spending. As we have mentioned in previous quarters, we anticipate leveraging our T&D spending in the coming months. All of these elements combined are driving our overall margin performance.
Operator, Operator
Thank you. Our next question comes from Stan Berenshteyn of Wells Fargo. Stan, your line is now open. Please go ahead.
Stan Berenshteyn, Analyst
Hi. Thanks for taking my questions. Maybe swinging back to BetterHelp. Revenue grew 5% sequentially. Membership grew 2% sequentially. So just curious what drove the incremental revenue performance in excess of membership growth. Thanks.
Mala Murthy, CFO
It's a combination of user performance and our significant ad spend in the first quarter, as reflected in our quarterly results. The revenue generated from users acquired at the end of the quarter is mostly realized in the second quarter. This is the reason for the increase in our second quarter revenue for BetterHelp.
Operator, Operator
Thank you. Our next question comes from Kevin Caliendo from UBS. Your line is now open. Please go ahead.
Kevin Caliendo, Analyst
Great. Thanks for taking my question. I was wondering what you are considering regarding the impact of student loan repayments starting again in October, particularly in relation to BetterHelp and its user volumes. Have you conducted any analysis on the overlap between users who might have to resume payments and your existing users?
Jason Gorevic, CEO
Yes, Kevin, I won't go into the components of our guide. I think what you heard us say relative to the overall expectations of the economic environment, we've included a range that contemplates a variety of scenarios where, I would say, a greater impact of economic factors at the lower end of our range and less of an impact at the upper end of our range. And I would put student loans into that category of overall economic factors. I don't think it's big enough to, quite frankly, be isolated as its own factor. And I wouldn't break it out as such.
Operator, Operator
Thank you. Our next question comes from David Larsen of BTIG. David, your line is now open. Please go ahead.
David Larsen, Analyst
Hi. Congratulations on the good quarter. Just do you have any thoughts on the proposed physician fee schedule for 2024? There were a couple of things in there on telehealth. Does that matter or not, especially for your plan clients that have a large MA presence? I mean it looks fairly favorable to me. Like they're talking about potentially increasing the kinds of providers that can participate in telehealth or talking about expanding revenue or reimbursement for primary care physicians. Just any thoughts or color there would be helpful. Or does it not matter? Thanks.
Jason Gorevic, CEO
Yes. Thanks, David. I would say, at a macro level, the trends coming out of CMS and the administration are favorable relative to virtual care. With respect to the fee schedule itself, we don't get direct reimbursement from the government on a fee-for-service basis for Medicare. So it really doesn't affect us directly. We work with the health plans on MA and on managed Medicaid. And so I would say, while the overall environment is favorable for us and I would call it a tailwind, those specific changes don't really have a bearing directly on our revenue.
Operator, Operator
Thank you. Our next question comes from Elizabeth Anderson of Evercore. Elizabeth, your line is now open. Please go ahead.
Elizabeth Anderson, Analyst
Hi, guys. Thanks so much for the question and congrats on a nice quarter. I was wondering if you could talk a little bit about some of the productivity improvement, I think, Mala, that you mentioned. Is that sort of a result of like new initiatives that you're doing? I assume it's sort of too early for something with like the Microsoft deal that you announced. And have you thought through sort of like what would be sort of the financial benefits of that either over the next year or sort of more broadly, over the next couple of years? Thank you.
Mala Murthy, CFO
Yes. Thanks for the question, Elizabeth. Look, we are continuously looking at efficiency and productivity across all of our lines, including our provider costs. When you look at things such as geography, we look at things such as how we can leverage technology. Jason talked about some of the uses of AI in his prepared remarks on how we are leveraging that for greater efficiency. As he said, we use over 60 models in AI alone already to just get more productivity. And the way it manifests is, how we can do better matching of providers with our members who are seeking care, and that ultimately does result in better productivity. We are certainly also seeing some modest tailwind in productivity when it comes to our employee physicians. As you know, we have talked about the shift that we are making in our provider force in terms of the hybrid model between the 1099s and W-2s, and we are seeing some modest tailwind from that in terms of productivity. So it's not one initiative. It is a series of initiatives. We are continuously looking at ways to improve our margin profile.
Elizabeth Anderson, Analyst
Got it. Thanks so much.
Operator, Operator
Thank you. Our next question comes from Vikram Kesavabhotla from Baird. Vikram, your line is now open. Please go ahead.
Vikram Kesavabhotla, Analyst
Yes, thank you for taking the question. I just wanted to follow up on some of the comments around the user behavior at BetterHelp. So specifically, when someone joins the platform, how long are they typically staying with the service? And when they leave, how often are they coming back? And are you seeing any changes in that behavior as the business continues to scale? And related to that, I was also curious if you could give us some color on how much BetterHelp is contributing to the total visit performance of 4.7 million. Thanks.
Jason Gorevic, CEO
Thank you for your questions, Vikram. We have not provided specific data on the average duration a member stays or their frequency of returning to the platform. However, we are observing steady improvements in the lifetime value of a member, which factors in customer acquisition cost, duration, and their return to the platform, along with pricing as the final element. When considering all these factors, we continue to see strong performance in the lifetime value of a member. There was also an additional part of your question...
Mala Murthy, CFO
Volume.
Jason Gorevic, CEO
Oh, the volume. We don't provide specific visit volume for BetterHelp. What I can share is that, as Mala mentioned, we're experiencing increased digital interactions and more group therapy. This actually leads to a decrease in what we consider visits because we only count a visit when there's a live interaction with a therapist or clinician. Therefore, the growth of our digital and group interactions tends to reduce the volume of what we recognize as visits on the BetterHelp side. However, this trend ultimately results in improved gross margins for us, which we view positively.
Operator, Operator
Thank you. Due to time, we'll take no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.