Earnings Call Transcript - TDOC Q1 2024

Operator, Operator

Good afternoon. Thank you for joining the Teladoc Health Q1 2024 Earnings Call. My name is Matt, and I will be moderating today's call. I would now like to turn the call over to our host, Adam Vandervoort, Chief Legal Officer of Teladoc. Adam, the floor is yours.

Adam Vandervoort, Chief Legal Officer

Thank you, and good afternoon. Today, after the market closed, we issued a press release announcing our first quarter 2024 financial results. This press release and the accompanying slide presentation are available in the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Mala Murthy, our acting Chief Executive Officer and Chief Financial Officer; and Laizer Kornwasser, our President of Enterprise Growth and Global Markets. During this call, we will also discuss our 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 in 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 Mala.

Mala Murthy, Acting CEO and CFO

Thank you, Adam, and thanks, everyone, for joining us today. Before we begin, I'd like to take a moment to reflect on the recent leadership changes at Teladoc Health. First off, on behalf of Teladoc's more than 5,000 employees, Board of Directors, and executive leadership team, I would like to extend our deepest gratitude to Jason Gorevic for his accomplishments over the past 15 years. Jason leaves a tremendous legacy having firmly established Teladoc as the industry leader in whole person virtual care. As we mentioned in our February earnings call, Teladoc is in a time of transition. And as part of this evolution, the Board of Directors decided that it was time to look for a new leader for our company, someone to help us write the next chapter in our growth story. The Board's search for a successor is well underway, and our permanent CEO is expected to be named later this year. The Board has appointed me to serve as CEO while they conduct a search, and I am honored to play this role for a company whose work I believe in so deeply. In the meantime, however, we are wasting no time in identifying and seizing opportunities to leverage our significant assets and capabilities. As an organization, our focus is on accelerating growth on both the top and bottom lines over the medium and longer term. And my focus as acting CEO is to ensure that our strategy continues to be supported by the appropriate level of investment, that our leadership team is executing on our priorities and that we are accelerating the pace of change and innovation across our business. With that, turning now to a review of our first quarter performance. I'm pleased to report a solid start to the year across the business, exceeding our financial and operating guidance for both consolidated revenue and adjusted EBITDA in the first quarter. Our team remains laser-focused on our key initiatives, which include building upon our market leadership position, driving increased product penetration through our large installed base of over 90 million virtual care members and accelerating our bottom line performance. This focus is evident in our first quarter results. In the Integrated Care segment, we are pleased to see continued strong interest in our whole-person care suite of products. First quarter Integrated Care revenue grew 7.8% year-over-year to $377 million, benefiting from high single-digit growth in our Chronic Care book of business, as well as strong visit revenues driven by increased infectious disease activity as well as an 8% increase in membership year-over-year. Chronic Care enrollment remained strong, up 9% year-over-year in the first quarter. BetterHelp revenue of $269 million declined 3.7% versus a difficult comparison in the first quarter of last year. BetterHelp also generated modestly lower revenue on a sequential basis, driven in part by a decline in paying users following our typical pullback in ad spend in the fourth quarter, which is the most expensive time of the year in our marketing channels. Additionally, as expected, the lower returns on our social media advertising spend we experienced in the second half of 2023 persisted in the first quarter and are impacting our year-over-year growth rate in the first half of this year. We are making progress to improve our yield on advertising spend which contemplates not only cost per acquisition, but also retention and other factors as well. I will speak to our efforts to reinvigorate growth in our BetterHelp business later in the call. We continue to make progress on our bottom line performance with first quarter consolidated adjusted EBITDA margin of 9.8%, improving 140 basis points year-over-year and adjusted EBITDA of $63 million, growing nearly 20% year-over-year. We are executing against our cost savings and productivity initiatives, and we remain on track to deliver $43 million in cost savings on a GAAP basis for our business in 2024 and a total of $85 million in 2025. The breadth of our product portfolio continues to drive productive conversations with both prospective and existing clients. Two-thirds of our bookings in the quarter came from cross-selling into our existing book of business, with the remaining one-third coming from new clients reflecting a continuation of our cross-selling momentum over the past several quarters, along with an acceleration in bookings from new business. Both existing and prospective clients are demonstrating increased interest in our Chronic Care Plus bundled solutions, and we remain optimistic about our ability to drive increased product penetration through our installed base of nearly 92 million members over the next several years. In Q1, we saw another example of our land and expand strategy playing out as we added our diabetes program into a large health benefits provider, a client who had previously only purchased our telehealth solutions. We are also seeing growing interest in our weight management solution from employers who are grappling with rising costs for GLP-1s and employee demand for these products. The addition of approximately 2.2 million members on a sequential basis since Q4 represents additional greenfield opportunity for future cross-sell and product penetration. And with more than $1 billion in cash and cash equivalents on our balance sheet, our financial strength continues to be another differentiator for our company and provides us with significant capacity and flexibility to invest and innovate in our business. We also continue to see growing benefits from our early and ongoing commitment to data and artificial intelligence with AI models now integrated across nearly all aspects of our business. From provider matching to enrollment optimization to member engagement, this automation is helping us not only reach our revenue and profitability goals but also achieve our mission of improving health by reaching more consumers. One exciting example is our use of generative AI in member engagement to create hyper-personalized content for individuals to get them signed up for Teladoc services they need and then keep them on track. Our pilot with this AI use case while still being carefully studied, is already delivering significant improvement in member engagement over prior approaches. I would now like to spend a few minutes reviewing our first quarter financial results in detail. First quarter consolidated revenue increased 3% year-over-year to $646 million, while first quarter adjusted EBITDA was $63 million, representing a margin of 9.8%. First quarter financial performance benefited from higher revenues in our Integrated Care segment and improved expense control. Turning to segment results. Integrated Care revenue increased 8% year-over-year to $377 million in the quarter, with growth relatively balanced across the portfolio. First quarter Integrated Care adjusted EBITDA was $47.7 million, representing a 260 basis point expansion in margins to 12.6%. The margin outperformance relative to guidance was largely driven by strong Chronic Care program enrollment during the first quarter, which combined with better expense control helped deliver improved gross margin and bottom line performance. Total Chronic Care program enrollment was 1.12 million at the end of the first quarter, representing growth of 9% year-over-year. Total U.S. Integrated Care members grew 6.9 million over the prior year, representing 8% growth and grew by 2.2 million sequentially to 91.8 million. Average Integrated Care revenue per U.S. member of $1.38 was down $0.01 over the prior year's first quarter, reflecting the timing of new client onboarding and enrollment ramp. The onboarding of large populations and our expanding membership base represents a long runway for continued cross-selling of our chronic care and other B2B products as we execute against our land and expand strategy. First quarter BetterHelp segment revenue decreased 4% year-over-year to $269 million, driven by an 11% decrease in paying users. First quarter BetterHelp adjusted EBITDA was $15.5 million, representing a margin of 5.7%. As we have discussed previously, the first quarter is typically the seasonally weakest quarter from a margin perspective for our BetterHelp business as marketing expense ramps up following the fourth quarter holiday season. As such, we continue to expect the first quarter to be the low point of the year for BetterHelp segment margins, and we expect consistent quarter-over-quarter margin improvement through the course of 2024. Consolidated net loss per share in the first quarter was $0.49 compared to a net loss per share of $0.42 in the first quarter of 2023. Net loss per share in the first quarter includes stock-based compensation of $42.3 million or $0.25 per share, restructuring charges, primarily related to severance of $9.7 million or $0.06 per share and amortization of acquired intangibles of $64.2 million or $0.38 per share. During the first quarter, free cash flow was a net outflow of $27 million compared to a net outflow of $32 million in the first quarter of 2023. As a reminder, the first quarter is our seasonally lowest cash flow quarter given the payment of annual incentive compensation. We ended the quarter with $1.1 billion in cash and cash equivalents on the balance sheet. Turning now to forward guidance, beginning with our Integrated Care segment. We expect Integrated Care revenue in the second quarter to be between 2% and 5% versus the prior year period. As a reminder, in our first quarter call, we called out a delay in launching our B2B consumer engagement efforts due to a technical issue in mapping new client populations, with an expected cumulative negative impact of $20 million for the full year, particularly in the second and third quarters. The impact of this delay, coupled with strong year-over-year first quarter Chronic Care results and the seasonal falloff of infectious disease-driven visit revenues versus the first quarter is expected to result in a lower year-over-year second quarter growth rate compared to our first quarter results. For the full year, as previously guided, we expect Integrated Care revenues to be in the low to mid-single digits, reflecting higher revenues in the second half versus the first half of the year due primarily to the enrollment ramp in Chronic Care and a growing contribution from the nearly 6 million new Integrated Care members we have added since the second quarter of last year. From an adjusted EBITDA perspective, we expect a margin of 12% to 14% in the second quarter, and we continue to expect 150 to 250 basis points of margin expansion for the full year, reflecting revenue-driven operating leverage and the impact of our cost-saving initiatives. As it relates to U.S. Integrated Care membership, we expect 92 million to 93 million members for the second quarter and 92 million to 94 million members for the full year, an increase from previous guidance after adding 2 million members in the first quarter. Turning now to our BetterHelp segment. For the second quarter, we expect BetterHelp revenues to be in the range of negative 8% to negative 4% over the prior year period. Our second quarter guidance reflects challenging cost per acquisition through early Q1, which caused us to pull back on our advertising dollars in the quarter in keeping with our goal of balancing growth and margin. These factors led to a decline in users in Q1, which is impacting our Q2 revenue growth rate on top of a difficult comparison relative to the second quarter of 2023. However, we are seeing signs of stabilization in our cost per acquisition in more recent weeks, which gives us increased confidence in the back half of the year for our BetterHelp business, something I will speak to momentarily. For the full year, we continue to expect flat to low single-digit revenue growth in BetterHelp. We do expect BetterHelp growth to accelerate in the second half of the year. I'd like to take a moment to discuss what's giving us increased confidence in the future of our BetterHelp business, which has been challenged in recent quarters. Late last year, we brought in new leadership for BetterHelp, who have helped inject a broader and more global perspective on growth levers for this business. We are seeing improvements in retention and in our international business, which are helping offset some of the impact from higher CPAs in the U.S. by improving our overall yield on advertising spend. The success we are starting to see with these levers along with the efforts in select international geographies that we expect to ramp in the second half of the year give us confidence in our second half BetterHelp outlook. We expect these initiatives to lead to meaningfully higher membership growth and improved customer retention versus the first half. We are excited about the international opportunity, particularly in select English-speaking geographies that are relatively underpenetrated compared to the U.S. market, which will allow us to reallocate some advertising and marketing dollars at a higher marginal return as we continue to build out our infrastructure in those markets. Given these dynamics throughout the year, we expect BetterHelp revenue growth for the full year to be in the flat to low single-digit range as previously guided despite our lower first half growth. I would also note that we have thoroughly pressure tested the assumptions that underpin our BetterHelp guidance for the rest of the year. We take several factors into account when developing both the low end and the high end of the range, including recent trends in advertising yields, channel dynamics, consumer sentiment, and other macro factors, and we have taken a close look at each one of these. That said, the impact of difficult-to-predict macro events creates unknowns as it pertains to our yield on advertising in the second half of the year. And we will continue to provide updates on the trends that we are seeing in upcoming earnings calls. From a margin perspective, we expect BetterHelp adjusted EBITDA margins to be in the 9% to 10% range in the second quarter and continue to expect margins to be flat, plus or minus 50 basis points for the full year. The sequential margin improvements that we expect to see over the course of the year primarily reflect the cumulative effect of new members added over the course of the year, the cadence of advertising spending, including the typical seasonal pullback in the fourth quarter, and innovation-driven improvements in our yield on advertising spend. On a consolidated basis, we expect second-quarter revenue of $635 million to $660 million and adjusted EBITDA of $70 million to $80 million. Our full-year guidance remains unchanged with the exception of the increase to our U.S. Integrated Care membership that I had mentioned previously. We continue to expect consolidated revenue to be in the range of $2.635 billion to $2.735 billion for the full year, representing revenue growth of 1% to 5%, along with consolidated adjusted EBITDA of $350 million to $390 million, representing growth of 7% to 19% on a year-over-year basis. We expect full-year free cash flow of $210 million to $240 million, driven by both the growth in adjusted EBITDA and an expected decline in capitalized software development costs. We are also maintaining our prior EPS guidance for the full year. Lastly, we are reiterating the three-year outlook that we provided you on our earnings call in February. In closing, I want to recognize my executive team and our broader leadership team for leaning in during this time of change. I've been incredibly pleased with their continued focus on living our values and delivering for our members and clients this year, especially over the past several weeks. We've had a solid start to the year and are poised to deliver significant growth in the second half of 2024. I remain focused on our strategy, our execution, and on our people. With that, we will open it up for questions.

Operator, Operator

First question is from the line of Stephanie Davis with Barclays.

Stephanie Davis, Analyst

Mala, thank you for your hard work. Could you share some insights on the international strategy and timing for BetterHelp? Specifically, can you discuss the rollout and how we should approach the timing of that? Additionally, have you already observed some positive developments that give you confidence in the expected growth rate for the second half?

Mala Murthy, Acting CEO and CFO

Thank you, Stephanie. I'm glad to be here. Regarding the growth in International, as we mentioned in our last call, last year, international made up a mid-teen percentage of our total BetterHelp business. This is definitely contributing to our revenue increase in the second half of this year. We're not starting from scratch in international markets; we are already established in several, including English-speaking countries like the U.K., Canada, and Australia. Our plan is to deepen our presence in these markets first, which fuels our confidence in the revenue growth for the second half. We are familiar with the BetterHelp business dynamics in these regions and have insights into the economics at play. As we increase our presence and investment in these areas, we anticipate continued positive returns on ad spend and revenue growth, supporting both top-line and bottom-line expansion.

Stephanie Davis, Analyst

And for like any follow-up, is there any way to compare the kind of rollout you're seeing on those international markets where you're already in them versus what we're seeing in the U.S.?

Mala Murthy, Acting CEO and CFO

Here's what I would say. I expect international to grow faster than the U.S. Certainly, that is something that we saw last year, and I do expect that to continue. From a rollout perspective, Stephanie, I would say we are going to start in the second half and roll out as we do our ad spending in these markets. The one thing I will remind you is Q4 typically in the U.S. is always the seasonally weakest quarter from an ad spending perspective; it's the quarter where we will typically pull back our ad spending. And I would say that dynamic is in the U.S. We will evaluate and assess how much of that dynamic also plays out in the international markets.

Operator, Operator

Next question is from the line of Lisa Gill with JPMorgan.

Lisa Gill, Analyst

Trying to understand two things. One, clearly, I understand the change in leadership and what the Board is going through. But just also curious if you're looking at any strategic changes to the business. And once again, under pressure on the BetterHelp side. I just heard you talk about international. But are there things that the Board is reviewing would be my first question? And then secondly, I just really want to understand the opportunity around that 8% membership growth, which was really strong in the quarter. We didn't see an increase in either revenue or adjusted EBITDA. Is that just timing? Is there an opportunity for cross-sell? So just really understanding how that's going to play into the numbers.

Mala Murthy, Acting CEO and CFO

Thanks, Lisa. Great question. So from an overall Board perspective and what might that imply for changes, obviously, as I said in our prepared remarks, right now, the focus of the leadership team, my focus, and I would say the focus of the Board as well is for us to be laser heads down focused on implementing our plans, our investments, our priorities. And frankly, leading our employee base, the 5,000-plus employees we have through this period of transition and change. I would say also that I'm pleased with the solid start we have to the year. Hopefully, we have given you enough transparency and color in our prepared remarks on what is really driving our confidence in our growth both from a top-line perspective and our bottom-line perspective as we roll through the year. We've kept our overall 2024 guidance as is from a revenue, adjusted EBITDA, and a cash flow perspective. We continue to make progress on our cost initiatives that we have talked about in February. So all of those are things that require execution, and I would say we are laser focused on that. Beyond that, look, we are always looking at different parts of our business. We are looking at what top-line growth they bring in and what bottom-line growth they bring in. Certainly, as we said in our prepared remarks, the BetterHelp business has been challenged in recent quarters. And I would say I am focused on the execution of the various initiatives that we talked about that will give us that second half ramp, whether it be improved retention, whether it be the fact that we are driving growth in international markets and the growth in the much smaller part of BetterHelp, the BetterSleep part of that business, which is also growing nicely. All of these require execution. On the Integrated Care side, I would say, I'm pleased with the strong enrollment that we have started out with. Obviously, you know this, the enrollment ramps through the year. And we are certainly working through that and that is going to drive our revenue growth and our margin expansion on the Integrated Care side as we go through the year. So the answer to your question in terms of what we are evaluating and assessing is we are executing, we are focused on driving our plans for this year, and we continue to assess how the various parts of our business are doing and whether they are driving both the top-line and the bottom-line we seek. Beyond that, I would say there isn't really more to comment on it at this time. On the second question you had around membership, here's what I would say. We certainly are pleased with the 2 million-plus member adds that we had in the quarter. Remember, the benefit we have of the membership adds is always the fact that it is the underpinning of our land and expand strategy. So it gives us fertile ground to continue to penetrate, cross-sell, upsell once we get these members into our fold. And as we sell in additional products, we expect to see the revenue accretion from that in the quarters ahead.

Operator, Operator

The next question is from the line of Jailendra Singh with Truist.

Jailendra Singh, Analyst

I wanted to ask about Chronic Care program enrollment metric. I understand it was up year-over-year, but it actually declined a little over 3% sequentially. Typically, we see a pickup from Q4 to Q1 due to new contract starts and enrollment increase in the new calendar year. So can you provide some color there, Mala? And then what are your expectations around that metric as the year progresses? And more broadly, anything you can share how you're focused on improving the positioning of your business in Chronic Care longer-term in a market which seems to be getting very competitive?

Mala Murthy, Acting CEO and CFO

Yes. So look, I would say I expect the enrollment to ramp through the year. That is typically always the case in a traditional year, and this year would be no different. Now the one thing I would also say is, remember, we had talked about the marketing pause. In the last earnings call, we had talked about $20 million of revenue impact for this year. I would expect most of the impact of that marketing pause to be in the second and third quarters. But despite that, I would expect for our Chronic Care program enrollment to ramp up through the year, just like in prior years. Laizer, do you want to handle Jailendra's question on competitive?

Laizer Kornwasser, President of Enterprise Growth and Global Markets

Sure. Our customers and clients are expressing their needs clearly, and we are satisfied with our performance during the sales season. We're having fruitful discussions with both new and existing accounts. For the quarter, a significant portion of our growth in bookings, specifically two-thirds, came from our current clients, while one-third was from new clients. We are pleased with the growth in bookings we are seeing, not only in our domestic market but also internationally. What do our clients want? They seek value, a scalable and reputable vendor to partner with, one that has a strong balance sheet, enabling them to drive value for themselves and their consumers. This expectation remains consistent and is influencing our bookings discussions.

Mala Murthy, Acting CEO and CFO

And then, Jailendra, just finishing up on your question around the Chronic Care enrollment. Look, this is a function of the fact that typically when we start off the year, we onboard a number of lives. And we also, at the same time, in Q1 is typically the time we would also see enrollees come on and enrollees roll off, and the net impact of that is what you're seeing. I would expect as we ramp up the year, despite the marketing pause, I would expect that to continue to go on into the rest of the year.

Operator, Operator

Next question is from the line of Jessica Tassan with Piper Sandler.

Jessica Tassan, Analyst

Mala, congrats on the good quarter and guide. I kind of wanted to ask about the 3-year outlook that you all issued on the fourth quarter call and then reiterated today. So the low to mid-single-digit annual consolidated revenue growth, mid-single Integrated Care, low-single BetterHelp, is that target achievable on an organic basis? And just maybe from an Integrated Care perspective, should we think about that growth continuing to be led by Chronic Care? And does it anticipate any new product launches? Just hoping for color around that 3-year guide.

Mala Murthy, Acting CEO and CFO

Yes. Thanks, Jess, for the question. Look, when we put that guide outlook out there in February, we had thought about the building blocks to those numbers, that trajectory, both on the Integrated Care side and the BetterHelp side. So let me sort of comment on it one by one. On the Integrated Care side, I would say, as we had stated previously, think of it as a combination of low single-digit growth on the much more well-penetrated telehealth side, and I would say mid- to high single-digit growth in Chronic Care. So yes, we do expect Chronic Care momentum to help us achieve the overall mid-single-digit revenue growth for Integrated Care. On the BetterHelp side, from a revenue growth perspective, we had said low single-digit. Look, here's what I would say on the BetterHelp side. The second half ramp that we have talked about, the initiatives that we have going to help us achieve that second half ramp, again, whether it be retention, international, continued momentum on BetterSleep, these are the inputs into the low single-digit revenue growth for BetterHelp. And I would say we will continue to execute against it, and we will continue to monitor it, again, assuming that we don't have something very, very unfavorable happen from a cost per acquisition perspective, which will impact our advertising yields. So assuming that we see CPAs in a reasonable range, I would say the building blocks that will help us grow in the second half will continue to be contributors into the low single-digit revenue growth for BetterHelp. When it comes to margins, I would say the cost initiative programs that we have that will help us with OpEx leverage, along with the revenue growth that we will see on the top line, particularly on the Chronic Care side, will certainly be contributors into our margin expansion that we have put out there. So what I would say in summary is we have thought of the building blocks that go into the long-term outlook. And we will continue to assess how they perform. And as I said, this year and especially in the second half, BetterHelp will give us a lot more information on that.

Operator, Operator

Next question is from the line of Sean Dodge with RBC.

Sean Dodge, Analyst

Mala, you mentioned in BetterHelp with the new leadership team, having seen some improvement in subscriber retention. Can you give us a sense of how long you're retaining BetterHelp users now on average? How much has that changed over the last couple of years? And then how much room and what kind of levers do you have to continue to drive improvements in that? What can you do to lengthen that?

Mala Murthy, Acting CEO and CFO

We haven't provided specific KPIs or metrics on retention. However, I can share that we are observing improved member retention mainly due to the innovations we are implementing on our platform and user experience, aided by AI models that enhance our matching of consumers with their needs and providers. This improvement in retention is driven by various factors, not just one. With the new leadership at BetterHelp, we are focusing on multiple areas within the business. We are expanding beyond our traditional emphasis on customer acquisition costs and exploring new geographies while continuing to innovate the user experience. Additionally, we are considering targeted pricing adjustments, all of which I believe will boost our revenue growth and contribute to improved member retention. Laizer, do you have anything to add to this?

Laizer Kornwasser, President of Enterprise Growth and Global Markets

Yes. I guess the only thing I would add is historically, in BetterHelp, we've been very focused on innovation on patient acquisition. And what I would tell you is, we are balancing spending time on increasing the value of that member, and I would say there's not one specific thing other than being very innovative and testing out little things that are driving value so that our return on our advertising dollars increase.

Operator, Operator

The next question is from the line of Allen Lutz with Bank of America.

Allen Lutz, Analyst

Another one on BetterHelp, Mala, have you considered at all moving from just cash paid to participating in health plan networks as a way to drive growth? Is that something that you've considered? And can you kind of talk about the pros and cons of making a move like that?

Mala Murthy, Acting CEO and CFO

We continuously evaluate various initiatives to foster innovation that drives growth in both revenue and profit. Currently, BetterHelp operates with over $1 billion in revenue, making it one of the largest direct-to-consumer players in the market. While there are competitors that have shifted from direct-to-consumer to business-to-business models, we have successfully built our presence in the direct-to-consumer space. Our focus will remain on direct-to-consumer, but we are also exploring ways to enhance and expedite our growth. I cannot provide further details at this time, but we will certainly share any relevant updates as they arise. We are actively looking for strategies to accelerate revenue growth at BetterHelp.

Operator, Operator

The next question is from the line of Sarah James with Cantor Fitzgerald.

Sarah James, Analyst

Mala, I was hoping you could help us a little bit with the pacing of this year, specifically thinking of the items that you have control over, like some of the savings initiatives to get to that run rate of 43 at the end of the year and then the advertising spend. Can you help us pace through how the savings initiatives are going to play out? And then on the ad spend, is there any pull forward of that into 2Q versus your normal cadence? And are you thinking about because of the increased efficiency, just lower overall need for ad spend for the year?

Mala Murthy, Acting CEO and CFO

Thank you for the question, Sarah. Regarding the pacing, we are focusing on our cost initiatives, which include offshoring, automation, and savings from our third-party supplier expenses. These initiatives will be implemented gradually throughout the year. However, with offshoring, we will see an incremental impact as it progresses later in the year. Other initiatives, like third-party supplier savings, will also maintain a steady pace throughout the year. As for advertising spend, we experienced some pressure on our advertising yield and cost per acquisition in the early part of Q1, which led us to reduce our ad spending. However, as we moved into Q2, our ad yield has stabilized, although costs per acquisition remain higher compared to the latter half of last year. While there has been improvement since early Q1, I am not pleased with our BetterHelp segment margins in the first quarter. We are currently evaluating how to adjust our ad spending in Q2 to achieve a better balance between revenue growth and profitability. This management of the BetterHelp business is dynamic, as we focus on return on investment for our spending to ensure that every dollar spent yields the desired efficiencies. Looking ahead to the second half of the year, we plan to reduce spending in Q4, as is our custom, and potentially increase ad spending compared to Q2, assuming we achieve our efficiency targets. Additionally, it's worth noting that our international advertising tends to be more efficient, so as we expand internationally in the second half, I anticipate that spending in these markets will be more effective.

Operator, Operator

Next question is from the line of Kevin Caliendo with UBS.

Dylan Finley, Analyst

Earlier this week, one of your competitors announced that they are winding down their telehealth business. Could you maybe speak to whether or not the guidance today contemplates any tailwinds from a competitive perspective?

Mala Murthy, Acting CEO and CFO

Laizer, would you like to address that?

Laizer Kornwasser, President of Enterprise Growth and Global Markets

Sure, Mala. So clearly, there's been some noise in the marketplace. And we're really not going to comment on the specifics, and we would refer you to that partner of ours that made that comment. But what I do want to highlight is we have a very strong relationship partnership, and we value the relationship that we have with UnitedHealthcare, and we foresee that strong relationship continuing.

Operator, Operator

The next question is from the line of George Hill with Deutsche Bank.

George Hill, Analyst

Mala, I do like to kind of come back to Lisa's topic, which is, I guess, can you talk about the degree to which the current management team kind of feels empowered to make change at the company as it either relates to margins or growth or strategic direction? And then, because I know we're trying to keep people to one question, if I can sneak in a second one. Just if there's any way you can kind of quantify the success you're seeing in BetterHelp? And what metrics you guys are looking at internally? I think we'd find that helpful.

Mala Murthy, Acting CEO and CFO

Yes. In response to your question about the leadership team's empowerment to make changes, I can confidently say yes. As mentioned in our prepared remarks, we are proactively moving forward with our plans, investments, and that remains our central focus. We are also affirming our long-term outlook, which involves regularly evaluating our strategy and various elements of it to determine how to allocate our investments effectively, assessing what is successful and what is not. This is a routine part of our operations every year, and we are committed to maintaining this approach. Regarding BetterHelp metrics, we typically examine several internal operational factors such as Customer Acquisition Cost (CAC), the return on investment from our advertising, retention rates, churn, and the lifetime value of the CAC we invest in. Additionally, we analyze the number of users we attract to the platform. Other factors considered include metrics that influence both user and provider experiences, such as the Net Promoter Score (NPS) for providers and users, all of which remain notably strong due to the positive experiences people have on our platform. These are the usual metrics we monitor.

Operator, Operator

Next question is from the line of Jack Senft with William Blair.

Jack Senft, Analyst

This is Jack Senft on for Ryan Daniels. I think in your prepared remarks, you mentioned reallocating some of the dollars in the second half as the international penetration ramps up. So first, did I get that right? And then two, can you just talk a bit more about where you plan to reallocate these dollars? Was it just reallocating dollars to ramp up the international portion? Or is there something else? Just curious if you can dive deeper into this.

Mala Murthy, Acting CEO and CFO

Yes. We have discussed in our previous calls that we anticipate international growth for BetterHelp. We will focus our advertising budget on the markets where we already have a presence, which primarily includes English-speaking countries like the U.K., Canada, and Australia. These are the regions where we will be investing our ad dollars.

Operator, Operator

Next question is from the line of Elizabeth Anderson with Evercore.

Elizabeth Anderson, Analyst

Mala, when you think about the longer-term growth, I appreciate your commentary, but was there other changes in the international focus, etc., how do we think about the component that pricing plays in both the Integrated Care outlook as well as BetterHelp?

Mala Murthy, Acting CEO and CFO

Yes, that's a great question, Elizabeth. I view the pricing strategy we have on both sides in several ways. First, regarding our Integrated Care segment and the progress we are making in Chronic Care, we've discussed this dynamic in previous calls. We're experiencing strong growth in Chronic Care bookings, and a significant factor behind this is that we are selling more Chronic Care bundles. These bundles provide an increase in revenue from our client base. As we continue to expand, having added over 2 million members in the first quarter gives us a solid foundation to cross-sell more of our Chronic Care products to this population. Chronic Care remains relatively underrepresented; it accounts for only 16% of our overall telehealth base of over 90 million members. This situation presents opportunities for revenue growth, which we are focusing on. On the BetterHelp front, when I consider pricing, we are broadening our approach to include more targeted pricing strategies across services like BetterHelp and BetterSleep. This could involve geographical considerations or other factors. We are actively and continuously working on this, as pricing is an area that is dynamic in multiple respects.

Operator, Operator

The next question is from the line of Daniel Grosslight with Citi.

Daniel Grosslight, Analyst

There's been some noise out in the market questioning the cost and efficacy of some digital diabetes management programs. I know it's still pretty early in the selling season for you guys. But I was curious if that report is having any impact on what you're seeing out there in the market. And maybe if you can comment a little bit on where you're currently seeing the greatest uptick from a new sales perspective in terms of indications, that would be great.

Mala Murthy, Acting CEO and CFO

Yes, thank you, Daniel, for your question. I'll start by sharing some insights, and then I'll let Laizer add more details. When I consider the momentum in the market, there are a few key factors that stand out. First, as I've mentioned, our strategy of land and expand is showing promise. Second, our discussions with clients highlight both the variety of our products and solutions, as well as our ability to demonstrate value and ROI, which is clearly resonating in the market. Lastly, our strong balance sheet compared to many competitors is noteworthy and underscores our capacity to inject innovation into all our products, including chronic care. These are the primary trends we're observing in the market as we continue to sell. Now, I'll pass it over to Laizer to address your specific questions.

Laizer Kornwasser, President of Enterprise Growth and Global Markets

Yes. So with respect to that specific study, I would say we haven't seen any impact from that study on our business. What I would tell you is just some caveats to keep in mind. The first is that report was a review of limited, selected secondary research, and the party did not conduct any original testing or any primary analysis of patient data. And I just want to highlight that based on our studies and those of third parties, we believe that our Chronic Care programs provide a clear ROI for our customers. Our programs have demonstrated meaningful reductions in A1c over a sustained period of time, but it's more than just A1cs. We also have shown improvements in blood pressure and weight, and the whole concept of value is one that we are having good conversations with our clients about. Our members in our diabetes programs also demonstrate higher adherence to their diabetes-related drugs. And so it's really important that you understand what's based in the research, what's included. But what I would tell you is we aren't seeing an impact, but we are having good conversations with our clients related to the ROI and the value of our products.

Mala Murthy, Acting CEO and CFO

Yes, to conclude on that point, Daniel, I want to emphasize that we are experiencing strong performance and momentum in Chronic Care. When I consider our guidance for this year, Integrated Care is starting off well. I anticipate that Integrated Care will maintain its momentum in terms of revenue growth and margin expansion, as stated in our guidance. It’s worth noting that the BetterHelp business has faced some challenges in recent quarters, but we have several factors expected to contribute to a ramp-up in the second half of the year. Overall, on the Integrated Care front, we continue to gain traction, particularly with our Chronic Care offerings.

Operator, Operator

There are no additional questions waiting at this time. That will conclude the conference call. Thank you for your participation. You may now disconnect your lines.