Talkspace, Inc. (TALK) Earnings Call Transcript & Summary

Okay. Thank you, and welcome back to the 40th Annual JPMorgan Healthcare Conference. My name is Matt Ben. I'm one of the healthcare investment bankers here at JPM. I'm really pleased to announce our next presenting company, Talkspace. And on behalf of the company, we've got interim CEO, Doug Braunstein; and Chief Financial Officer, Jennifer Fulk, will join us after the presentation for Q&A. I'll remind folks if you want to submit a question through the portal I will lead the questions for relevance and [indiscernible] afterwards. So with that, I'll pass it over to Doug.

Matt, thanks, and good morning, everyone. I'm actually quite pleased to have the opportunity to present today as the interim CEO of Talkspace, which is a virtual health care platform that provides accessible, high-quality mental health care to our members. And just as a matter of history, it's my 23rd year at the JPMorgan Healthcare Conference. So I'm excited to be here. I believe Talkspace to be a company with significant growth opportunities ahead of it. And my first few months in the interim role make me even more confident today that Talkspace is going to be able to deliver long-term value to our members, to our commercial partners, our clinicians, our employees and importantly, our shareholders. So I'm going to start us off on Page 3, which is the full-stack behavioral health platform with proven clinical and tech capabilities. And what I want to do on this slide is highlight what I believe are the key differentiators for our platform, and I'll expand upon a number of these as we go through the deck. So unlike many of our peers, we address the full spectrum of digital care and acuity within behavioral health. We offer self-help tools. We offer therapy. We offer psychiatry all at scale and all across both B2C and B2B channels. We've got a sizable network of providers, both W2s employed by Talkspace today and Contractors 1099s and we use that network to dynamically meet our customer demand. And we're among the few to deliver services exclusively from licensed clinicians, i.e., we don't use coaches and psychiatrists and nurse practitioners. We also adopt a rigorous clinical approach, and we track our results on a systemic and systematic basis, and I'll talk a little bit about that on our technology slides. It's particularly important this network to our B2B franchise, where we see significant opportunities to increase both market penetration and enhance our profitability. Our commercial partners require periodic reporting through KPIs, and we can provide all of those, thanks to our technology platform and our clinical foundations. And these metrics, I believe, are going to grow in importance over time as value-based health care gains traction, particularly on the behavioral side. Our digital native technology platform and the machine learning capabilities that we have really enable us to provide enhanced care, track progress throughout the clinical journey, and we think that differentiates us between many of our competitors. And lastly, and importantly, we've got a very strong balance sheet that we believe provides us the flexibility to invest in both the growth initiatives we have in front of us, while ultimately increasing our leverage to -- towards profitability. And I wanted to just describe in a little bit more detail what I mean by that because I think there's some confusion in the market. It means that we believe that we have ample cash on the balance sheet to continue to invest in our businesses, throughout 2022 and 2023. And so with that, I want to turn to Page 4 and talk a little bit about the TAM. I'd say increasingly, everyone is familiar with the growing need for affordable and accessible mental health care services in the country, but I want to highlight 3 things from this page. First, approximately 1/3 of the U.S. population today experiences anxiety depression. The incidence of behavioral health conditions keeps growing across all ages and demographics. And this is creating what we believe to be one of the most significant large unmet medical needs in the United States and therefore, an underserved and growing TAM. Second, we're actually living through a major industry shift where health care -- behavioral health care is finally recognized as an essential component of care and employees and payers increasingly understand that providing access to behavioral health care has significant consequences across the full spectrum of health care. And then the third thing and perhaps the most interesting for our business digital delivery of behavioral health care, which increased dramatically out of necessity at the outset of the pandemic remains and we believe will remain the preferred delivery mechanism of care today. Unlike most other medical specialties, virtual delivery really enhances access and at least we have the clinical data to support the fact that it is equally effective and it plays right into our business model and the opportunity set in front of us. So with that, let me turn to Page 5. And I've made a number of those points. So I'm just going to really highlight the fact that we believe we're a leader and an innovator in virtual behavioral health care. We built an incredibly strong consumer brand. We service both B2B and B2C platforms. We service a whole host of different members and provide a whole host of different services and therapies. We use a full range of digital delivery mechanisms, including asynchronous and video-based therapy, and we deliver all of our services in a secure and HIPAA compliant manner. So we think we're really an incredibly important platform for the future of access to behavioral health care. So with that, I want to spend a fair amount of time on Page 6, which is a preliminary view of our fourth quarter revenue and a view of some of our longer-term financials and metrics. So I'm going to use the midpoint and the slide uses the midpoint of our range for revenue in Q4 of $28 million between the range of $27.5 million and $28.5 million. And we're obviously going to provide a bunch more detail, both around the number itself, the adjustments that we're making, the rest of the P&L and balance sheet when we do our full fourth quarter release in February. But I wanted to give our investors and those interested in us some preliminary views on what happened in the fourth quarter. So first, revenue did grow modestly year-over-year, but the components of growth were really quite different in this quarter, right? We recognized significant growth in our B2B revenue year-over-year. And for reference, we ended the quarter and the year with 69 million covered lives. And I would add, we have a very strong pipeline of additional lives going into 2022. Now I want to spend a moment on the covered lives matter because I think there has been some understandable confusion in the marketplace about it. On December 21, we filed an 8-K, and I want to read from that 8-K, which is, there was a change in the total eligible B2B lives, and we corrected numbers due to updated information provided by a large health plan. So before Talkspace had included certain B2B eligible lives under the company's arrangement with that health plan that the health plan subsequently made clear we're not eligible to use in our numbers. So as a result of that, we actually revised our number in the third quarter to be 56.6 million eligible lives. In our fourth quarter, including the month of December, we added substantially to the eligible lives number. We also, in the fourth quarter, provided a record number of sessions to our B2B members in the quarter, up almost 15% quarter-over-quarter. And we also had significant growth in our direct-to-employer customers in the quarter. And in fact, December was our strongest month of the year in terms of new customers. So importantly, we actually grew our B2B business in the quarter despite concerns about management transitions. And I would say that we signed numerous new accounts, retained all of our existing business, and we added materially to our pipeline, both in terms of covered lives and DTE opportunities. So as a result of that, we enter 2022, and I'll talk a little bit about this when we get to DTE with our ARR in DTE, up over 100% from where we were at the beginning of 2021, which gives us a very nice and strong base of growth to build upon. Second, I want to talk a moment about consumer revenue that was actually down year-over-year and quarter-over-quarter. And that was largely based on the fact that we reduced slightly our advertising spend during the quarter as a purposeful way to begin the process of optimizing our returns on the B2C business. While we're disappointed, obviously, with the revenue, we have seen some modest positive signs around stabilization in both our conversion rate and our retention rate, and we continue to see modest gains in ARPU in the quarter. So what I will say about B2C is that we continue to work to optimize that business, and I will talk about it more at length as we go on. Let's switch to Page 7. I want to highlight some of the near-term priorities that I have in the interim role. And as I mentioned in our third quarter call, I do want to reiterate that we are conducting a search for a new permanent CEO. We're actually making very good progress on that front. But in the interim, I want to be clear that we are working as a management team every day to improve the performance of our business, for our customers, our members, our employees and our shareholders. So what have we been doing over the last 2 months? We've been really looking to optimize the value by focusing on execution, prioritizing our resource allocation for growth, and optimal returns, promoting operational and financial discipline across the organization, and I'm going to give you a couple of examples that I want to highlight from this page. First, in order to grow and improve the way we operate our therapist network, we expect to roll out a number of changes in the way we work with our network actually beginning in the month of January, which we believe are going to directly address and improve the utilization of the network and ultimately improve both customer retention and engagement, which impacts our B2C conversion and retention factors. Second, we're now working on opportunities to unify the funnel between the B2B and the B2C network. That way we better leverage the robust website traffic and brand awareness that we built, and we can actually simplify the process for claims for all of our members. So for example, we're currently rolling out procedures that make reimbursement easier for out-of-network customers, and there's going to be a number of changes planned and scheduled to be released over the coming months. Third, we actually recently approved substantial additional incremental resources, particularly in our B2B business to really take advantage of this large and growing demand from our payer and our enterprise customers. And then finally, where we engaged outside consultants in December to help us optimize revenue cycle management in the B2B segment and to address the current level of reserves that we not only took in the third quarter but continue to take going forward. And we expect that investment to have a very positive ROI during the course of 2022. So our view is all of these initiatives over time will really allow us to leverage our cost base and ultimately enhance future profitability. So if I turn to Page 8. For our new investors, I want to give a quick overview of what we do in our B2B business. We serve our commercial partners through 3 different segments: Managed Behavioral Care -- Health Care, MBH; Employee Assistance Programs, EAP; and Direct-to-Employer, DTE businesses. So the first 2 segments generate revenues on a fee-for-service basis. They serve large health plans who offer their members access to our platform on a pre-negotiated in-network reimbursement rates. So for MBH, we build a payer for each session delivered and consumers pay based on whether or not they have a co-pay or whatever their insurance plans provide for. For EAP, members have fully covered access, but it's limited to a number of Talkspace sessions, and that goes directly from their employers, and we build our payers as partners. And then under the DTE model, clients provide employees with a firm fully covered access to a particular Talkspace plan depending on what they choose and we bill a monthly fixed amount of per employee per month charge for access to the service. And the benefit of this model, obviously, is it provides a recurring and a visible stream of revenue and it has limited acquisition costs from a customer standpoint. So if I look to Page 9 and think about the drivers for MBH and EAP, which remember, our fee-for-service businesses, what I would share with you is I think we are in the early days, very early days of executing on this opportunity. Because it's a fee-for-service business, the more we drive sessions and engagement over time, the better we optimize that business. And we can do that really in 3 distinct ways going forward. The first is add covered lives at the existing utilization. And as I said, we have a robust pipeline and a growing set of covered lives that we expect to add in 2022. Second, and arguably, more importantly, given the aggregate number in the numerator, we can drive both penetration and utilization. So not only the number of members that come to us but the amount of time that they spend with us, and we're devoting substantial resources for the first time really in 2022 to drive revenue through both penetration and utilization. And then finally, we're actually going to work to bundle some of our services, including some of the self-help options that we talk about and psychiatry to our B2B partners. And that is really to address the specific needs that our B2B partners have raised with us. So if you turn to Page 10 and think about the drivers for Direct-to-Employers, some of the same and some quite frankly, are different. We think we have a number of growth drivers here that are really propel the growth in DTE accounts through 2022. And I should mention, we had 70 accounts at the beginning of 2021. We left 2022 with 150. So there's an enormous opportunity in terms of size of companies and organizations we can do business with. And again, December was our best month for new additions and a very robust pipeline going into 2022. So there's a number of ways we can optimize the revenue here particularly as it relates to providing incremental data-driven metrics that we think are going to create value for employers over time. And then finally, I would say we continue to grow our sales and our support staff in the area, and we believe that there's significant opportunity to drive more business through that. On Page 11, I just want to quickly highlight the B2C business. It builds, as I mentioned at the outset, on a leading brand in the consumer space, we offer a full spectrum of virtual mental health care, from self-help to medication management and the -- and members can use Talkspace through a variety of modalities and through a variety of price points, which makes us a very attractive offering to the average consumer. And just to highlight for you, the average consumer in our network today uses therapy, and the majority of that revenue is obviously driven through the subscription service. And on average, our consumers today are choosing a plan that includes video, but we still retain a little more than 40% of our members who only choose text as a means of communication. So on Page 12, I'm not going to spend much time here because I think this is one of the areas we will be consistently through 2022 updating our investors on. But as we mentioned in the third quarter, we think the real opportunity in the B2C business is to address the decline in conversion and retention rates in our network. And as I mentioned, we showed some modest signs and I would stress modest signs in the fourth quarter. We have a number of work streams and dedicated teams focused on these 2 very important initiatives, and we do expect to spend more time over the coming quarters after we've demonstrated an ability to actually execute on our plan. So with that, a couple more pages, Page 13. I want to spend a moment on technology again for folks new to the space. We've actually, I believe, developed a real differentiation in our tech stack and our data set that's gone on over the last 8 years of the company's history. And what's important for us is we use technology really at every stage of the user's experience from intake to post discharge. So we use tools like our proprietary matching algorithm, we use machine learning-assisted diagnostics, our clinicians use our app to monitor and improve their performance. We have a clinical progress tracker -- We ensure the best possible experiences for both our users and our clinicians and then we follow the patients after. So we think at every step of the journey, we're using technology to both improve access and improve outcomes. And we're quite excited about the opportunities to turn our data sets over time to drive value-based care in behavioral health and more to come on that as we make progress on that front. So I'll conclude on Page 14, really just highlighting the fact where I began that we believe as we move through 2022 that the management is going to continue to try to make progress in driving both the differentiated factors that make Talkspace a unique platform but ultimately, executing on our plans and our capabilities in order to drive shareholder value over time. So with that, Matt, I'm going to open the floor to questions.

Absolutely. Thanks, Doug, for the presentation. And just to remind folks one more time you can go ahead and submit a question through the portal. We've got one in here now. And Doug, it relates to -- it actually [indiscernible] Jennifer, if you want to come off video and audio mute to join us. Perfect. So this first question relates to dynamics specifically around B2B lives between the third and fourth quarter. And maybe while we're on this topic, Doug, you talked about it a little bit, but I think we're double-clicking on just because of the confusion with that 8-K. Maybe you could just give a little more context about the misunderstanding. I think anything there would be helpful.

Yes, sure. So quite frankly, there were -- there was discussion and dialogue with ourselves and a very large payer about the access to their network for Talkspace as a benefit. And I think there was a belief on Talkspace side based on those conversations that we had access to a large portion of their network. And that was included as a result of that, we actually included those lives in both the second and the third quarter lives in part when we announced our results for the third quarter. Subsequent conversations, it was clear that, that payer did -- we did not have access to that payer's covered lives. So as a result of that, we actually filed an 8-K to correct for that. We did that on December 21, so it might have been a tree falling in the forest because many people might have been on vacation. And what I want to say is when we -- and we updated at that time where our covered lives were and remained at the end of the year, which was 69 million. So if you look corrected quarter Q3, 56.6 million to 69 million, substantial growth in the quarter. That does not include that payer's lives. Those lives are not included in our network today. I would add, we believe there's an opportunity to capture those lives, but that's an opportunity that will present itself in 2022.

Got it. That's really helpful. Another question from the portal is they wanted to get some more information on how you'll improve retention and conversion rates, and I had jotted down a similar question. I'm wondering how important it will be to leverage technology there to improve those rates?

Yes. So I want to say, in general, we end up approximately in the number varies quarter-over-quarter. But we have 5 million visitors that come to our site, right? And our conversion rate is of a very small percentage of that total. So there's really 3 very significant initiatives that actually all revolve around technology and analytics. The first and perhaps the most important is we talked about unifying the funnel. And what that means is making it easier for someone who comes to our consumer site to use their insurance to pay because we have, as we said, 69 million covered lives, right? We have a large base of people who can actually can be reimbursed rather than pay for it out of pocket. And even for people who are doing out of network, we have the ability to help them facilitate submitting those bills. So we announced very recently a super bill function for out-of-network individuals. That's gone live on the platform. There are a number of other changes that we're going to actually do to the funnel that make it easier for a B2B member to come into our consumer website and convert to an insured life. So that's the first thing. The second is we're changing a number of functionalities in our matching and the engagement with our therapists to improve the people who come to the site and actually get placed with the therapist and then retained with that therapist. So there's a number of activities that we're doing there, both technology and from a network standpoint to address those issues. And then the final thing I'd say is we are increasingly devoting resources to drive optimized search and optimize performance of the website. And so there's a lot of opportunity for us during the course of 2022 to add technologists and data scientists in order to optimize the spend and improve our conversion. So I will say, Matt, to be fair, it will take time. So it will take us the time to develop the capabilities, hire the individuals and execute. But it's a -- we think, over time, it's a very significant opportunity for us. And the good news is we have a great brand and a lot of people visit our site. So the ability to capture more of those individuals, whether they're B2B or B2C is upside for the company.

Yes. That's awesome. And Jennifer, have you guys quantified at all any of the white space opportunity? Or if you have it maybe -- Doug during the presentation, you talked about bundling and some of that cross-selling? So maybe you can just add some more context there, if that might be helpful.

I don't have anything more in terms of quantifying that white space other than as Doug has alluded to, there's significant opportunity. I think that near-term focus as Doug walked through what those focuses are really with our foundational elements of our offering and ensuring that we are executing with excellence across our operations and our financial controls and processes. The white space is clearly on our radar and clearly, a huge opportunity as we build out the foundation.

Got it. And maybe on the topic of the opportunity out there. Can you maybe discuss the global TAM? I saw the page in the U.S., but any other countries that may be more progressive, I assume some of the tailwinds for the market is the stigma going away for mental health? And is there anything on that would be great.

Yes. Let me comment on that because I think when we originally part of the opportunity set when we first went public was global. And I don't want to discount that because there's a huge opportunity set outside the United States. Matt, the priority for us in 2022 is the TAM and unmet medical need is so significant in the U.S., and we have so much opportunity to improve our execution and operations that -- our focus is going to be exclusively in the U.S. in 2022. And part of what I think the opportunity is with any high-growth young company, is to focus and prioritize the very most important things. And when we kick those off and we execute on those successfully, we'll expand our aperture and think about other opportunities.

Got it. Yes, that makes sense. There's definitely yes, true unmet need still here in the United States. So that makes total sense.

And if you think about our -- just our average users on a quarterly basis are in the tens of thousands, we have literally millions of covered lives, and we have millions of visitors to our website. So we got -- we have lots of room to increase utilization and penetration before we go OUS.

Makes sense. We've got a couple of more questions in the portal and while I track processing. This one is pretty easy. How do you think about the growth opportunities across the different B2B initiatives you identified? So maybe just between the 3, I think that you had laid out, how do you feel about the different growth profiles there?

Well, so all of -- I feel that each of them offers substantial growth opportunity over time. The -- let me start with DTE, right? So we ended the year with about 150 accounts, right? That leaves literally thousands of opportunities in front of us. There's no company that I know today. There's no university that I know today that isn't concerned about the mental well-being of their employers, employees or their students. So the benefit that we provide by providing this service, we think, has great value to employers and universities and institutions in general. So the nice part about that business is as you -- it's a recurring revenue stream as long as you can service your existing customers. So every month and quarter that you add you build to what will ultimately be in annualized stronger ring. And as I mentioned, just the ARR from beginning of '21 to '22 is up almost 100 -- actually a little low for 100%. So that's a really nice recurring and growing revenue stream. We are -- we've got more sales people, more support staff targeted lists now. So there's a significant opportunity there. On the payer side, whether it's MBH or EAP, driving utilization is an enormous opportunity for us. So right, because we literally have tens of millions of covered lives. So there's a very important initiative really B2B2C marketing that we're going to use part of unifying the funnel will hopefully drive utilization across the MBH space. And then obviously, we have additional plans and pipeline in place to add to our covered lives, which we expect to do during the course of 2022. So each of those areas has substantial new white space, if you will, and then within the existing white space driving increased utilization across the board. I'll add one more thing to that, which is we have a real opportunity to do a better job in bundling our product offerings. So offering a self-help digital capability, which we have today across indications through clinical therapy, through psychiatry is really a very attractive package to our payer partners, and we need to do more there during the course of 2022. Again, Matt, I'm going to just say building a business and building it in a very effective and efficient, disciplined way, we expect it to do very well in 2022, but it will take time, and you'll see that grow over time.

Got it. Got it. We have 5 minutes left. So if anyone wants to submit additional questions, now it would be the time. We do have a few here. So this question is up to 69 million covered lives in B2B, how many can access your services for free or for a modest co-pay? Is that just that...

So a portion -- so I want to divide the 69 million covered lives, some of them are EAP lives, and some of them are MBH lives. Some may -- by the way, we've made this comment before, we don't know, but there could be some overlap in double counting in all of that, but we don't know what that is. The EAP plans, Matt, as you know, most employers offer EAP. We partner with the large payers that provide EAP services. And typically, that provides for 1, 3, 5 sessions for free, right? For an employee who is seeking behavioral health care. One of the big opportunities for us is those folks that come in through EAP, can we, at the end of their free sessions, can we be effective in either converting them to an MBH member or converting them to a B2C member. And we're really just beginning -- that's using technology to help facilitate that transition. We're just beginning that effort. On the MBH side, Managed Behavioral Health Care, it is completely matter of function of the employees plan, right? So you're going to be subject to whatever co-pays and deductibles that plan provides. But as you know, behavioral health care, we're plans are required to cover behavioral health care. So it will largely follow the employees' plan or the covered lives' plan depending on where they work and where they receive their coverage.

Got it. Okay. We've got one question on the path to profitability. I know your laser focused on these near-term objectives, but anything there you can talk about?

What I would say is we're -- I made clear that we have ample cash resources in our belief for the next several years to do everything we need to do to drive the growth of the business to improve the operating performance and efficiency of the business and to deliver value. I believe that this business model inherently as it scales, has the ability to also generate cash flow. But I don't think we're prepared today to say where we'll be on that front. And quite frankly, what I'd rather let us do is let our operating performance over the next several quarters speak directly to that.

Yes. Got it. We've got just under a minute left. So there's one final question. This person wants to know a trend on average revenue per session. So maybe any comments there, and then we can wrap it up.

Yes. I think I actually said in my prepared remarks, ARPU is up. So -- and that's not per session that's per user, right? So our session prices are reasonably constant, right? And so whether it's reimbursement rates for payers or it's consumer pricing is reasonably constant. And we continue to get on the consumer side in particular because the therapy is actually quite important and quite clinically helpful. We actually get -- we continue to have very good duration for our average user right? And that continues. And our ARPU is slowly been going up because we've been offering higher services mostly through video and the mix has been changing. So the consumers who use us really, quite frankly, they get an enormous amount out of it and like the service. We just need to reach more of them. And what I would say in closing is, I think what this company does is really important. The employees that work there feel very passionately that we're a real mission-driven company. And so we think we're providing a service that is both important and needed. And many more people need it then have access to it today. And over time, solving that problem should work really well for our shareholders. So thanks for having us.

Awesome. Yes. Thanks so much for coming and fielding all these questions. And look forward to seeing the progress this year.

Thank you.

Thank you.