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

All right. Good afternoon, everyone, and thank you for joining the Talkspace presentation here at the Citi Healthcare Services Conference. My name is Daniel Grosslight and I'm the healthcare technology analyst here at Citi. And I'm very pleased to welcome Doug Braunstein, the Chairman and Interim CEO of Talkspace; and Jennifer Fulk, the CFO of Talkspace. Before we begin just some minor housekeeping items. If you want to ask a question, there's a space top right, where you can type in your question and it will go to me, and I will ask on your behalf or you can just e-mail me directly at [email protected]. All right. So before we dig into the Q&A here, Doug and Jennifer relatively new to the public markets here. You went public back last summer. So I think it would be helpful for those listening in, if you can just do a little table setting and give a brief overview of the business.

Sure. So Daniel, thanks for having us and appreciate the opportunity to talk about our company. So Talkspace is a leading provider of digital behavioral health care services. The company is -- has about a decade worth of history. It began as a direct-to-consumer capability where members could come on to our website or our app and be matched with therapists for treatment for behavioral issues. And approximately 2 years ago, the company -- a little bit more than 2 years ago, the company began to build out a B2B effort, which today is a really interesting opportunity where we provide our services of our network of clinicians and therapists as part of the provider networks for managed behavioral health care plans like Cigna or an Optum. We provide our therapists as the provider of services for EAP or employee-assisted plans. And then we have a product which we sell directly to employers and organizations where Talkspace benefits are offered to employees as an added incremental benefit. And all of that together is our B2B business. As you mentioned, the company went public a little over 6 months ago, and we just announced our full year financial results. Our top line was up year-over-year approximately 49%. And much of that growth year-over-year was driven by the growth in our B2B business. So maybe I'll stop there and sort of for questions for you.

Yes. That's great. There have been some operational issues which you've been very upfront and transparent about. And I think I'd just like to spend the bulk of the call just going over kind of action plan to remedy some of those issues. But before we do that, you're looking for a CEO, just any update on how that search is going? And as you mentioned, that B2B side is kind of your growth driver. So looking for someone to run the B2B business as well or would you expect that to just free up to the CEO?

Yes. So we announced in November a transition of leadership, the Board -- I was Chair of the Board at the time and the Founder of the company, co-Founders, Oren and Roni Frank left the company, and I became interim CEO. And at the same time, Daniel, we announced that we had hired Korn Ferry to begin a process of searching for a new Chief Executive Officer. And what I would say is those processes tend to take for public companies, 3 to 6 months. We're in month 3. And the Board is highly focused and very active and very engaged in finding the right full-time permanent CEO for the company. In the interim, I have, along with the management team, been active and engaged in making a number of changes to the fundamental operations of the business to allow our shareholders to benefit from that improvement in operations. We have today a person we put in charge of the B2B business, Erin Boyd. As you noted, we had a very strong 2021. In our B2B space, we had a very solid end to the fourth quarter. And I spoke about in our earnings call yesterday, the early indications of a solid start in 2022 as we add new managed behavioral health and EAP members, and we are off to a very good start in our direct-to-employer business. So we like our existing leadership in that business and the direction we're heading. We would fully expect that the full-time Chief Executive Officer would continue to invest and drive the growth in our B2B business, which we think is the single largest opportunity for the company of shareholders.

Got it. And sometimes with these management transitions, there's a concern that it will have an impact on the sales cycle for the next year. It sounds like that has not happened here at all. Is that right?

So there was a great deal of concern I think when we made the management transition and as you know, our Chief Operating Officer also left the company. As I mentioned in our call, December was actually our best month up until this January of signing on new direct-to-employer accounts. We've added substantially, and we will continue to add in the first quarter to our covered lives. I think we've done a number of things in the last 3 months to dramatically improve the operating performance on an ongoing basis for the B2B business. And I also mentioned we had not lost a single significant customer in the B2B business. And in fact, we've actually extended our relationships with a number of our existing customers. I've had the good fortune of being on quite a number of sales calls since I took over the role. As a matter of just fortuity, I spent a great deal of my prior professional life in healthcare and healthcare services. So I've got a number of wonderful relationships with senior executives amongst the payer community and a number of large employers. And so using our Board as well as the existing management and leveraging those relationships quite frankly, I think, to accelerate the growth in that business.

Got it. Good to hear. Okay. On earnings, just a couple of questions. Solid earnings above -- roughly in line with our expectations, stock has reacted well, up 8% today, that's not too shabby. On the B2B side, it was actually a little better than we anticipated. And it seems like most of the outperformance there is being driven by more sessions. And you introduced a new metric this past quarter on the number of sessions. For the full year sessions were 274,000, 138% year-over-year increase, not too bad. But we saw a decline -- slight decline in the number of active B2B members. So curious if you can kind of walk us through what's driving the increase in sessions or the increase in sessions per member?

I can address that. So like I said on the call, we had historically given the metric of active members that is a static measure at a point in time, which is the last day of the period, which measures members who have been active on the platform in the last 25 days is the actual definition of the term. So as of December 31, we pick up our -- the holiday period in which we had most of our therapist took time off around the holiday is to decompress like a lot of us. So in Q3, recognizing that the static measure was going to be less than satisfying as we described our growing B2B business as well as the opportunity we introduced sessions, which is really in the quarter. So in Q4, we completed over 81,000 sessions, and that applies specifically to our EAP and our MBH businesses. So you'll continue to see that metric, which I would describe as a really good gauge and KPI that we're using internally as well to gauge the performance there.

Got it. Okay. Good. On the B2C side, we're seeing continued decreases in membership, which I think is planned. But you also noted an increase in ARPU. So curious if you can just give us a couple of reasons why ARPU is growing here.

Yes. I think the principal reason is product mix. We've seen our customers increasingly choose a product that involves one or more video sessions. And I think it's an interesting evolution. Quite frankly, we continue to have a lower-priced product, which is -- which really the company was an innovator in which is asynchronous therapy for many members, particularly younger members, that ends up being an attractive and, quite frankly, very effective tool for therapy. But increasingly, our direct-to-consumer customers are choosing to add video capabilities that allows them to not only text but also engage with the therapist. And we're -- that allows us to really optimize our network in a variety of ways that we think over time will be both attractive to our members and, quite frankly, more attractive to many of our therapists.

Got it. Okay. Good. And I know you haven't provided 2022 guidance yet. I think maybe you're waiting for the management team to come in. But you did give hints that it was a strong end to the year. But I was curious if you could maybe provide some high-level guideposts on how we should think about growth in the B2B and B2C channel for 2022.

I think, Daniel, we have chosen not to give guidance for a variety of reasons. I think most important, we've made a number of changes that we talked about in the call that we literally implemented in January and February, and we have plans for March and April as we roll out new capabilities. We want -- we have an operating premise amongst many of those investments that they will improve our operating performance. Some of that is reasonably straightforward. So the work that we're doing on, for example, revenue cycle management, we know we'll have a direct impact on reducing our reserves and improving revenue and cash flow. Others, we want to have data to demonstrate that the assumptions on hypothesis we've had in making these changes are actually flowing through to the top and bottom line as we expect. So -- and I would add, one of the unfortunate parts about our first 2 quarters as a public company is we set expectations and then underperformed relative to those expectations. So I think the approach that Jennifer and I have at least in the interim is to be conservative and then ultimately deliver beyond those expectations. So that's philosophically just to give you some perspective. We know it's frustrating for you and the investors, but we want to have the benefit of data to renew our expectations in setting those. We continue to expect because we're devoting resources and opportunity is significant. We continue to expect to see the B2B business improve over time. But many of these things that we're doing today and investing in today will take some time to actually flow into the P&L. On the B2C side, what we said is we cut advertising in the fourth quarter in November. On November 15, when we announced the management changes, we began to reduce our advertising spend. So we expect that half of a quarter impact to actually be larger when we do that -- when we continue that practice for a full quarter. And so that is likely to have an impact near term on B2C revenues. But again, our expectation is we're making some investments in that as that business as well that should ultimately optimize return of investment dollars there. So that hopefully gives you a calibration of the -- at least in the early days, sort of where we expect the levers to be in the business.

Yes, yes. And look, I appreciate all your transparency here. There's a great slide in your investor presentation that lays out a 6-point plan and reports on the progress. So I think that's a very helpful way for us Street to think about things. So maybe if we could just dig into some of those strategic priorities. Now you mentioned in the B2C space, you're cutting back on marketing spend, but perhaps you're looking to kind of that top of the funnel is reduced a little, but you're looking to increase retention from folks who are coming in through the B2C channel. Can you go over some ways that you're looking to increase retention in the B2C channel?

Yes. I would say, Daniel, the 2 big drivers there for us are conversion and retention. Where we see falloff in retention is actually at the very early days of interaction, meaning if we match a patient or a member with a therapist and that's a good, solid match and there's active engagement at the outset, that relationship tends to be long enough in duration to actually get clinically positive outcomes, meaning they stay on the platform for several months, have a relationship with that therapist. It's in the early days where the members made the decision to join Talkspace, and there's friction between the member and the therapist. And there's a variety of things we're doing to actually improve that interaction. One of the things, for example, we announced is adding right upfront for certain customers, a 45-minute video session. That actually -- that intake session being longer and live better matches the expectations of the member and the therapist and we think it's going to have a direct impact on early day retention. On the conversion side, the single biggest opportunity interesting that we have is the unification of the funnel. So think about it, it's actually understandable and simple. When I went through the history of the company, we started as a direct-to-consumer company. And so we built a website and we built our apps around out-of-pocket payments. That was really the only choice. You gave somebody your credit card and you entered the system. Well, we've now built out a B2B business with 69 million in growing covered lives. And we haven't actually made the website and app efficient or easy to use for someone who can actually be reimbursed by insurance. And so that unification of the funnel means that we can make it easier for people to come into our app or our website and actually get reimbursed. We -- the first product we introduced in and around this space was our Superbill. We're already seeing that have a really positive impact. And there's a number of other changes to the funnel that we anticipate actually introducing beginning at the end of the first quarter that we expect are going to dramatically change our conversion. I do have to say even with -- and then I'll stop on this even with our reduced spend the company has built a really strong brand. We have almost 5 million individuals who visit our website every quarter. And we talked briefly about whether it's active users or sessions, there's a long way between how many people we're serving today and the number of people who come to our website. And so driving conversion there is a meaningful opportunity set for us, and that's where we're really focusing our investment and energies.

Makes sense. Have you done a study on -- of your DTC members, what percent could potentially have coverage from an EAP or a payer?

So we have not done a formal analysis of that, and I want to be really careful, though. Remember, EAP plans, Daniel, they're really good for employees, but they're a big duration in terms of benefits. So most EAP plans only will give you 3 or 5 some do one session with a therapist. So it's really the MBH conversion that we're focused on. We haven't done an exact analysis, but we have literally millions -- tens of millions of lives that there's an opportunity set to penetrate. And we know that our utilization in our MBH population are literally in the hundreds of basis points. So we have -- we have lots of opportunity set.

Yes. Yes. Got it. And going back to that retention comment and having that visit with a provider to make sure that you're with the right person and you're comfortable developing a longitudinal relationship with them. One of the aspects there is just enhancing your clinical network, right, making sure you're getting the right providers on your network, which is easier said than done, particularly now because there is a massive shortage of qualified mental health professionals. So just curious how you're looking to enhancing and grow your clinical network and how you think about employing these providers versus having them as independent contractors.

Yes. So we think having both is a strategic advantage for us. So amongst the initiatives we've also undertaken in the first quarter is really to readdress some of the opportunities that made Talkspace a really attractive platform for 1099 therapists. So we've increased the simplicity and transparency of our compensation and improved it. We've actually increased the simplicity and improved the dashboard by which therapists interact. We brought back training and education for our therapists. We've offered opportunities for research. We've added community sessions to our therapists. So we're trying to make it both a rewarding platform for therapists economically as well as a sense of community. And while we don't have formal data on it yet, what I would say is the anecdotal feedback we're getting from the therapist community is actually quite positive. We've also -- we think it's valuable to have a portion of our network be employees, right, where we can help allocate those resources to new customers or to geographies where we think we have particular shortages and opportunities. And we did a very effective job at adding W2s to our network. We literally began that process in April of last year. We added quite a few. And again, I would say we are not for all therapists, but we are perceived as a very attractive platform. Where we've been quite transparent, Daniel is we've -- while we added a lot of W2 therapists, we -- the management systems to optimize that network of therapists has lagged our hiring. And so we're taking a pause from hiring. We're going to catch up on our operating expertise to maximize the utilization of that network. And then we would expect to add additionally to that network over time. But again, I would say these are -- we've begun these initiatives in January and February and March. And so we'll keep you posted on how that goes. I do want to just go back by the way, I probably misspoke. It wasn't hundreds of basis points in terms of utilization. Our utilization is in 0.1%, which is basis points, and we've still got lots of opportunity there, but I apologize for the misspeak on the data.

Understood. All right. And can you remind us what percent of your -- how many clinicians you currently have on in your network? And what percent are W2s?

Yes. So we -- as of the end of the year, we had approximately 275 approximately therapists and our W2 network. I would say as we go through some of these management upgrades will probably optimize the network a little more efficiently than that. I would guess we will we'll probably shrink that network some in order to make sure we've got the right match of how we view efficient operations. The 1099 network is north of 2,000 therapists. That network has -- we have therapists on the network in the 1099 network that work almost exclusively for us, but they're 1099s. They're very, very engaged. They carry a meaningful customer load or membership. And then there are some that are just episodic. And so part of the opportunity for us is bring more of the episodic, shift their curve to the left to get them more actively engaged with us. And then ultimately, we continue to recruit and add new therapists to the equation. The one thing I do want to say about our therapists that we're quite proud of is our average therapist has been in practice for quite a number of years. So it's a very seasoned, experienced group of clinicians. And we actually take great pride. We do a lot of research around our outcomes and efficacy. We take a lot of pride in the quality of the care that we deliver. And so we make sure that our -- that that therapist network is -- we're making sure that they're delivering a quality of care to our members that we would hope and expect to have.

Got it. Okay. So into the B2B channel and the priorities that are specific to that, you mentioned the nearest term priority is probably just fixing that RCM function. Curious how that is going? And is it simply a matter of having folks and call centers calling payers and making sure they're paying their bills? Is it data integrations? What needs to happen on the health plan front to make that more efficient?

Yes. So in Q3, we took a fairly large reserve and we identified then that while we had built out covered lives and had grown enterprise clients quite significantly. We had not built the infrastructure through revenue cycle management to support that. So in really simple terms we had not scaled nor acknowledged the complexity that is just inherent to billing payers for services. So we've made good progress, I would say, in the last few months, the most important of which that we talked about on the call was the -- I was called a version 1 of a claims management system. So at this point, most of our payers are now automatically processed from not only the claims but also the cash postings that were received back. And I will say that has made a significant difference in just obviously, the speed to which we are submitting claims, but then also the staff is then able to squarely focus on where we will have denials and we can quickly follow up on those denials. That will -- just the system, we'll always have an element of that, but I think freeing up that capacity has been an important step and really the first one in the last, I would say, several weeks as it. And more broadly, we've partnered with consultants to look at the holistic process that we have there. So everything from benefits investigation at the front end, following that all the way through the system to claims follow-up and making sure that we're optimizing every aspect of revenue cycle management. Not only do we see that having very clear and positive impact on the revenue reserves itself, but also just in overall revenue and optimizing the top line when it comes to the EAP and MBH business.

I think it's also fair, right, Jennifer, to say the payers prefer to have a much more efficient system and actually our relationship with them and the -- as we improve that system, it actually reduces the challenges where we might face with them from a counterparty.

That is a really great point. It's a really great point, yes.

They're pleased we're doing this, let's put it that.

You're getting rid of the fax machine?

We're getting rid of the fax machine, yes. Getting rid of the fax machine.

On the B2B side, the lives covered is very impressive. 69 million people have access to Talkspace. But if you convert that to active users, it's a 0.05% utilization rate. And you guys, as you mentioned, you have a great brand. You've got Michael Phelps out there, other celebrity endorsements. So I would think there's this kind of consumer push out there. People knew they had active it. So what steps are you taking to increase that utilization, increase that awareness within the B2B channel?

Yes. So it's actually a great question, and it's a huge opportunity set for us, Daniel. So there are 3 things we're doing. One, we talked about already on this call, which is unifying the funnel so that as people come in, we make it easier for them to be aware that they have coverage from Cigna and that they can choose a tax-based therapists and be reimbursed whatever their planned reimbursement is. The second thing is we actually added a direct marketing organization to the B2B effort, and we've added resources for marketing dollars. So think about that as B2B2C. And we think that's really important. The third is we do have a really important consumer brand. It's an excellent brand and it's excellent for a number of really good reasons, continuing to support and optimize that is quite valuable, not only to gaining new customers, whether it's on the [ D2E ] side or new covered lives. But ultimately, it's driving familiarity with the covered lives themselves that this is a great place to go get therapy. So that -- all of that is actually, we think all of those efforts, more resources more focus, adjusting our product and our experience for our members to make it easier for them. All of that got huge opportunity to move that very small percentage even modestly, and you'll see a dramatic change in revenue. By the way, I would just add, we also continue to add covered lives. So it's -- we're growing whether you pick the numerator denominator, we're going to add more covered lives. And if you drive that utilization there, it also enhances revenue opportunities in a meaningful way.

Got it. One last question for you on just the general environment for virtual mental health. Obviously, a big question remains, what does utilization look like post COVID. COVID was a huge boost to the space in general as people realize they could get this help online. And to me, it seems like mental health is uniquely suited for virtual -- the virtual modality. But I'm curious to get your thoughts on how utilization will shape up as the pandemic wanes as people go to in-person doctors once again because you're get these changes in an environment where we may see utilization broadly drop as well.

So I think, Daniel, to be fair, and I know you cover other names in the space. I think for physical health. I mean there's clearly been a decline in virtual visits and there's still an enormous amount that has to happen in a doctor's office. You made the point behavioral health care is actually uniquely suited for digital delivery. And so we've actually not seen any decline -- we think this was a permanent shift of the curve, if you will. Now having said there, there are going to be some people who want to go back into their therapists. The majority, the vast majority of individuals find the digital capability to actually dramatically improve the experience for them. And you also have to put this in the context of access for many, many, many Americans is severely limited. It's difficult to find an appointment to schedule with a therapist Literally, if you're not on one of these digital networks, it can take weeks or months depending on your geography, just to get an appointment, you have to drive back and forth to that office. Many times the appointment that's available is the middle of the day and you're working, we're in school or the like. So what's so powerful about digital delivery and Talkspace's modality is it directly impacts access in a very positive way. So we think this for the digital delivery mechanism for behavioral health care, it's actually better suited to the treatment, and we think it's here to stay for the duration.

Got it. Okay. And one more that's just coming in here. I know you got this on the call yesterday, but I think there's been a lot of chatter around this question more recently. And I think it speaks to your brand, frankly, and you are a well-known entity. Does hospice fit better under a broader platform? We've seen consolidation in the virtual health space as platforms become more robust and can treat multiple conditions, multiple QED levels. What are your thoughts in terms of hospice under a more diversified virtual health platform versus being a stand-alone solution?

Yes. We -- so I'll say a couple of things about it. One is we talked yesterday on the call about broadening our product suite around behavioral, which we think is quite important. So now building out our self-help digital platforms through therapy, through psychiatry. And we expect to expand our portfolio as an organic matter. I would say, over time, many industries, this is one I would assume in health care, there will be and there should be inevitable consolidation in the space. For us as a management team, we're -- we believe that the greenfield opportunities are so significant and our ability to improve our operating and execution excellence so significant that there's a lot of growth in front of us as a stand-alone matter. Having said that, as Chairman of the Board, we -- the Board is focused on -- as we are always focused on optimizing shareholder value and we're going to work right now on doing that through better operating and execution capabilities and we'll remain open to opportunities that deliver the best value to the shareholders over time.

Makes sense. All right. I'll let you guys go and enjoy your afternoon. Really appreciate you spending some time with us. Doug, Jennifer. Thank you. Have a good day.

Thanks, Daniel, you too.