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

All right, everyone. A little bit of an echo. Can we turn the volume down a little bit? Well, thanks for joining us, everyone, for Talkspace's fireside chat here. My name is Daniel Grosslight, I'm the health care technology analyst here at Citi. And I'm pleased to welcome Talk CFO, Jennifer Fulk for a fireside chat with us.

I want to make this a little interactive. So if you guys -- we're close puncture now. So do you guys have any questions, please feel free to get my attention. I'll leave some time at the end of the chat too. So everyone can have an opportunity to ask if they want. But I'll take it off here. It's been an interesting ride for Talkspace and the management team -- a whole new management team. You joined in July of '21. Dr. Jon Cohen just joined us year or so. I have a couple of questions about the revamping of the C-suite. First of all, when you joined, what was the most surprising thing about Talkspace?

It's a great question. So I joined about a month after the company went public via SPAC transaction. And I'll start with maybe just what brought me to Talkspace. First of all, obviously, I was coming from Eli Lilly, a company with a pretty broad health care background, being able to leverage that in a mental health care space, where I feel really passionate about it, both personally and professionally, I think it's an enormous opportunity. I think the challenges that we talked about being a post-SPAC company that we -- as Doug came in and we addressed in our third quarter earnings call in 2021, kind of -- we kind of laid out some of the challenges and some of the work we needed to do. I would say, not -- I guess, on a pleasant surprise basis, I always knew there was enormous growth opportunity. I think our -- the COVID tailwinds and what that meant for ongoing market potential has been incredible really positive surprise. And so yes, that's probably the short answer. It's been an incredible privilege to be here since. And you mentioned the amazing leadership team that we have added to over the last year plus that I've been here most recently with the addition of Jon. He brings also an incredible background in health care experience.

Yes. Can you talk a little bit about Jon's background and how him coming in might shift the strategy at all?

Yes. So first of all, he brings phenomenal extensive experience in health care and scaling organizations, both in health care and technology. I would say the really exciting part, if you've heard him on our most recent earnings call or J.P. Morgan, you'll know that his excitement about our growth opportunities is immense. And so I would say, collectively, that excitement and our visibility to a lot of exciting opportunities for us to leverage our platform and to scale it. It's numerous in nature. And I'll say the other side of that is, our acknowledgment and need to focus on our operational plan to make sure that we're delivering not only on the market potential that obviously we have, but also on our path to profitability, which we have squarely in our crosshairs and is now have increased focus of the company overall.

Yes. Let's dig into that a little bit because that was the most surprising thing to me about the earnings release last week, was that you are going to breakeven according to your plan in the second half of '23. It's really a pretty significant ramp in EBITDA improvement. Just for folks, if you're not aware, you're now projecting about a 24 percentage point improvement in EBITDA margins, reaching breakeven by the first half of '24. And to do this, according to my model, you'll have to cut around $30 million of operating expenses, and I would assume that most of that's going to have to come from marketing. And you'll need to return to around 20% growth to do that as well. So I guess, where do you see the most opportunity to cut costs? And how can you ensure that you're going to cut those costs, most of which will be marketing while being able to achieve 20% growth?

Yes. So maybe I'll come back to starting with the guidance that we provided, which first was, I'll call it, revenue guidance for this year with a range of $125 million to $135 million. I think it's important to breakout the components of that and characterize it a bit. So historically, we've had the majority of our revenue made up from the consumer category. And as we significantly reduced advertising spend over the last year plus, we've kind of started this in the fourth quarter of 2021. We've also had a lesser decline on the consumer revenue. So as you look at our overall revenue results for 2022, the consumer decline is a drag, I would say, to significant growth in the B2B category. So then as we look to our revenue guidance for 2023, there's some important components of that. So first of all, in the payer category, this is our growth from coverage, not only through covered lives in either EAP or behavioral health spaces but also utilization within those covered lives. We've got line of sight to -- we had 92 million covered lives as of the end of '22, and we've got very good line of sight to adding to those covered lives. More importantly, though, and what I think is an enormous opportunity for us going forward is, continuing to increase utilization within those covered lives. So that's on the payer revenue growth, and we said on our call, we see that being our significant revenue growth driver for us going forward. On the DTE space, the direct-to-enterprise, this is another great opportunity. We have a lot of excitement about our pipeline. This is a lumpier space for us. So meaning, we're pursuing larger clients, where we've got in our revenue guidance, we've got a consideration for maybe a macroeconomic consideration as companies are making the decisions and then just potentially taking longer. So that's considered in our revenue guidance as our base case, but we feel very confident on our competitiveness and the ongoing conversations in our pipeline there. I'll just end with the consumer category, which is not an area of focus for us, but it remains an important part of our revenue base and we see it stabilizing this year, so becoming -- as we get into -- going forward then, not a drag to revenue and we're able to accelerate growth in our B2B categories.

Yes. Yes. And then on the cost side, right, because I think that's where, at least from my conversations with investors, where there might be a little more skepticism, let's say, or debate, is how much you can cut costs while still achieving those growth rates that you have achieved on the B2B side? So where do you see the most opportunity to cut costs to get to that breakeven in the second half -- by the second half of '24?

It's a really great question. So in the fourth quarter, in our results, we reduced, I'll call it, ongoing run rate operating costs by $5 million from $30 million to $25 million. There were some important components in there on really every aspect of our cost base, the first being a reduction in our corporate headcount in our infrastructure. We didn't see -- in the $25 million, we didn't see all the benefits from those reductions. And from our -- the efficiencies we've found in the fourth quarter that a lot of those efficiencies came through the marketing organization. So we call it a strategic move that didn't burden any growth opportunities, it really was a play on efficiencies of our processes and our talent. Second was a significant reduction of contractors and vendors that we've used historically. And I would say that is also something that will continue to play out this year. So we had several of those, we had contractual commitments in play that meant that we couldn't fully unwind. We have to let those play out, if you will. So as those come up for renewal this year, we'll continue to see savings on that regard. And then lastly, on media spend. So I guess, if the question is, can you grow revenue and reduce media, I'll just point to our results quarter-over-quarter in 2022, where we continue to decrease our media spend with an effort to make sure that we are optimizing the economics on the consumer side, but we also significantly grew the B2B categories. I'll point to the proof point. But then also say, it's important to note that we view our media spend in our advertising. We're focused on optimizing profit for the company with those dollars. So last year, we started unifying our funnel, and I'll say, we worked backwards from there. So we started last year, we're taking what has historically been a consumer business and merging the member experience that meant regardless of how you're paying if you're paying out of pocket and you're a consumer or you're leveraging your behavioral health benefits, the experience is the same, that helped us with a lot of efficiencies. We moved up the funnel, and we said, actually, if you come to Talkspace, their consumer channel will help you check your benefits. That was very impactful. We saw a really good lift and conversion from that. And then most recently, we've modified and started leveraging our advertising, messaging to help create awareness. That Talkspace is covered by a lot of insurance providers checking out. We feel very good about the progress that we've seen with that. I'll also add that we've seen really good progress with traffic and conversion through our SEO efforts, which, as you can imagine, is a very efficient channel for us to leverage. And so while -- so I guess -- then I'll just wrap it up with a short answer, we see opportunities for the cost reductions in every area, including media as we just look to optimize the overall platform for profitability. And I will say, we're also conscious that we're not going to -- that we're going to make sure we keep investing so that we're capitalizing on the growth, all the meanwhile leveraging the significant work we've done to build our capabilities to be able to scale and everything we've done prior to this to be able to make sure we're capitalizing on that growth.

Got it. Okay. That's helpful. And let's go into those growth drivers, those revenue growth drivers. So you've got -- on the B2B side, you've got tough plan, EAP and enterprise, and it sounds like health plan is going to be really what's driving growth, at least in '23. And then you've got the enterprise on the B2B. And then on -- then you have DTC. So is it fair to rank the growth rates of those 3 channels, health plan, enterprise, DTC for the near future?

I think that's fair in our base case revenue guidance. So we see several points of upside and potential there. It's fair to rate those in the categories as far as our line of sight to each one of those. And I say that I mentioned this in the call, we had anticipated there having some seasonal impact in our session growth in the fourth quarter. We were very pleased with the fact that we saw slowing growth but not a decline over the Thanksgiving and Christmas holidays. And then we said also so far in Q1, we're really pleased with the momentum we've continued to see this year. So I would say, our confidence is from what we have -- we can see in our boots in our Q3, Q4 and Q1 to date growth.

Yes, makes sense. Okay. And as we think about the gross margins of those segments, I think you have said this on previous calls, but the B2B channel comes in at a lower gross margin than the DTC channel. Is there any way to dimensionalize the differential in gross margin between health plans and enterprise? I assume health plans are lower gross margins than enterprises, but any way to give us a bit of a framework on how to think about gross margins there?

Yes. So we've not broken out category margins. And so what I have said is, we expect there to be some slight pressure on margins that we've seen in the most recent quarters with the acknowledgment that the B2B categories do have a lower margin than in the consumer categories. But we also have a few things that we're working on that we feel really confident on to mitigate that. So first is, just on ensuring we've got optimal prices and competitive prices for our services. I'll point to in our Q3 and then again in our Q4 results, we said that we had successfully renegotiated some of our enterprise contracts at more favorable prices and that was a benefit to margin in those periods. So we see other opportunities and those conversations are very productive at the moment. We also have opportunities when it comes to revenue cycle management and working on our claims process and ensuring we're collecting at higher rates as we move forward and this becomes a bigger part of our business. And if you're familiar with health care claim, this is just a complexity and a capability you have to have. It's a nature. It's part -- by nature, just something you've got to focus on and work on and feel really good about the talent we have covering that part of the business to be able to drive basically collection rates, and that's straight to margin.

Yes. Yes, makes sense. And as we think about growth within health plans, specifically, you mentioned 92 million lives are eligible to utilize Talkspace about what was it, 426,000 sessions were conducted last quarter. So lots of room to grow within your installed base currently, but as we think about growth for '23 and beyond, do you think most of that growth is going to come from activating your current eligible lives or adding new eligible lives to the platform. How should we think about that dynamic going forward?

Yes. It's a really good question. And I would say what's exciting is, it's both. When we say 92 million covered lives that are -- that's EAP lives and BH lives, there's some overlap between those lives, but it's also -- it's not overlap when you think about the treatment paradigm. So it's possibly you come in as an EAP member, you use your sessions, and then we now seamlessly move you on to leveraging your behavioral health benefits to continue your care. So we've got really good line of sight, like I said, to continue to grow the 92 million covered lives. But we also are really excited about what we've demonstrated, especially in the last several months on driving utilization. And it's -- the first part is around, what I mentioned earlier as far as just using our messaging and our advertising dollars to create awareness to come take a look and see if you're covered. There's a lot of power in removing the friction, which is paying out of pocket for your therapy. So that we see a lot of progress there, we're really -- our marketing team is optimizing that each and every day. But we also have opportunity when it comes to then, I'll say, retention just to use a consumer word, which is our members using all their EAP sessions. Or is there more opportunity there? If you're a behavioral health client, are you actually completing a treatment program that actually scientifically proven to reduce your symptoms, whatever it is the element that you -- that brings you to therapy. So there's a lot of opportunity that we see to leverage the product and to support our therapists to drive not only utilization as it comes to lives but also the retention and usage after they come to the platform.

Yes, that makes sense. Is there a risk, though, on the other side that by marketing to a DTC member that they might be covered by insurance, such are cannibalizing a higher-margin product? Or is the B2B channel or the health plan channel kind of not at that point yet where it's taking demand away from the DTC channel?

It's a really important question. And I would say, we're probably in a very unique market, where this is not a story about cannibalization as we see it. So in January, we saw actually 50% of our new members were brand new to therapy. So that's not only were they using a Talkspace therapy, they've never tried therapy before. And as we've talked about the market potential, there are a few things that are huge tailwinds for us, which is just -- unfortunately, the incidence of mental health care issues is growing. Stigma is reduced. I think really importantly, the demand for access and the demand for mental health care parity is also growing. So we see our strong belief is the pie will continue to get bigger, and it becomes the even thought of cannibalization is not on our radar and it's actually not in our -- in the data that we have.

Yes. Yes, makes sense. Okay. Turning to the enterprise side, you mentioned a little bit of economic weakness might be slowing things down. I'm just curious if this year, given pending recession, benefits managers are and a comp that breaks a little bit on adding a new benefit, waiting to see how things shape up?

So again, it's a great question. And I think there's a few points that I think are important to understand there. One is that mental health care support for employees remains the #1 topic in boardrooms and for executive teams. I would say, what COVID did was push that need and that awareness to #1s. I think we saw a lot of kind of point solution vendors and through the market. I would say, what we see is, of course, everyone is challenging their cost basis as we are, it's not a matter of should I remove mental health care benefits. It's how do I make sure that my employees are actually leveraging them and I'm getting value for those services. So I would say, the conversations went from COVID, mental health care crisis. I'm going to add -- I know my employees need support. I'm going to add any and all that I can. The conversations have moved to be much more sophisticated, meaning they understand and they understand that what Talkspace brings, which is a full platform of mental health care services. And then I'll also point to what we launched a couple of weeks ago, which was Talkspace Engage, which is explicitly geared towards supporting enterprise clients with a dashboard and visibility for them to not only understand the utilization and what's going on with their employee base, but also provide them some easy tools to use to drive awareness and to help drive some of the -- point them to the solutions that they're providing. So we actually -- as you think about those conversations and what we're bringing, I think we're really confident that having this full spectrum of mental health care services, including the transparency and visibility to support the ROI for that investment is really powerful.

Yes. Yes. Okay. Has there been any pushback on your pricing model? We've heard from some benefits managers that they're moving more towards performance-based contracts or value-based contracts, any desire within that channel to move away from the PEPM type of model?

A couple of things from my perspective, so I think the overall move to value-based care is something that I know we worked on in my previous company in the pharma industry. I think it's the holy grail of where we should move as far as health care goes. I would say in most recent conversations, particularly with payers, we are much more advanced and much more ready to execute on a value-based approach to our agreements than maybe they are. So it's -- we're ready when they are. On the enterprise side, it's -- I would say, it's -- while the sophistication has grown as far as making sure that their investments are actually driving the efficacy and the results from meeting people, meeting their employees mental health care needs. I would say that the conversation around let's create a value-based agreement, I think, is a step beyond that, that we haven't seen yet.

Yes. Yes. Okay. Let's turn to the DTC channel, which has been a little bit of kind of the problem child here. I guess, big picture, why you didn't keep DTC. It seems like B2B is really what's driving your growth. It's more efficient from a capital deployment perspective. Why stick with DTC?

I love that you asked that question because it -- I think historically, we talked about our consumer business as if it was a separate business. And prior to a year ago, when we started really unifying the experience overall, I would say, it was closer to a several business. At this point, we've fully unified our platform offering. Again, it's -- you come into the platform, it matters whether you're going to pay cash out of pocket or we're going to check your eligibility for your health care benefits. After that point, it doesn't matter. So your experience is the same. I would say, we laid out our 4 operational -- the pillars of our strategy this year. It's payer revenue growth. It's direct to enterprise revenue growth. It's the -- being the employer of choice for our network therapist providers and its operational excellence. Those are deliberate what you didn't hear in there was further optimizing the consumer category and the team -- but this is -- it's kind of a site -- consumer will be the side effect where people are going to come to our platform, they're going to check their benefits. There's always going to be a subset of those folks that either aren't covered. And by the way, if you're not covered, and you do pay cash out of pocket, we're able to provide you -- but you have commercial coverage, we can give you a super bill, you can send that to your commercial insurer and they will provide you reimbursement for an out-of-network therapy. So we see always having that element. It's not a focus of the company. We're working on the member experience regardless of how you pay. We're working on our therapist experience regardless of who you're providing therapy to. And so we see it as a byproduct of what we're doing. It's not a focus of energy. We're optimizing our advertising dollars for profitability overall. I think we are really excited about the progress that we're making to drive member acquisition from behavioral health and EAP coverage members. We're also getting consumer coverage through those as well.

Yes. Yes. Makes sense. And one of your publicly traded competitors made some new disclosures around their DTC mental health product. And they've done pretty well in that business growing to $1 billion plus business with positive EBITDA margins. I'm just curious is clearly, someone can make it work, but is it a winner-take-all type of market? Or where subscale players, it's just too difficult to compete efficiently? Or is it right for disruption, and it's just not your opportunity. I'm just curious, how a large player can make it work, whereas others seem to be struggling in the DTC channel?

Yes. I guess the premise of your question is really that there is a separate set of the market that really desires to pay out of pocket. We believe that is a historical approach to mental health parity. And we talked a lot about on our call that the demand that your mental health care be treated just as your physical health care. There's so much funding. There's so much attention to this. And so I can't speak to their business models, but we see that the biggest opportunity is under discovered space. I'll stop there. But I think our belief is it's not a separate -- it's not a separate business. I think if you're paying privately out of pocket today, but you learn your insurance covers it, you're going to be the same person tomorrow, but you're going to be leveraging your health care benefits. I think most people would. Having said that, I also mentioned that 50% of people are brand new to therapy, so I think this is much more about how do we grow access and get people that can benefit from mental health therapy versus share taking versus pursuing -- if they're paying cash out of pocket versus coverage, I think this is about access, and we believe where the market is going is through mental health care benefits will be where that access happens.

Yes, that makes a whole lot of sense. So kind of a unified market, you're not making that distinction now between DTC, B2B and how you're getting people through the funnel. So I guess this question really relates to that because we track CPCs in mental health and they're really high. They've been high since the start of the pandemic. How have you shifted your marketing strategy because of these persistently high CPCs in the performance marketing channel?

So we -- I think we first noted this in the first half of 2021, the significant rise in CPCs at that point. And so we made deliberate actions and we significantly reduced our media spend at that point. And we did that through the course of 2022. I would say, over the past year, it's not that we saw any other inflection point. So we saw them stabilize at that higher level. I would say, what we're really excited about is, our leveraging our messaging to drive member engagement and member acquisition overall early days, but the economics are very promising, and we're really excited about the efficiencies we're seeing there.

Got it. Okay. And so your peers have come under more scrutiny for the utilization of health care data for marketing. I'm just curious how, if at all, you're using patient data for marketing purposes. And if that is a risk at all, given the regulatory environment has shifted to be more aggressive in enforcing that.

So I'll just start with just never in our history and we don't leverage health information of our members for anything other than therapeutic purposes. So we're HIPAA compliant and that compliance and privacy is critical to our business, and it's just how we operate and always have. And so I would say, growing scrutiny from regulators is a very positive thing, I think, for just privacy in general and to make sure that you could imagine that the bad players in the group, and you've seen an issue like that, it could certainly drive some hesitation on whether you want to seek therapy or not. So it's really important to us that we continue to confirm and express how important privacy is to us. So I'll just say there, I would say, growing scrutiny then has no impact in our marketing efforts because we've always had these controls and privacy in place. So it's not a factor for us.

So no use have meta pixels and all that, but been in the news recently?

Exactly.

Got it. Good to hear. So let's turn to your provider network because that's going to be a big source of efficiency for you going forward. You had some issues, particularly with your W-2 workforce for the past year or 2. But this past quarter, you saw some very nice efficiency out of that provider population. Just curious if you can kind of lay out what the issue was historically with the W-2 folks and how you rectified some of those issues?

Yes. So we had, I think, started in 2021, adding a full-time therapist to our network with the view that a full-time therapists could -- one -- it's another avenue of therapists that are seeking benefits in full-time employment. But maybe there's a quality play there, too. So the fact is we identified some significant inefficiencies as we were adding to that network. And so we scaled it down in early 2022, we took some actions to, one, to set some clear expectations for our W-2 network that hadn't been set, but then into the third quarter, we removed several kind of inefficient parts of the network, move them to what was a more appropriate contract basis, and we continue to scale from there. I think as we go forward, I think the big opportunity for us is to maintain where it makes sense, a full-time therapist space. So I'll say where we've got some high-quality therapists that want full-time employment or in high demand areas and states, where we know we can fill their capacity, but then always leverage this variable cost base in our contract network for -- it makes the overall -- our overall margins variable and we're able to optimize them across the network using both of those.

Remind me, right now, around was it 95-ish percent of your provider network is contracted versus employed?

Yes. We haven't given numbers. We've got about 3,000 -- a little over 3,000 total therapists on our platform.

Got it. Okay.

And maybe I'll just elaborate on that because I mentioned earlier that being the employer of choice is one of our 4 strategic initiatives. It's a pillar of our operational strategy. We're really excited about some of the investments that we've made there. So I guess, first is, making sure that we're being responsive and provider support, we've created communities, these have been big investments where we've created communities to make sure, I'll give the example, the drop in networks where the therapist has issues, they have a place to go that they can get real-time support. We've also worked on turnaround times for when they have issues. The other part of that is, as we build out our product and we make the product much better for our therapists. We've created this direct connection with them. So it's focused group to our therapists so that they can provide the feedback as we're working on those enhancements, say, calendaring, for example. Or if you can imagine when you're paying cash out of pocket, it's pretty straightforward from there on out. But if you're using your behavioral health benefits, you might pay a co-pay, but you also might get -- have a deductible that hadn't been met and get a bill later. That comes to the therapists. They're the first point of contact. So us understanding that and helping to remove that administrative burden for our therapist has been really important, and we've received really good feedback from our therapists. So I would say, lastly is, just on compensation. We have to be competitive. We've got a big focus on that to make sure not only are we competitive with pay, but the transparency is also there and is also enhanced. We've had really great progress on the recruiting front. So adding therapists and adding -- not only adding therapists, but adding hours provided by our contract network, and we view that as a really important capability for us.

Great. Well, we've got a couple of minutes left. I want to open it up to the room in case anyone has a question. We have mics here, if not, I'll keep on going. All right. So let's talk about the destocking process and kind of where you are now. If I look at the investor deck news during that -- it's like a life coming on destocking process, you -- not to you, because you weren't back at the company. But the thought was you would be at around -- Talkspace would be at around $42 million of EBITDA and $285 million of revenue, clearly, some big changes since then. But I'm just curious if there's any kind of structural shift that would prevent you from eventually reaching those milestones? Or is it just a push out of timing? And how long do you think it will take you to get to scale? And what does Talkspace look like at scale?

So I guess I'll start. I'm not sure that it's super productive to reconcile the models used by those that came before me. It's a completely different time, both from a call it, COVID era, macroeconomic era, where the main revenue streams were from the business, the kind of revenue growth at any cost, right? There's so many dynamics that have changed so drastically. From that point in time, having said that, I think and I mentioned this earlier, what Jon said, he's so excited about, I think, the market potential, particularly as it comes to the market forces around demanding access to mental health care are much stronger at this point than I think anyone could have anticipated. And so how and when we get back there, we've not given -- we've given some specific points to our adjusted EBITDA breakeven, how much cash we will have on our balance sheet. I think it's important to note that we're really focused on those. And to the extent that we meet or exceed those really excited about how quickly then we can get to a really capitalizing on a really immense market potential.

All right. Sounds good. We're just about out of time. One last question for you. I'll make it a quick one. You have around $140 million of cash on your balance sheet. Are you fully funded internally? Or do you think you'll have to come back to market at any point in the near future?

It's a really good question, a really important one, specifically with the current kind of environment that we're in. So we said we expect to reach adjusted EBITDA breakeven, which we said we'll be close to our expected cash flow. And we also said that we expect to have $95 million in cash on the balance sheet at that point. So the message there is we expect to have not only -- not need to return to the capital markets, but also have a lot of flexibility at that time.

Perfect. Well, really appreciate your time and all the color this afternoon. It's very informative. And thank you, everyone, for joining us.

Thanks so much for having me.

Thanks, Jennifer.