Talkspace, Inc. (TALK) Earnings Call Transcript

Hello everyone, and thanks for joining Talkspace's call to discuss earnings for Q4 and the entire 2024 fiscal year. I trust you've been able to pull up the press release that's available on Talkspace's investor relations site, along with the deck covering our results. That presentation will guide us as we go through what we have to say today. Our CEO, Dr. Jon Cohen, and our CFO, Ian Harris, are heading up this session. After management delivers their prepared comments, we'll open things up for your questions. Some of the metrics we'll cover here are presented on a non-GAAP footing, having been adjusted to strip out the effects of one-time items. You can find reconciliations for those non-GAAP figures in our earnings release and at investors.talkspace.com. I'd also like to note that today's discussion will touch on forward-looking information, potentially including projections, targets, and other statements about our plans, objectives, strategic priorities, and expected financial outcomes. Although these statements reflect our best judgment right now regarding future results and performance, actual outcomes face numerous risks and uncertainties that might cause them to diverge materially from our expectations. Key factors that could influence our future results are outlined in our latest SEC filings and in today's earnings press release. For additional details, please see our safe harbor disclaimer on Slide 2; with that, I'll hand things over to Dr. Jon Cohen.

Hi, all. It’s great to share that 2024 was another standout year for Talkspace. We saw strong expansion: top-line results increased by 25%, the number of sessions grew by 45%, and EBITDA made a huge leap of $20.5 million, moving from a loss of $13.5 million in 2023 to a gain of $7 million in 2024—all while we reduced operating expenses by $7 million. The results we're seeing line up with what we set out to do: keep widening our footprint, drive awareness and adoption, and deliver top-tier care. It's been 13 years since Talkspace launched and 3 years since we went public, and in that time we've built a business model that's both sustainable and profitable, offering a full solution that sets us apart from competitors. With mental health demand rising, the road ahead for Talkspace looks very promising. Over the past 3 years, we've made major strides in shifting our strategy — moving from relying solely on consumer subscriptions to concentrating on Payors. As a result, our covered lives have reached 179 million people, and we've reworked how we bring members on board to tap into that audience. Our patient base has grown well past working-age individuals with private coverage—it now encompasses adolescents, seniors enrolled in Medicare, and military personnel on active duty along with their families. As we expanded, we held firm to four pillars that, in our view, define an outstanding health care organization: availability, affordability, accessibility and sustainability. Taking availability first: our network has been assembled with care and now consists of 6,000 experienced, licensed clinicians prepared to deliver care. That marks roughly a 10% gain over the course of 2024, spanning all 50 states, and emphasizing over 150 separate specialties. What we prioritize is maintaining a provider-centric experience that ranks among the best, paired with a commitment to evaluating and tracking quality across 5 dimensions: service quality, clinical quality, client experience, documentation and productivity. Our approach to marketing has shifted toward a blend of awareness-building and performance-driven efforts, targeting prospective members who want therapy and most likely have some form of insurance. All we ask is that individuals verify their plan details so they can access advantages they may not have realized were available. In fact, Talkspace established a brand-new observance called National Check Your Coverage Day, held every January 21, to prompt folks to look into their plan early in the year — a time when many people feel motivated to make changes. Our goal is for people to understand that we're here for them and that coverage is probable. Now moving to Pillar 2, which is affordability. Affordability is one of the most significant barriers to seeking and getting care. Our shift to a Payor covered model addressed this issue as over 60% of people with commercial insurance have a $0 co-pay or just $15 on average at Talkspace. Since the end of last week, our service now operates throughout the lower 48 U.S. states for traditional Medicare, and every month we bring on a substantial volume of new Medicare Advantage members. The biggest Medicare Advantage insurer in the country has gone live with us. Thanks to this coverage that now spans nearly the whole nation, meaningful momentum is beginning to appear. Turning to the armed forces segment, we expanded our presence. TRICARE East launched in August, and we then entered TRICARE West in January, so Talkspace now counts as an in-network benefit for approximately 9.5 million active-duty personnel, military retirees, and their families, who pay almost nothing themselves. Just like with Medicare, people are picking it up more and more, and we can't wait to see what kind of difference we can make going forward. We also just told everyone about a partnership with USRowing, which builds on our commitment to mental health in elite athletics and pairs well with the work we already do with the Professional Tennis Players Association. Much like Michael Phelps, these efforts show how dedicated we are to helping athletes handle the mental side of what they do. Turning to teens, more than 500,000 young people across the U.S. can now use Talkspace at no charge by going through their city, county, or school. That covers New York City, Baltimore County, a number of private schools, and, as we shared in December, the City of Seattle, where over 55,000 teens and young adults aged 13 to 24 can now get care. Our partnerships with municipal governments continue to expand. Take Memphis, for example — we've now completed four years of providing mental health services to the city's workforce of 8,000, and this marks year five. A new development for this year: we've extended that support to their family members, including teenagers. What makes our platform distinctive is its asynchronous design — among the teens using it, 95% choose text-based therapy. We're also doing a good job of reaching young people in neighborhoods that have traditionally been hard to serve — 57% of these teens live in places with a lot of economic disparity. Just offering a therapist network and affordable prices doesn't get the job done. What matters is whether someone can actually get to a provider easily and make it work. Accessibility is that third pillar, and to improve it, one of our biggest efforts carrying over from 2024 into this new year is using technology to make the member journey smoother and better at every step — checking eligibility, signing up, scheduling, the session itself, and billing at the end. We're looking at every stage of that journey for ways to improve it. Thanks to some new technology work with certain test groups, we've recorded an 18.5% drop in the no-show rate, a 30% rise in patients who finish 3 sessions within 1 month, and a 15% gain in sessions per member. Clinical evidence shows that improvements like these lead to better outcomes for members. The AI innovation group we have continues to develop solutions across 4 company divisions — above all assisting providers and improving clinical and network quality, operational excellence, and how members experience us. What we launched not long ago, Talkcast, has me genuinely excited: a fresh personalized podcast offering designed for people 18 and up, which ought to increase engagement among members between their sessions, assist them in remaining concentrated on their personal progress, and ultimately reinforce their clinical gains. In essence, a provider is able to produce a 3- to 5-minute audio installment tailored to a given client, one that emphasizes the central lessons and motifs from that person's therapy sessions. Here's one more addition to our growing set of AI capabilities for providers, and it draws on a mental health data repository that ranks among the biggest anywhere, containing more than 10 billion proprietary clinical data points that help drive our AI engine. The purpose of this clinical data bank is to examine redacted session transcripts so that thorough, anonymized client vignettes can be constructed and care paths can be charted. Through sorting interventions into categories and spotting meaningful patterns throughout therapy journeys, the data bank delivers the understanding needed for personalized care. Our many years of work in virtual care delivery and innovation show up in our financial results, which brings us to the fourth pillar of sustainability. The numbers we've reported demonstrate a business design that can grow while generating profit, and Ian is going to address those matters and also walk everyone through what he saw in the fourth quarter along with the complete year. In closing, our belief is that we enjoy an advantage over competitors because of the breadth of what we offer: a clinical network of high caliber consisting of 6,000 therapists, in-network access that reaches approximately 200 million lives, all virtual methods of care delivery, robust infrastructure for providing top-quality clinical care, and a sophisticated technology platform that includes AI plus a data set capable of supporting and expanding a profitable operation. With that, I'll turn it over to Ian.

Thanks, Jon, and hello, everybody. Like Jon said, Talkspace has become a uniquely scaled operation across the last 2 years. During 2024, we hit a second straight year of 25% revenue growth, ending at $187.6 million for the entire year. Also, a major milestone came when the company turned profitable in Q1 of last year, and we held that through every quarter of 2024, producing full year adjusted EBITDA of $7 million. GAAP net income reached $1.2 million for the year, which is a $20.3 million gain over 2023. Beyond growth and profitability, our strong financial standing gets extra support from a healthy balance sheet, with $118 million in cash and cash equivalents, including available-for-sale securities, plus 0 debt as 2024 closed; that sturdy foundation means we control our own destiny and gives us substantial room to pursue strategic growth initiatives; now let me walk through our financial results for the fourth quarter of 2024; we're happy to share that strong results continued, extending the momentum we talked about on our third quarter earnings call. Total revenue in Q4 came to $48.7 million, which is a 15% rise over the fourth quarter of 2023. The main driver was ongoing strength in our Payor business, up 33% year-on-year, with solid performance across key metrics like Payor sessions, totaling almost 330,000 during the quarter, a 32% year-over-year gain. We also recorded 21% growth in unique Payor members who completed a session in the quarter, hitting nearly 96,000; and utilization of sessions per active member improved 9% year-on-year. DTE revenue rose 7% versus a year ago, with notable new launches during the quarter, such as the City of Seattle and the U.S. Navy. Consumer revenue fell by roughly $3 million compared with the same quarter in 2023. Gross profit for the quarter reached $21.5 million, up 3% from the prior year. Our gross margins were 44.2% in Q4, versus 45.6% in Q3 and 49.4% a year ago. As a reminder, since we're shifting the overall revenue mix more toward our Payor business, we expect gross margins to slip slightly, and we see that as an appealing trade-off because of the superior long-term unit economics and lifetime value for new members under the payer-focused strategy. During the quarter, we also stayed focused on operational efficiency. Operating expenses fell 11% year-over-year to $21 million, which was 43% of revenue in the quarter versus 56% a year ago. We delivered GAAP net income of $1.2 million in the quarter, a big improvement from a loss of $1.3 million a year ago. And adjusted EBITDA for Q4 was $2.7 million, up from a loss of about $300,000 in the same period last year. I'm happy with the cost-cutting work we did in 2024, and as we look toward '25, we plan to put some of those G&A savings back to work selectively in areas that bring in revenue — things like more marketing spend, plus further technology and product improvements that we believe will help boost member retention and engagement. Now on to the balance sheet. Like I said in my opening comments, our balance sheet is still strong. We closed the fourth quarter with $118 million of cash and cash equivalents, down a touch from $119 million in the third quarter, and versus $124 million a year earlier. That $6 million year-over-year difference came from $11 million of open market share repurchases we finished across 2024, $3 million of which happened in the fourth quarter, which held our shares outstanding basically level compared with a year ago. Looking forward to 2025, this morning we're introducing our full year financial outlook, which consists of revenue of between $220 million and $235 million — that's 21% growth at the midpoint — and adjusted EBITDA of $14 million to $20 million, which is a 144% increase at the midpoint; in 2025, our activation strategy will stay in line with the approach we've taken before, balancing higher marketing spend against sustainable, profitable growth. As we work to take advantage of our broader reach, we'll stay sharply focused on maximizing ROI via strategic partnerships so we can optimize efficiency; now that our coverage stretches to roughly 2/3 of the American public, which is more than 85 million additional lives compared with 2 years ago, any marketing initiative we put money into can have a much bigger impact. As usual for us, we expect our marketing investments to carry more weight in the first quarter, which lets us capture the benefits of those investments across the whole year, and that will hold true again, partly because our payer outreach is broadening alongside the launch of military and Medicare. Because of that, we'd anticipate an EBITDA trajectory across 2025 similar to what we saw in 2024. In setting our capital allocation priorities for the coming year, organic growth opportunities remain our main focus — for instance, more investment in our technology platform to improve the experience for providers and members alike. Second, we're still committed to holding our share count neutral, exactly as we did in 2024, through our share repurchase programs, which have roughly $29 million of capacity left, giving us room to be more opportunistic with buybacks if we decide to be. As we showed over the past year, our cash flow profile can fund those first 2 areas and still leaves us the flexibility to weigh a third: using our well-capitalized balance sheet to look into potential inorganic opportunities that could further strengthen our market position. As ever, we'll keep evaluating the highest and best use of our capital. We appreciate everyone sticking with the Talkspace narrative, and we're really enthusiastic regarding what's coming in the next year, along with our ongoing effort to grow into a Rule of 40 business. At this point we'd like to take your questions. Operator?

We've seen operating expenses keep shrinking relative to revenue. What's behind those efficiency gains, and where do you expect you can push costs down even more? Also, on the follow-up, which factors will decide whether you land at the top or bottom of your 2025 guidance range?

Steve, honestly it's fairly broad-based. I came on board in May, as you're aware, and used the first 2 quarters to thoroughly examine everything — head count, G&A, organizational structures, whether we can operate more efficiently, what we're spending with vendors. So on the G&A side, there isn't one particular area I'd call out. And naturally, when you reduce in absolute dollars while revenue climbs 25% for the year, that percentage-of-revenue decrease follows fairly organically. On the top versus bottom end, I'll have Jon address that somewhat. Regarding military and Medicare, as we've indicated over the past 2 quarters, we've now at last reached what I'd call the critical mass needed to genuinely launch. While we've devoted the past 2 quarters to bringing on those lives, this quarter — Q1 — is when we're seriously working to activate them. The initial signals look very encouraging. We're feeling quite optimistic about both of those categories and about our broader commercial Payor business too. We simply need a certain amount of latitude since these are entirely new populations.

Regarding what you asked about the headline figure — that's precisely the point Ian made moments ago. What we continue to see across military, Medicare, and naturally the commercial side leaves us quite optimistic, and beyond that, you're witnessing our increased focus on the tech aspects of the member journey, something I've described as a major undertaking for this year aimed at raising the standard of our work. We're putting substantial effort into retaining members on the platform and reaching out to them via certain tools we've previously discussed; even so, our confidence in top-line expansion stays very strong.

So as we look ahead to 2025 and think through the marketing approach, since you're targeting these clearly new and quite sizable groups, especially in Medicare, could you discuss what part different channels play and how you're balancing them — particularly because social media has traditionally been a fairly major channel, and Meta has grown somewhat stricter about health and wellness advertising and about how you target people there? Are you noticing any effects from that at this point? And with those shifts, in what ways are you perhaps expanding or diversifying your marketing approach?

Absolutely. To start, we restrained ourselves somewhat on marketing — actually quite a bit on what we spent on marketing — to kick off this quarter, since we truly wanted to have a presence in basically all 50 states. As you noticed, we're in 48 out of the 50. On top of that, we wanted to watch not only traditional Medicare, but also the direction we were taking with Medicare Advantage, because the greater the number of individuals enrolled in MA alongside standard Medicare, the greater the number who will in fact join the platform once they check whether they're covered. That said, we understand, and we've conducted a good deal of research so far, regarding our thinking on how to reach seniors. It's quite unlike a number of the other social platforms we utilize; we know, for example, that they use Facebook more heavily than any other social platform, and we also know they're readers of newspapers and direct mail, and they respond strongly to in-person visits; so all of that goes into the marketing plan, which involves deploying people — whom we already have in the field — to start scaling up and finding out what will actually succeed and what won't. But it's still early, that's what I'm telling you. We genuinely have hardly begun to scratch the surface regarding how the Medicare population will respond and what the strategy should be. Even though we've constructed it, we can't yet share the results with you. We are, however, seeing at minimum some early positive signals when it comes to the people visiting the site and signing up.

Ryan, on what you asked regarding Meta, I've been watching that quite carefully alongside the team. Since any of the recent changes, we haven't observed any adverse effect. For us it's a relatively minor channel in the grand scheme, so we don't expect it to act as much of a headwind.

All right. And perhaps since the Medicare and military rollout is still at an early stage this year, it's clearly encouraging to hear some positive sentiment regarding those initial phases. But as we consider the variety of possible outcomes within your guidance, could you give us a little more directional detail on how you're viewing growth for Payor versus DTE versus consumer within that implied guidance range?

Regarding the first part of your question, military and Medicare as a share of Payor, we're truly taking an opportunistic approach, correct? So we're optimizing for the strongest returns. Clearly, our view and the early signals — what we're attempting to communicate — is that interest from military and Medicare members is very strong. So although we're optimistic about it, should it for any reason prove less appealing or deliver weaker returns than what we observe over time, we won't keep forcing it along. We'll redirect the budget and steer it toward commercial; so we're solving for the best economic outcome overall; when it comes to the Payor, consumer, DTE mix; I believe you ought to anticipate ongoing outsized growth from Payor lifting the consolidated figures. DTE — while we don't disclose line of business level insights into revenue guidance — what I'd say is that '24 clearly gained from a very substantial new contract in New York City, which we now have base effects to contend with in 2025, right, essentially lapping New York's initial year. So you saw in Q4 7% year-on-year growth in DTE and just as a reminder, Q4 '23 was the first quarter where we had New York. So I'd direct you to that annual growth rate as a base case for DTE. Consumer — I'd simply repeat what I said on the last call in Q3 — will decline slightly, clearly because of the Payor strategy, and as we grow covered lives, that becomes increasingly the case since it's a better alternative for members to go through the Payor route. Clearly the numbers will be much smaller. So the headwind on the consumer keeps dissipating.

This is Jack Senft sitting in for Ryan. Gross margin came down quarter over quarter — you landed at 44.2%, compared with more than 45% in the prior quarter and for most of the year — and I realize you're flagging a move in Payor mix. That said, is there anything additional that drove that compression? My guess is part of it ties to bringing new partnerships onboard. If you could walk through that, it would be helpful. Then, how should we frame it looking ahead into 2025?

Certainly. Honestly, it's essentially a coefficient of 1 when it comes to the revenue mix shift; that alone explains it. To repeat what I said in the prepared remarks, a modest dip in '25 stemming from ongoing mix shift. However, the drop in consolidated gross margin you observed between '23 and '24 was far sharper than what we anticipate from here on; we've pinpointed a number of mitigating factors that we're putting into action across the year, and those will assist in offsetting it. Still, we see that trade-off, if you will, as an easy call. The long-term unit economics, plus the contribution margins we capture from chasing that somewhat lower gross margin member session, are simply much, much more appealing; so we'll keep doing that.