Talkspace, Inc. (TALK) Earnings Call Transcript

Good morning, everyone, and thanks for being here today as we go over the results for our second quarter; across the business, we achieved significant progress on a number of initiatives and brought in quite a few new wins and renewals during the quarter. As I've noted previously, close to two-thirds of Americans can now reach Talkspace via their health insurance for either no cost or a very small one. Not long ago, we expanded our reach even further by launching several additional large Blues plans covering Texas, Illinois, and Idaho, which brought in 16 million more covered lives; given how many people can now access us, our 2025 priorities have centered on drawing more of them into Talkspace and retaining them on the platform. To accomplish that, our approach during the first half of the year involved boosting marketing spend and making significant product investments. That covers substantial upgrades throughout the member journey, ranging from higher eligibility and checkout rates to better therapist matching, simplified booking and scheduling, stronger retention between sessions, and improved care quality by keeping members actively involved in their therapeutic journey. Because of the steps we took, the quarter showed encouraging traction from the money we've put in. The count of unique active payer members climbed 10% versus the prior period — about 10,000 above Q1 — which stands as our largest quarterly increase in two years, and it was also up 25% compared with a year earlier. Payer sessions also carried forward the energy of recent periods, rising 10% from the previous quarter and 29% from the same time last year; in our view, the power of these KPIs signals favorable direction as we move toward the latter half of 2025. We told everyone earlier in the year that traditional Medicare is now available in every one of the 50 states, and we continue to be brought into network with more Medicare Advantage plans. Like we do with any emerging group, we're taking a careful approach to figuring out the smartest way to reach these new members at this stage, and the payoff is visible—Medicare sign-ups have gone up every single month. During our previous call, we mentioned that we'd introduced extra military coverage by starting TRICARE West. Our commitment remains on making Talkspace available to the greatest possible number of active duty service members and the people they love, and we're happy with how readily this group has embraced Talkspace. So far, the focused strategy we've used to grow within these military communities has delivered both success and cost savings. Because community matters so much to families in the military, our marketing has shifted toward a more local model. On the ground, we've grown our grassroots digital community work by partnering with groups located in places where base concentration is high. Renewing our standalone direct-to-enterprise agreement with the U.S. Navy, which brings services to 6 naval bases nationwide, confirms that we're succeeding at getting therapy to this population. A strong pipeline remains for direct-to-enterprise clients, with multiple contracts progressing through the process, plus several fresh wins and renewals, among them injuriRx, a sizable telemedicine platform for personal injury. When it comes to our traditional employer business, some new deals took more time to finalize during the first half of the year than we had expected. That said, we saw an especially strong quarter on the mid-market renewal front, and those results came in above what we had projected. The youth mental health crisis is still a challenge across the country, and schools along with state and local governments continue to treat it as a leading priority, which our healthy pipeline reflects. We keep moving forward in this segment, and most recently we brought on the University of Alaska at Anchorage, Chattahoochee Valley Community College, and the State of North Carolina, all of which are set to go live in Q3. Through our relationship with North Carolina, we will serve up to 20,000 youth who have been impacted by the legal system, including teenagers who may themselves have been detained or involved with the courts, plus teams who have lived with crime victims or who are otherwise flagged as at risk, for instance those with family members who are incarcerated. Given all these recent launches and a strong set of opportunities in the pipeline, we anticipate direct-to-enterprise will grow during Q3 and Q4. To actively use a range of channels for building awareness and bringing members to our solution, we expanded on partnerships we already had and introduced several new ones during the quarter. In particular, we took our relationship with Amazon further by rolling out our integration with Amazon Pharmacy. Members are now able to fill prescriptions from their Talkspace provider smoothly through Amazon Pharmacy and receive fast, free delivery to their homes, which makes things easier for the patient and simplifies medication management and adherence support for providers. Back in July, we announced we were teaming up with Tia Health — a women's health firm focused on providing integrated, personalized care. Through this deal, Talkspace becomes Tia's primary therapy partner, so we're providing joined-up mental health support that serves women across all life stages. Talkspace and Tia's primary care clinicians will work hand in hand to ensure care is smooth and complete, addressing physical and mental well-being alike. This new relationship marks Talkspace's ongoing expansion into women's health, alongside our Ovia Health collaboration and our current Evernow partnership; we are eager to keep finding like-minded partners who share the mission of improving patients' mental health and wellness, as well as their physical wellness; this approach lets us take advantage of the overlapping audience to build awareness and also generate cross referrals so care stays continuous. Now for an update on our many AI-centered innovations; this year, we invested meaningfully in AI throughout the business, introducing a variety of tools and initiatives designed to make the therapy journey stickier and to help our providers in our mission of delivering the highest quality care to our members. Since the March launch of Taal cast, the AI-powered program that creates personalized podcasts for patients so they can reflect on topics discussed in sessions with their therapists, we have been seeing a positive impact. Once a member listens to a Taalcast episode following their initial session, the likelihood they finish a second session rises by 14%, and the odds they finish a third go up by 29%. Between appointments, these podcasts help patients stay more involved and gain a clearer grasp of what they are learning in therapy. Turning to the provider experience, AI adoption keeps producing efficiency improvements for our therapists. During this quarter, we introduced AI-powered smart evaluation, a tool that produces top-tier intake documentation for first sessions automatically. Providers get back 10 to 15 minutes they would otherwise spend on manual documentation, freeing them to concentrate on the most important thing, which is forming a connection with the patient sitting in front of them. Working alongside the AWS Generative AI Innovation Center, we are building a foundational safety and quality model that examines therapy sessions for clinical quality as well as clinical risk. We've maintained strong clinical quality standards for years, and combining this AI with our own risk algorithms allows us to push those standards significantly further—unlocking capabilities and efficiencies that weren't possible before. That enables us to deliver reliable, top-tier care across a wider footprint, all while keeping safety, outcomes, and the patient experience as top priorities.

This fresh safety and quality framework delivers a lasting competitive edge by merging two of our distinctive and valuable resources: our sizable data repository and our profound clinical know-how. When expert clinical judgment is powered by AI tailored to a specific vertical and applied to enormous volumes of real-world information, it will sharpen the definition of our behavioral health platform and network, bolster our standing, and lay out a responsible structure for upcoming innovation in behavioral health. We anticipate it will also boost member retention; beyond that, we keep enhancing our suicide detection technology, sharpening the risk algorithm further and moving into additional areas of concern like substance misuse and abuse, plus neglect. On top of that, we retrained it using more recent data, which matters so it remains current with the way individuals genuinely speak. Consequently, the updated algorithm now measures 92% accurate, an increase from 83%. During the prior quarter, I shared that we were constructing a system of foundational large language models, made specifically for behavioral health. In contrast to the horizontal general-purpose LLMs that exist, we collaborate closely with mental health clinicians who have experience using evidence-based therapeutic frameworks, and we are training these models, drawing on our own distinctive in-house de-identified clinical data set. This ranks among the biggest mental health data sets, made up of millions of therapeutic interactions that took place on the Talkspace platform across the last 12 years. Talkspace behavioral health LLMs are being built specifically to grasp the language, complexity, and workflows involved in mental health delivery. Once operational, these behavioral health LLMs will form an essential component of how we deliver higher-quality care to our Talkspace members. The AI platform is going to not only improve current Talkspace services but additionally act as a springboard for upcoming AI applications and behavioral health services, including risk assessment tools, integrated tools that embed behavioral health intelligence into primary care workflows, structured intake systems, personalized routing to appropriate care levels, and enhanced client engagement tools. Our foundational models will merely drive the next generation of features on our platform, yet will open up a completely new ecosystem of applications for mental health. We are achieving steady progress on this significant initiative, and while it remains in the early stages of development, we anticipate having an initial version ready later this year. We hold a very bullish view on the prospects of this initiative and are allocating CapEx investments to speed up our progress. I'm happy with what our team accomplished in the second quarter and believe we have positioned ourselves for success in the second half of the year. Now I'll hand the call to Ian so he can go over the financials in greater detail.

Thank you, Jon, and hello everybody on this morning's call. During Q2, we experienced faster expansion in payer revenue along with broader growth overall, which came from powerful engagement momentum among unique active payer members and payer sessions — a sign that the technology and marketing spending we made at the start of the year is paying off. On this call today, I'll walk through the quarter's results carefully, speak about our financial guidance, and go over a few of the assumptions that underpin growth for the back half of the year. Let me begin with the Q2 numbers. Total revenue reached $54.3 million, which was up 18% versus the same quarter a year earlier — quicker than Q1 and a pattern we anticipate carrying on through the remainder of the year. Payer revenue — meaning revenue generated when consumers use Talkspace alongside their insurance benefits — came to $40.5 million, which works out to 35% growth year-on-year, and it remains our main engine of growth. We delivered more than 385,000 therapy sessions to our payer members, a 29% rise year-on-year, and more than 111,000 unique payer members were active during the quarter, which climbed 25% against a year ago and rose 10% on a sequential basis. As Jon noted, those roughly 10,000 extra active users mark the biggest sequential gain in more than 2 years, which shows how well our product and technology improvements are working, along with our efficient allocation of marketing dollars. Our DTE revenue for Q2 came in at $9.4 million, which declined 2% versus a year earlier. Although renewal rates during the quarter beat what we had anticipated, new wins took more time to finalize than we'd expected. A number of sizable deals we had hoped to sign earlier in the year were indeed closed during the quarter. That said, they were finalized near the end of June and into July, so they'll go live in Q3, which helps give us visibility into DTE growth across the second half. Broadly speaking, the pipeline is still strong, and we've noticed a clear uptick in the energy of our conversations. Consumer revenue — from individuals who pay out of pocket — totaled $4.4 million in the quarter, compared with $6.5 million a year earlier, since we now cover the majority of Americans through in-network benefits, which by its nature moves the checkout mix away from consumer and toward payer. Before I get into adjusted gross profit, I want to point out one modification to our financial presentation this quarter. Following SEC guidance, during this quarter we moved our depreciation and amortization expense into a separate operating expense line, taking it out entirely from cost of revenues, where we had earlier recorded certain cloud computing costs. Because of that, we restated prior periods so they line up on an apples-to-apples basis with the new presentation; our net results are unaffected by this modification. Adjusted gross profit for the quarter was $23.4 million, up 11% year-on-year. Gross margin came in at 43.1%, versus 45.7% a year earlier, largely driven by the ongoing shift in our overall revenue mix toward the faster-growing payer business. During the second quarter, gross margin faced a modest pressure point because we hired more W-2 network providers than usual. When therapists first come aboard, they represent an expense while going through onboarding and training before they begin seeing clients with an active caseload; this particular hiring group exceeded typical size, reflecting the higher payer sessions we expect during the latter half of the year stemming from our effective work expanding the user base. Operating expenses reached $25.2 million in total, rising roughly $600,000 from the equivalent period a year earlier and around $700,000 on a sequential basis. Nonrecurring items accounted for most of the sequential rise, while a $1 million bump in sales and marketing fueled the year-over-year growth. OpEx came in at 46.4% of total revenue for this quarter, versus 53.3% during the same quarter last year, which illustrates the scalability built into our model. Our marketing performance has left us encouraged. Since the vast majority of visitors are now on the network, CAC showed improvement this quarter, both quarter over quarter and against the prior year. GAAP net loss came to $500,000, unchanged from a year ago. Adjusted EBITDA reached $2.3 million, up from $1.2 million in last year's second quarter — a 93% gain. Now to the balance sheet. We closed the quarter holding $103 million in cash and cash equivalents, which includes available-for-sale securities. That number was down $5.6 million quarter over quarter, driven by the timing of working capital as well as what we spent on CapEx for AI projects. On top of that, in Q2 we bought back roughly $1.4 million in stock, bringing our total repurchase activity for the year to date up to $8.4 million. Altogether, since we first announced an authorization program last year, about $19.4 million has been bought back. And finally, turning to guidance for the rest of the year: we're keeping our full-year revenue outlook unchanged at $220 million to $235 million, with adjusted EBITDA of $14 million to $20 million. Let me walk you through some more specifics on the assumptions behind what we expect for growth in the back half. For our payer segment, we expect it to keep growing every year at a rate above 30%. As we've said before, a big chunk of our tech and product spending has gone toward improving what members experience, which in the end makes it easier for them to locate care and stick with it. We also ramped up what we put into marketing for 2025, and like I mentioned, that spending continues to perform well for us. Proof that both of these efforts are paying off can be seen in important metrics such as unique active users and growth in payer sessions. Because retention patterns are dependable and payer users bring in revenue over a longer tail than our older consumer approach did, the increase in users during Q2 gives us solid confidence about the back half of the year. Furthermore, the product and funnel optimizations will keep generating returns and fuel new user growth throughout the remaining year. As Jon noted, we recently brought on 3 Blues plans as well, which adds another 16 million people. Blue Cross Blue Shield, Texas, launched in June, while Blue Cross Blue Shield Illinois launched only this past week. As we work to engage those populations through the remainder of the year, both will contribute positively; for DTE, we still anticipate growth on a full-year basis in 2025. Like we said earlier, our renewal results with current customers in the opening six months came in above what we had projected. That said, the arrival of new contracts and the work of getting them up and running shifted partially into the third and fourth quarters. Two of the big customer wins we recently told you about — InjuryRx and North Carolina — illustrate the kind of agreements we mean. We look for that pace of signings and go-lives to keep building over the remainder of the year, adding to both DTE revenue and adjusted EBITDA. Turning to EBITDA with more detail: on the last two calls, we noted that heavier spending on marketing would pressure OpEx during the first half. During the first six months of 2025, we spent roughly $2 million more on sales and marketing than we did in the same period of 2024. As for the revenue growth we're anticipating from payer and DTE, it ought to require minimal additional operating expenses, if any at all. That's what should fuel the operating leverage we're looking for in the back half. On top of that, we rolled out a new operational efficiency effort in June, and it'll generate still more G&A savings. Between the clarity we have on accelerating top-line growth and these G&A savings programs, we feel confident in keeping our EBITDA range where it is. In closing, we expect the money we put into operations and marketing during the first half to carry that momentum forward into the back half of the year. We're eager to share further updates on how things are going. With that said, operator, please open the line for questions.

Congrats on everything you've achieved. To kick things off, Ian, since we've just gone over the guidance, could you share your perspective, particularly regarding EBITDA — how are you approaching the bottom end of that range? What does that assume compared with reaching the top end?

Sure. I'd say it's the same as any other quarter or year — you're constantly weighing short-term earnings against ensuring you're building the foundation for growth over the medium and longer term. So we have levers available, and we review them every quarter; the marketing component is the more flexible of the two, so if we wanted to boost profitability and perhaps give up some growth down the road, that's something we could do. Honestly, much of it depends on what conditions the market gives us, and what return we're getting on those dollars. What I hope you take from this call is that in Q2, I mentioned some of the CAC gains we achieved. During Q2, market conditions were extremely favorable. And the efficiency of our marketing spend improved both quarter over quarter and compared with a year ago. Part of that comes from what the marketing team does every day. Much of it — and I hope the prepared remarks made this evident — much of it comes from all the product and technology adjustments, investments, new funnels, eliminating friction, and creating a far smoother member journey, which raises conversion. So these aren't one-off changes. We enjoy the benefits of those optimizations forever. And honestly, there's also a structural element: as we gain more in-network lives, by definition a larger share of traffic arriving at our site will qualify, will be in network, and will move into that higher LTV payer bucket we maintain. So we're holding the ranges where they are, Richard. I expect that next quarter, I might be able to provide somewhat more detail on how we see the year shaping up, but we want to preserve that flexibility so we keep as many options open as possible. What I do want you to take away is that our growth outlook is quite strong, and that has carried into July. So regarding the trade-off I mentioned, we're keeping our foot on the gas.

So perhaps we could take a closer look at Medicare and get a bit more granular. An update on that would be great. Clearly, another quarter has passed, and it sounds like you've added some Medicare Advantage partnerships. Could you share specifics about how that early engagement is progressing? You mentioned sign-ups were performing strongly. Additional specifics would be useful.

Not a great deal has changed, other than steady expansion each month, and we keep looking at additional states. As I mentioned, Medicare Advantage plans are the ones initiating contact, reaching out so that we can join their networks. We also keep improving our marketing strategies for engaging these groups. As you're aware, we experimented with many different approaches during the first 2 quarters, and things keep moving forward favorably.

During Q2, every one of your utilization KPIs for the Payers segment clearly sped up, which you folks laid out. And that seems to line up nicely with what you said on the Q1 call — that March and April brought really robust new user sign-ups. So two things I'd like to hear about. First, did that new user sign-up momentum carry on through Q2 and on into July? And second, were those new user sign-ups the main force behind the rise in utilization?

Bobby, I appreciate the question. Yes is the short answer. It wasn't some lump sum in March that we then drew down. If anything, it kept building speed across the quarter — meaning we came out of June with a higher user base run rate, and we hadn't yet gotten any revenue benefit from that. And once more, that pattern has more or less carried on into July.

Then, for my second question — the average revenue for each payer session dropped somewhat on a quarter-over-quarter basis. What I wanted to know is whether that came largely from a shift in mix, with 30-minute sessions making up more of the total than 60-minute ones. And could that same mix shift also explain the quarter-over-quarter movement in gross margins?

Regarding the revenue per session that's implied, the figure rose 5% compared with a year earlier. You're correct that it fell by a couple of dollars per session from one quarter to the next. Payer mix is the main factor behind it. Inside any given payer, as you noted, session length matters, and so does which specific codes show up most often. On top of that, because of the rates we negotiate naturally — say we embed and launch a new directory with a particular payer — that payer then accounts for a bigger share of the total, which can move things. A secondary factor, though one that still carries a fairly material effect, involves the many product enhancements we made during this quarter: we've built a lot of predictive analytics around no-show and late cancellation fees. Our ability to foresee those improved considerably, and our product now gets ahead of them and reschedules. In the past, when a no-show session occurred and a fee or revenue was tied to it, that revenue carried very high margin, yet no session accompanied it in the denominator. So our success at reducing those cases will drag on the revenue per session figure you're referring to, though it clearly helps us keep that customer. You can picture how your LTV would probably be shortened when cancellation fees are part of the picture, and in the end that appears in our larger overall session count.

And then the final thing from my side. Jon, I believe you devoted some time near the conclusion of your prepared remarks to discussing those LLM models, and your expectation is that something ought to launch in the latter part of this year. I was simply attempting to gauge — and I completely recognize the amount of value this might deliver for other therapists — but my curiosity was whether you might consider selling that software to outside parties or licensing it out. Or will it only be deployed inside the Talkspace ecosystem?

I'd respond that every one of those options, and more, is possible depending on how things unfold. What we believe at present is that we should create the model using our extensive database. After the model exists, we've definitely outlined internally no fewer than 8 or 10 significant potential use cases. Yet past those, perhaps somebody might approach us seeking to license it, or somebody might approach us wanting to partner around it. Certain additional use cases will undoubtedly emerge that we haven't yet considered. Every one of those outcomes is feasible and remains open for consideration. What we intend to do at this moment, however, is create it and afterward start observing what takes place once that has happened.

This is Matthew Mardula, filling in for Ryan Daniels. During your prepared remarks, you brought up DTE growing in Q3 and Q4. Over the past 2 quarters, we observed a decline of about 3% compared with the same period a year earlier. What's the right way to think about the back half? Should we treat it as positive growth versus a year ago? And if that's the case, how big an effect ought it to have?

Matt, what I'd do is direct you toward those comments. On a full-year basis, we continue to see growth in that area; so picture low single-digit percentage growth compared with a year earlier. Regarding Q3 and Q4 cadence, I'd describe it as ramping from now through the close of the year. That means we're exiting '25 at a run rate that's much higher. And yes, when it comes to Q1 and Q2, as we mentioned, renewal rates among existing customers came in above what we'd expected, surprising us relative to our forecast. Many of our bigger new clients and ARR wins, such as a couple we highlighted here, especially when public entities and schools, and municipalities are involved, the sales cycle there, as you can imagine, is somewhat tougher to forecast. So I think the takeaway is renewal rates that beat expectations, a pipeline that remains very strong, and items I expected to close in Q2 instead closing in Q3. July, August go-lives. That meant Q2 didn't capture that benefit. Still, as with any SaaS ARR book of business, it's a backlog and pipeline we track quite closely, and at last we're beginning to see many of those larger deals convert here in July and August. So Q3 and Q4 definitely come with a greater level of visibility.

Then, given the push toward more payer revenue—and you noted during your prepared remarks a growth rate of 30% or higher for the back half—how competitive has that area been lately? Has it gotten tougher to bring in or keep patients? Any additional detail would be great to hear too.

Yeah. Like I said earlier, I don't believe you constantly focus on what rivals are doing. Yet honestly, the TAM—the mental health market—is so big that we keep viewing our job as expanding that market rather than worrying about what competitors are doing, frankly, since the need out there is enormous, and from where we sit, growth is driven by a tremendous number of individuals turning to Talkspace because they need mental health services. So honestly, we aren't observing much from the competitive side that affects us in any way.

Congratulations on the impressive strides made regarding payer member lives that were brought on board. When we consider that unprecedented quantity of additions, comparing one quarter to the previous one, could you describe approximately how those additions broke down between commercial and Medicare? I'm simply attempting to gauge the remaining opportunity on the commercial side relative to the traction gained from the Medicare lives that were added.

Ryan, absolutely, what I'd say is that we saw beneficial input from Medicare and, furthermore, I'd argue even greater input from the military, which we've hinted at regarding our optimistic outlook on that particular segment. I realize investors pay attention to these 2 categories since they're recent and simple to highlight. To address what you asked, the overwhelming majority of our expansion originated from our primary commercial business. Consequently, the opportunity within, I'm unsure what label you'd prefer, the core talks area before Medicare and before military, remains truly considerable, an abundance of untapped potential, and that is the source of the bulk of our growth. Naturally, the expansion rates for Medicare and military are fairly significant, though they begin from lesser bases because they are more recent.