Talkspace, Inc.

Good evening and welcome to Talkspace's earnings conference call for the third quarter of 2021. Leading today's call are Doug Braunstein, Chairman of the Board and Interim Chief Executive Officer, and Jennifer Falk, Chief Financial Officer. Management will offer their prepared remarks and will then take your questions. Talkspace press release and webcast link are available on the Investor Relations section of Talkspace's website. On this call, we will be making forward-looking statements. These statements reflect our best judgment based on factors currently known to us, and actual events or results may differ materially. Please refer to the documents that we file with the SEC, including the Form 8-K filed with today's press release and the disclaimer posted on Talkspace's website. I'll now turn it over to Doug Braunstein.

Thank you, Operator. Welcome and thank you all for joining us today. I'm pleased to have the opportunity to speak with you both as Chairman of the Board of Talkspace and now as Interim Chief Executive Officer. For those of you who are not familiar with my background, I spent nearly 35 years in the financial services industry, predominantly in management positions. I spent almost 20 years at JPMorgan Chase. where I helped to build and lead several large businesses and ultimately served as the bank's chief financial officer and vice chairman. As you know, Talkspace went public earlier this year through a merger with Hudson Executive Investment Corp and raised $250 million in that transaction to fund the company's operations and investments. While Talkspace is a relatively young company, it remains committed to its nearly 10-year mission of democratizing high-quality behavioral healthcare. I was excited to help bring Talkspace to market in the summer, and I'm stepping into this interim CEO role today because I continue to believe that Talkspace is a company with a bright and an exciting future. Working together with our board and the management team, I believe we can leverage the company's differentiated offerings and the sizable market opportunity with the goal of delivering long-term value to our shareholders, to our members, to our clients, clinicians, and employees. I'm pleased to be joined on the call today by Jennifer Folk, our new Chief Financial Officer. She's already made a meaningful impact on the company, establishing operational and financial discipline, and implementing processes to optimize the deployment of shareholder capital. I'm excited to work with her and the rest of the management team in my new interim role. Before Jennifer discusses our third quarter operational results in more detail, I wanted to highlight what I believe are some of the important changes as well as some of the key strategic priorities for the company going forward. First, As you know, we announced changes to our management team today. I'd like to take the opportunity to thank Oren and Roni Frank for their vision as Talkspace's co-founders. Oren and Roni created an innovative digital behavioral healthcare platform combining access to mental healthcare resources with a data-driven approach to clinical outcomes. This approach to behavioral healthcare, which encompassed asynchronous therapy, and digital delivery has touched numerous lives and has positively changed the mental health landscape and the perceptions associated with it. We're actually very grateful for the wonderful legacy they leave behind, and we look forward to building on their vision as we take the company to its next stage of growth. As the company continues to grow and increases in complexity, The board believes the best way to optimize value going forward is to focus on execution, product innovation, network optimization, and to promote operational and financial discipline throughout the organization. We believe this focus will thus position the company to take advantage of this large and growing need for behavioral healthcare and ultimately re-accelerate growth and enhance future profitability. We believe we can attract a strong leader for the company, and we've retained Korn Ferry to conduct a comprehensive search for a successor. We will of course look for someone who can both build on the founder's vision, but also take the company from its startup roots to a new level of execution and success. While Jennifer will cover our financial performance in detail, I wanted to briefly comment on the quarter from a financial perspective. While our revenue grew year over year and we continue to experience positive momentum across portions of our business, particularly in the B2B space, the overall financial results for the third quarter came in below expectations management shared with investors on our last earnings call. We're obviously disappointed by this performance and we have to do better. Fortunately, The board and I believe several of the operational challenges that negatively impacted the business during the quarter are addressable and should positively influence performance as they're remedied over time. I do expect our management team to work with me with an increased emphasis on execution, prioritization, and a more disciplined approach to capital allocation going forward. I'd like to spend a few moments highlighting several areas that I believe will be a focus for us over the near term that can ultimately maximize value over the long term. First, our biggest opportunity is to take advantage of the synergies between B2C and B2B, unifying customer acquisition funnels, leveraging the company's robust website traffic and brand awareness, and ultimately simplifying the process to submit claims for all of our members. I actually believe much can be done to boost the monetization of our existing offerings with modest additional investments. Second, improving how we operate our therapist network is critical to member engagement, satisfaction and retention, as well as actually being critical to all of our growth initiatives. For example, more effectively utilizing our W2 network across both the B2B and B2C platforms can improve matching rates, can improve conversion, reduce churn, and increase utilization and margins for the company, all without additional expense. Third, we need to better rationalize our new product roadmap. prioritizing projects that have the highest probability of driving accretive growth and delivering value by expanding both our B2B and our B2C offerings. For example, our technology team is working to simplify the session submission process and automate billing for our insurance clients. These changes can minimize the administrative burden for our clinicians while simultaneously improving the collection rates of our receivables. Finally, we need to continue to invest in our market-leading brand, prioritizing and adding marketing channels and optimizing search engines that allow us to capture demand at a lower cost, while originating a larger portion of our traffic organically. We must also improve conversion rates and increase retention through improved customer experiences. Efforts in the planning process of the company must be prioritized and executed on these issues going forward. Fortunately, I believe we have a strong group of talented employees dedicated to our mission to provide affordable access to behavioral healthcare, and they are assisted today by an extraordinary board of directors. each of those members with deep operational technology and healthcare experience, all of whom are committed to working more actively with the current management team. We have the resources, the talent, and the capital necessary to invest in our existing business and new initiatives going forward. And I'm optimistic about the company's competitive advantage and our ability to create value for our investors over time. With that, I'll turn the call over to Jennifer to provide you details on the third quarter, and I look forward to taking your questions at the end. Jennifer, over to you.

Thank you, Doug, and good evening, everyone. My remarks today will cover three areas. First, I will review the financial results, which we highlighted in our earnings release. Second, I will update you on our key operating metrics and some enhanced disclosure. And finally, I will provide an update on our 2021 financial outlook. Unless I say, all numbers presented are rounded for ease of reference, and the comparisons I'll be referring to are on a year-over-year basis, unless specifically noted. Our net revenue for the third quarter was $26.4 million, a 23% year-over-year increase. This came in below our expectations as a result of a lower number of acquired customers during the quarter in our direct-to-consumer business, and an adjustment to our reserves for credit losses related to receivables from health plan clients, which was only partially offset by growth in B2B gross revenue. Our direct-to-consumer revenue, which is generated from the sale of subscriptions to our therapy users, was $18.6 million, a 10% year-over-year increase in the third quarter. We believe the slowdown in our b2c business resulted from delays in launching new products features and markets, as well as a decline in our conversion rates. We intend going forward to prioritize products and services that we expect will lead to higher customer engagement better retention and increase lifetime value and focus on efforts to increase conversion rates. Our B2B revenue was $7.7 million in the quarter, a 69% increase year over year. It is worthwhile to highlight the continued strong performance of our recurring revenue coming from PEPM fees, which tripled year over year. Our DTE business represents a meaningful portion of our B2B franchise, and we expect it to continue to be a strong driver of recurring revenue growth. In the third quarter, we increased the allowance for credit losses on receivables by $3.4 million, of which $2.8 million related to prior quarters. Claims processing has so far been a highly manual and complex process. Improvements in this operational capability are a high priority and critical as we scale the business for B2B revenue. If we normalize for the one-time non-cash adjustment related to prior periods, B2B revenue would have been $10.5 million, up 144% year over year, and quarterly consolidated revenue would have been $29.2 million, up 37%. Turning to membership and access, we ended the third quarter with 60,300 active members, a 21% increase over the prior year's quarter. During the third quarter, our clinicians completed 71,300 B2B sessions, a 96% increase versus the prior year's quarter. You will notice that we have slightly revised how we report active users, and we have also added incremental disclosure for number of sessions. We are breaking out these two categories to add additional clarity for our investors and expect to continue this practice going forward. In addition, at the end of Q3, our B2B business covered over 75 million eligible lives, a 92% increase over the prior year's quarter. I would also note that because individuals can be covered by multiple programs, for example, health insurance and EAP, this aggregate number may include a certain degree of overlap for individual members. Nonetheless, our definitions have remained consistent, and so it provides a helpful barometer of our growth in eligible members. Gross profit was $14.2 million in the third quarter compared to $15.1 million in the prior year's quarter. Gross margin was 54% compared to 70% a year ago. This decline was due to the reserve allowance I referenced earlier, the revenue mix shift towards B2B, and the continued investment in the W-2 Therapist Network. Excluding the prior period's reserve adjustment, Gross profit and gross margin for the quarter would have been $17 million and 58% respectively. While an expansion of the W2 Therapist Network will put pressure on our gross margins in the near term, we believe building this national practice is strategically important and represents a unique long-term competitive advantage that will deliver over time higher patient satisfaction, increased retention, and faster close rates. Going forward, we will implement more robust processes and systems to better optimize the network utilization with the aim of leveraging therapist value more effectively. GAP operating expenses in the third quarter were $39.4 million versus $17.5 million in the prior year quarter. Our GAP cost base grew by $22 million year on year, mainly due to higher marketing and administrative costs. Net income was $1.5 million compared to a net loss of $2.7 million in the prior year period. This reflects a non-cash reduction of the warrants liability amount driven by lower share price. Adjusted EBITDA loss was $20.8 million in the third quarter of 2021 compared to a loss of $2 million a year ago. EBITDA was lower than we anticipated as revenue came in below expectations and costs remained elevated. Turning to the balance sheet, we ended the quarter with approximately $223 million of cash and equivalents and no debt outstanding. As we've discussed today, in the third quarter we underperformed our plan and we're taking immediate actions to improve execution and re-accelerate growth and profitability. While we expect our fourth quarter to also be below our initial expectations, Many of the initiatives we are taking today will benefit future quarters. As a result of current performance and near-term expectations, combined with the management changes announced today, we are withdrawing our year-end guidance, as well as the initial long-term guidance provided in January of 2021. We believe that withdrawing guidance at this time is the most prudent approach given current business conditions, and we will provide updated guidance as soon as we have greater visibility. I'd like to close by echoing Doug's confidence about Talkspace's future. We maintain a large cash balance with no debt on our balance sheet, which allows us to invest in important operational enhancements and new initiatives and continue to drive long-term growth. We have a highly differentiated value proposition, a well-known brand, and a huge market opportunity. This gives us a solid foundation to invest in accretive growth and capture a substantial part of the vast and unmet demand for high-quality behavioral health services. With that, I will ask the operator to open it up for questions.