Teladoc Health, Inc.

Hello and welcome to today's Teladoc Health Q2 earnings call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during a presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to Patrick Feeney, Vice President and Investor Relations. The floor is yours. Please go ahead.

Thank you and good afternoon. Today, after the market closed, we issued a press release announcing our second quarter 2022 financial results. This press release and the accompanying slide presentation are available in the investor relations section of the TeladocHealth.com website. On this call to discuss the results are Jason Gorovic, Chief Executive Officer, and Mala Murthy, Chief Financial Officer. During this call, we will also provide our third quarter and full year 2022 outlook, and our prepared remarks will be followed by a question and answer session. Please note that we will be discussing certain non-GAAP financial measures that we believe are important in evaluating Teladoc Health's performance Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for Teladoc Health to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement and our press release and our filings with the SEC, all of which are available on our website. I would now like to turn the call over to Jason.

Thank you, Patrick. Good afternoon and thank you for joining us. After the close today, Teladoc Health reported strong second quarter results with both revenue and adjusted EBITDA coming in above the midpoint of our guidance range. We entered the second half of the year positioned to expand our market leadership by delivering innovative solutions that transform the way consumers interact with the healthcare system. We do this through a relentless focus on clinical quality that enables us to deliver value to as many people as possible through an integrated whole person care offering underpinned by technology and data. This is made possible by our broad set of capabilities and a model that allows us to integrate with all parts of the healthcare system without misaligned incentives inherent in other parts of the delivery system. Our second quarter outperformance as compared to guidance was primarily driven by chronic care revenue, where enrollment came in ahead of our expectations. As discussed earlier in the year, we expected chronic care enrollment growth to be weighted toward the back half of 2022. However, our team has worked tirelessly during the second quarter to onboard new populations at several clients ahead of schedule, fast tracking new program enrollment and driving over 90,000 net new enrollments during the second quarter alone. That enrollment growth came from both new and existing clients. And importantly, we continue to drive multi-program enrollment with roughly 30% of our chronic care members now utilizing multiple chronic care programs. This is significant not only from a member penetration standpoint, but also serves to improve retention as our members report higher satisfaction with access to more solutions. We found, for example, that member retention after one year is 10% higher for members enrolled in our diabetes program plus at least one other program as compared to those enrolled only in the diabetes program. We're also finding that clinical outcomes improve for members enrolled in multiple programs. For example, A1C reduction improves as our diabetes management members go from a standalone solution to adding two, three, and four programs. All of this combines to help us deliver more value to our clients and members while driving greater revenue per member. While we were pleased to exceed our member enrollment targets during the quarter, we are continuing to see our pipeline of chronic care deals develop more slowly than we anticipated at the start of the year, as we discussed in our first quarter call. It remains early in the selling season, but deals continue to progress at a slower pace, we believe at least in part due to competitive noise as the market transitions from standalone point solutions to integrated whole person virtual care. Based on what we're currently seeing in the marketplace, We also believe heightened economic uncertainty over the past several months is increasingly playing a part in delaying the decision-making process in the employer market. More and more, we're seeing our chronic care clients recognize the value of combining those products with primary care, adopting our whole person approach. And so, Primary 360 continues to be a significant bright spot in terms of commercial momentum. While the market remains in the early part of the adoption curve for virtual primary care, we continue to see indications of strong demand. Our clients are finding that Primary 360 is expanding access to care, as two-thirds of engaged members had not seen a doctor in the last two years prior to Primary 360, and nearly one-third say that they would not have seen a doctor at all if not for access to Primary 360. Patients are reporting high satisfaction and our members are telling us this is the result of our providers actually taking time to listen because our doctors are able to spend time delivering care rather than checking boxes on a chart and dealing with administrative overhead. As a result of the positive experience our clients are having with Primary 360, we now expect to expand our relationship with one of our larger health plan partners to offer Primary 360 to more of its populations. This is a strong validation of the value Primary 360 is delivering. And we're expanding our support of virtual first health plans for this client to several additional states starting next year. During the second quarter, we also signed a new agreement to expand our relationship with one of our larger health plan partners in the Midwest. This expansion is building upon our existing chronic care partnership and will enable the plan's clients to benefit from a comprehensive suite of integrated primary care and chronic care solutions. The agreement represents another example of our ability not only to land and expand horizontally into new client populations, but to expand vertically with new products. In another example of our whole person strategy paying dividends, we recently announced an expanded relationship with Priority Health, an integrated health plan that will bring our primary 360 product bundled together with our suite of chronic care solutions as part of one holistic, comprehensive, integrated solution. I reference these three deals not just because they're important new business signed in the past few months, but because I think they illustrate three different examples of how we drive growth. landing with a client and expanding to serve new populations within that client over time, two, cross-selling new innovative products to existing clients, and three, bringing a new integrated whole person suite of services to bear for a client bundled together into one offering. Finally, we continue to add new capabilities to our Primary 360 offering that enhance value for our members and clients. During the second quarter, we added multiple new last mile enhancements. In-home lab testing is now available at no additional cost to primary 360 members across the nation. And free same-day delivery of prescription medications is being rolled out in the second half of this year, which will increase both convenience and compliance. So while it's still early relative to the ultimate opportunity in terms of adoption and penetration of virtual primary care, we continue to see many reasons to be excited about the momentum for our integrated primary 360 offering. Turning to our direct-to-consumer business, we saw BetterHelp continue to deliver robust revenue growth of over 40% year-over-year, as well as strong sequential growth. At the same time, BetterHelp performance did come in toward the lower end of our expectations, as we continued to experience the decline in yield on marketing spend that we discussed in April. We still see smaller private competitors pursuing what we believe are low or no return customer acquisition strategies to establish market share. Although we do not see this as sustainable, it's difficult to predict how long this dynamic may continue. We also believe that the weakening economic environment and declining consumer sentiment is likely having an effect on BetterHelp performance. Over the past few months, we've seen modest incremental decline in yield on advertising spend, which we believe may be an indication of belt tightening among consumers. With inflation on the rise, consumer confidence has now dropped to multi-decade lows. Given our significant leadership position in the DTC marketplace and our substantial scale advantage, we remain confident that we can continue to outperform the industry and drive strong financial performance as we navigate this increased level of near-term economic uncertainty. Taking these trends in both chronic care and better health into account, as well as the impact of a stronger dollar on our international revenue, we believe it's more likely that our overall financial performance will be toward the lower end of our consolidated revenue and adjusted EBITDA guidance ranges in the second half. However, there are scenarios in which our results could be above or below this due to the increased uncertainty in the broader economic backdrop, particularly as it relates to trends in consumer spending and its impact on our DTC business. We will continue to watch these near-term evolving dynamics and provide updates as appropriate. With that, I'll turn the call over to Mala for a review of the second quarter and our forward guidance.

Thank you, Jason, and good afternoon, everyone. During the second quarter, total revenue increased 18% year-over-year to $592 million. Revenue from Better Health, our direct-to-consumer mental health brand, grew over 40% as compared to the prior year's quarter, or 7% sequentially over the first quarter, representing strong growth, albeit towards the lower end of our expectations. as we continue to see lower yield on marketing spend as compared to the prior year. We ended the quarter with U.S. paid membership of 56.6 million members, an increase of 2.4 million members over the first quarter, driven by new virtual care client onboarding. Individuals with visit field access was 24 million at the end of the second quarter. The total number of our unique members enrolled in one or more of our chronic care programs was 798,000 as of the second quarter, an increase of 67,000 enrollees over the first quarter. Thirty percent of our chronic care members are now enrolled in more than one program, up from 27 percent sequentially from the first quarter. This helped drive new chronic care program enrollment of 92,000 in the quarter, bringing total program enrollment to over 1 million programs, an increase of 167,000 or 20% over the prior year. As Jason discussed, the strong new enrollment in chronic care programs during the second quarter outpaced our expectations. We have now added nearly 70,000 new chronic care members and 127,000 new program enrollments year to date. At the start of the year, we expected enrollment to be more back half-weighted due to the cadence of the expected population starts. However, due to our team's efforts to get new populations onboarded faster than anticipated in the second quarter, we were able to drive more of that enrollment into the second quarter than expected. As a result of the significant second quarter outperformance, which effectively pulled forward new enrollment from the second half, as well as the slower pace of pipeline development Jason mentioned, we no longer expect enrollment gains to be weighted towards the second half of the year. Average U.S. revenue per member per month was $2.60 in the second quarter, up 13% from $2.31 in the prior year's quarter, and up 3% sequentially from the first quarter. The sequential growth in per member per month revenue was driven primarily by BetterHelp and Chronic Care Program revenue growth. Adjusted EBITDA was $46.7 million in the second quarter compared to $66.8 million in the prior year's quarter and at the high end of our guidance range. As discussed earlier this year, we expect a more pronounced margin seasonality this year as we return to a more normalized cadence of advertising spend. It's typical for us to see lower ad spend and higher margin in the direct-to-consumer business in the fourth quarter as we pull back on media spend during the more expensive holiday season. As we talked about last quarter, it's important to note that in 2020 and 2021, this seasonality was less pronounced due to a weaker advertising market during the onset of the pandemic. Net loss per share in the second quarter was $19.22 compared to a net loss per share of 86 cents in the second quarter of last year. Net loss per share in the second quarter includes a non-cash Goodwill impairment charge of $18.78 per share, or $3 billion. The Goodwill impairment was triggered by the decline in Teladoc Health's share price with the valuation and size of the impairment charge primarily driven by an increased discount rate and decreased market multiples for a relevant peer group of high-growth digital healthcare companies. Also included in net loss per share was stock-based compensation expense of 32 cents per share and amortization of acquired intangibles of 30 cents per share. During the second quarter, we generated free cash flow of $47.6 million and ended the quarter with $884 million in cash and short-term investments on the balance sheet. Now, turning to forward guidance. While we are maintaining our full-year 2022 and revenue-adjusted EBITDA guidance provided in April, the current trends in the direct-to-consumer and chronic care marketplaces as well as a headwind from the strengthening of dollar year to date, which at current exchange rates represents nearly a $20 million drag to our full year outlook. We believe it is more likely that our results will fall towards the lower end of the range. As Jason noted, there are scenarios in which our results could be above or below this due to the increased uncertainty in the broader environment, and we will continue to provide updates as appropriate. We expect total U.S. paid membership of 55 to 56.5 million members, an increase of 0.5 to 1 million members over our prior guidance, and representative growth of 6 to 8% year over year. We expect total visits in 2022 to be between 18.8 and 19.3 million visits representing growth of 22 to 25 percent over the prior year. For the third quarter of 2022, we expect revenue of $600 to $620 million, representing growth of 15 percent to 19 percent over the prior year's third quarter. We expect total U.S. paid membership in the third quarter of $55.5 to $56.5 million, Total third quarter visits are expected to be between 4.8 and 5 million visits. We expect third quarter adjusted EBITDA to be in the range of 35 to 45 million dollars. The lower expected sequential adjusted EBITDA in the third quarter is primarily a function of a lower contribution from direct-to-consumer mental health and increased engagement spending in support of recently launched chronic care populations. I will turn the call back to Jason for closing remarks.

Thanks, Mala. This week we were pleased to welcome Mike Waters to the team as our new Chief Operating Officer. Many of you know Mike from his work building and leading the ambulatory care business at Providence Health System, a leader in digitally enabled hybrid care. Mike brings a proven track record of scaling complex care operations to serve more people more efficiently. and I couldn't be more pleased to have him on the team. Mike joins Vidya Rahman Tangella, our new chief medical officer who joined us in April from AWS, as we continue to see market-leading talent choose Teladoc Health as the place where they can make a difference by transforming the healthcare experience. And I'm excited for where this team will take us. With that, we'll open the call for questions. Operator?

Thank you for our Q&A. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Ryan Daniels from William Blair. Your line is open. Please go ahead.

Yeah, guys. Thanks for taking the question. Mala, I'm assuming you anticipated this one given the Q3 guidance and but it looks like a very material ramp in EBITDA, kind of a more than doubling on an absolute dollar basis from Q3 to Q4, and I appreciate some of the commentary you had on DTC spending pullback, but what else is going to drive that, you know, pretty significant increase in sequential EBITDA Q3 to Q4? Thanks.

Yeah, Ryan, so you're absolutely right. We have anticipated a material ramp in the guidance, And if you think about what's driving the ramp, it's essentially the timing of our advertising and marketing spend in the Better Health business. We talked about it in our prepared remarks. And if you think about the Better Health business and the dynamics, the typical seasonality in spend is to see a ramp up in the early part of the year. and a pullback in Q4 due to the expensive holiday season. That's not a new phenomenon, but it has been significantly less pronounced during the COVID period, which muted the seasonality in the ad spend in that business. It will be more pronounced this year. So you should expect to see A&M spend come down materially in the fourth quarter. both on a dollar basis and as a percentage of revenue. So I'd say that is primarily the reason for the significant uptake in our margins. And as I said, one thing just to reinforce, this factor is not new. The overall adjusted EBITDA seasonality in our business is not new. If you look back prior to 2021, you would find it was typical to see a significant ramp up in EBITDA from the first half into the second half of the year. In fact, if you look at our margin ramp from 1Q to 4Q, it has been as much as approximately 700 to 800 bits. And that was when BetterHelp was a much smaller portion of our business. So as we have given you more color and transparency into the size of the business and the growth of the business, it is more material. And therefore, the dynamics through the year in terms of the ad spend will have now a much more perceptible impact on our overall margins.

Our next question comes from Lisa Gill from JP Morgan. Your line is open.

Thanks very much and good afternoon. Jason, I want to go back to your comments around competition in a direct-to-consumer area. You know, we saw what happened with Cerebral. And I'm just curious as to if you picked up from some market share from what happened with them. And I know you talked about others trying to just gain some lives at this point. But one, if you could talk about the competitive environment there and what you're seeing. And then secondly, I just want to make sure that I understand that. So you're saying that for that big ramp between the third and the fourth quarter, it's really primarily advertising spend and you're still able to hold on to the revenue for direct-to-consumer on the BetterHelp side. I just want to make sure. I do remember that dynamic historically, but it's obviously a much bigger number than what it's been.

Yeah. Lisa, I can take – maybe I'll take both of those. On the direct-to-consumer advertising costs, We just haven't seen a significant change in the paid search costs over the last three months, and that's what we baked into our revised guidance that we gave in April, and we talked at length about the increased expense in that channel. We are seeing a modestly higher customer acquisition cost in a few channels, and it's not any one channel to call out, and we're really not seeing significantly higher pricing in these channels. But the revenue yield we're seeing on the ad spend is just trending toward the lower end of where we expected back in April. So what we're seeing is continued sort of consistent expense, but lower revenue yield. And we believe that a fair amount of that is due to greater price sensitivity in the consumer because of the overall economic backdrop. and the fact that they're seeing inflation in the rest of their lives. So we talked about revenue growth in the 35% to 40% range being baked into our outlook for BetterHelp this year. We still expect that to be the case, but based on the current trends, we expect to be toward the lower end or really the bottom half of that range. On the ad spend for BetterHelp and can we retain the revenue we're not shutting off advertising completely. So you'll see we're not going to go to zero on the advertising spend in the fourth quarter, but it is a significant reduction because of the greater expense per advertising impression. And therefore, we want to make sure we're making good economic decisions and therefore we pull back at sort of the higher end of the marginal return curve.

Our next question comes from Sandy Draper from Guggenheim. Your line is open. Please go ahead.

Thanks very much. I'm going to try to frame this in a way that makes sense. When I look, Mala, at the outperformance of U.S.-paid members, and I recognize that, one, that's stepping up or sort of a pull forward and maybe a little bit of commentary would be helpful about it seems to be the guidance that may trail down. But you also had chronic care members growing faster. Both of those are higher PMPM. Seems like pulling forward, it's recurring, that would have flowed through for some better revenue. So I guess the question is basically is that accurate, but the offset is slower ramp up of additional new chronic care contracts and better help? I'm just trying to understand the outperformance on those two metrics, which I would think would be a positive impact on the second half of the year. That would be great. And if you could just quickly answer that question about why membership would trail off. Thanks.

Yeah. So, Sandy, your observation is right. You know, as we said, we are really pleased with the hard work that our teams have done work to be able to get the populations onboarded in the second quarter ahead of schedule, that essentially resulted in really strong enrollment numbers. You know, we talked about the 67,000 net new chronic care members in the second quarter alone and 92,000 additional program enrollments, enrollment sequentially over the first quarter. So this effort, as we said, is a pull forward of some of the enrollment that was previously expected to happen really primarily in the third quarter. So what's important to recognize is these new enrollees should contribute revenue to the rest of the year, but keep in mind that they were obviously already in our forecast, right? So it's a little bit of an uptake in revenue for the back half of the year because of the pull forward. However, what we've also said is given the pace of the deal closings, we have also essentially removed our assumptions for in-year contributions or revenue contributions in the back half of the year at this point from additional chronic care sort of launches. So that's really what is driving our expectations in the back half of the year for chronic care. So essentially, we did haircut in-year revenue in April, as we talked about quite significantly, but we are also continuing to see some of the competitive dynamics in the chronic care space. And from a guidance perspective, we felt it was prudent at this point to remove most of the in-year revenue assumptions in chronic care.

Our next question comes from Richard Close from Canaccord Genuity. Your line is open. Please go ahead.

Yeah, thank you for the question. On the employer side of the business and economic uncertainty, I was just curious, you know, are employers still poking around but just don't want to pull the trigger because of the uncertainty? Has the pipeline essentially dried up on new potential deals? Just any thoughts in and around that would be helpful.

Yeah, Richard. Thanks for the question. I appreciate it. Let me give you a little bit of color on the pipeline and then I'll try to characterize how buyers are acting. The good news for us is that our current pipeline and the late stage pipeline, which you've heard me talk about the last couple of quarters, are both up year over year to the tune of about 20% relative to where they were at this time last year. We also have twice as many multi-million dollar deals in the pipeline as we did as we entered the third quarter last year. So the pipeline, I would say, is very healthy and has improved since where we were at this time last year. The challenge that we're seeing is in these times of economic uncertainty, all purchases are just getting a significantly higher level of scrutiny. I think we're also facing a situation where a lot of HR leaders within organizations are dealing with a very challenging time as you've heard and read in all of the news about companies reducing workforces, having to control costs. And so I think there is a level of distraction at the same time. So while we had historically seen more mid-year launches for our chronic care solutions, We're really not seeing many of them this year, which is why Mala had commented about our outlook for in-year revenue, which means deals that we sell this year and launch this year. We've taken down our outlook for the back half of this year. I do feel it's still good about where the pipeline is and about our prospects for this selling season. As you know, we're entering sort of the critical three-month period of the selling season and so we'll know a lot more as we come back to you with our third quarter results. But the pipeline is certainly healthy and we're seeing significant interest. We're just finding it significantly delayed for purchasing decisions to be made within those organizations.

Our next question comes from Stephanie Davis from SVB Securities. Your line is open.

Hey, guys. Thank you for taking my questions. I was hoping to touch on some of the macro environment, just given some of the macro softness we're seeing across retail and tech earnings. Could you tell us more about what's baked into your 2022 and long-term guidance? And as a follow-up to that, just given how different the macro is today, even compared to your analyst day, Are we still on track for that 25% to 30% growth target?

So, Stephanie, I just want to be clear. We're not giving a multi-year outlook at this point, and I think we mentioned that last quarter on our call. So we're not going to comment on the multi-year outlook. With respect to the current year and our 22 outlook, We've assumed essentially status quo through the rest of the year. If there's significant deterioration in the market, just in terms of consumer sentiment and or the macroeconomic environment, there could be downside, particularly to the better health business. If the environment improves, then we see upside opportunity in the back half of the year. So that's specifically the reason for our commentary about indicating that we expect to be toward the lower end of our guidance and that there's upside and downside around that depending on how the economic scenarios play out.

Yeah. And Stephanie, just to add to that, if you think about the macros that may have an impact on our business. So three of them come to mind, right? One is, as Jason talked about, the consumer sentiment and how that impacts either positively or negatively as the months go on on our direct-to-consumer business. The second is, as we just talked about in our prepared remarks, the direction of the Euro and the possible headwinds we face on our international revenue. We have quantified it as we know as of now and we'll see how those progress through the year. Obviously, we've also talked about the employer market and the impact that just the the thoughts of a possible looming economic slowdown is having on sentiment in the employer market. And last is wage inflation. And what we are seeing is the impact on our business as of now is relatively modest. It's not something that we would want to, that's not material enough for us to comment on. As we refine our views for this year and then as we go on to next year, to the extent that they are important enough, we will absolutely provide transparency to you all.

Our next question comes from Sean Dodge from RBC. Your line is open.

Thanks. Good afternoon. On BetterHelp, Jason, you mentioned the impact the economy is likely having on subscribers. I know you've in the past talked about experimenting with different pricing and utilization models to give people more options to stay on the service. Have you rolled those out and maybe give us an idea of what some of the other tools you have at your disposal to help manage BetterHelp through what could be a pretty tough period for consumers?

Yeah, Sean, we're always experimenting with new pricing models. And when we do that, we do that in a multi-faceted testing control environment. Sometimes we do it in different geographies. Sometimes we do it through different channels. And we're always innovating around various product features and capabilities. So what we've seen is pretty interesting in that we're not really seeing a change in our retention rates. We're not really seeing a change in the LTV for consumers who we have on the platform. We're just seeing a slight degradation of the yield per ad spend, which would indicate slightly higher price sensitivity to make that first purchase decision. Once they're on the platform, we actually haven't seen change behavior. And so we think that that is directly related to the consumer sentiment and the current economic environment. It's difficult to be precise about that, but we know exactly what the change in yield is. It's modest, but obviously at a large scale, it can have an impact. We're consistently refining the channels that we use. And I think that's one of the critical advantages that we have. At our scale, we have the ability to continually optimize. And so, you know, we're going to keep doing that throughout this period of time. And, you know, I would just sort of remind that we didn't see 40% growth year over year in the last quarter, and sequential growth from the first quarter to the second quarter. We're seeing benefit of those efforts. I would say we're taking a slightly more cautious outlook.

And we continue to balance between the growth, which as Jason talked about, 40% growth, as well as margins in that business. And we will continue to balance and optimize between those.

Our next question comes from Charles Rhee from Cohen.

Your line is open. Please go ahead. Yeah, thanks for taking the question.

I wanted to follow up on Sandy's question, Amal. I get your comments about on the revenue side as we have greater enrollment than expected enrollment here in the second quarter. I just want to get a sense on the adjusted EBITDA side. Given that it's all recurring and we've signed up more than we expected, I would think that we would get more of that benefit in the back half of the year, particularly as we're looking at the third quarter guidance. Just curious, you know, what else? I understand you're talking about a little bit of a but to help us maybe understand maybe if we're not going to see some, you know, sequential benefit, you know, from the pull forward enrollment. And then secondly, when you're talking about advertising spend, you know, I think in the quarter, you know, on a non-GAAP basis, 161 million for advertising marketing. Can you give us a rough or any kind of breakdown between how much of that goes to direct-to-consumer versus just sort of the rest of the business? Thanks.

Yeah. So I don't want to go into specifics at this point in time on further breaking down our ad spend between our direct-to-consumer business and the rest of our business. The thing I would say is If you look at the various pieces of data and information we have given about our Better Health business, our revenue per CAC, etc., from Investor Day until now, one can actually fairly easily back into what the overall P&L is for our Better Health business. We've actually given enough information to you all to be able to do that, so I don't want to go into more detail on that. But, you know, for your first question, Charles, it is a good question. And what we are essentially seeing is, you know, we have talked about the fact that we are seeing the sort of intro year dynamics on our bed house business. The other thing that we have been steadily saying all along is that this is an important year for us in terms of our R&D investments. We talked about it in Invest Today. We've talked about investing in our integrated platform, in new capabilities, in new products such as My Strength Complete, Primary 360, Chronic Care Complete, continued integration of our data that underpins bringing together all of our suite of products. That still continues. The step up that we have made a very deliberate decision to invest in R&D this year, it's a heightened level of investment relative to last year. And we are, for now, staying the course on that because we do expect this to result in sustained revenue growth for us in the longer term. These R&D investments are essentially underpinning our whole person care strategy. So we do expect to continue to stay the course on that. I will say, having said that, we are always responsibly looking for ways to optimize our cost structure. And we'll be taking an even closer look at our cost structure as we head into 2023. And we'll be very thoughtful in the way that we balance our need to maintain our near-term profitability while continuing to make all these necessary investments to drive our longer-term growth. That is something we always do and we will continue to do that.

Our next question comes from Daniel Crosslight from Citi. Your line is open.

Hi, thanks for taking the question. There seems to be more intense scrutiny now on the Hill regarding the utilization of healthcare data, even if being used in accordance with HIPAA. I believe a few senators sent BetterHelp and one of your competitors a letter regarding this a few weeks back. I'm curious if you could just spell out for us how BetterHelp is using member data for marketing and targeting, and if this increased scrutiny is on healthcare data and data utilization will change how you market into the DTC channel?

Yeah, of course. We received the letter and we're providing all of the relevant information about our services. Dan, we conduct all of our operations in compliance with state, federal, and international privacy laws. We also take consumer transparency extremely seriously. and we operate in compliance with all of the consumer protection laws. We hold ourselves to HIPAA compliance standards and we believe very strongly in the privacy of our members and we continue to work with all the relevant parties to make sure that we are compliant. So I'm not going to go into the more detailed specifics given any particular ad channel, but I think it's been clear from our track record and our history that we take this extremely seriously.

Our next question comes from George Hill from Deutsche Bank. Your line is open. Please go ahead.

Yeah, good evening, guys, and thanks for taking the question. And I guess, Mo, I have kind of a numbers question digging in the kind of the implied Q4 guidance. And I guess my first one is just, is there going to be anything in the adjustments for reconciliation that might stand out from the prior quarters? Because what I'm trying to do is kind of bridge the gap between the EBITDA run rate in the first three quarters and what we're expecting in Q4 And if the implication is that the marketing spend needs to be reined in, we're talking about cutting the marketing spend in half. That kind of goes back to Lisa's point around how do we retain the revenue on that.

We seem to have lost connection with George Hill. George, are you still there?

George, you cut out at the end of that.

We move on to Jessica Tasan from Piper Sandler. Your line is open. Please go ahead.

Thanks for taking the question. So the revised commentary just on Livongo membership seasonality was helpful. Can you just confirm if your expectation is still that chronic care revenue grows low to mid-teens in 2022? And maybe if you could comment a little bit just on average chronic condition PMPMs. Given that 30% of members are now using multiple conditions, how is pricing trending relative to the kind of $75 per member per month that we used to see with standalone Lubongo? Thanks.

Yeah, Jessica, so to your first question, yes, we still expect to be in the low to mid teens as we have talked about on the last call. Just given what we said in terms of the dynamics that we are seeing on chronic care and given the fact that we talked about in the back half, you know, there is pressure on in-year revenue from additional deals that we were expecting. I would expect chronic care revenue growth to be towards the low end of the low to mid-teens. And then the second question is, from a pricing perspective, we are really seeing no change in pricing. It still continues to be robust, healthy. So I don't see much of a change in pressure from a pricing standpoint.

Our next question comes from AJ Rice from Credit Suisse. Your line is open.

Thanks. Hi, everybody. Two quick things to your comments and then the press release. Your utilization performance continues to step up 24% this quarter. That's a step up from last quarter and up from 19 a year ago. With less COVID and a lot of mixed commentary in the market around utilization, what are you seeing that's continuing to drive that uptick? Is that primary 360 or is it some other dynamic? And then maybe just to the comments that Jason made about the new wins you have with health plans, virtual first, relatively new product offering. Can you just comment, how are these structured at a high level? Are you the exclusive vendor for these health plans? Are you the preferred vendor? Is there steerage toward just a first visit or is there multiple visits that would come to you? How are these being structured?

I can comment on the utilization. The growth in the first half of the year has been a combination of BetterHelp and our general medical volume. We've continued to see good increases in both of those areas. Mostly for BetterHelp, it's new membership coming on as we've continued to see growth there. When it comes to our general medical, it continues to be strong trends in terms of consumer engagement. It's not really due at this point to our primary 360, which is still small this year, but you do indicate appropriately that we're seeing very good results in terms of new sales as we look into 23 for our primary 360. Primary 360 has a number of different, I would say, access vehicles for different plans. If you think about some of the exchange-based virtual first health plan designs, Primary 360 is the default virtual primary care for those plans. In other areas, like you probably saw we just announced or EMBLEM and Connecticut just announced that Primary 360 is now available to all individual and small group members in their fully insured plans in Connecticut starting July 1st of this year. That's an opt-in for a consumer to select that as a primary care provider, not necessarily in a virtual first plan design, but just like they would select any other primary care provider. When we talk about priority health, we're bundling our primary 360 together with our chronic care programs into a virtual first plan design that's a fully insured plan that employers can choose as they're making their plan design choices for 23. So it's a variety of access vehicles depending on plan design and depending on the health plan's virtual care strategy. What we see though is really tremendous results in terms of improving access to care. As I indicated in the prepared remarks, two-thirds of the people who are engaging with Primary 360 haven't seen a doctor in at least two years. And so these are really the disenfranchised from the healthcare system. And we're finding that those people were having a tremendous impact relative to their overall care as we end up bringing a lot of additional services to bear for them, including both mental health as well as other chronic care solutions.

Our next question comes from Stan Berenstein from Wells Fargo. Your line is open. Please go ahead.

Hi. Thanks for taking my questions. I guess speaking of BetterHelp, do you still expect BetterHelp EBITDA margin to remain accretive to company-level margins for this year? And then maybe I missed this, but can you comment on what drove the sequential decline in visit fee members in the quarter? Thanks.

Yeah, so the answer to your first question is yes. We still expect BetterHelp margins to be accretive this year to the overall enterprise margins. And as we talked about a few minutes ago, we are very thoughtful about balancing revenue growth and margins. You know, we are talking about the 40 percent margin growth, balancing that with our margins. So, yes, it is accretive. And in the case of Wardrobe, in answer to your second question, you know, there was a change in our reporting that we got in terms of the members on the VFO side, and so we essentially are just adjusting that.

Our next question comes from Steven's allocates from Barclays, your line is open.

Hi, this is Tiffany on for Steve, just on the chronic care sales type, given that you guys mentioned you're seeing early signs of for progression and closing deals, and that we're still pretty early in the selling season, are you making any maybe like maneuvers or shifts in the sales approach? I understand part of it may also be macro driven, but just any color you can add there.

The answer is yes. We're constantly refining our approach, especially as we move more and more into whole person care sales where we're bundling together multiple of our chronic care solutions. And, you know, some of the data that I pointed to is relatively new data. So we're able to demonstrate greater success and deliver proof points to our clients relative to the benefit of buying a bundle of services. So, for example, when mental health services are integrated into chronic care, members see an average of an additional half a percent A1C reduction, almost 10 millimeters reduction in systolic blood pressure, and about a 2 percent additional weight loss And so those are relatively new. We haven't been bundling together these services for that long. And so we're really focused on outcomes and, quite frankly, stepping up and putting our money where our mouth is to guarantee the outcomes from the programs. And I guess I do just want to say What we're seeing in terms of slowness in the pipeline turning into bookings is affecting our in-year revenue, but we haven't yet seen it push beyond to, well, we're not going to make a decision this year at all and therefore affect 23.

Our next question comes from David Larson from BTIG. Your line is open.

Hi. Can you talk a little bit about the competitive dynamics in the market overall? Like, Jason, when you think about the platform that you have now, are there certain assets or products, certain gaps that you want to fill? Like, for example, Accolade obviously has a benefits navigation solution. Other platforms have something called advocacy where it's sort of a concierge type of medicine where you have a health coach and they can sort of show you which docs to go to if you need to. For other platforms, they're actually bearing some risk on a PMPM basis. Like when you think about your platform, are you just any holes that you might see? Thanks.

Sure, David. Actually, we do all of the things that you just mentioned. We're more and more entering into value-based arrangements with our clients. In some cases, those are for clinical outcomes. In others, it's for financial cost savings and putting a portion of our fees at risk relative to those savings and sharing in the upside. We also, as you know, have A care team model that includes coaches and a big part of our primary 360 program is making sure that we can get care to you in your home or refer you to the right physician the first time in the event that you need to be seen in person. I think the rollout and we recently announced the expansion of home lab testing where we can dispatch someone to the home. to perform phlebotomy or take urine samples. That's a great partnership with Scarlet, which is owned by BioReference. We also announced home delivery of medications in a partnership with Capsule. And so I really see that our primary 360 combined with our suite of chronic care and mental health solutions And, of course, leveraging our expert medical services are truly differentiated in the market as the only really full credit answer for the consumer. Now, that doesn't mean that we're done, of course. We're always looking to expand the scope of our offerings, and so that's why we've developed over the course of the last year things like a program focused on CHF, a program focused on CKD. And you'll see us continue to expand the scope of our offerings.

Before we go to the next question, George, if you are hopefully still on the line, I wanted to just answer your question. So the dynamic for Q4 is, as you mentioned, it's really around BetterHelp advertising. We are looking to pull back in Q4 on ad spend, we've talked about the pricing dynamics in the holiday season. It is something that we typically do every year, so this is not a new dynamic. So that is the reason for the margin progression as it is in the fourth quarter. And I just also wanted to, you know, reiterate at this point from a revenue perspective, We are seeing some modest incremental pressure on our yield on advertising spend in the Better Health business. But that could, as we look forward to the next few months, as Jason talked about a few minutes ago, from a revenue standpoint, those dynamics could change and it could change to the positive or it could change further to the negative. We'll just have to go through the year and see how the consumer dynamics play out and whether the consumer sentiment improves or it continues to be more towards the belt-tightening mode.

This concludes our Q&A and today's conference call. Thank you for your participation. You may now disconnect your lines.