Teladoc Health, Inc.

Good afternoon. Thank you for attending the Teladoc Health Third Quarter Earnings Call. My name is Matt, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I now have to pass the conference over to our host, Patrick Feeley, Head of Investor Relations. Patrick, please go ahead. Thank you, and good afternoon.

Today, after the market closed, we issued a press release announcing our third quarter 2023 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 discuss our fourth quarter and full year 2023 outlook, and our prepared remarks will be followed by a question and answer session. Please note, I 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 in this call. For additional information, please refer to our cautionary statement in 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, and thanks, everyone, for joining us. This afternoon, we're pleased to report a strong third quarter with results that met or exceeded our key financial and operating guidance. Our performance reflects the fundamental strength of our business, and our continued success in making better health available to our more than 90 million members. In my prepared comments this afternoon, I want to focus on three key themes that reflect the value that we're delivering today and poised to deliver in the years ahead. First, our third quarter results met or exceeded our key financial and operating guidance, strengthening a solid balance sheet that distinguishes us across our industry. Second, the demand for our products and services remains strong, with the largest payers and partners globally viewing Teladoc Health's whole person care as the prescription for point solution fatigue and a disconnected healthcare system. And third, we are taking additional concrete steps to further accelerate our business on bottom line performance. This includes a comprehensive operational review of our business. I'll talk more about what that means in a moment. Let's begin with Q3 results. On the top line, our consolidated revenue grew 8% on a year-over-year basis in the third quarter to $660 million. And as a result of our continued efforts to drive margin improvements this year, our consolidated adjusted EBITDA of $89 million exceeded the high end of our expectations. We were pleased to see revenue from our integrated care segment grow 9% year over year to $374 million. Compared to the second quarter, revenue grew 4% sequentially, driven in large part by higher enrollment in our chronic care programs, where enrollment now exceeds 1.1 million active users. Driven by a combination of strong leverage over the cost structure, improving efficiency, and a contribution from performance-based payments earned during the quarter, the integrated care segment delivered $63 million of adjusted EBITDA, or a margin of 16.8%, which we believe demonstrates the leverage that's inherent in the integrated care business model. Turning to BetterHelp, we recorded $286 million of revenue in the quarter, up 8% year-over-year and within the guidance range provided last quarter. Third quarter margins for BetterHelp improved nearly 500 basis points over the prior year's third quarter, and we're on track to deliver material EBITDA growth again in the fourth quarter, which is typically BetterHelp's seasonally strongest quarter for margin. After scaling rapidly to surpass a billion dollars of revenue last year, we have since taken a more balanced approach to growth and margin at BetterHelp. This means we'll continue to prioritize profitable growth that meets or exceeds our return requirements. Customer acquisition costs remain near the midpoint of our outlook range. Combined with stable gross margin trends, that means we anticipate landing near the midpoint of our prior full year segment revenue and margin guidance for BetterHelp. The second theme I want to cover is client demand. where the environment remains strong for our whole person care solution. In thinking about the selling season so far, I'd call out three key trends. First, while there are still over two months left to go in the year, we're pleased that year to date our bookings are tracking in line to moderately ahead of the same point last year. We're seeing strength across all key products and channels. Through the end of the third quarter, chronic care sales represent just over half of our total bookings in the US, up incrementally from the same point last year. Next, we've seen particular success in pulling through chronic care sales and enrollment via our whole person bundled solutions. We're increasingly selling access to multiple chronic care programs at a single bundled price point. For example, Clients purchasing our Diabetes Plus Bundle enable access to multiple chronic care programs, diabetes management, hypertension, and weight management. This has the benefit of removing friction by creating a simpler contracting path, opening access to all programs from day one, and driving better engagement and outcomes for our clients. It also meets the member where they are. with more than one quarter of Americans diagnosed with multiple chronic conditions. And by delivering more value to the client, it enables us to unlock better economics. Over the past 12 months, more than two thirds of our chronic care deals included our whole person bundled solutions. That's helped drive faster program adoption, resulting in total chronic care program enrollment growth of 13% year over year. Finally, not only are we seeing growth within our existing client base, but we're also seeing significant competitive takeaways. This is a direct result of other players struggling to deliver for their clients and, in some cases, fall out from unprofitable business models with weak balance sheets. During the third quarter, we added nearly 4 million lives to our virtual care programs in competitive takeaways. While our Q3 results and selling season validate the value that we're delivering for our clients and members, we also recognize that there is still even greater potential to unlock business performance. We have built a strong and durable foundation for efficient growth, increasing profitability, and generating cash flow. You've heard us talk about a more balanced approach to growth and margin. In 2023, we're demonstrating that we can drive material EBITDA and free cash flow growth, despite a lower rate of top line growth. We will continue to focus on improving bottom line performance, and we're confident that we can continue to deliver significant EBITDA margin expansion, particularly within the integrated care segment. There are a few things that give us a high level of confidence in our ability to deliver EBITDA and free cash flow growth well in excess of revenue growth over the next few years. First, we are exiting a period of elevated investment following the Livongo transaction. As many projects wrap up, like our integrated app that launched this year, we expect moderating costs will allow us to drive material operating leverage over the cost structure as we grow our top line. Second, over the past 12 months, we have broadly sharpened our focus on improving efficiency across the organization. You've seen those efforts begin to bear fruit this year as EBITDA and free cash flow have consistently exceeded our own expectations. Which leads me to three. We're disappointed with the valuation of the stock today, which we don't believe adequately reflects the value we are driving today and will continue to drive in the future. At the same time, we also know there are significant opportunities to add value through improved business performance. To that end, we recently kicked off a comprehensive operational review of the business. This review includes two broad components. First, we have undertaken a portfolio assessment to identify any opportunities to sharpen the focus across our portfolio of products and services and ensure our investments remain highly selective and prioritized in the direction of our integrated whole person care strategy. Second, we are pursuing a comprehensive review of our cost structure. Following our cost reduction efforts earlier this year, we are confident that we have the right operating structure in place to support the next phase of our growth. Meanwhile, we are actively working to identify opportunities to improve upon this operating efficiency. For example, as a part of that exercise, we have begun standing up centers of excellence that will leverage shared services across the business to enable a more efficient operating structure. We are committed to a thorough review and analysis, and we are working with a third party to bring an independent perspective. In short, we are accelerating our efforts to ensure that our business is operating as efficiently as possible in order to drive profit growth at a level that is meaningfully higher than our revenue growth over the next few years. We will do this by fully tapping the operating leverage that is a market differentiator for Teladoc Health as the leader in digital health at scale. And we will do this while ensuring that our business remains centered on our mission and that no efficiencies are taken at the expense of keeping our promises to our clients or caring for our members. We look forward to sharing more details on these efforts in the coming quarters. And with that, I'll turn the call over to Mala to review the third quarter and share our forward guidance.

Thank you, Jason, and good afternoon, everyone. Third quarter consolidated revenue of $660 million increased 8% year over year. Third quarter adjusted EBITDA was $88.8 million above the high end of our guidance range, representing a margin of 13.4%. Consolidated net loss per share in the third quarter was 35 cents. compared to a net loss per share of 45 cents in the third quarter of 2022. Net loss per share in the third quarter includes amortization of acquired intangibles of 42 cents per share and stock-based compensation expense of 32 cents per share. Third quarter free cash flow was $68 million compared to $20 million in the third quarter of 2022. We ended the quarter with over $1 billion in cash and equivalents on the balance sheet. Turning to segment results, integrated care segment revenue increased 9% year-over-year to $374 million in the third quarter, growing 4% sequentially. The largest contributor to year-over-year integrated care revenue growth was chronic care, followed by primary 360. On a sequential basis, the primary contributor to integrated care segment growth was the ramp up of enrollment in chronic care programs. During the quarter, we added 49,000 new enrollments in chronic care programs, bringing total year-to-date net enrollment growth to over 100,000. We ended the third quarter with chronic care enrollment of 1.12 million an increase of 13% year-over-year, and 5% sequentially. The biggest drivers of new chronic care enrollment year-to-date have been hypertension, which is now approaching 30% of total program enrollment, followed by our diabetes prevention and weight management programs, which have each crossed the 100,000 enrollment mark this year. Program enrollment growth has been bolstered by our success in selling our bundled chronic care management solutions. In total, the integrated care segment added over 4 million members during the third quarter, ending at 90.2 million. The significant membership growth during the quarter was primarily a result of a large competitive takeaway during the quarter. Average integrated care revenue per U.S. member of $1.41 increased one cent over the prior year's quarter and was flat sequentially. Excluding the large new population added during the third quarter, revenue per member increased four cents sequentially. Third quarter integrated care adjusted EBITDA was $62.8 million. representing a 540 basis point margin expansion over the prior year's third quarter. That margin expansion was driven by higher gross margin due to an increased mix of subscription revenue, an increase in performance-based revenue earned during the quarter, and improved operating efficiency, particularly on the GNA line. The margin outperformance versus our third quarter guidance was primarily driven by lower expenses, again, most notably on the GNA line. Turning to BetterHelp, revenue increased 8% year-over-year to $286 million in the third quarter, a decline of 2% sequentially in line with our guidance range. Average monthly users increased 5% over the prior year's quarter. Third quarter BetterHelp adjusted EBITDA was $26 million, resulting in a margin of 9.1%. This represents a 490 basis point increase over last year's third quarter, a reflection of the more stable advertising environment compared to the prior year, as well as sustained gross margin improvement. Now, turning to forward guidance. We expect full-year revenue to be in the range of $2.6 to $2.625 billion, representing growth of approximately 8% to 9%. We now expect full-year consolidated adjusted EBITDA to be in the range of $320 to $330 million, representing year-over-year margin improvement of approximately 200 to 225 basis points. We now expect full year free cash flow of approximately $175 million, up from our prior expectation of $150 million. For the fourth quarter, we expect revenue to be in the range of $658 to $683 million. Assumed in the fourth quarter revenue outlook is high single-digit percent year-over-year growth in our integrated care segment and low to mid-single-digit year-over-year growth in our better health segment. One thing I would remind you of, which we've discussed previously, is that the cadence of better health advertising spend in 2023 is more heavily weighted to the first half of the year than last year. This change in ad spend cadence results in quarterly year-over-year comparisons that favor the first half of 2023 to the detriment of the second half of the year. Therefore, we do not see the year-over-year growth rate expected in the fourth quarter as reflective of the underlying growth in the BetterHelp business. Fourth quarter consolidated adjusted EBITDA is expected to be in the range of $107 to $117 million. The adjusted EBITDA outlook for the fourth quarter assumed integrated care segment margins between 11.5 and 12.5%, and fourth quarter better health segment margins between 22 and 23%. As discussed throughout the year, Our prior guidance assumed a modest deterioration in the cost of customer acquisition at the low end of the range and an improvement at the high end of the range. Recent customer acquisition costs continue to trend within that initial outlook range, albeit in the lower half of the range. We believe trends are likely to persist in this range through year-end, and you see that reflected in the revision of the high end of our revenue guidance. With that, I will turn the call back to Jason.

Thanks, Mala. Before we go to questions, I do want to share some work that we're particularly proud of in the wake of so much tragedy in recent days. As you may have heard, BetterHelp is offering therapy to anyone impacted by the war in Israel and Gaza at no cost. The support applies to anyone affected by the war anywhere. As some of you know, BetterHelp frequently offers therapy at no cost to those in need through our social impact program. In the past 18 months, we have responded to the Maui fires, Hurricane Ian, the war in Ukraine, the Robb Elementary Uvalde shooting, and Midwest flooding, among other crises. While no one has all the right answers right now, I'm pleased that BetterHelp and Teladoc Health can make a positive contribution to healing at a time of such great suffering. With that, we'll open it up for questions. Operator?

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We ask that you please limit yourselves to one question and one follow-up. We will pause here briefly as questions are registered. The first question is from the line of Lisa Gill with JPMorgan. Your line is now open.

Thanks very much. And, Jason, I just have to say that that's a wonderful thing that you do. I know this is a really difficult time for a number of people. I really want to focus on a few things. I know I always ask about the selling season, but I want to focus on two areas. And that's really around integrated care, the margins we saw this quarter, how you're thinking about that business going forward, the significant wins that you said competitively, you had 4 million lives that shifted over to your integrated offering. Can you maybe just talk to me about the competitiveness in the marketplace today, what you saw in the selling season and I'm sure you don't want to name who you took those 4 million lives from, but can you talk about were they single-point solutions? Were they other parties that you feel are fairly competitive to you? How do we think about how you're positioned on a go-forward basis, especially on the integrated side of your business?

Thanks, Lisa. I appreciate that, and thanks for the comments on our work with BetterHelp. If I think about the competitive landscape, I think the incidence of us selling bundled solutions really speaks to the power of the breadth of our offering and how that is significantly differentiated from anyone else in the market. As we've talked about, the majority of our chronic care management programs make up the majority of our bookings. and the majority of our chronic care management solutions are sold as bundles of services. We're also seeing very significant wins where we sell additional products and services into existing clients. In many of those cases, we're replacing single point solution or more narrow solutions by adding our products into those clients. And so I would say that the dimensions of our competitive wins come into really three categories. One is where we replace a single point solution with either a bundle of solutions or by selling additional products into an existing client. Two is where our competitors have failed operationally and or in terms of the value proposition for the clients and our proven track record of success and value creation uh, wins the day and three is where we're replacing someone who quite frankly is faltering, uh, in this current economic environment because they have a business model that, uh, and an economic model that isn't sustainable. And we're seeing them struggle either to raise capital or quite frankly, to exist, uh, at all as a going concern. So we've seen all three of those. The biggest one this quarter that represented the largest competitive win was the latter, where we saw a competitor fail and we were able to step in and replace them. And I think that really speaks to the strength of our balance sheet and the strength of our financials. And I think we said last quarter, Mala and I have never spoken to so many CFOs at clients and prospects who are really kicking the tires to make sure that the partners they engage with are going to be here, not just today, but into the future and be able to grow with them. The second part of your question, or maybe the first part of your question, was about integrated care margins. Mala, do you want to speak to that?

Yeah, I'll speak to that, Lisa. So if I take a step back and look at our integrated care margin performance in the third quarter, and I look at it vis-a-vis year over year where, as we said in our prepared remarks, we expanded by 500 basis points, or even if you look at it sequentially where we have had a pretty sizable improvement, over 600 basis points in our integrated care margins, You know, there are a few factors and drivers across both that stand out. First of all, it is the growth that we are seeing in our chronic care book, right? So, as we've talked about, that has a nice pull through to gross margins, and we are seeing leverage from that. We've also talked about the fact that, you know, in the third quarter, we saw revenue growth in a more balanced way across both chronic care and primary 360. So we are seeing the pull through of that revenue growth in the integrated care side. We are seeing the results of our cost controls and the cost efficiency programs that we have already put in place this year. We are seeing the benefit of that. And as Jason talked about in his prepared remarks, As we look at the, do an operating review across our business, certainly we will look to additional areas where we can drive cost efficiencies. So that will be a continuing theme. Look, we also had, as we talked about in our prepared remarks, some amount of benefit. It's about $4 million from our performance guarantees. That really was about that we recognized because of the outcomes we have driven. That was, if you look at the overall contribution to our margin expansion, it was about 100 basis points. So if you really look at what's driving the margin expansion, it is the revenue mix. And it is the cost efficiency programs that we have put in place, and we will continue to focus on that. Thank you.

Thank you for your question. Next question is from the line of Ryan Daniels with William Blair. Your line is now open.

Yeah, guys. Thanks for taking the question. One for you on the chronic care book of business. I think you mentioned hypertension. It's about 30% and seeing strong growth in diabetes and weight management. So curious what your longer term thoughts are on the impact potentially to that business, either favorably or unfavorably from all the GLP-1 data that's coming to market.

Yeah, thanks, Ryan. You know, as we said earlier in the year, we don't really anticipate any material financial impact from the new program that we launched and announced earlier in the year. this year. We think that that will have an impact for us in the future and we expect to participate in being able to take advantage of some of the benefits of GLP-1s for people who are living with diabetes as well as for people who engage with our diabetes prevention and weight management programs. So we see that as paying off for us in the future. We also see, quite frankly, that the market is very engaged in this, and our clients are looking to us for solutions, especially because of the cost of those medications. With respect to whether that's going to be a headwind, I would say probably the hype has gotten ahead of the reality. with respect to the GLP-1s. I think I saw an analysis recently where some people said that the airlines were going to save on fuel costs when the country engages with GLP-1s and collectively loses weight. I think that gets to maybe a little bit of overhype at this point. We've seen the prevalence of diabetes continually increase year over year. and is expected to increase by over 25% in the next 10 years. While I think that GLP-1s can have an impact on maybe moderating that rate of growth, I really don't think, and I wish it weren't the case, but I don't think we're going to suddenly see a massive decline in the need for people to engage in more comprehensive solutions that include behavior change with respect to activity, with respect to nutrition, with respect to mental health care. And so I think GLP-1s and really we view them as a tool to enhance those programs, but don't really see them as a headwind. And I think we also, again, going back to my initial comments, you have to take it in the context of the cost of those medications. and the need for our clients to engage in programs that help manage the overall cost of them.

Okay. That's super helpful. I'll hop back in the queue. Thanks so much.

Thanks, Ryan.

Thank you for your question. The next question is from the line of Joe Andrews-Singh with Truist. Your line is now open.

Thank you, and thanks for taking my questions. I understand we need to wait for a detailed 2024 guidance until Q4 earnings call, but I was wondering if you could give any directional color or qualitative color on revenue and margin trends or any additional puts and takes we should keep in mind across those two segments as we think about 2024 next year.

Yeah, I guess I'd say a couple of things and then I'll hand it to Mala for some color. I think what you heard us say today is that you can expect to see our EBITDA grow faster than our revenue for the next couple of years, and that certainly will hold true or that's part of our expectations for 2024. I think you heard us talk about the selling season today for integrated care being in line to modestly ahead of where we were last year at this time. We have a couple of months still left in the selling season. And we see our late stage pipeline pretty flat relative to where it was this year. So that should give you at least a little bit of color relative to where our integrated care segment will be. And client retention there continues to be in the 90s. So no material change there. And then on the BetterHelp side, I think you heard Mala say that we continue to take a more balanced approach than we had historically to revenue and margin growth there, and that you shouldn't view the fourth quarter as being indicative of the underlying growth of that business. I think those are the – we're going to stop short, as you expected, of giving 2024 guidance at this point. We expect we'll do that in the first quarter of next year. But I think those are the components and ingredients that should go into your outlook. Mala, did I miss anything there?

I would just add a little bit more color on BetterHelp specifically. Thinking about the starting point for 2024, Jaylandra, think about two things. You know, we have said this several times up until now, the quarterly comps line up very differently this year relative to last year. And they, so I will think about, you know, if you think about the first quarter, Think of it as above run rates, the fourth quarter as lower than the true run rate due to the Euro area comps. When I talk about Euro area comps, it's about ad spend as well as the revenue flow. Just as a reminder, what we've been saying all year is the ad spend cadence was going to be very different this year versus the last year. Last year, over half of the ad spend took place in the second half of that year. This year, it's the opposite with half of the spend taking place in the first half. So that's sort of the first thing to keep in mind. The second thing I'd say is on a full year basis, you know, if you think about BetterHelp revenue, as per our guidance, has decelerated each year over the last two years, and that's happened for a few reasons, right? One is This business has scaled pretty rapidly over a short period of time. It's just simply a much bigger business today. So off large numbers, you're just not going to see it continuing to grow at those hyper growth rates annually. The second thing I'll say is as Jason just talked about we are managing the business differently. We are balancing top line growth as well as bottom line growth and cash flow. So certainly that balanced approach has an increasing focus on driving ROI and margin. And that is in instances going to come at a lower overall rate of top line growth. And then the last point is if you look at this business, which is the largest player in the DTC virtual mental health space by far, you know, we are also the largest advertiser of virtual mental health. And unlike many of our smaller peers, our scale enables us to drive and earn strong returns on our spend. And that gives us a real advantage. We have talked about this before. but there's only so much incremental ad spend and customer acquisitions you can drive in any short period of time. There's just a natural growth to that every year as the market shifts more and more towards virtual and as the channels themselves grow. So that does limit the amount a DTC business can profitably grow year after year. So all of this, just to lend some color, to the dynamics that we are certainly seeing in the Better Health business.

Very helpful. Thank you.

Thank you for your question. The next question is from the line of Richard Close with Canaccord Ingenuity. Your line is now open.

Yeah, thanks for the questions. Jason, maybe more details on how you're thinking about investments going forward. You talked a little bit about it. I just, you know, how big of a change is this compared to past years? And it sounds like you're being more restrained. So I'm just curious examples of what maybe gets prioritized.

Yeah, a couple of thoughts there, Richard. I think first of all, it's important to put it in the context of where we've come from over the last couple of years. You know, we're emerging from a significant investment cycle during which we've spent a lot of time and effort building and integrating post Livongo acquisition. And so now I think it makes sense for us to look across the organization for further ways to enhance business performance. And part of that is focusing our investments on the areas where not only are we going to get the greatest return, but also are closest to the center of the bullseye of our strategy. I think that also you'll see in the continued progress we're making on capitalized software. You've seen that this year, and I think you'll see that again next year. As we move into more focused investments and less, quite frankly, foundational investments on big chunks that have helped to get us to this point, but also put the platform in place for us to move forward. You've seen that with our integrated app. You've seen that as we've migrated some of our internal ERP and financial systems. You see that as we put in place some of the capabilities that enable us to deliver on a true integrated experience for Primary 360. And so we'll continue to focus on delivering that whole person care in a differentiated manner, but also making sure that we're judicious in making sure that we're delivering the return on capital spend. Okay, thank you.

Thank you for your question. The next question is from the line of Charles Reed with TD Cowan. Your line is now open.

Hi, this is Lucas on for Charles. I want to ask about the performance guarantees that you recognize from generating positive outcomes. I'm assuming this is related to value-based arrangements. What portion of your guys' integrated care segment is derived from these sorts of value-based arrangements or at least engagements that enable you to recognize performance payments? And then can you give us a detail into how these are structured and how you can earn from them?

Yeah. Thanks for the question. You know, the way I would think about it is on a run rate basis, the amount of performance-based revenue tied to clinical outcomes would be in the single digits percentage of our total integrated care segment revenue. So just to give you some sort of dimensions on the size of that. And the other thing I would say is, you know, we have a long history of performance against these clinical measures. We have a lot of data to support our analyses. We feel very comfortable in terms of our ability to perform against these outcome guarantees. As I just said, it's a relatively small percentage of our revenue today. And finally, we also believe that we take an appropriately conservative approach in recognizing performance-based revenue. So all of it to say this is work contracts that certainly we have been used to delivering against for some time supported by data. And it is a relatively small percentage of our overall revenue book today.

Thank you for your question. The next question is from the line of George Hill with Deutsche Bank. Your line is now open.

Hey, good afternoon, guys. I'm Jason Amon. Thanks for taking the question. I guess so I would have a question on BetterHelp. And, Mala, I recognize the guidance that you gave for Q4. My question is kind of now that we're about a month past the Q3 close, I guess I would just ask, like, is that business from a membership perspective, basically tracking in line with expectations to where you guys have guided for the balance of the year? And then, Jason, one for you quickly would be it sounds like the company wants to take a pretty broad approach to a cost-cutting program. I don't know if there's any way to kind of size order of magnitude in the way that you're thinking about what the opportunity looks like inside of the cost structure. Sure.

Justin Cappos- yeah so maybe i'll take that one first George and then mala can talk about where we are, I think that actually i'll maybe i'll take it, the short answer is a month into the quarter we're right in line with where our guidance is so. Justin Cappos- So I can take that for mala and I think with respect to our comprehensive operational review. We're really looking across the portfolio to ensure that everything we do is aligned with our strategic focus and maximizing our profitable growth opportunities. You know, I think these efforts are really focused on operating efficiency, and we've stood up now centers of excellence for things like member operations, clinical operations, client operations, revenue cycle management, supply chain and purchasing, all areas where we can leverage our scale and make sure that we're driving for greater efficiency and take advantage of the opportunity to drive costs out of the business such that we can operate more efficiently. I mentioned before, we are emerging from a significant period of investment And so it makes sense for us to really look at a more right-sized organization based on the cost reduction efforts that we took earlier this year and make sure that all parts of the business are contributing to our profitable growth. And I think that that is really the fundamentals of it. we don't have anything to announce today regarding you know what the magnitude of the performance improvements that we expect and as we're in the middle of that assessment right now I think you can expect us to give you more color on that in the quarters to come as we quantify the opportunities and and then help you to tie those opportunities to what we described earlier, which is EBITDA growing at a faster rate than revenue over the next couple of years.

The one last thing I would add is, you know, we have talked about all of the operating expense initiatives and things we would look at. I would also say if I think about gross margin and the gross margin improvement, which has been, you know, a strong contributor to our margin expansion, think about better help and the gross margins that we are seeing there. You know, we are taking steps and initiatives to improve therapist productivity, whether it be group therapy, more digital interactions, So it's, I would say, both across gross margin as well as operating expense.

Thank you. Thank you for your question. Next question is from the line of Jessica Tassin with Piper Sandler. Your line is now open.

Thank you, guys, for taking the question. So I'm curious, as you think about the kind of new guidance that EBITDA and free cash flow should grow faster than revenue over the next couple of years, Did we still be thinking about those long-term revenue growth targets, the mid-single digit to high single digit for integrated care and low-double to mid-teens for better help as being valid against that new guidance? Or should we think about sort of a different revenue growth rate on a consolidated basis? Thanks.

Yeah, Jess, so we haven't given longer-term guidance for the business as a whole or the segments. I think you'll see us come out in the first quarter of 24 with an outlook for 24. I think, quite frankly, the indications that we've given today about expecting to see EBITDA growing faster than revenue for the next couple of years is probably the longest outlook that we've given in the last several quarters. You know, I think as we solidify what the findings are and results from this operational review, that will feed into a more multi-year outlook and will endeavor to give you more of a longer-term view when we're ready to. But I don't want to acknowledge or validate those numbers because I don't recall us giving a longer-term view.

Got it. Thank you.

Thank you for your question. The next question is from the line of Daniel Grossleit with Citi. Your line is now open.

Hi, guys. Thanks for taking the question. I just have a couple on integrated care margins and the outlook for the remainder of the year. So if I heard you correctly, at the midpoint, you expect around 12% margin for integrated care, which would be around 477 basis points of degradation, lop off 100 basis points for the performance fee. So still talking around 375 basis points of degradation sequentially. I'm curious what's driving that. And then I guess if I look at the full year, what's implied by that 4Q guidance, it's around 250 basis points of margin expansion versus when we started the year, I think you thought it would be kind of flat top 50, and then you change that to, 75 to 125 basis points, and now it's significantly outperforming there. So maybe if you could just put a finer point on that and the outperformance there and what we should expect going forward in fiscal 24. Yeah.

Thanks, Daniel, for the question. So if you think about the 4Q guide that we have given for integrated care, I'd say... You know, there are a few factors driving, exactly as you said, the decrease in margins. So what are those? First, the fourth quarter is always the cold and flu season, and that, as you know, drives gross margin compression, right, as visit volumes increase. So that's always a factor. We are also spending ahead of member onboarding, right? As you know, we have, we've talked about the strengthened bookings. We have several member onboardings starting Jan 1. You know, we are spending ahead of those client launches. I would also say we continue to grow our class of W-2 physician hires. And we will do so in the fourth quarter. We will increase our W-2 rolls. So that certainly is a small drag to margins during the quarter. And the last thing I would say is, as you mentioned, as you noted, certainly the performance guarantees contributed about 100 basis points to the third quarter margins, and that certainly has an impact sequentially. On your second question around full year performance on the margins and why are we seeing the expansion and the strength that we have seen, it really comes down to two big themes. Number one is we are seeing strength in chronic care revenue growth. that has been a consistent theme over the past few quarters. And certainly that has exceeded our expectations when we gave the initial guide. And the second thing is all of the cost efficiency programs that we are, you know, seeing the fruits of as we have rolled through the year. And, you know, Jason and I have talked about it in the last few minutes around what those are. So it's really those two things that have allowed us to outpace the margin expectations as we have rolled through the year.

Makes sense. And then maybe just a follow-up. I'll take a shot at fiscal 24 as well. It seems like, if anything, you're going to get more margin expansion in 24 versus what you had going to achieve in 23 which is around 200 230 basis points all right you got that operating uh efficiencies that might go through and some other uh less spend on on the integrated care app so i'm just curious you know should we think about 200 250 basis points of margin expansion going forward as kind of the floor for you guys we're gonna we're gonna stop short of giving a magnitude of the margin uh expansion um but i think

By definition, the fact that we expect EBITDA to grow faster than revenue, you can take away from that that we are targeting margin expansion again in 24, and we'll give you more insight into the magnitude of that as we get into 24 guidance.

Thank you for your question. The next question is from the line of Elizabeth Anderson with Epicor ISI. Your line is now open.

Hi, guys. Thanks so much for the question. I had a question about how to think about pricing and sort of if we think about the average revenue per U.S. integrated care member and then on the better health side as well. Obviously, you've had a bunch of new integrated care members roll on. So I just wanted to understand, is that something we should think of as kind of ramping as those members sort of come and get geared up? And so that's something that we should think about maybe over the next couple of quarters as that ramps? or is that not the right way to think about it? And then obviously you had a nice inflection in BetterHelp therapy revenue per user per month as well. So just how to think about the cadence of that as we kind of move forward. Thank you.

Yeah, I would describe, Elizabeth, thanks for the question. I would describe the pricing environment as stable. With respect to the members that we just onboarded in integrated care, It's really more of a revenue per member than a pricing question because we have to activate those members to drive visit revenue. The subscription revenue stays stable over time, but visit revenue tends to ramp. That's not really a pricing question. It's more of an activation and engagement question. And then, of course, we always look for land and expand opportunities. so that we can increase our revenue per member. So when I think about pricing, I think of it as an apples to apples basis for either a single product or a bundle of products from one year to the next, and we're seeing it pretty stable. With respect to BetterHelp, you know, we're always experimenting with pricing across markets, but overall pricing hasn't changed in a notable way. I think if you're looking at revenue divided by user count, any small change you're seeing period to period is primarily a reflection of mix, including the growth of the other line item, which is mostly a DTC sleep asset that's small but growing faster. And really importantly, when you're looking at revenue in a quarter versus membership, there's quite a bit of impact or there's impact within a quarter of the timing of when members come on and then start paying for the program and or roll off of the program. So overall, I would say pricing has remained pretty stable in that market.

Thank you for your question. The next question is from the line of Sean Dodge with RBC Capital. Your line is now open.

Yeah, thanks. Good afternoon. Jason, you kind of alluded to it a bit in earlier response, but just on BetterHelp, with the resumption of student loan payments on October 1st, are there any updates you can provide on what you're seeing, you know, at least thus far into October? Any potential impact that's having on new ads or churn or any kind of discernible change in customer behavior? I mean, just, I guess, in general around BetterHelp?

You know, we haven't seen anything in the data that suggests that that's had an impact. Churn has been stable. We haven't seen significant notable change, nor are we assuming any significant change in churn in our guidance. So I would say no, we haven't seen really any impact of that.

Thank you for your question. That will conclude the conference call. Thank you for your participation. You may now disconnect your lines.