Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the Talkspace Fourth Quarter and Full Year 2023 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Jeannine Feyen, Director of Communications. Please go ahead.

Good morning, and welcome to Talkspace's Fourth Quarter and Full Year 2023 Earnings Conference Call. I am Jeannine Feyen, Director of Communications. I hope you've had the opportunity to access the press release we posted on Talkspace's IR website and the presentation of our earnings results. We'll use this presentation to walk you through today's remarks. Leading today's call are our CEO, Dr. Jon Cohen; and our CFO, Jennifer Fulk. Management will offer their prepared remarks, and we'll then take your questions. Certain measures we'll discuss on this call are expressed on a non-GAAP basis and have been adjusted to exclude the impact of one-off items. Reconciliations of these non-GAAP measures are included in our earnings release and on our website, investors.talkspace.com. I also want to remind you that we will be discussing forward-looking information today, which may include forecasts, targets and other statements regarding our plans, goals, strategic priorities and anticipated financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. Important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. For more information, please review our Safe Harbor disclaimer on Slide 2. Now I will turn it over to Dr. Jon Cohen.

Thanks, Jeannine, and thank you all for joining us today. I am excited to discuss our strong Q4 results and the successes we had in 2023. We will then provide financial guidance for 2024 and, for the first time, discuss a longer-term outlook as to how we believe the business will perform over the next three years. Overall, 2023 was a year of important achievements for us, and I am proud of the way we executed against our strategic goals outlined early last year. Financially, it was a year of solid growth and operational refinement, which positioned us well entering 2024. We increased revenue in 2023 by 25% year-over-year while significantly reducing operating expenses, resulting in an adjusted EBITDA loss of $13.5 million, an improvement from a $59 million loss in 2022. The improvement in our financial performance developed sequentially throughout the year, and our adjusted EBITDA loss in Q4 narrowed to just $300,000. With our top-line momentum and rationalized cost structure, we are poised to grow profitably in 2024 and beyond, and Jennifer will elaborate on this later. Let me review in more detail each of our strategic initiatives that we outlined at the beginning of 2023. Our first initiative was to grow payor revenue. We delivered on this objective, more than doubling our payor revenue compared to the prior year. As we laid out in our objective, this strong growth was driven by both an increase in covered lives from 92 million to 131 million lives, as well as through expanding our same basis capture rate, which grew by almost 50%. As a result, we nearly doubled our session volume. We also established a business development process to engage new partners and increase referrals to Talkspace by leveraging our in-network status. We are pleased with the early traction…

Thank you, Jon, and good morning, everyone. We are pleased with our fourth quarter and 2023 results, which reflect our continued execution across our company priorities, translating into strengthening financial performance. Today, I'll primarily focus on the fourth quarter results on a sequential quarter-over-quarter basis and 2023 on a year-over-year basis, unless otherwise stated. Let's begin with our top-line performance. Fourth quarter revenue was $42.4 million, a 10% increase from the previous quarter, and a 40% increase year-over-year. For 2023, our total revenue amounted to $150 million, or 25% growth over 2022. GAAP net loss was $1.3 million in Q4 and $19.2 million in 2023. Adjusted EBITDA loss was approximately $300,000 in the fourth quarter and $13.5 million in 2023. And as of December 31, 2023, our cash and cash equivalents totaled $123.9 million. Moving to revenue results by category, Payor fourth quarter revenue maintained strong growth with an increase of 15% sequentially to $25.4 million. Payor Sessions completed by behavioral health and EAP members grew 9% sequentially to almost $250,000, and unique payor members completing sessions grew sequentially by 5% and year-over-year by 67% to $79,200. We will provide both sessions completed and active payor members within each quarter going forward, as these metrics are key indicators to progress against both capture rate and utilization in the payor category. Also of note in Q4, there was a one-time net revenue and gross profit benefit of $1.5 million from year-end reconciliations and further progress on collections from prior periods. For the full year 2023, payor revenue more than doubled from the prior year to $80.8 million. Covered lives grew 42% year-over-year and sessions in 2023 nearly doubled to $850,000, driven by additional covered lives as well as an increase of almost 50% in the same basis capture rate. Net price…

Thank you. [Operator Instructions] We'll take our first question from Charles Rhyee at TD Cowen.

Yes, thanks for taking the questions, and congrats on the quarter. And I really want to talk a little bit more about the outlook here. Jennifer, you talked about sort of these digital channels that you're looking to use to leverage to really fuel growth. One of your peers kind of talked about customer acquisition costs, particularly in sort of the social media channels being a gating factor for growth. Maybe can you talk about the difference of how you look to deploy different types of marketing channels on your end, particularly through in conjunction with your payor clients as well as DTE clients, and maybe what the differences are there when you deploy these kind of solutions into your customer base versus maybe a pure direct-to-consumer model?

Yes, thanks, Charles. So first on the member acquisition costs that we've talked about for a few quarters now, where our marketing efforts are really channeled at driving kind of overall member acquisition and driving the lifetime value of those members that we acquire. And so I would say on the payor category and specifically related to the outlook, we'll continue to focus those dollars on acquiring those members. I think we've made a lot of really good progress in driving down that cost of acquisition over the last several quarters. And we continue to expect that. I would say, I would come back to the references we made earlier in the call on our opportunity with referral partnerships and that being what we see as a big catalyst for us, particularly in the three-year timeframe, to be able to drive that member acquisition at a really effective cost. On the digital capabilities that I mentioned related to the direct-to-enterprise category, that's more related to our product offering and how we're enhancing the suite of offering for that category. So we see those two go-to-markets as, of course, highly related but really incremental opportunities for us over the long-term.

Great. And, Jon, you spent a lot of time talking about teens and children, and obviously that's a big challenge in the country as well as an opportunity for Talkspace. You've talked about school systems as a big opportunity as well. Can you give us an update there more? I mean, is this – how much in this year or in the pipeline are these opportunities sitting there right now? And maybe kind of give a sense on the average size of one of those kind of fields. Is it on par with a DTE or is it even larger? Maybe give us a sense of scope and scale upgrade [ph].

Sure. So we have had a very significant interest since we made those two announcements. And it's variable between school systems – what I'll say is school districts, and then there's the cities, and then actually the states and or the counties. So all – there are much different entities that are looking to improve the mental health of teens. So it really is – quite honestly, it's quite variable entity to entity. The Baltimore, for instance, we are in contract with them with the Baltimore County school system, whereas in New York City we're in contract with the Department of Health in New York City, just to give you an idea of the difference. So we're – we are seeing significant interest in terms of the teens and what our pipeline looks like. So the answer is to stay tuned in terms of the size and scope. It always comes down to how many kids there are that we need to cover. And it could be – it is really quite variable. I mean, you've seen the size of the New York City contract for 465,000 kids. It's obviously less for Baltimore for the – however many we're doing there, 20,000, 30,000. So it goes anywhere between that and can scale either way. So it's – they are quite variable is what I'm telling you.

Great. And then maybe one last on the guidance, Jennifer. If we look at the -- maybe get a sense of how we should think about the adjusted EBITDA. Is that -- obviously we're close to break even in the fourth quarter. Should we think of it as fairly linear in terms of profitability improvement as revenues kind of sequentially increase through the year? Or is there any seasonality that we should be aware of?

Yes, Charles, I would say for now and without giving a specific quarterly number, I would -- we expect that we'll be able to deliver quarterly sequential improvement in adjusted EBITDA through the year. So a fairly smooth estimate is contemplated in our guidance.

Okay. Great. Congrats again. Thanks.

Thank you.

We'll move to our next question from Ryan Daniels at William Blair.

Yes. Hey, guys. This is Jack Senft on for Ryan Daniels. Thanks for taking my question and congrats on the solid year. This is kind of a follow-up on the previous question here. But with the three-year guidance you noted, EBITDA margins are expected to improve significantly. If we take the 2024 midpoints, you are exceeding -- you are expecting EBITDA margins of about 3%. So first, maybe can you touch on where you see the most leverage in OpEx to get these three-year margins? Like, is that confidence? Really to the max since you've already decreased the OpEx margin by a lot this year. So trying to figure out how much more you can kind of go. And then just as a quick follow-up there to how should we think about the progressions of margins to get there? Maybe not on a quarterly basis but on a yearly basis. Will you see kind of fairly linear improvement each year kind of going out the next three years? Any additional follow-up here would be appreciated. Thanks.

Yes. So thanks, Jack. So first on 2024 -- and I talked earlier about some specifics there. In 2024, our guidance assumes that the payor category continues to be the largest driver to our revenue growth. And I mentioned that it comes at a lower gross margin relative to the other categories. So we mentioned a moderately slower growth in the gross margin as a result in 2024. As we look further -- and again, this is a preliminary long-term outlook that we provided and it was in response to several inquiries we got from investors on what is our view of the longer-term profitability of the business given that 2023 was such a year of important progress towards profitability. 2024 is still a transitional year as we grow into profitability. We wanted to give this three-year view. And I'll just come back to the couple of elements that weigh in there, which is continued progress in the payor category. And that's really in the long-term against our capture rate opportunity. So we mentioned how big of a volume opportunity we see there. And then in direct-to-enterprise, that playing a bigger part to contributing to both the top line and the bottom line over the next three years. And it's the things we referenced earlier as far as the digital capabilities and very importantly all the opportunities that Jon has mentioned we see in the teams market.

Yes, I would just reiterate that the majority of operating costs are taken out. We're relatively stable on the OpEx side. It's the top-line growth that we see a lot of opportunity now, which we think is going to have the biggest impact on the longer-range plan because the opportunity is so big. So it's not like you're going to see us take a lot more out of the operating costs. It's going to be much more the ability and the opportunity before us to grow the top line.

Okay, understood. I appreciate that color. Just a quick follow-up here, too. I know you've grown the clinician network to about 5,300 or up about 75%. Can you maybe just talk about therapist turnover, clinician turnover? I'm kind of curious what you're seeing on that front. And are you seeing good traction from clinicians on the artificial intelligence front? Or is there kind of something else that you see clinicians citing that they really like?

Yes, so we don't. The turnover is low. It's really not an issue. And the reason it's growing is because of all the time and effort we put in to be the employer of choice and the interest we have from people coming onto the platform because of all the things that Talkspace actually does offer, a chance to grow their practice in an environment where they like the people they're talking to, they like the community, they like the education we're providing them. So the success there has been, as you can see, quite extraordinary in terms of growing the market. I would say that the AI thing we know will be very positive for the therapist. We only have anecdotal information, quite honestly, but the very early experiences, they're really, really excited about the idea to have the summary available to them, both on sessions that they've completed and soon to have the summary of the intake information to be able to make it much easier for them. So those two documentation issues we know are very popular. The third is going to be the ability to help them provide actually better care, which is what we're doing with the self-harm and suicide and we're going to lean in on developing other algorithms which will help them deliver better care. It doesn't substitute in any way for them, but it gives them, it really makes it better for them as clinicians to provide better care. So we're seeing a lot of interest in that, to say the least.

Okay, perfect. Thanks guys and congrats again.

Thank you.

We'll go next to Stephanie Davis at Barclays.

Hey guys, congrats on the quarter. Thank you for taking my question. Jon, you have been very busy since my garden [ph] leave. You have talked about going into the student population and government populations and some payor populations. Should I think about the majority of your expansion into new markets as done and now it's, you've made your proof points and you're going to go on a kind of a hunting spree? Or are there further markets you're looking at and thinking, well why don't we do that?

Well, first Stephanie, thanks for that. I would say that one is, focus is a really big issue for us. It always is, not getting diverted. I would say the other yes, we've leaned in on teens. We've talked about the respect in terms of government, cities, counties is all relative to teens. So it's the same market that we're after. It's just a matter of who the customer is going to be. I would say though, the other big one for us was our announcement for Medicare. We are, we will be, we believe, the primary, if not only large, national telehealth mental health provider that's going to be providing that service to the Medicare population. As a result of that, we like to think now it's from teens to seniors. So the senior, it's not just a matter of getting into Medicare, which as you heard me talk about is both the regular Medicare or standard Medicare, but Medicare Advantage. It's really a strategy to get Medicare patients, people over the age of 65 usually, to actually utilize the service. So given we know the mental health challenges of the seniors, the question is, the challenge for us, which we are ready to address because we put an enormous amount of effort and planning into this, is to address the needs of the Medicare patient and get them to use the platform as we're doing with teens. So you have the product and now we have to figure out how to make sure that they come onto the platform, which we actually have proven we're able to do with teens and I'm very confident we'll be able to do on the Medicare population also.

[Indiscernible] that out a little bit more. Is there any color you can share on these revenue models and what sort of offsetting costs you're going to have to try to experiment around engagement for these populations?

So I would say that the payors are very interested in us being in Medicare and Medicare Advantage. So for us, that's a really important advantage, quite honestly, because we're already in network with all the majors. So in terms of that, it's not the investment for us on Medicare was to get us ready. It was to get us ready to go into all 50 states to make sure that the therapists are signed up and then develop some marketing plan to go and try different channels. We know the opportunity is pretty big. The data is 20% 25% of seniors say that they have significant loneliness/depression. So we know that the market is there. I'll reiterate what I said earlier. The question is how do we get to them to get them to sign up? We think it's going to be a big opportunity at 65 million people, but it's obviously not even early days. We haven't even just barely gotten out of the gate.

Understood. I have another question, Jon. This is my last one on just broader sizing of your consumer opportunity. How are you looking at historical top of funnel investments and what the steady state could look like given you do have an established brand?

Great question. We've talked since it's been around for 12 years. It has a very strong brand and continues to have so in the market. What we're seeing on the consumer side is we've talked about before is there continues to be pressure on consumers. I think everybody would say no one's going to predict where the market is going or where the economy is going, but you can see that consumer spending is very, very much up in the air relative to how much they're going to spend and how much they're not. Our pivot two years ago to a payor strategy we know is working, because when people come to find Talkspace and they have a choice between paying out of pocket or determining eligibility and then having the payors pay for it, we know is a very strong movement towards the payor side because they're going to pick their insurance given the choice. That's a big differentiator for us in the market. The other to consider on that is the consumer we know will spend less time on the platform than a person that has insurance. That's a big deal because the long-term value of that individual patient relative to what it took for us to get that person onto the platform is much, much better than a consumer. Essentially if insurance is paying for your therapy, pretty good chance you're going to stay on and continue to get therapy for as long as you need it without the overhang of, oh, am I going to continue to need to pay for it? That's a big differentiator for us relative to being in the consumer market.

Got it. Cannibalization, but welcome cannibalization. Thank you for taking my questions.

Thank you.

There are no further questions at this time. I'd like to turn the conference over to Jon Cohen for closing remarks.

Thank you for everybody for being on. In closing our achievements in 2023 and our outlook for 2024 reflect our unwavering commitment to providing easily accessible, readily available, and affordable high quality mental health care. We are poised for continued success and we look forward to sharing our progress with you. Thank you again for joining us today.

This concludes today's conference call. Thank you for your participation. You may now disconnect.