Teladoc Health, Inc. (TDOC) Q2 2023 Earnings Report, Transcript and Summary

Hello, and welcome to the Teladoc Second Quarter 2023 Earnings Conference Call. My name is Alex, I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Patrick Feeley, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon. Today after the market closed, we issued a press release announcing our second quarter 2023 financial results. This press release and the accompanying slide presentation are available on the Investor Relations section of the teladochealth.com website. On this call to discuss the results are Jason Gorevic, Chief Executive Officer; and Mala Murthy, Chief Financial Officer. During this call, we will also discuss our third quarter full year 2023 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 on 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 are pleased to report a strong second quarter with results that met or exceeded all of our financial and operating guidance. It's a reflection of the strength and stability we've seen across the business and why we're raising the low end of our revenue and adjusted EBITDA guidance for the rest of the year. In my remarks today, I'll start with a brief recap of the quarter, but then I'll also want to touch on some of the themes and mark trends we've seen through the first half of the year from continuing economic uncertainty and the growing demand for whole person care to the changing discussion around weight loss drugs and, of course, the explosion of interest in AI. But let's begin with Q2 results. Consolidated revenue grew 10% on a year-over-year basis last quarter and 4% sequentially to $652 million. Our consolidated adjusted EBITDA of $72 million exceeded the high end of our expectations, and both the Integrated Care and BetterHelp segments had a strong quarter. Revenue from our Integrated Care segment grew 5% year-over-year to $360 million. Compared to the first quarter, revenue grew 3% sequentially, driven in large part by higher enrollment in our chronic care program. At the halfway point, we remain on track for our full year enrollment targets, which is one of the factors giving us the confidence to raise the bottom end of our guidance range. Within the Integrated Care segment, we're seeing growth across all our chronic care programs year to date. In particular, more clients are taking advantage of our digital diabetes prevention program as they expand their portfolio of solutions within our whole person suite. Today, more than one in every three of our chronic care members is now enrolled in multiple programs. It's an example of the ongoing shift in the market towards whole person strategies as more and more clients recognize the value and effectiveness of a holistic approach to care. As a company, Teladoc Health remains our industry's clear leader in this shift to a whole person approach. And we're going to keep driving more growth, expanding our offerings, and delivering exceptional value to our clients and members. BetterHelp also continues to set itself apart as the leading player in its category. We're happy to report strong performance in the second quarter, with segment revenue growing 18% year-over-year, which was execute against our expectations. This reflects both our ability to successfully execute against our strategies and the continued demand for our mental health services. We've also seen stable customer acquisition costs through the first half of the year. This stability combined with consistently strong gross margin performance meant that our margins improved significantly over Q2 last year, a result which was also consistent with our forecast. Consumer demand has proven resilient through the first half of the year, even with the financial pressures that many households are facing. But given the uncertainty in the broader economy, we're continuing to incorporate a more cautious outlook at the low end of our guidance range. Regardless, we'll continue to provide exceptional value to our BetterHelp members. Those are the main headlines from the quarter. Now I'll take a few minutes to talk about some of the themes we're seeing in the marketplace and what we're hearing from our clients. First, the role of virtual care continues to grow. A recent market survey commissioned by Teladoc Health tells us three out of every four employers expect to spend more on virtual care over the next three years. This represents significant opportunities for our business. It also validates our approach. Over half of the employers we surveyed said they plan to implement a whole person virtual care strategy over the next three years as they move toward consolidating vendors. And half of the employers said they're interested in health plans that incentivize virtual care. These trends combined with the fact that consumers are looking for more convenient and affordable options mean that comprehensive virtual care will be the first stop for more people on their care journeys, and we'll keep leading the way. Clients are also talking to us about challenges of managing the cost of GLP-1 drugs. These drugs were originally designed to treat diabetes, but have since been found to help patients lose weight. Employers in health plans want to meet rising consumer demand, but in a way that doesn't break the bank. Right now, roughly four out of every five of our clients believe that virtual care programs can help them manage access to these high cost medications. As a result, we're seeing growing interest in our provider based care programs, especially our recently announced weight management program scheduled to launch later this year. This program gives patients access to personalized care plans developed in collaboration with a Teladoc Health physician. And because we know drugs aren't enough on their own, the program is based on a broader strategy with tailored support to help patients lose weight. It's more effective and it helps our clients manage the runaway costs of GLP-1 medication. We also continue to hear concerns about overall economic uncertainty. As access to capital has become tighter, some startups are struggling and companies of all size are being forced to do more with less. This is yet another factor causing more clients to explore vendor consolidation, because they want a strong, stable partner who can drive innovation and deliver real value over the long term. This means working with a partner that has a solid financial foundation. At Teladoc Health, we're providing high quality care and continuing to innovate, all while generating strong free cash flow. As the healthcare landscape continues to evolve, we will keep making investments and leveraging technology to drive better outcomes for our members, clinicians, and clients. Which brings me to another key theme this year, AI. At Teladoc Health, we use AI across our business, leveraging more than 60 proprietary AI models to strengthen our products and create a better experience for our members. For example, our proprietary virtual care queuing system allows us to facilitate tens of thousands of visits every day, connecting patients with the right providers in real time. It's a complex problem to solve at scale and one that requires taking into account provider licensing, availability, geography, specialty, and patient preferences. AI is helping us to grow and become more efficient at the same time. The same is true for BetterHelp. When it comes to mental health, finding the right provider can make all the difference. So, we use AI to optimize member therapists matching based on over a 100 different criteria. On average, we're matching a patient with a provider every 30 seconds, something no one else in the industry can say. Besides making life better for patients and providers, it's also helping to drive our strong gross margin performance and competitive advantage. Finally, AI allows us to deliver personalized content and insights to our members, helping them change their behavior in a sustainable way. We provide customized next best actions on a massive scale driving better outcomes at lower costs. Because if you want to have a real impact, a one size fits all approach isn't good enough. So we're already taking advantage of AI across our business. And now, we're going even further. Last week, we announced that we're expanding our partnership with Microsoft to bring Microsoft's open AI services and Nuance Dax’s capabilities onto the Teladoc platform. Our goal is to automate more of the clinical documentation during virtual exams, making visits more efficient, improving the quality of medical data, and letting providers focus on what they do best, caring for patients. We're also exploring ways to use generative AI to improve the experience of our members. So that's what we're focused on right now, expanding our competitive advantage, making our business more efficient to drive higher margins, and generating more value for our clients and our members. It puts us in a very strong position today and will allow us to keep setting the pace and delivering strong results for years to come. With that, I'll turn the call over to Mala to review the second quarter and share our forward guidance.

Thank you, Jason, and good afternoon, everyone. Second quarter consolidated revenue of $652 million increased 10% year-over-year or 4% sequentially as compared to the first quarter. Second quarter adjusted EBITDA was $72 million, representing a margin of 11.1%. Turning to segment results. Integrated Care segment revenue increased 5% year-over-year to $360 million in the quarter and grew 3% sequentially. On a year-over-year basis, Integrated Care segment revenue growth was relatively balanced across the portfolio. On a sequential basis, new chronic care program enrollment growth of 45,000 was the largest driver of segment revenue growth over the first quarter. Total chronic care program enrollment was 1.07 million at the end of the second quarter, an increase of 7% year-over-year and 4% over the first quarter. Second quarter Integrated Care adjusted EBITDA was $38 million, representing nearly 30% growth and a 200 basis point margin expansion over the prior year second quarter. The Integrated Care segment added 1 million members sequentially, ending at 85.9 million US members. Average Integrated Care revenue per US member of a $1.41 was down $0.02 over the prior year second quarter, driven by the impact of 6 million new telemedicine member addition over the last 12 months. As compared to the first quarter, average revenue per US member increased $0.02. Turning to BetterHelp. Revenue increased 18% year-over-year to $292 million in the second quarter, driven primarily by membership growth. Second quarter BetterHelp adjusted EBITDA was $34 million, resulting in a margin of 11.7%, in line with our expectation. This represents a 360 basis point increase over last year's second quarter and a 540 basis point improvement over the first quarter. A result of both, a more stable customer acquisition environment and improved gross margins. Consolidated net loss per share in the second quarter was $0.40 compared to a net loss per share $19.22 in the second quarter of 2022. Net loss per share in the second quarter includes stock based compensation expense of $0.34 per share, amortization of acquired intangibles of $0.32 per share and restructuring charges of $0.05 per share, primarily related to office based rationalization. Second quarter free cash flow was $65 million compared to $48 million in the second quarter of 2022. We ended the quarter with $959 million in cash and short term investments on the balance sheet. Now turning to forward guidance. For the full year, we now expect revenue to be in the range of $2.6 billion to $2.675 billion, an increase of $25 million at the low end. This outlook contemplates high single digit percentage growth in our Integrated Care segment versus our prior expectation for mid to high single digit growth and low double digit to mid teen percentage growth in our BetterHelp segment. We now expect consolidated adjusted EBITDA for the full year to be in the range of $300 million to $325 million, an increase of $15 million on the low end. We now expect full year 2023 adjusted EBITDA margins to increase approximately 75 to 125 basis points for the Integrated Care segment versus our prior expectations for flat to 50 basis points margin improvement. We continue to anticipate an increase of 100 to 300 basis points for the BetterHelp segment. We now expect full year free cash flow of approximately $150 million. For the third quarter, we expect revenue of $650 million to $675 million, representing growth of 6% to 10% year-over-year. We expect adjusted EBITDA in the range of $72 million to $82 million. For the third quarter, we expect year-over-year revenue growth for each of the segments roughly in line with overall consolidated revenue growth. We expect Integrated Care segment margin to exceed BetterHelp segment margins in the third quarter. Finally, we expect total Integrated Care segments US membership of approximately 86 million members. With that, I will turn the call back to Jason.

Thanks, Mala. Before we take your questions, I want to share that last week Mala and I had the pleasure of addressing more than 200 of our key clients at our annual forum event in Boston. It was great to spend time with so many employers, health plans, hospital systems, and governments from around the world. We discussed many of the themes that I just talked about, including GLP-1s, AI, and how Teladoc Health is becoming the way more people get more of their care. And I was happy to see many of our clients see us not just as a vendor, but as a true partner in innovation. So I'm pleased with our first half performance and look forward to providing updates on our progress throughout the year. With that, we'll open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question for today comes from Sandy Draper of Guggenheim. Your line is now open. Please go ahead.

Thanks very much, and congrats on a second consecutive pretty solid quarter. I guess my question, Mala, the really big change or notable change to me was your latter comment about the improvement in free cash flow now looking at $150 million versus a $100 million previously. Just trying to understand what's improving because EBITDA is up a little bit, but not that much. Where the cash benefits, what lower cash uses, just trying to understand the dynamics of what's improving that because that's a 50% jump at the mid -- at simple math. So that's a pretty big improvement.

Yes. Thank you, Sandy, for the question. Look, we are really pleased with our free cash flow performance of the business through the first half of the year. You're seeing that in our results. Our prior outlook, as you said, call for over $100 million of free cash flow, we have now opted and we expect to generate over $150 million. If I step back and talk about the drivers of it, part of that is improved visibility into the operating performance of our business. Our adjusted EBITDA guidance reflects that as well with the low end of the range up $25 million versus our initial expectation. Part of it is also a reflection of better CapEx expectations. You'll see this quarter, for example, that our capitalized software costs have come down by nearly $9 million quarter-over-quarter, sequentially. So that improvement is in part due to completion of projects, including the launch of the unified consumer app earlier this year, and we are pleased to see that trend. And, frankly, finally, free cash flow is also a little harder to predict because there is a significant timing component to it. So naturally, as we are halfway through the year, we have a little more visibility on the timing of when things may land than we did at the start of the year. So if I were to summarize what the key drivers are of the cash flow expectations, revised cash flow expectations. It is, we are seeing better adjusted EBITDA. We are taking the lower end of the range off the table as we said in our guidance. We continue to see good cost control and efficiencies when it comes to capital spending. And as we move through the year, we generally have more visibility on the timing of the cash flows, especially since, as I just said, the timing component when it comes to cash flows is large.

And then Sandy, I would just add, I think Mala did an excellent job of going through the drivers of our cash flow. If I step back and talk about the importance of our free cash flow, more and more, we are speaking with the CFOs of our clients who have concerns about the financial strength of their vendors and partners. And they want greater visibility into the financial stability, the free cash flow or cash drain of their partners. And it becomes a very positive discussion, we welcome when our commercial team comes to us and says, “Hey, can you get on the phone with the CFO of our clients”, because when we can walk them through what our balance sheet looks like and the very strong free cash flow performance that we have it really becomes a positive for us.

Great. Thanks.

Thank you. Our next question comes from Jailendra Singh of Truist Securities. Your line is now open. Please go ahead.

Thank you. And thanks for taking my questions. I actually want to go back to your comments around gross margin trends at BetterHelp. It seems like, I mean, those came in much better than expectations. Can you provide a little bit more color, the key drivers there? What specific trends outperformed compared to expectations? How do you -- how are you thinking about gross margin trends at BetterHelp for the rest of the year?

Yes, Jailendra, thank you for the question. Yes, as you said, we are seeing strong gross margin performance overall, we are seeing that across the business, both on the Integrated Care side and the BetterHelp side. Specific to BetterHelp, look, over the course of 2022 we talked about improvements in BetterHelp gross margins. We have done a number of things, we've actually taken a number of initiatives to improve therapist productivity ranging from group sessions, group therapy sessions to more digital interactions. And all of that is resulting certainly in the trends that we are seeing in our gross margin improvement for BetterHelp. I would say that's really the key driver of the gross margin expansion that we are seeing overall therapist productivity improvements.

Okay. Thank you.

Thank you. Our next question comes from Lisa Gill of JPMorgan. Your line is now open. Please go ahead.

Thanks very much. Good afternoon. Jason, I want to go back to your comments talking about weight loss programs, and I know you spent time with your clients last week. As I think about those programs, is there an opportunity for both direct to consumer as well as direct to the employer? And how do you view that? So are we thinking about that as an addition to who you're adding in these chronic programs? Are we thinking of this as incremental? I know it's going to start in the third quarter, but I just want to try to frame how big a potential opportunity this could be. And, again, just understand if there's also a direct to consumer opportunity here.

Yes. Thanks, Lisa. Appreciate the question. And certainly, the GLP-1's and weight management solutions are a hot topic right now, especially among our employer and health plan clients. Right now, we're focusing our sort of newly updated weight management program that features provider based care on the B2B market. We're seeing significant demand from employers who are very concerned about the cost. GLP-1s which -- we talked to one and a large employer, I guess mid-sized employer of 5000 employees who saw $100,000 increase in cost of GLP-1s in a single month. We talk to others who are seeing fourfold increase in the cost of these medications over the course of a year. And so, that is very, very front and center for them in terms of their concerns relative to overall cost of care. Of course, they want to balance this with the benefits that can be derived from these medications in terms of weight management and certainly as they affect people living with diabetes So today we're very focused with those programs on our B2B market. I would never close the door to saying that we wouldn't take something like that into a direct to consumer market. But we're more focused today on the B2B market. And I think you'll see the benefits of that in 2024.

Thank you. Our next question comes from Daniel Grosslight of Citi. Your line is now open. Please go ahead.

Hi, guys. Thanks for taking the question and congrats on the quarter. I'd like to dig in a bit more into the BetterHelp guide. So at the high end of the 2023 guidance, it implies a step down in year-over-year growth from around 20% in the first half of this year to around 11-ish percent in the second half. Given the stability in tax, I'm curious what's causing the step down. Is it just general conservatism given the macro backdrop? Or is there some structural change in that business that would cause that to slow to kind of the low double digits?

Yes. Thank you, Daniel, for the question. No structural change. Let me just give you some color on the dynamics of that business. So the lower sequential growth is sort of fueled, if you will, think of it as in part by the planned cadence of ad spend over the course of the year, which is different from last year. We have talked about that in the past few quarters, but just to put a finer point on it. Last year, over half of the ad spend in BetterHelp business took place in the second half of the year. This year's plan calls for the opposite with over half of the ad spend taking place in the first half. So last year's cadence looked different due to the dynamics we've talked about we experience in some of our ad channels half way through the year. So last year, we actually spent more in 3Q than we did in 2Q. And we saw that reflected in the BetterHelp margins last year which declined over the course of 1Q to 2Q to 3Q and then accelerated back up in 4Q. So this year, the cadence of ad spending is more balanced across the first three quarters of the year in contrast to the steep ramp over the same period last year. And so, if you think about what the implication of that is, what it means is, the sequential revenue contribution is also going to be more balanced across the quarters than last year. So that's sort of the difference in the pacing of the ad spend in this year versus the prior year means that the revenue comps line up differently, and that is what is essentially resulting in the deceleration in the second half versus the first half. Again, this is something that as we -- it's not new, we've talked about this right from the beginning of the year when we have set guidance. It's now -- it's just that we are -- you're seeing that now in the numbers as you see the first half now actualized and we are guiding to the second half.

Thank you. Our next question comes from Sean Dodge of RBC. Sean, your line is now open. Please go ahead.

All right. Great. Thanks. Maybe just with all the recent payer commentary around growth in behavioral health utilization. Jason, are there any updates you can give us on what you're seeing with your enterprise or B2B mental health offerings? You mentioned lots of interest in whole person care. I guess, how integral is mental health in those conversations? And then maybe anything you can share to help [indiscernible] within integrated care? How meaningful contributor this is? How fast it's been growing? Thanks.

Yes. We continue to see very strong demand for our mental health programs. I would say in general, they are -- the demand is in concert with our other products and services. So we're now seeing and continue to see that over three quarters of our sales are multiproduct sales. And mental health is the most frequently included sort of second product, if you will. We're seeing it as an integral part of our sales for chronic care programs, which we're very pleased with the continued growth and really strong results in our chronic care programs. We believe very strongly that that's bolstered by our strength in mental health where we can provide a whole person solution rather than an individual or isolated point solution. We also continue to see mental health as a very important part of primary 360, which we're very pleased with the results. Obviously, it's off of a small base, but it continues to grow tremendously. So I would say very, very strong demand for mental health that continues to be top of mind among health plans, employers, and obviously as well among consumers as we see the strength in our BetterHelp business.

Okay. Thanks again.

Thank you. Our next question comes from Jessica Tassan from Piper Sadler. Your line is now open. Please go ahead.

Thank you guys so much for taking the question and congratulations on the great quarter. So, on the integrated weight management and diabetes solution, is there incremental price versus prior iterations of those products? And then just curious to know if you all are going to market with any kind of case studies or clinical evidence just supporting the validity of the Teladoc solution versus maybe any possible alternative. Thanks.

Yeah. So obviously, our weight management solution that includes provider based care is just being introduced in the third quarter. It does sell at a modest premium with the provider based care as a component of it. Obviously, provider based care isn't unique to our weight management solution. We had previously rolled that out as part of our diabetes and hypertension programs. And we believe very strongly that we are uniquely positioned to bring this to market in a virtual chronic care management program. I feel strongly that those are supporting our overall success in our selling season relative to chronic care solutions, as well as the enrollment gains that we saw in the second quarter. It's early, Jess, to be able to bring clinical studies to market. Obviously, we're just launching the provider based care and waste management -- and weight management in the third quarter. So we don't have results from clinical studies yet. But certainly, we always rely on measuring and demonstrating improved outcomes. And as soon as we have adequate data to be able to demonstrate that in the weight management program, we will bring that to market as well.

Thank you. Our next question comes from Richard Close of Canaccord Genuity. Richard, your line is now open. Please go ahead.

Thank you. Congratulations on a strong quarter. I know international is relatively small part of the business, but Jason, maybe if you can give us an update there. It looked like growth is accelerating somewhat first quarter to second quarter? And any update would be helpful.

Yes. Richard, we're pleased with the results and the growth of our international, I would say, among a number of dimensions. We're seeing strength actually selling our technology into hospitals and health systems overseas. We're seeing strength selling into governments. And I would specifically call out success in the UK as well as in Canada with respect to wins -- recent wins among nationalized healthcare systems. Those are relatively new for us over the last couple of years. Of course, we see a significant opportunity in the Nationalized Healthcare Systems. And we've been working hard to adapt our solutions and to be able to create the right selling capabilities into those larger nationalized healthcare systems. So across the board, I would say we feel very positive about the growth in the international arena and continue to focus our efforts and resources taking advantage of the global opportunity, not just the domestic opportunity.

Thanks.

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

Yeah. Good morning, guys. Thanks for taking the question, and I'll say thanks to Lisa Gill for leaving me the selling season question for 2024. I guess as you guys think about the kind of the sales outlook for 2024. Jason, can you talk about whether you guys are focused more on the cross sell of products like the diabetes product, the weight management product, or do you still kind of see an opportunity to add a lot of new lives to the integrated care business? I'm just kind of trying to think about [indiscernible] focused thinking about 2024.

Yes. I appreciate the question, George. I would say generally speaking, we're pleased with the selling season through the first half. I would say it's in line to slightly ahead of our expectations for the first half of the year. I would say it's been especially strong in the health plan part of the market. And of course, the employer market tends to make decisions in the back half of the year. Multi product sales continues to be a key with over three quarters of our deals being multiproduct sales. We are seeing more clients go, what I would call, all in with Teladoc where they buy our entire suite of services And we signed deals in the first half to bring the full suite of chronic care solutions, telemedicine, primary 360 and mental health to health plan clients. If I think about cross sell versus new logos, we're certainly continuing to see our land and expand strategy pay dividends for us with about 75% of our bookings in the first half be cross sell and upsell. Now upsell, of course, maybe additional populations within an existing client. So that could result in additional lives. So I don't want to preclude those. But as I think about our overall opportunity with 85 million, 86 million members, I would say that our biggest opportunity is to continue to penetrate those populations with more products. Having said that, over the last 12 months, we've added 6 million new members to the Integrated Care segment, which is, I would say very strong growth.

Thank you.

Thank you. Our next question comes from Charles Rhyee of TD Cowen. Charles, your line is now open. Please go ahead.

Yeah. Thanks for taking the question. Jason, I want to go back to the GLP-1 comment, because you mentioned your clients are struggling with sort of the cost aspect and from what we've heard, a lot of employers are trying to put in more restrictive prior authorization requirements, sort of to validate diabetes diagnosis, etcetera. Is there something that you guys in the way you guys deliver that can sort of ensure that compliance so that these drugs get to appropriate patients? And is there something that you're able to deliver that's kind of unique from what -- having a usual broad network of physicians in a regular health plan setting would allow for.

Yes, Charles, I appreciate the question. And the answer is absolutely yes. Our new provider-based care programs are an evolution of our existing weight management and prediabetes solutions. Of course, those are native digital programs. And so, we're adding on the provider-based care, meaning the ability to both prescribe as well as titrate those medications through a physician-based delivery mechanism and working with our existing coaches. So if you think about the difference between our solution and someone going to their local physician in their market, the local physician is limited to simply a prescription. We're working with our health plans and our employer clients to make sure that we are bringing the full scope of our services, the digital solutions, the coaches as well as the physicians with the goal of ensuring that the people who are appropriate and in need of these medications get them and that we're engaging them with all of those other behavior and lifestyle changes, including registered dieticians and nutritionists, including coaching relative to activity and exercise. And the goal of making sure that the people who don't really need to be on them for a long term are ultimately getting the right support so that eventually they can move off of those medications and live a healthier life, while at the same time maintaining a healthier weight. So from our perspective, our clients are coming to us looking for exactly that: a broader, more comprehensive solution than what they are finding in the general marketplace.

Thank you.

Thank you. Our next question comes from Ryan Daniels of William Blair. Your line is now open. Please go ahead.

Yeah. Thanks for taking my question. Jason, one for you. You talked a few times about some of the noise in the end market with your smaller competitors, maybe not having the balance sheet and capital to give their clients comfort that they're going to be sustainable entities. I'm curious, number one, if you'll just leverage that to gain organic market share? Or number two, are there opportunities for M&A either to expand the client base or perhaps get some unique products in the market at a more favorable valuation? Thanks.

Yes. Thanks, Ryan. Certainly, we're going to leverage our financial strength for organic growth. And as I mentioned, when our clients or prospects go deep into our financials relative to those smaller competitors, there's a stark difference. And we see that resulting in decisions in our favor -- buying decisions in our favor. We are certainly starting to see -- I would say finally starting to see some rationalization among private companies in terms of their valuations. And we're definitely starting to see some companies who are struggling to raise subsequent rounds of capital given the higher cost of capital and higher hurdle rates for both growth and profitability. For us, we have to make sure that those line up with strategic priorities and that there is both a strategic imperative as well as a strong financial proposition for us to move forward. We're always looking to be opportunistic in that regard and to be able to continue to expand the scope of our clinical solutions to be able to deliver on the promise of whole-person virtual care. So I would say that the current environment will likely yield benefits on both sides of that equation.

Thank you. Our next question comes from Scott Schoenhaus from KeyBanc. Scott, your line is now open. Please go ahead.

Hi, team. Thanks for taking my question. So following up on the breakout in margins between Integrated Care and BetterHelp for 3Q, you noted that you expect Integrated Care margins to be actually above BetterHelp. Could you give us more color here? It's a pretty nice acceleration for 2Q levels. What's driving this? Is this higher PMPM associated with the accelerating chronic care and that mix shift? Or is there something else that we should be aware of? Thanks.

Thanks. Yes. Thank you, Scott, for the question. So if I think about the margin expansion, really, it comes down to a few different drivers. One is, you are certainly seeing the benefit and the flow-through of our Integrated Care revenue and particularly the chronic care revenue flow-through to our margins. So that is the first. The second thing is, we are certainly getting some modest tailwind on the Integrated Care side from the fact that we are seeing some nice productivity gains from our employed physicians in our gross margins. So you're seeing the benefit of that. And then I would say we are demonstrating good cost control across the business on line items such as G&A, even technology and development spend, I would say. As we have said for the last couple of quarters, we do expect to get leverage from our T&D spend over the next several quarters. So you put all of that together, and that is what is driving our gross -- our overall margin performance.

Thank you. Our next question comes from Stan Berenshteyn of Wells Fargo. Stan, your line is now open. Please go ahead.

Hi. Thanks for taking my questions. Maybe swinging back to BetterHelp. Revenue grew 5% sequentially. Membership grew 2% sequentially. So just curious what drove the incremental revenue performance in excess of membership growth. Thanks.

It's essentially -- it's a combination of both the user performance, as you talked about. And then it's also the -- think of it as we -- our ad spend was quite significant in the first quarter. You saw that in our first quarter results. If you think about what that yields in terms of revenue, a lot of those users coming on at the end of the quarter, the revenue realized from that really happens through the second quarter. So that is really the pickup that you are seeing in our second quarter revenue for BetterHelp.

Thank you. Our next question comes from Kevin Caliendo from UBS. Your line is now open. Please go ahead.

Great. Thanks for taking my question. I was wondering if you guys -- what you're contemplating, if anything for the impact of student loan repayments coming back on board in October. I guess, specifically as it accounts with BetterHelp and BetterHelp volumes. Have you guys done any analysis on the overlap of people that might have to pay again and those who are your users?

Yes, Kevin, I won't go into the components of our guide. I think what you heard us say relative to the overall expectations of the economic environment, we've included a range that contemplates a variety of scenarios where, I would say, a greater impact of economic factors at the lower end of our range and less of an impact at the upper end of our range. And I would put student loans into that category of overall economic factors. I don't think it's big enough to, quite frankly, be isolated as its own factor. And I wouldn't break it out as such.

Fair enough. That's helpful. Thank you.

Thank you. Our next question comes from David Larsen of BTIG. David, your line is now open. Please go ahead.

Hi. Congratulations on the good quarter. Just do you have any thoughts on the proposed physician fee schedule for 2024? There were a couple of things in there on telehealth. Does that matter or not, especially for your plan clients that have a large MA presence? I mean it looks fairly favorable to me. Like they're talking about potentially increasing the kinds of providers that can participate in telehealth or talking about expanding revenue or reimbursement for primary care physicians. Just any thoughts or color there would be helpful. Or does it not matter? Thanks.

Yes. Thanks, David. I would say, at a macro level, the trends coming out of CMS and the administration are favorable relative to virtual care. With respect to the fee schedule itself, we don't get direct reimbursement from the government on a fee-for-service basis for Medicare. So it really doesn't affect us directly. We work with the health plans on MA and on managed Medicaid. And so I would say, while the overall environment is favorable for us and I would call it tailwind, those specific changes don't really have a bearing directly on our revenue.

Okay. Thank you.

Thank you. Our next question comes from Elizabeth Anderson of Evercore. Elizabeth, your line is now open. Please go ahead.

Hi, guys. Thanks so much for the question and congrats on a nice quarter. I was wondering if you could talk a little bit about some of the productivity improvement, I think, Mala, that you mentioned. Is that sort of a result of like new initiatives that you're doing? I assume it's sort of too early for something with like the Microsoft deal that you announced. And have you thought through sort of like what would be sort of the financial benefits of that either over the next year or sort of more broadly, over the next couple of years? Thank you.

Yes. Thanks for the question, Elizabeth. Look, we are continuously looking at efficiency and productivity across all of our lines, including our provider costs. When you look at things such as geography, we look at things such as how we can leverage technology. Jason talked about some of the uses of AI in his prepared remarks on how we are leveraging that for greater efficiency. As he said, we look -- we use over 16 models in AI alone already to just get more productivity. And the way it manifests is, how we can do better matching of providers with our members who are seeking care, and that ultimately does result in better productivity. We are certainly also seeing some modest tailwind in productivity when it comes to our employee physicians. As you know, we have talked about the shift that we are making in our provider force in terms of the hybrid model between the 1099s and W-2s, and we are seeing some modest tailwind from that in terms of productivity. So it's not one initiative. It is a series of initiatives. We are continuously looking at ways to improve our margin profile.

Got it. Thanks so much.

Thank you. Our next question comes from Vikram Kesavabhotla from Baird. Vikram, your line is now open. Please go ahead.

Yes, thank you for taking the question. I just wanted to follow up on some of the comments around the user behavior at BetterHelp. So specifically, when someone joins the platform, how long are they typically staying with the service? And when they leave, how often are they coming back? And are you seeing any changes in that behavior as the business continues to scale? And related to that, I was also curious if you could give us some color on how much BetterHelp is contributing to the total visit performance of 4.7 million. Thanks.

Yes. So Vikram, thanks for the set of questions. We haven't given specific average duration of a member or frequency of returning to the platform. What I would say is that we continue to see consistent improvements in lifetime value of a member, which incorporates customer acquisition cost, duration. And then, of course, return to platform is part of it. And then pricing is the last component. So if you wrap all of that together, we continue to see strong performance in terms of lifetime value of a member. With the -- sorry, there was a last part of the question...

Volume.

Oh, the volume. We don't break out visit volume for BetterHelp. What I can tell you is that we're actually seeing, as Mala said, more digital interaction and more group therapy. So that actually serves to depress the -- what we call visits because we only count a visit if it's a live interaction with a therapist or a clinician. And so we've actually seen the fact that our digital interactions and group interactions are growing faster actually serves to depress the volume on the -- what we count as visits on the BetterHelp side. Now of course, that drives better gross margins for us. So we see that as a favorable trend.

Okay. Thank you.

Thank you. Due to time, we'll take no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.