Description

Summary

We believe Talkspace (“TALK”) is an asymmetric risk/reward opportunity in a defensive healthcare business that will benefit from strong secular tailwinds (i.e., the growing unmet need for mental health care). With a significant net cash balance sheet (~36% of its market cap in cash, ~$0.70/share according to the 2Q24 balance sheet) and the business recently inflecting to profitability and growing, we believe there is limited downside. Management’s three-year outlook (https://investors.talkspace.com/static-files/20996af9-469c-4e82-92a7-219e1c8dcc16) suggests the company should grow revenue 20%+ annually over the coming years and continue to increase EBITDA margins. We believe there are reasonable upside scenarios (i.e., meaningful improvement in capture rate, upcoming Medicare launch, etc.) that could drive substantial upside in earnings resulting in a stock price that is multiples higher than the current price.

It is worth noting on the front end of this pitch that unlike Teladoc’s BetterHelp business, which is 100% direct to consumer and declining, Talkspace has limited consumer exposure (only 14% of revenue based on the 2Q24 financial results) and a rapidly growing and under-appreciated B2B business.

The Bet

At the current price, we see an asymmetric risk/reward in TALK. We believe the stock is too cheap at ~1x revenue with strong double digit revenue growth and a recent inflection to profitability (first two quarters of 2024 EBITDA positive). As discussed below, continued upside to Talkspace’s financial performance could be driven by improvement in the capture rate, growth in covered lives and a significant shot on goal with the upcoming expansion into Medicare. We view downside as limited given the net cash per share (which we believe should continue to grow) and the strong performance of the growing business.

As the company has demonstrated its ability to execute on signing up payor and enterprise customers over the last few years (having more than doubled covered lives from 70 million in 2021 to 145 million today based on the 2Q24 financial results), management is now turning its attention to Talkspace’s capture rate (unique members completing a session divided by the total number of covered lives). As of the latest quarter the capture rate was only 0.06%. At an ASP of ~$100/session and nearly 150 million covered lives (per the 2Q24 financial results), small improvements in the capture rate can drive significant growth in revenue. It appears management is increasingly focused on improving the capture rate through product improvement initiatives, driving increased engagement through marketing and enhancing the patient journey on the platform. Given the low out of pocket cost for covered lives (60% of members paying $0, per management’s comments on the 2Q24 earnings call), we like management’s prospects of being able to drive greater utilization on the platform. Furthermore, we believe the company will continue to grow covered lives through both its payor and DTE channels which will drive a mix of reoccurring fee for service revenue as well as recurring PMPM revenue. 

While there is nearly zero contribution in Talkspace’s 2Q24 revenue from Medicare (as confirmed in our discussion with management), we believe Medicare represents a significant opportunity for the company and could drive meaningful upside to 2025 numbers and beyond. There are ~65 million lives enrolled in Medicare (per Centers for Medicare & Medicaid Services) and, according to management on the 1Q24 earnings call, 25% of the Medicare population is depressed, lonely or has a diagnosable mental health issue. Even assuming a very conservative capture rate and Medicare ASP, we believe the revenue opportunity for Talkspace could be substantial. The company is in the early innings of its Medicare roll out, having expanded coverage to 14 million Medicare beneficiaries in 12 states in the second quarter of 2024. Per comments on the 2Q24 earnings call, management believes they are on track to roll out coverage for Medicare beneficiaries in all 50 states by year-end at which time, we believe, the company will formally launch a broad marketing campaign to drive utilization. 

Business Overview

Talkspace provides audio, video and asynchronous (text messaging) mental health therapy through its network of more than 5,700 licensed therapists. We believe the company serves a significant unmet need, as 32% of adults report symptoms of anxiety or depression and 34% of patients seeking treatment report difficulties finding a therapist that accepts their insurance (https://investors.talkspace.com/static-files/8523eed3-6321-4ab8-9c2b-b5335fb6cb41). Access and affordability remain significant barriers to treatment, as it is not uncommon for out of pocket costs without insurance to reach hundreds of dollars per session. Talkspace treats more than 20 mental health conditions including anxiety, depression, grief, trauma, loneliness, eating disorders and many more. Talkspace generates revenue primarily from three different channels: 1) in-network payor contracts (“payor”), 2) direct-to-enterprise clients such as large employers and governments (“DTE”) and 3) individual subscribers paying out of pocket (“consumer”). Since Dr. Jon Cohen joined as CEO two years ago, the company continues to successfully pivot towards rapidly growing its payor and DTE channels while de-emphasizing its consumer exposure. As of the last quarterly results, more than 85% of Talkspace’s revenue came from B2B sources (payor + DTE) and more than 145 million lives had access to the platform.

Within the payor channel, Talkspace is an in-network provider of mental health therapy services to most of the national payors and continues to add additional regional insurers. The company generates revenue by billing insurance companies on a fee for service basis as its therapists provide sessions to patients. At the JPM Healthcare conference in January, management commented that the company is the largest in-network mental health provider in the country. In our conversations with management, they suggested that Talkspace’s size provides scale advantages such as quality measures, outcomes data and institutional grade compliance, which is favored by the payors vs Talkspace’s primary competition: independent therapists. According to comments on the 2Q24 earnings call, management currently expects that within the next 12 months nearly 200 million people will have access to Talkspace through their health insurance (an incremental 55 million lives from today). Given the broad insurance coverage for Talkspace’s services, the average out of pocket cost for those in-network is only $15 per session with 60% of patients paying $0 (per 2Q24 earnings call). In the most recent quarter, Talkspace’s payor revenue grew 62% year over year driven by the continued expansion of covered lives.

The Direct to Enterprise channel provides mental health therapy services to enterprise customers through recurring, contractual relationships that result in Talkspace being paid a per member per month (“PMPM”) fee for each enterprise member enrolled. A common use case for Talkspace’s services within DTE would be an employer contracting to extend mental health benefits to its employee base. However, more recently, Talkspace has been entering into contracts with cities and counties to extend coverage to teenage students to help meet the demand resulting from the mental health crisis among teens (see press releases for NYC and Baltimore). According to management, the company is seeing continued demand across a diverse set of enterprises including cities, municipalities and employers for Talkspace’s DTE services.

Consumer is Talkspace’s smallest channel at less than 15% of total revenue today despite being more than 90% of revenue just five years ago (per annual and quarterly financial results). Within the consumer business, patients pay out of pocket for monthly subscriptions to access Talkspace’s platform. This side of the business carries high customer acquisition costs and elevated churn, leading to questionable unit economics. Management has made the strategic decision to pivot away from the consumer channel and continues to proactively shrink this side of the business. While we believe this is the right decision for the company, the declines in consumer revenue have weighed on the consolidated company growth, masking the rapid B2B revenue growth. Teladoc’s BetterHelp segment is only now beginning the process of transitioning to a B2B model, several years behind Talkspace making the same pivot. While there are potential fears around what this means for Talkspace, we believe this is not a winner-take-all market and there is a significant unmet need for mental health care that will allow both Talkspace and BetterHelp to co-exist in the market as in-network providers to the payors.

Financials / Upside

Management has guided to 2024 revenue of $185 to $195 million, or +23-30% year over year growth. While strong revenue growth on a consolidated basis, we believe this understates the true growth of the higher quality B2B side of the business as management continues to pull back from the consumer channel. We believe embedded in the consolidated revenue growth guidance of +23-30% is B2B annual growth of 40%+. Management has also guided to the company being EBITDA positive for the full year 2024. It is worth noting that management has not included material contribution from the Medicare launch in the 2024 guidance, which could provide upside to the guide.

Management has also provided a three year outlook that assumes a revenue CAGR of 20-25% and adj. EBITDA margin of 12-15%. It is our understanding that the three-year outlook ((https://investors.talkspace.com/static-files/20996af9-469c-4e82-92a7-219e1c8dcc16) does not assume any significant “wins” or material changes in the current business trends. We believe there is a range of potential upside earnings scenarios driven by continued growth in covered lives, improvement in capture rate and a successful Medicare launch. 

At the current stock price, TALK is trading ~5.3x management’s outlook for 2026 EBITDA. We believe this is too cheap for a company that continues to execute and we think it will grow revenue strong double digits for the foreseeable future. In the upside scenarios, we believe the stock could earn a double digit multiple leading to significant upside in the stock price. 

Talkspace has a pristine balance sheet with no debt, $115 million of cash and should generate positive free cash flow going forward. Given the balance sheet and growth in the business, we believe it is hard to envision a risk scenario below $0.80-$1.00/share. Therefore, while the range of outcomes is very wide, we believe there is an asymmetric skew in the risk/reward.

We would also note that there seems to be a material disconnect for telehealth valuations between public and private markets. Headway, while a different business model than Talkspace, recently raised capital at a $2.3 billion valuation (see press release here).

Management

We believe Talkspace is led by a strong management team that, in a relatively short period of time, has had profoundly positive impacts on the company. CEO Dr. Jon Cohen joined the company in 4Q’22 during a very tumultuous time in which the company was losing ~$70mm annually and the core (at the time) D2C business was seeing revenue declines. Dr. Cohen has overseen the transition from a founder-led management team (former founder/CEO was fired by the board), pivot into B2B and an inflection to profitability. In our view, he has done a good job and executed on everything he has said he would do. Dr. Cohen holds more than one million options and more than two million shares of stock according to the company’s proxy filed on April 29, 2024, aligning interest with minority shareholders.

The company recently announced a CFO transition in which Jennifer Fulk stepped down and Ian Harris joined as the permanent CFO. While we believe Ms. Fulk did a good job stabilizing the business and enhancing the company’s systems and processes, we feel that this is an upgrade for the company as Mr. Harris will bring a more capital allocation-oriented perspective. Mr. Harris is a seasoned investor, having spent more than seven years at the investment firm Hudson Executive Capital, most recently as a partner. It is worth noting that Hudson Executive remains one of Talkspace’s largest investors (based on a Form 4 filed on September 1, 2024) and TALK continues to be meaningful economic exposure for the founder of Hudson Executive.

Risks

• Payor reimbursement changes
• Compliance/regulatory issues (we would note the company does not prescribe controlled substances)
• Poor capital allocation decision such as a large acquisition
• Teladoc’s BetterHelp increases B2B competitive pressure
• Disruptions resulting from recently announced CFO transition

The thesis expressed above contains forward-looking statements and is intended for informational purposes consistent with the nature of this forum; it is not a recommendation to buy, sell, hold, or otherwise trade the securities of the referenced issuer.  The authors/their affiliates do not hold a position with the issuer such as employment, directorship, or consultancy.  The authors/their affiliates currently own a position in the referenced issuer's securities; however, that position may change at any time and without notice.

Catalyst

• Continued revenue and earnings growth
• Medicare launch in 4Q
• DTE contract announcements
• Continued share repurchases