#18 The Talkspace Turnaround
How Talkspace went from losing $5 million a month to profitability
Hi friends,
To the few hundred of you that are new here since last week, I want to say Hi!
It’s genuinely great to have you here and see so many smart people who are passionate about mental health innovation. I hope you find this content valuable.
Every week, I write about what’s happening in the mental health startup ecosystem. Sometimes that means a company Deep-Dive, like Flow, Pear or Headspace. Sometimes it’s an investigation into important trends affecting startups, like The Platform-Provider Problem).
The common goal across all my content is to help the people running mental health startups to succeed. That means helping you to scale your impact with patients and building a commercially successful business while you’re at it.
So who am I?
Above anything, I’m someone who cares deeply about improving population mental health. It’s the single most important problem we face as a society and I believe innovation and business must play a vital role in the solution.
Before all this, I used to work at McKinsey but left that to help build two tech unicorns (LetsGetChecked and Wayflyer). I learned what it takes to create and scale a successful startup and now spend my time doing exactly that for mental health businesses - helping them to develop winning business models and build Go-To-Market machines that deliver profitable growth.
And of course, I write about everything I learn.
But enough about me. This is about you.
So feel free to respond to this email. Let me know what you’re working on and any challenges your facing. If I can help out, I will!
So what’s on the docket today?
Well, we’re going to talk about one of the biggest online therapy providers in the world. One of the pioneers of this entire category and also one of the only mental health companies that is publicly traded. A company that was losing $60 million a year in 2022 but has now finally reached profitability.
That’s right, today, we’re talking about Talkspace!
Two weeks ago, Talkspace released their Q2 earnings and it made for some very interesting reading. I’ve spent the last few weeks understanding Talkspace’s business, analysing their earning reports and reading transcripts from their leadership team. Turns out, they’ve got a pretty interesting story and it’s full of lessons for startups.
In this post, we’ll learn about;
- The Talkspace turnaround. How they went from losing $60 million a year to turning a profit 18 months later.
- The Talkspace Strategy. The four priorities of Talkspace and how they’re executing on them
- Go-To-Market Machine: How Talkspace are growing revenue whilst reducing marketing spend
- The future of Talkspace: The financial future of Talkspace and what it will take for them to get there.
Let’s get into it.
In June 2021, Talkspace went public via SPAC with a valuation of $1.4 billion. Twelve months later, their share price had fallen by 80% and they were on track to burn $59m (in adjusted EBITDA). A storm was brewing and Talkspace were heading for the rocks.
But after their latest earnings release, it’s clear that they’ve somehow managed to avoid disaster. With CEO Jon Cohen at the helm, they’ve delivered two consecutive quarters of profitability and very impressive revenue growth.
Their share price is still in the gutter, but maybe, just maybe, they’ve created the space they need to sail this ship into better territory.
OK, that is more than enough sailing metaphors…
Let’s get into the numbers and what Talkspace actually did to achieve this turnaround
1. The Talkspace Turnaround
In 2022 Talkspace had a whopping $143 million in operating expenses and lost $59million in adjusted EBITDA. In Q1 2024, just over twelve months later, they produced their first quarter of profitability. And two weeks ago, they announced another quarter of profitability and growth with strong Q2 results.
Here are some of the highlights from their Q2 earnings release;
- Revenue grew by 29% YoY, up to $46 million
- Payor revenue increased by an impressive 62%
- Operating Expenses stayed flat at $24 million
- Adjusted EBITDA was $1.2 million, compared to a $4 million loss in Q2 2023
- Covered lives increased by 33% to 145 million
Although $1.2m of adj. EBITDA on $46 million of revenue is pretty meagre (a 2.6% EBITDA margin), it’s an incredible turnaround from where the business was just 18 months ago.
So how did they get there?
The answer is actually very straightforward. First, they got their Opex under control. In Q1 2023 they completed a massive reduction in Opex, cutting it from an annual run rate of about $150m to under $100m. Since then, they’ve kept their Opex incredibly consistent every quarter, always hovering in the $20 - $25 million range. But it was combining this rationalised Opex with significant growth in Payor revenue that’s allowed them to reach profitability.
Talkspace are smashing it with Payors. Their Payor Revenue grew from $18.5m in Q2 2023 to $29.9m in Q2 2024 (62% YoY growth) and now accounts for 65% of their total revenue.
Interestingly, this Payor revenue has come with a trade-off, lower gross margins. As Ian Harris (Talkspace CFO) stated in their earnings release;
“Gross margin for the second quarter was 45.5%, lower than last year as well as sequentially as expected due to further net revenue mix shift towards Payor.”
But their strong revenue growth and efficient Opex was able to overcome the reduced Gross Margins and allowed Talkspace to finally reach profitability.
While increasing Payor Revenue and continuing to manage Opex are two components of Talkspace’s strategic priorities, there are another two other important elements that they are focused on…
2. The Talkspace Strategy
Since 2023, Talkspace have had a four-pronged strategy to turning around the business and putting it in a position for growth.
- Grow Payor revenue
- Grow Direct To Enterprise (DTE) revenue
- Be the platform of choice for providers
- Be operationally excellent
I have to give it to them, it’s a very solid strategy. Simple, but solid. What’s more impressive, is that they’ve actually executed on it.
I mentioned already how they’ve grown Payor revenue. This has included landing massive a deal with Medicare for all fifty US states. In Q2 2024, they went live in twelve states with this Medicare deal, increasing their covered lives by 14 million. In the same quarter, they also went live with 6 million active military lives through TRICARE.
And they expect this Payor train to keep rolling.
“We expect that within the next 12 months, nearly 200 million people, almost 2/3 of the American public, will have access to Talkspace through their health insurance.”
That’s pretty wild!
While their covered lives has increased significantly due to these Payor contracts, much of the potential revenue from these deals remains untapped. Why? Because they have a lot of room to increase their capture rate with these populations(the percentage of covered lives who actually use their service). More on that later…
Direct to Enterprise (DTE) is now their second biggest business line by revenue (representing 21% of total revenue), having overtaken consumer.
Their main focus here? Teens. They landed a huge contract to deliver online therapy to young people aged 13-17 living in New York City and have started to deliver on this in 2024.
This deal alone covers approximately 465,000 teenagers and is a pretty awesome initiative. They’ve also announced deals with other school systems like Baltimore County School System, as well as a range of Universities, employers and government agencies.
The third priority for Talkspace is to “be the platform of choice for providers. It’s hard to deliver an objective analysis of how they’re doing here. What we do know is that they now have over 5,700 therapists on their platform, up 34% YoY but only 2% vs Q1 2024. They say this is because they’ve “intentionally slowed the growth of the network”. Maybe that’s true. Maybe they over recruited and need to cool the jets for a while. Maybe it’s because (as they claim) they have made their existing therapists significantly more efficient (but I think that’s unlikely).
Whatever the reason, if they are going to continue to grow the number of sessions they deliver each quarter, they are going to need to continue to recruit therapists and grow their network.
“Operational Excellence” is the phrase we used at McKinsey for any project that included significant cost-cutting. Talkspace have already completed the bulk of their cost cuts and have reached a steady-state of spend, consistently around $23m a quarter. Just look at the consistency of their Opex spend over the last six quarters. This kind of predictability and consistency is any CFO’s dream.
In recent quarters, they’ve expanded the remit of Operational Excellence to also include their focus on developing new technology (which, by the way, I find incredibly un-MECE and extremely frustrating). While they’ve referenced the introduction of some new tools for therapists and some incremental self-serve features, I’ve not yet seen evidence that they’ve succeeding here (but perhaps it’s too early to say).
3. Go-To-Market Machine
Yesterday, I forced myself to take a step back from all the earnings releases and spreadsheets and ask the question; “Who will win in this market?”
With pretty strict ceilings on gross margins, there are significant benefits to scale in this market. Talkspace have already proven this. Over the last two years their gross margins have reduced, but they’ve had strong top-line growth, without any increase in Opex. Ultimately, this led them to profitability.
There’s very little product differentiation in this market. So how do you achieve scale (and the benefits it delivers) when you look similar to all your competitors? By becoming a Go To Market Monster, that’s how! The winners (at least in the short to medium term) will be the ones who can win contracts, and activate them while being super efficient with sales and marketing spend.
So far, Talkspace are doing a pretty good job.
They’ve won a bunch of big Payor contracts that has significantly increased their covered lives. They’ve also done well on activating these populations. While they don’t share specific capture rates, we can see that the number of Payor Sessions from Q2 2023 to Q2 2024 increased at a greater rate than the total number of covered lives, suggesting the capture rates have increased too.
But perhaps the most impressive achievement of Talkspace has been their ability to deliver all of this growth whilst increasing marketing and sales efficiency.
From Q1-22 to Q2-24, they improved their S&M efficiency from 71% to 29%.
They’ve proven they can win huge contracts. They’ve proven they can activate these covered populations (so far). And they’ve proven they can do all this with efficient sales and marketing spend.
If the winner of this market is going to be the one with the best GTM machine, Talkspace seem to be pretty well positioned.
Their next biggest GTM challenge? Activating the 65 million older people covered by Medicare.
4. The future of Talkspace
Talkspace have given pretty clear guidance on what they think they can deliver over the next few years.
"Compounded revenue growth in a range of 20% to 25% and deliver adjusted EBITDA margin in a range of 12% to 15% by 2026".
If they hit the upper end of this range, that will deliver almost $300m of revenue in 2026 with $44.5m of adjusted EBITDA. Not bad.
The obvious question, is if they can actually hit these projections.
I believe that if they continue to execute on their strategic priorities, then they can.
Their work to increased covered lives has created a huge opportunity to drive revenue by increasing capture rate. In their latest earnings call, they admitted that they haven’t even tried to start marketing to people on Medicare yet - choosing to wait until they are live in all fifty states. They did mention good success driving referrals from a wide-range of partners - a channel that will help with marketing efficiency - but it will take more than that to deliver on their revenue targets.
A large portion of their revenue projections rely on the activation of both the teen and older people market segments. But marketing to these groups will require very different tactics to Talkspace’s core market of young adults. It remains to be seen whether they can keep their marketing efficiency in check whilst activating these populations - or if they can activate them at all. Cohen himself admits that they have little idea what the LTV of the medicare population will look like. Not ideal considering the amount of their growth that rides on it.
Outside of Medicare, they need to continue to expand DTE and maintain cost discipline.
Finally, they need to avoid any major provider problems. Losing supply would put a huge spanner in the works for any growth plans and therapists are becoming increasingly picky with the platforms they work for (there’s a lot of competition too). Payors want quality care and that comes from quality therapists. Talkspace must make sure they look after their providers!
What about beyond 2026?
The biggest long term opportunity for Talkspace is to develop technology that allows them to reach more people at lower marginal costs. In the earnings call, Cohen stated:
“We intend to make investments in AI in pursuit of our goals to leverage our unique data to identify patterns and improve the way behavioral health is delivered.”
He identified a couple of applications around how they are using AI to reduce therapist admin and for risk identification with patients, but nothing ground-breaking.
If they want to build technology that will meaningfully change their business, they’ll need to invest in it.
Over the last two years, they’ve cut their R&D budget in half. It’s now only $8m a year (approx. 4% of revenue). Their new CFO hinted at increasing this investment in the Q2 earnings release, saying he sees opportunities to cut some G&A expenses and reallocate that to more “revenue-generating” opportunities like marketing or research and development.
With their scale, data and cash reserves (they’ve got $115m in the bank) they’re well positioned to build some exciting products.
But it will take more than just being well positioned to actually deliver the level of innovation that will both help patients and shareholders of Talkspace.
The Talkspace turnaround is complete. They’ve reached profitability (barely), have cash in the bank, massive Payor contracts and a bunch of opportunities in front of them.
But rescuing a sinking ship is a very different task to sailing it into unchartered territories. Let’s see if they’re up for the challenge!
I’m so sorry, I just couldn’t resist one more sailing metaphor….
That’s all for this week. If you liked it, send me an email and let me know. I’d love to hear from you.
Keep fighting the good fight!
Steve
Founder of The Hemingway Group
P.S. feel free to connect with me on LinkedIn
