Hi friends,

I have a singular goal for The Hemingway Report…

To improve population mental health by helping people build impactful mental health organisations.

All the time I spend researching, interviewing people, running analysis and writing these deep dives, it’s all to try and achieve that goal.

That’s the impact I want to have.

But I realised that while I’ve been trying to have this impact, I’ve been ignoring some of my own advice…

In these newsletters, I always talk about the importance of having a business model to support your impact goals. If you can’t sustain the work you are doing, you’ll never reach the scale you desire.

That’s true for mental health businesses and it’s true for The Hemingway Report.

So I’ve been listening to my own advice lately and questioning what business model would support me to continue delivering on my impact goals, to provide more support to founders and operators, whilst also making it sustainable for me.

The result is that I am launching a new tier of The Hemingway Report, THR Pro.

I’ve thought long and hard about what THR Pro should be and how to balance impact with sustainability.

Here’s how it will work;

Subscribers to the free newsletter will get three newsletters (like this one) every month. However, once a post has been out for three weeks, it will no longer be available to read for free subscribers.

THR Pro subscribers will get access to a new, Pro subscriber email each month. This will cover the most relevant topics in mental health business in even more detail, with first party data and exclusive interviews with top operators.

You will also get access to the entire THR back catalogue of content, additional THR Pro resources like data reports, industry guides and first party data, as well as invitations to THR Member meetups with other mental health operators.

Lastly, you’ll be supporting me to invest more time and energy into creating helpful resources each month!

If you want access to additional insights and resources, and to support my work, please consider becoming a THR Pro member.

Now, back to what’s happening in mental health right now….

On Tuesday, Talkspace announced their Q3 earnings and there is A LOT to talk about. They delivered some very impressive financial results, hitting profitability for the third quarter in a row (on an adjusted EBITDA basis) and actually delivering profit on a net income basis too.

Remember, this is a company which just two years ago, lost $59m in a single year. I analysed this turnaround in a previous post and was eagerly awaiting their earnings release this week to see how they had been progressing. I listened to the call with CEO Jon Cohen and CFO Ian Harris and while it gave me a lot of answers, it also raised a lot of interesting questions.

We’ll get into all of them in this post.

We’ll cover;

• Financial highlights: the key metrics from Talkspace’s earnings release.

• How they got here: What did Talkspace do to deliver these impressive results?

• Capture rate: The single most important metric for Talkspace’s financial future and how they are addressing it.

• Customer acquisition at Talkspace: How Talkspace approach direct and referral partnerships to acquire new users.

• Retention and Engagement: Do Talkspace have a leaky funnel and what can they do to solve it whilst also doing right by patients?

• Question corner: Some open questions and thoughts I have about this business

1. Financial Highlights

This was an impressive financial quarter for Talkspace. They improved year on year and sequentially in almost every financial metric and are on track to hit their full year guidance.

Here are the numbers you need to know

• Q3 Revenue was $47.4m (+23% YoY)

• Gross margin was down to 45.6% (vs 48.8% Q3 23) - this is due to the greater mix of lower margin Payor revenue

• DTC revenue continues to decrease (down 30% YoY)

• Operating expenses were $21.5m (down 10% YoY)

• Net income was $1.9m (+ $6.3m YoY)

• They hit their third consecutive quarter of profitability on an adjusted EBITDA basis ($2.4m vs $2.8m loss in Q3 2023)

• Their balance sheet is still strong with $119m of cash

The market liked these results. Their share price was up 18% after the release, giving them a market cap of ~$530m, almost double what it was in August of this year.

Those are the results. But what Talkspace actually do to deliver them?

2. How they got here

Since 2023, Talkspace have been executing a strategy with four priorities;

1. Grow Payor revenue

2. Grow Direct To Enterprise (DTE) revenue

3. Be the platform of choice for providers

4. Be operationally excellent

1. Grow Payor Revenue

Payer revenue is up 45% YoY and now makes up 68% of their total revenue mix. This came from an increase in payer sessions (+38%) but also from an increase in revenue per session of ~5%.

Payer revenue is lower margin however, which contributed to their drop in gross margins (from 48.8% in Q3 2023, to 45.6% in Q3 2024). Interestingly, most of this payer revenue increase didn’t come from one of their largest payer contracts, Medicare.

They noted that they’ve made good progress on activating their Medicare payer relationship - they are now CMS approved in ~40 states and live in 30 (including Texas, Florida, California and New York) with the remaining 20 states on the horizon. However, they are yet to start realising any material revenue from Medicare but see it as a big opportunity for the next few quarters (more on that later).

2. Grow Direct To Enterprise (DTE) revenue

DTE revenue grew 18% YoY and now constitutes 20% of their total revenue. They cited good success with their Teenspace deal in NYC, noted their launch of Teenspace Community, a peer to peer offering, and that they had “significant interest from other municipalities and school districts”, highlighting seven new school districts they had recently signed.

3. Be the platform of choice for providers

They didn’t talk about “being the platform of choice for providers” much (little worrying) but noted that they now have over a network of 5,900 therapists (+24% YoY and 3% sequentially) and that they’ve had their highest NPS with their providers (would love to know what that actually is). They’ve intentionally been slowing growth here, saying that they’ve been able to increase the efficiency of their existing provider network.

4. Be operationally excellent

They are continuing to increase the efficiency of their operations. Operating expenses were down 10% YoY to $21.5m which is 45% of revenue. For the same quarter last year, Operating expenses were 62% of revenue and in Q3 2022, a whopping 120% of revenue.

This has been driven by a reduction in R&D spend (where they were able to capitalise some of their investments) but also in marketing and sales efficiency which continues to improve.

To wrap this up, there are a few other things you should be aware of that Talkspace announced;

1. They have expanded into Medicare Advantage, launching with the nation’s largest Medicare Advantage plan on October 1st (which increased covered lives by seven million).

2. They recently announced a partnership with Wisdo (an AI solution combatting loneliness) to provide more solutions for seniors and helping them get into more Medicare and Medicare Advantage plans.

3. They have started an initiative to offer Talkspace to all active military personnel and their dependents. They launched with Tricare East in August (covering six million lives) and expect to be in network for the rest of Tricare beneficiaries in early 2025.

4. They entered into a DTE pilot program with the US Navy, providing Talkspace to six naval bases across the US, representing 25,000 lives.

5. They mentioned that they signed some value based care contracts, that have some basic metrics that they say they are very comfortable in reporting on (e.g., appointment availability within x days).

So let’s turn our gaze towards the future.

What’s next for Talkspace?

They’ve clearly steadied the ship, got their operations under control and have grown revenue. They’ve won huge payer deals, expanding their covered lives to over 158 million people in the US (up 40% YoY).

But what can we expect from Talkspace next and will they be able to turn those deals into revenue and profit for the business?

3. The importance of capture rate

Talkspace have a clear financial plan for the next few years, aiming to reach almost $300m in revenue by 2026 and delivering $45m in EBITDA.

This plan hinges almost entirely on their ability to activate the large payer deals they have landed.

On the earnings call, Jon Cohen said that they expect to be in network for 200 million lives by early 2025. That’s a huge amount of people that can access Talkspace for free (or for minimal out of pocket expense).

For reference, if they could get even 1% of that number to do just one therapy session, that would be two million sessions a year which would deliver over $200m in revenue (using my estimations).

So the question is; how do they activate this population? Specifically, how do they increase their capture rate?

Jon shared some good details about how they are thinking about this and breaks it into two pillars, new customer acquisition and increasing retention - very MECE Jon, thank you.

4. Customer acquisition at Talkspace

Let’s not overcomplicate this, Talkspace need more people coming to their site and signing up for a therapy session. There are two ways they can do this (direct and through referral partners) and they shed some light on these strategies in the earnings call.

Let’s look at each of them.

A. Go Direct

Talkspace have to market directly to people covered in their payer contracts and find ways to get them to try Talkspace. They’ve been doing this for years and have recently been doing it with a lot more efficiency. They invest in Paid Social and Paid Search, SEO as well as significant brand building through influencer deals and organic social content. In their earnings call, they even mentioned some direct mail campaigns they have been testing to target the seniors population. They’ve acquired hundreds of thousands of customers over the years so they are clearly doing a lot right.

But I see two major challenges for them when trying to achieve their next phase of growth.

First, they have a very diverse target audience. I called this out in my previous post on Talkspace but with their recent announcements, I actually think this is an even greater challenge (and one their leadership is aware of).

For their medicare plans they need to reach older people and for their school district plans they need to reach teens. They also now need to figure out how to reach military and navy personnel stationed around the country. They have a marketing team of only 16 people and splitting budgets, resources and brain power across multiple strategies is going to be hard. This will impact marketing efficiency and make it harder to scale spend.

The second challenge is that it’s hard to develop a defendable distribution model. This challenge is not unique to Talkspace, in fact, it’s one of the biggest challenges for a lot of businesses right now.

Most businesses rely on a handful of major marketing channels for their growth (often Meta or Google if you are an online player). These channels have turned into auctions, with costs increasing over time. Competition has been going up, with the supply of available ads relatively constant. A handful of companies (Google and Meta) control this supply and therefore have significant pricing power. Businesses relying on these channels feel the effects of that power with the costs eating into their margins. They would love to switch to a more efficient channel, but there’s not many others they can turn that would deliver the same level of growth as Meta and Google.

Lastly, even if you do get one of these channels working at scale, they aren’t defendable. If a competitor lands a new major funding round and wants to outbid you on Meta, or even directly on your own branded search terms in Google, they can do that. You’re distribution lasts only so long as you pay the price the platforms demand. You are their hostage.

Yes, Talkspace have achieved a lot so far, but can they develop a truly defendable distribution model that allows them to grow customers whilst having acquisition costs go down (or at they very least, remain constant) over time?

The fact they are in network for so many people will help (it’s much easier to run ads for a free product) but I think they will need more than that in order to hit their revenue goals whilst keeping their sales and marketing efficiency in check.

Their sales and marketing efficiency has been increasingly steadily for two years, but what will the next few quarters look like as they try to drive growth whilst maintaining “operational excellence”. A tough job for any CMO.

B. Increase outside referrals

Talkspace are hoping that referral partnerships with other organisations can bring them a stream of new customers. We will know quite soon whether they are right.

In September, Talkspace launched a partnership with Amazon Health Services which they spoke about at length on their earnings call.

The idea is this…

When someone completes a mental health related search on Amazon, they will be shown a screen that offers them online therapy support. They can go through this journey, check their coverage and if they want, sign up for a therapy session with Talkspace.

I tested this out and here’s what it looks like.

I have to say, the process was smooth.

But my question is, how many people are really conducting ‘mental health related’ searches on Amazon and what percentage of them are going to convert through this funnel?

They are six weeks into this partnership and Jon said he’s happy with how it’s going so far; “a very positive launch”. 

I couldn’t help but pick up on something during the Q&A section however. When Ian (CFO) was referring to this Amazon partnership he spoke about it as a “testament to their brand and national coverage”. This is true, but I couldn’t help feel it was also an attempt to down play the partnership as a meaningful source of new customers.

They have much more insight into how this partnership is going than I do but that won’t stop me from having an opinion… so what do I think?

Honestly, I just can’t see this being a meaningful customer acquisition strategy for them.

I don’t think there’s that many people searching for mental health services on Amazon and from my research, the number of search terms the Talkspace screen actually showed up for was super limited.

In fact, the only term that worked was ‘mental health’. Even searching for ‘therapy’ wouldn’t trigger it.

My scepticism for partnerships is well documented so I would love to be proven wrong here and perhaps there are other forms of partnerships that may serve as a scalable acquisition channel.

These referral partnerships seem to be a major part of Talkspace’s acquisition strategy but I’ll need to see evidence of them actually working before I can get behind them. On paper, I can see how they can provide a good acquisition channel and a better experience for customers, but we all know there’s a big difference between a nice press release and real world results.

I’m already looking forward to their Q1 2025 earnings update. Is that weird??

5. Increasing retention and engagement

My hypothesis is that Talkspace have a bit of a leaky funnel. For the customers they do get on their platform, how many of them keep coming back? Unfortunately they don’t share data on this, but they did note that increasing retention and engagement is a core priority for revenue growth.

They outline three things they are doing to improve retention and engagement;

1. Improving product design to get patients to second and subsequent sessions

2. Improving methods to establish better rapport between clients and therapists (primarily by improving therapist matching)

3. Better line of sight for patient to reach improved clinical outcomes

While I can understand how therapist matching helps improve retention, I’m not really sure what the other two items actually mean in practice. I’d love for more details so Jon, if you’re reading this, my DMs are open!

This retention problem is more important to solve than new customer acquisition.

When trying to drive revenue, you have to work from the end, backwards. If you know that your customers stick with you, that they have a high LTV (Lifetime Value), then you can justify investment in marketing to acquire new users into the top of your funnel. But if you’ve got low LTV customers, a leaky bucket if you will, then no amount of new customer acquisition will solve your problems. Remember, you pay the same amount for a new customer whether they stick with you or not!

One thing that worries me here is what “improving product design” might actually mean? The incentives are very much set up to get people into therapy and keep them coming back. In the most part, this can be OK. If someone needs therapy, they should be able to get access to it, and for most people, they need multiple therapy sessions to start experiencing outcomes.

I just hope that Talkspace ensure that their product and design decisions are based on what is best for each individual patient.

6. Question corner

When researching this piece there were a few questions I could’t get good answers on and thought I would share them. Here’s what I’m interested in;

Outcomes: Circling all the way back to the start of this post… the reason I do what I do is to improve population mental health. Many of you reading this will be the same. So wouldn’t it be great to get more insight into the outcomes Talkspace are delivering for the people they serve? Most importantly, on the clinical outcomes they can deliver for patients, but also on the impact they are delivering for payers and other customers like school districts. They must have a huge amount of data and I would love to see this discussed more publicly, including in their earnings calls.

Provider relations: There is still a significant tension between platforms and providers. I believe that any major mental health business needs to ensure that they are looking after their providers well. Not only because it is the right thing to do, but because it will also lead to better business outcomes. I’d love to know more about how therapists feel about Talkspace and what Talkspace are tangibly doing to improve that experience.

Product usage: While their main product is therapy, they also offer psychiatry, self-guided programs and now even peer programs like Teenspace Community. I would love to learn more about the usage of those different products and what they’re learning from them. They have one of the largest mental health customer bases in the world, I’m sure there’s a stack of interesting insights in there!

So hey, if you work at Talkspace and are up for a chat, drop me a line!

That’s all for this week.

Feel free to subscribe if you haven’t already or share this post with someone who might find it useful.

Keep fighting the good fight!

Steve

Founder of The Hemingway Group

P.S. feel free to connect with me on LinkedIn

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