Talkspace Inc. revealed that it’s in recovery mode following poor financial performance in the third quarter and the announcement that its co-founders and CEO are no longer leading the company.
On Monday, the company said in press releases and through its earnings conference call with management that Co-founders Oren and Roni Frank decided to leave the company.
And apparently, the CEO change was months in the coming.
Oren Frank was CEO. Roni Frank was head of clinical services. Both held seats on the board of directors. Now, they will engage with the board for six more months as strategic advisors. The board retained Los Angeles-based executive search and consulting firm Korn Ferry to advise the search for a new top executive.
Oren and Roni Frank co-founded Talkspace (Nasdaq: TALK) in 2012 and led the company through going public via merging with a special purpose acquisition corporation (SPAC) called Hudson Executive Investment Corp. (Nasdaq: HECCU).
Talkspace made its public markets debut in June at $8.90. The company’s share price opened Monday at $3.56 but dropped to $2.85 after hours. As of Tuesday morning, it’s trading at about $2.20, a 62% decrease over about 24 hours.
Talkspace offers a variety of virtual behavioral health care services, including individual, couples and teen therapy, as well as psychiatric prescription management. Talkspace matches users with therapists in their home states. Customers can receive care services 24/7 via voice, video and text messaging.
The company also operates business-to-consumer (b2c) and business-to-business (b2b) segments. The b2b business serves enterprise clients and individual health plans.
Talkspace also announced that it was pulling its annual and long-term guidance because of the CEO change and the company’s poor financial performance in the third quarter — driven by worse-than-expected growth in the b2c segment. This comes at a time when demand for digital mental health services has been pushed to historic highs due to the pressures of the protracted global coronavirus pandemic.
Talkspace posted an operating loss of $25.2 million in the third quarter, a 949% increase from the third quarter of 2020. Its now-defunct guidance projected $125 million in revenue for 2021.
“We’re obviously disappointed by this performance and we have to do better,” Douglas Braunstein, board chairman and interim CEO, said on the third-quarter earnings conference call. He was joined by Talkspace CFO Jennifer Fulk. Oren Frank was not on the call.
Braunstein also said that the company feels “an extraordinarily strong sense of urgency that we need to address these issues both as quickly as we can and as efficiently as we can.”
Talks between the company and the board have stretched over the previous five months and included several conversations about management succession, Braunstein said.
“Collectively, with Oren, we decided to make a change here. And obviously, as you can see from the press releases that came out, Oren agreed that this was the right decision at the right time,” Braunstein said. “So having said that, I stepped into the interim role because I still believe fundamentally in the strong tailwinds that I’ve talked about, this large growing unmet medical need.”
In a press release, Oren Frank expressed pride in the company he and Roni built, calling it a pioneer in mental health services. He also acknowledged the need for a change in the company’s management.
“Talkspace will continue to see tremendous success and growth with a new leadership, one that is suited for the different set of needs and skills required for a publicly traded company,” Oren Frank said.
However, Talkspace’s growth was apparently stunted in the third quarter because of delays in launching new products, new markets and foul-ups in the conversion rates of its digital offerings. Fulk said the conversion factor was the biggest problem for b2c growth in the third quarter.
Braunstein laid out four points that his management team will address while he leads the company:
— Optimizing synergies between the b2b and b2c lines of business and investing in the company’s insurance claims infrastructure
— Rethinking the company’s projects roadmap and prioritizing the most accretive ones
— Investing more in the company’s brand by adding marketing channels, better search engine optimization for its website and improving the customer experience
— Optimizing the company’s network of therapists to improve better customer experiences
On the last point, the company will grow its network of therapists on the payroll as W-2 staffers compared to the therapists on its payroll as 1099 contractors. Fulk said this will further challenge the company’s growth margins but is needed to allow the company to succeed long-term.
Membership numbers and financial performance
The company increased its total active users to 60,300, a 21% increase year-over-year, and completed 96% more therapy sessions (71,300) year-over-year.
The b2b segment covered over 75 million eligible lives and increased by 92% over the prior year’s quarter. There is some overlap and duplication of members in the b2b segments membership count because members might be in more than one Talkspace program, Fulk said.
As of September 2021, over 2 million people have used Talkspace, the release states.
Revenue overall increased by 22.6% year-over-year to $26.4 million for the third quarter. At the same time, the company’s total operating expenses increased by 125% to $39.4 million.
The company’s profitability picture changes depending on how you slice it.
By one measure, its net income was $1.5 million. That’s a $4.2 million swing from the previous period’s $2.7 million net loss. That translates to about 1 cent of earnings per share. The consensus EPS estimate of five analysts was a loss of 9 cents per share, according to Yahoo Finance.
But the company’s public financial documents show that net income includes $26.7 million in financial income. This financial income comes from changes to the valuation of warrant liabilities in the third quarter, not company performance.
Without the financial income, the company’s operating loss was $25.2 million.
Company-adjusted EBITDA was a loss of $20.8 million, compared to a loss of $2.0 million in the prior-year period, a 918% increase.
M&A talk is muted as Talkspace focuses inward for growth
According to Fulk, Talkspace has no debt outstanding and has $223 million in cash on its balance sheet.
Despite having a pile of cash and no debt, Braunstein said the company will focus on organic growth and is only slightly open to strategic M&A opportunities.
“Just doing what we do well today provides substantial growth for the business,” Braunstein said. “We think that there are a number of new products and new initiatives that can further grow the business.”
Braunstein said that the company’s present, while unpleasant, is changeable.
“The good news for the company … is that much, if not all, of [this] is within our control,” Braunstein said. “And if we do our jobs in executing, as I said, there is plenty of unmet need on the demand side for us to actually help our members and help people who are looking for behavioral health care get the help they need.
“So that’s what’s really exciting about the opportunity for us going forward.”