Q2 2023 Teladoc Health Inc Earnings Call

Hello, and welcome to the tile adult second quarter 'twenty three earnings Conference call. My name is Alex and I'll be coordinating the call today.

If you'd like to ask a question at the end of the presentation you compress style led by one on the telephone.

Pat if you want to.

To remove your question you May press Star two.

I'll now hand 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 a Teladoc health Dot Com website on this call to discuss the results are Jason Garlock, Chief Executive Officer, and Mala Murthy Chief.

Officer.

During this call. We will also discuss our third quarter and 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 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 1095, 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 statements in 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 <unk>.

Adjusted EBITDA guidance for the rest of the year.

In my remarks today, I will start with a brief recap of the quarter, but then I'll also want to touch on some of the themes and market trends, we've seen through the first half of the year.

Continuing economic uncertainty and the growing demand for our 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 better health 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 and 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 our 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.

And our help also continues to set itself apart as the leading player in the category.

We're happy to report strong performance in the second quarter with segment revenue growing 18% year over year, which was in line with our expectations.

This reflects both our ability to successfully execute against our strategies and the continued demand for our mental health services.

We have also seen stable customer acquisition costs through the first half of the year. This stability combined with consistently strong gross margin performance method, 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 will continue to provide exceptional value to our better help members.

Those are the main headlines from the quarter.

Now I will take a few minutes to talk about some of the themes. We are 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 are interested in health plans that incentivize virtual care.

These trends combined with the fact that consumers are looking for more convenient and affordable options, mainly 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 the challenges of managing the cost of DLP. One drugs. These drugs were originally designed to treat diabetes, but have since been found to help patients lose weight.

Employers and 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 base 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 the Teladoc health physician.

And because we know drugs arent 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 <unk> one 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 <unk>, 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 it 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 better health.

When it comes to mental health finding the right provider can make all the difference.

So we use AI to optimize members therapists matching based on over 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 cost 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 Open AI services, and nuanced dax 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 Molla 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 booking.

Second quarter, adjusted EBITDA was $72 million.

Genting in margin of 11, 1%.

Turning to segment results.

Integrated care segments revenue increased 5% year over year to $360 million in the quarter and grew 3% sequentially.

On a year over year basis integrated care segments revenue growth was relatively balanced across the portfolio.

On a sequential basis.

Chronic care program enrollment growth of 45000 was the largest driver of segment revenue growth over the first quarter.

Total chronic care program enrolment 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% ROE and a 200 basis point margin expansion over the prior year second question.

The integrated care segment added 1 million members sequentially, ending at 859 million U S numbers.

Average integrated care revenue per U S member of a dollar and 41.

<unk> was down to one of the prior year second quarter, driven by the impact of 6 million New telemedicine member additions over the last 12 months.

As compared to the first portion of <unk>.

Average revenue per U S member increase too.

Turning to better health.

Revenue increased 18% year over year to $292 million in the second quarter, driven primarily by membership growth.

Second quarter better help 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.

<unk> 540 basis point improvement over the first quarter.

A result of both.

More stable customer acquisition environment and improved gross margins.

Consolidated net loss per share in the second quarter was 40.

Compared to a net loss per share of $19 and 22 in the second quarter of 2022.

Net loss per share in the second quarter include stock based compensation expense of 34 cents per share.

Amortization of acquired intangibles of 32 cents per share and.

Restructuring charges of five cents per share primarily related to office space 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 262 to $6 $75 billion, an increase of $25 million at the low end.

This outlook contemplate high single digit percentage growth in our integrated care settings.

Versus our prior expectation for mid to high single digit growth.

And low double digits to mid teen percentage growth in our better health.

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 <unk> 23, adjusted EBITDA margins to increase approximately 75 to 125 basis points for the integrated care segment.

First is our prior expectation for <unk>.

Flat to 50 basis points margin improvement.

We continue to anticipate an increase of 100 to 300 basis points for the better health settings.

We now expect full year free cash flow of approximately $150 million.

For the third quarter.

<unk> 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 rose.

We expect integrated care segment margin to exceed better health segment margins in the third quarter.

Finally, we expect total integrated care segments U S membership.

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 Marlin 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 <unk> AI and how Teladoc health is becoming the way more people will 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.

As a reminder, if you'd like to ask a question you can press slipped by one on your telephone keypad.

If you'd like to remove your question you May press star two.

Please ensure you're on mute locally when asking your question.

Please limit yourself to one question. Thank you.

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.

Second consecutive pretty solid quarter.

I guess my question Mala really big change there notable change to me was your latter comment about the prudent and free cash flow now looking at $150 million versus $100 million previously just trying to understand what what's improving because EBITDA is up a little bit but not that much.

Where the where the cash benefits lower cash use is just trying to understand the dynamics of what's improving that because thats, a 50% jump it at that.

Simple math, so that's a pretty pretty big improvement.

Yeah. 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 culture over $100 million of free cash flow, we have now update and we expect to generate over $150 million.

If I step back and talk about the drivers of that.

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 of $25 million versus our initial expectation.

Part of it is also a reflection of better capex expectations.

We'll see.

The this quarter for example that are capitalized software costs have come down by nearly $9 million quarter over quarter sequentially. So that improvement is in part due to completion of our 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.

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.

I've learned to summarize what the key drivers are of the cash flow expectations, the revised cash flow expectations.

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.

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 as large.

And then Sandy I would just add.

I think Marlin 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.

<unk> 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 Jonathan dressing of Trust 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 better health it seems like.

Those came in much better than expectations provide little bit more color to the key drivers there what specific trends outperformed compared to expectations and how do you. How are you thinking about gross margin trended better hope for that for the year.

Yeah.

Thank you for the question.

As you said, we are seeing strong gross margin performance overall.

Is that across the business both on the integrated care side and the better health side.

Specific to better health.

Over the course of 2022.

We talked about improvements in better help gross margins, we have done a number of things we've actually taken a number of initiatives to improve therapist productivity.

Ranging from.

Sessions group therapy sessions to more digital interactions.

And all of that is resulting certainly in the trends that we're seeing in our gross margin improvement or better health.

I would say.

That's really.

The key driver of the gross margin expansion that we're seeing overall therapist productivity improvements.

Okay. Thank you.

Thank you. Our next question comes from Lisa Gill of J P. Morgan. 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 with your clients last week.

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 is in addition to <unk> you're adding in these chronic program 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 of a potential opportunity. This could be and again just understand if theres also a direct to consumer opportunity here.

Yes, Thanks, Lisa I appreciate the question and certainly the <unk> and weight management solutions are.

Hot topic, right now, especially among our employer and health plan clients.

Right now were focusing our.

Sort of a newly updated.

Management program that features provider based care on the <unk> market. We are seeing significant demand from employers who are very concerned about the cost of <unk>.

<unk>.

We talked to one large employer or I guess mid sized employer of 5000 employees, who saw a $100000 increase in cost of <unk> ones in a single month.

We talked to others, who were 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 the 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.

Today, we're very focused with those programs on our <unk> market.

I would never close the door to saying that we wouldn't take something like that into a direct to consumer market.

We're more focused today on the <unk> market and I think you'll see the benefits of that in 'twenty four.

Thank you.

Next question comes from Daniel gross slides of tissue.

Your line is now open 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 better hub.

<unk> so.

So at the high end of the 23 guidance it implies a step down in year over year growth from 20% in the first half of this year or 2011 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.

Thank you Danielle for the question no structural change let me just give you some color on the dynamics of that business.

So.

Well the lower sequential growth.

It is sort of fuel if you will think of it as <unk>.

In part by the planned cadence of AD spend over the course of the year, which is different from last year, we've 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 and better health business took place in the second half of the year.

This year's plan calls for the opposite with over half of them taking place in the first half.

So last year's cadence looked different due to the dynamics, we've talked about we experienced in some of our channels partway through the year. So last year, we actually spent more in <unk> than we did in <unk>.

And you saw that reflected in the better help margins last year, which declined over the course of one Q2, Q3, Q and then accelerated backup and <unk>.

This year the cadence of that spending it's 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.

We're going to be more balanced across the quarter 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 lineup 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.

Talked about this right from the beginning of the year when we have set guidance.

Now, it's just that we are.

You are seeing that now in the numbers as you see the first half actualized and we're guiding to the second half.

Yeah.

Thank you. Our next question comes from US Sean Dodge of RBC.

Your line is now open. Please go ahead.

Alright, great. Thanks.

Maybe just with all the recent pay your commentary around growth in behavioral health utilization.

Jason are there any updates you can give us on what youre seeing with your enterprise or VIP 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 it helps size within integrated care, how meaningful a contributor. This is how fast it's been growing.

Thanks.

Yes, we continue to see very strong demand for our mental health programs.

I'd 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 multi product sales and mental health is the most frequently.

The most frequently included sort of a 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's.

Solution.

Rather than an individual or isolated point solution.

We also continue to see mental health is a very important part of primary $3 60.

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 it continues to be top of mind.

Health plans employers and obviously as well among consumers as we see the strength in our better health business.

Okay. Thanks again.

Okay.

Thank you.

Our next question comes from Jessica <unk> from Piper Sandler.

It sounds like <unk>. Please go ahead.

Thank you guys. So much for taking my question and congratulations on a great quarter.

On the integrated waste management and diabetes solution is there incremental price versus prior iterations of those products.

Then just curious to know if you all are going to market with any kind of case studies or clinical evidence just supporting them.

Supporting the validity of the Teladoc solution versus maybe any possible I'll turn that thanks.

Yes, so obviously, our weight management solution that.

That includes provider based care is just being <unk>.

Just being introduced in the third quarter.

It does sell at a modest premium.

With that provider based care as a component of it.

Obviously provider based care isn't unique to our weight management solution we.

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 just to be able to bring.

Clinical studies to market.

<unk>, we're just launching the provider based care and waste management in weight management.

In the third quarter, So we don't have.

<unk> 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'll 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.

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.

Im pleased with the results and the growth of our international.

I would say in among a number of.

<unk> of dimensions we're.

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 when this recent wins.

Among nationalized health care systems.

Those are relatively new for us over the last couple of years.

Of course, we see a significant opportunity in the nationalized health care 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 health care 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 on 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.

Yes.

Yes.

Good morning, guys. Thanks for taking the question and I will say, thanks to Lisa Gill for leaving me that selling season question for 'twenty four I guess as you guys think about.

The kind of the sales outlook for 'twenty for Jason can you talk about whether you guys are focused more on the cross sell.

Products like the diabetes product in the weight management product or do you still see an opportunity to add a lot of new lives to the integrated care business I'm, just kind of trying to think about how you have the salesforce focused on thinking about 'twenty four.

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.

Multi product sales continues to be a key with over three quarters of our deals.

<unk> multi product 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've we've signed deals in the first half to bring the full suite of chronic care solutions telemedicine Pri.

Primary $3 60, and mental health.

Two to health plan clients.

If I, if I think about cross sell versus new logos.

We're certainly continuing to see our land and expand strategy paid dividends for us.

With about 75% of our bookings in the first half.

The cross sell and up sell.

Upsell of course may be.

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 to 86 million members.

I would say that.

Our biggest opportunity is to continue to penetrate.

Those populations with more products and 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 <unk> of TD Cohen.

Charles Your line is now open. Please go ahead.

Yeah. Thanks for taking the question.

Jason I want to go back to the to the GOP one.

Because you've mentioned.

Clients are.

I'm 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 validate.

Diabetes diagnosis et cetera is there something that you guys in the way you guys deliberate that can sort of ensure that compliance so that.

These trials get to appropriate patients.

Is there something that youre able to deliver that kind of unique from what.

Having.

Unusual broad network of <unk>.

Physicians in a regular health plans that would allow for it.

Yeah, 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 pre diabetes solutions of course, those are native digital programs and so were adding on the provider based care, meaning the ability to both prescribed 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 seeing simply a prescription.

We're working with our health plans in 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.

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.

Okay.

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 way 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.

Great. Thank you.

Keith.

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

Yes. 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 because theyre going to be sustainable entities. I'm curious number one if youll 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 and more favorable valuation.

Yes, Thanks Ryan.

Certainly we're going to leverage.

Our financial strength for organic growth and as I mentioned, when 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.

Our favor.

We're 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 lineup with strategic priorities.

And that there is both a strategic imperative as well as our 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.

We will likely yield benefits on both sides of that equation.

Thank you.

Our next question comes from Scott Shiao of in House 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 margin between integrated care and better health for three Q.

You noted that you expect integrated care margins to be actually above better help could you give us some more color here, that's a pretty nice acceleration from Q2 levels. What's driving this is this higher <unk> associated with the accelerating chronic care and that mix shift or is there something else that we should be aware of thanks.

Yeah. Thank you Scott for the question.

So if I think about the.

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.

Two 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 youre 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.

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 growth our overall margin performance.

Thank you.

Next question comes from less than <unk> of Wells Fargo.

Your line is now open. Please go ahead.

Hi, Thanks for taking my questions, maybe swinging back to about our health revenue grew 5% sequentially membership grew 2% sequentially. So just curious what drove the incremental revenue performance in excess of membership growth.

It's essentially.

It's a combination of both.

The user performance as you talked about.

And then it's also.

B.

Yes.

Think of it as we are AD spend was quite significant in the first quarter you saw that in our first quarter results.

Do 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 better health.

Thank you our next.

Next question comes from Kevin Caliendo from UBS.

Please go ahead.

Great. Thanks for taking my question.

I was wondering if you guys what youre contemplating if anything for the impact of student loan repayments coming back on board in October I guess, specifically as it accounts with better health and better volumes.

Volumes have you guys done any analysis on the overlap of.

So people that might have to pay again.

And those who are users.

Yes.

Yes, Kevin.

I won't go into the components of of our guide.

What you heard.

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.

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 as its own factor.

And I wouldn't break it out as such.

Fair enough.

That's helpful. Thank you.

When key next.

Next question comes from David Larsen of <unk>.

David Your line is now open. Please go ahead.

Hi, congratulations on the good quarter.

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.

Fairly favorable to me like they're talking about potentially increasing the kinds of providers that can participate in telehealth I'm talking about expanding revenue where 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 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.

Work with health plans on MAA and managed Medicaid.

So I would say while the overall environment is favorable for us and I would call a 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 ethical.

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 improvements I think that you mentioned is that sort of a result of like new initiatives that youre doing I assume it's sort of too early for something like the Microsoft deal that you announced and have you thought through sort of like what.

These are the financial benefits of that either over the next year or sort of more broadly over the next couple of years. Thank you.

Yeah. Thanks for the question Elizabeth.

We are continuously looking at efficiency and productivity across all of our lines, including our provider costs.

We look at things such as.

Geography, we look at things such as.

How we can leverage technology jase.

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.

In AI alone.

Already.

Can you just get more productivity and await 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 employed physicians.

As you know we have talked about the shift that we are making in our.

Provider.

Fourth in terms of.

The hybrid model between the $2 99, and W. Twos, and we are seeing some modest.

Tailwind from that in terms of productivity. So it's not one initiative is hcv's 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 that.

Catch up from bad debt.

Your line is now open. Please go ahead.

Yeah. Thank you for taking the question I just wanted to follow up on some of the comments around the user behavior at better help 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.

I was also curious if you could give us some color on how much better help is contributing to the total visit performance of $4 7 million.

Yes sure.

Vikram, thanks for the set of questions.

We haven't given specific.

The 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 a customer.

Acquisition costs.

The ration and then of course return to platform.

As 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 the last part of the question the volume we don't breakout.

Visit volume for better health.

What I what I can tell you is.

We're actually seeing as Malo said more digital interaction and more group therapy.

So that actually.

Actually serves to depressed.

The what we call visits because we only count a visit if it's alive.

The interaction with 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.

That will have what we count as visits on the better help 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 will take no further questions for today. So that concludes today's conference call. Thank you all for joining you may now disconnect your lines.

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Yes.