Ladies and gentlemen, thank you for standing by and welcome to the LifeStance Health Third Quarter 2022 Earnings Call. I would now like to turn the call over to Monica Prokocki, VP of Investor Relations. Please go ahead..

Thank you. Good afternoon, everyone and welcome to LifeStance Health's third quarter 2022 earnings conference call. I'm Monica Prokocki, Vice President of Investor Relations. Joining me today are Ken Burdick, Chairman and Chief Executive Officer; Danish Qureshi, President and Chief Operating Officer; and Mike Bruff, Chief Financial Officer.

We issued the earnings release and presentation after the market closed today. Both are available on the Investor Relations section of our website, investor.lifestance.com. In addition, a replay of this conference call will be available following the call.

Before turning the call over to management for their prepared remarks, please direct your attention to the disclaimers about forward-looking statements included in the earnings press release and SEC filings. Today's remarks contain forward-looking statements, including statements about our financial performance outlook, business model and strategy.

Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. In addition, please note that we report results using non-GAAP financial measures which we believe provide helpful information for investors to facilitate comparison of prior and past performance.

A reconciliation to the most directly comparable GAAP measures is included in the earnings press release tables and presentation appendix. Unless otherwise noted, all results are compared to the prior year comparative period. At this time, I'll turn the call over to Ken Burdick, CEO of LifeStance.

Ken?.

Thank you, Monica. And my thanks to all of you for joining us today.

Over my 4 decades in health care, I have observed how we, as a country, have underfunded mental health care and underserved millions of individuals with both diagnosed and undiagnosed mental health conditions and I witnessed firsthand the need for an integrated approach to physical and mental health treatment.

Informed by these experiences, I am thrilled to have joined LifeStance, a company with a vision of a truly healthy society where mental and physical health care are unified to make lives better. What the LifeStance team has accomplished over the past 5 years is extraordinary.

From a starting -- from a standing start, they have built a uniquely positioned national business with over 5,400 clinicians and approximately $820 million in trailing 12-month revenue.

But some of the successful initiatives that brought LifeStance to where it is today must evolve for the company to grow to multiples of its current size, expand profitability and deliver on long-term value creation for patients, clinicians and shareholders.

I look forward to building on the successful trajectory set by the founders at a time when our services are needed more than ever. Turning to financial results. We are lowering expectations for the year based on our third quarter performance and fourth quarter outlook.

Third quarter revenue was $218 million, on the low end of our expectations, primarily due to lower-than-expected visit volume.

Center margin of $60 million and adjusted EBITDA of $15 million were primarily affected by revenue being on the low end of expectations as well as higher-than-expected costs associated with our employee health benefits program. As for guidance, I'd like to share my perspective on how we intend to set financial expectations going forward.

Our business, especially in this dynamic labor environment, produces some variation. As a service business, our revenue is driven by our number of visits which is in turn driven by the number of clinicians, their capacity and their scheduled utilization. Danish will touch on each of these in detail.

Recognizing this inherent variability in a relatively young company that is early in its journey, going forward, we will present ranges reflective of this variability. We are lowering our expectations for the remainder of the year.

We now expect revenue of $845 million to $850 million, center margin of $229 million to $232 million and adjusted EBITDA of $50 million to $53 million. These lower ranges are primarily due to lower-than-expected visit volume and higher costs of our employee health benefits relative to our prior forecast.

Mike and Danish will provide additional color in their prepared remarks. It is clear to me that we're not performing to our full potential. In taking on leadership of LifeStance, I am laser-focused on execution, profitability and operational excellence. This will be our formula for long-term value creation.

Since joining the company in September, the leadership team and I have been working through our strategic planning process. We will provide an update on our multiyear targets and deliver guidance for 2023 during our fourth quarter earnings call.

Through these planning processes as well as countless conversations with management, clinicians and other team members from all across the company, I have some initial observations. First, I believe that the business model and strategy are sound.

Therefore, we will continue to differentiate ourselves with our hybrid in-person and virtual care model with a multidisciplinary approach through which we can treat all types of mental health diagnoses.

We will also continue to expand access to mental health care through commercial in-network coverage and primarily source our patients through referral partnerships with primary care providers. And finally, we will continue to march toward our long-term vision of unifying mental and physical health care.

LifeStance succeeded in developing a unique business model that overcame historic industry challenges in the mental health space, developing relationships with commercial payers and increasing access to trusted, affordable and personalized mental health care at scale.

There is no shortage of patients seeking the services we offer and we believe that our ability to attract new clinicians to LifeStance remains unparalleled. This company has the potential to become a unique and valuable component of the broader health care ecosystem. Furthermore, our immediate priorities remain unchanged.

I'm impressed with the quality of the people and their passion for our mission and I believe we can deliver on our near-term goals as well as our long-term ambitions. We have the right strategy, the right near-term priorities and team.

However, I also see opportunities to better position LifeStance to have the greatest positive impact on society while delivering superior long-term value. LifeStance was founded in 2017 and the company has grown revenue at a compound annual growth rate of nearly 90% from 2018 through 2021.

Like many growth companies, LifeStance has experienced natural growing pains as we have begun to outgrow certain processes and systems. We need to evolve and build a platform that can meet the needs of a large national business that can scale to support LifeStance's full potential as the premier destination for clinicians and patients.

I have led companies with similar opportunities and challenges. These experiences have taught me that while it may not be easy and will not happen overnight, making the right investments and maintaining focus on the key priorities can establish the foundation for a long-term trajectory of growth and profitability.

We have a tremendous runway ahead of us. We've been in an all-out sprint. We now need to build processes and systems worthy of the huge opportunity before us. Several areas will receive greater emphasis going forward. First, we will further focus on long-term profitability, capital discipline and generating free cash flow.

Second, we will focus on simplifying administrative complexity and we'll make strategic investments in enterprise-level scalable infrastructure over the next few years beginning in 2023.

When we refer to scalable infrastructure, we mean strengthening our underlying platform through end-to-end process optimization, standardization and automation to reduce manual processes and drive operating leverage.

For example, through the implementation of an enterprise workforce management solution, we expect to retire multiple systems and drive significant operational efficiencies while better supporting our clinicians and their patients.

Additionally, we will continue to make digital investments such as a new virtual care platform, continued rollout of our online booking and intake experience which we call OBIE and launch new digital products to reinvent the entire patient care journey, beginning with finding the right clinician and continuing through the entire treatment plan.

Third, our payer strategy will become more selective. Today, we support hundreds of payer contracts.

Streamlining our commercial payer contracts will reduce administrative burden and allow us to better align with payer partners who share our vision of expanding access to mental health care and improving the coordination between physical and mental health care.

These partners invest in that vision with rates commensurate with the value that LifeStance clinicians provide. Finally, we will continue our shift toward organic growth through expansion of our clinician recruiting team and a much more focused approach to M&A.

Now that we've built a broad national presence, we plan to do fewer deals aligned with some of the priorities I just referenced. We will focus primarily on larger practices with a minimum clinician count as each incremental acquisition adds administrative demands.

We will further emphasize profitability and market density in the businesses that we acquire and we will ensure that new acquisitions bring in minimal exceptions when it comes to things like payer mix, service line adjacencies and operational processes and policies.

In summary, we're evolving from a purely growth mindset to creating a balanced set of objectives that include operational excellence, profitable growth and disciplined capital deployment. In closing, I am excited about what the future holds for LifeStance.

Psychiatrists, nurse practitioners, psychologists and therapists form the backbone of LifeStance. Whether we recruited them or they joined us through acquisition, they make an extraordinary commitment to our patients.

We will honor that commitment by providing them with the operational support and technology to optimize their ability to improve patients' lives. This is our calling at LifeStance. 2023 will be a year of transition for the company, with likely slower growth and a focus on investing in strategic initiatives that will build scalable infrastructure.

I believe that these and other initiatives will set LifeStance up for long-term growth and profitability acceleration beyond 2023 while remaining disciplined with capital deployment. With that, I'll turn it over to Mike to provide additional color on our financial performance and expectations.

Mike?.

Thanks, Ken. As usual, I will frame my comments in the context of our long-term strategy which includes balancing growth, profitability and liquidity considerations. Starting with growth. Revenue of $218 million was up 25% year-over-year, driven by clinician growth of 24%. Turning to profitability.

Center margin of $60 million increased 16% over the same period last year, driven by revenue growth, partially offset by growth in center occupancy costs. Sequentially, we did not achieve the expansion that we anticipated in center margin as a percentage of revenue.

This was driven by lower-than-expected revenue and higher-than-expected employee health benefit costs that impacted center margin in the quarter by $1.3 million, or 70 basis points.

While our actuarial models for our self-insured program included assumptions for increased utilization during 2022, the actual magnitude of increase and the persistent inflationary environment have resulted in costs coming in higher than the models estimated last year.

Total G&A costs were in line with expectations and improved 95 basis points sequentially as a percentage of revenue. Adjusted EBITDA grew 44% year-over-year to $15 million, or 7.1% of revenue, up 90 basis points, driven by center margin growth, combined with generating leverage in G&A.

Adjusted EBITDA was impacted by $1.7 million or 95 basis points of higher health benefits costs relative to expectations. Turning to liquidity; LifeStance continues to be supported by a solid balance sheet. We exited the quarter with cash of $90 million and net long-term debt of $212 million.

In the third quarter, we generated positive $6 million of cash from operations. Cash flow from operations was negatively impacted by an increase in accounts receivable, resulting in a 4.5-day increase in DSO sequentially. The increase in DSO was primarily driven by approximately 3 days of payer-specific items.

For example, we had some holds and short pays related to the implementation of rate increases and new coding requirements which we expect to be substantially resolved in the fourth quarter. We are continuing with planned investments to standardize and optimize our billing and collections processes.

Overtime, these initiatives will drive improvement in cash collections efficiency. Our free cash flow of negative $9 million improved by $9 million sequentially, primarily driven by lower capital expenditures from the planned moderation of de novo center openings. Turning to guidance. Ken covered our full year expectations.

For the fourth quarter, we expect revenue of $215 million to $220 million, center margin of $55 million to $58 million and adjusted EBITDA of $7.5 million to $10.5 million. Revenue is below prior expectations due primarily to lower forecasted visit volume.

Fourth quarter center margin and adjusted EBITDA are below prior expectations due to lower revenue as well as the higher-than-expected costs associated with our employee health benefits representing $3.3 million of impact to adjusted EBITDA or 170 basis points, of which $2.6 million will impact center margin, or 135 basis points.

Now, I'll turn it over to Danish to provide additional operational color..

one, built out our boots on the ground primary care referral team; two, made enhancements to organic search traffic; three, focused on improving internal referrals between our clinicians; and four, began conversations with enterprise referral partners about potential multistate collaborations.

These actions delivered improvement sequentially at the top of the funnel. Second, at the middle of the funnel, in terms of converting patients to scheduled appointments, we did 4 things.

One, we leveraged the capabilities of our digital team to improve patient matching via OBIE which is now live in 14 states and will be fully rolled out nationwide by the end of Q2 2023, with patients rating the booking experience an average of 4.4 out of 5 year-to-date.

Two, we enhanced our overall provider profile systems to create a better user experience, a project we call ConnectMe. We launched the ConnectMe pilot in September and quickly pivoted to a nationwide rollout in October with a planned completion date of December 31.

Third -- three, we reduced the complexity of our scheduling system to open up hidden capacity; and four, we improved our phone intake answer rates and reduced our credentialing time lines to drive faster ramps.

These middle funnel actions were slower to take hold in the third quarter but recent data indicates they are beginning to gain traction and should have a more meaningful impact in 2023.

Finally, at the bottom of the funnel, in terms of scheduled appointments converting to completed visits, our patient cancellation and no-show rates were running at approximately 15%. In the quarter, we drove a small but meaningful improvement in this rate to 14% by putting a focused spotlight on this KPI across all operational teams.

Based on these early results, we have put together a new task force to drive further acceleration of improvements in this area, with the goal of having an impact in 2023. Through these top, middle and bottom funnel efforts to better fill clinician schedules, we have seen overall utilization tick slightly higher in the third quarter.

It is still early days for these initiatives and because of that, we have not assumed any incremental improvements to productivity from utilization as part of our Q4 guidance. Turning to capacity. In the third quarter, we found that on average, clinicians made less time available for patient visits than in the second quarter.

As previously discussed in our Q2 earnings call, clinicians increased their time off in June and we carried those planning assumptions forward into the remaining summer months of July and August.

Though clinician time off in September declined compared with the summer months, it did continue to run at slightly elevated levels relative to the first half of 2022 and versus the prior year comparable period. This summer, we conducted a detailed survey across our thousands of clinicians to better understand their preferences.

This "Future of Work" study revealed that clinicians value the flexibility we offer and that on average, they may want to work slightly less over time. We recognize that this labor dynamic is potentially not just a short-term post-COVID issue.

The desire for flexible work and flexible schedules is consistent across many industries and LifeStance's value proposition was purposely built to support a range of clinician work preferences. It's still too early to confirm whether slightly lower capacity will persist.

And for now, we are rolling forward into the fourth quarter the productivity trends we observed in the third quarter which is the key factor driving down our revenue expectations for the near term.

Longer term, we'll focus on strategic actions to meet clinicians where they are and provide clinicians who would like to work fewer hours or take more time off with part-time options that appeal to them but are still financially sound for the business.

In closing, as we continue to learn more and gain deeper insights, my confidence in our ability to execute has never been stronger.

Operationally, we will focus on the key priorities within our control, such as organic clinician growth and optimizing clinician utilization through our top, middle and bottom funnel actions as well as taking a more focused approach to M&A and payer partnerships.

We expect these efforts to give us -- to get us to higher levels of revenue and profitability over the long term. In terms of leadership, I want to note that we are also enhancing our teams by recruiting top talent. For example, we welcomed Lisa Miller in September as Senior Vice President for the North division.

Lisa has a strong track record of operational excellence in health care services having most recently served as COO for Invo Healthcare and Division Vice President at DaVita. I am now more than ever excited about the future of LifeStance and look forward to driving operational improvements across the business.

With that, I'll turn it back to Ken for a few words before going to Q&A..

Thanks, Danish. I'd like to comment on the announcement we made last week. Aligned with our objectives of building long-term scalable infrastructure, we are establishing a business transformation office dedicated to end-to-end process optimization, standardization and automation.

Mike Bruff will take on a new role as Business Transformation Officer, leading this initiative. I'd like to thank Mike for his contributions as CFO and building a stronger finance organization, demonstrating strategic company leadership and leading with integrity. I would also like to welcome to the team Dave Bourdon, who is succeeding Mike as CFO.

Dave has extensive knowledge of the health care and behavioral health industries and 2 decades of experience leading finance organizations, including as CFO of a $45 billion business unit at Cigna, as well as CFO of Magellan Health. I have the utmost confidence in his ability to take over the reins of our talented finance organization.

In closing, I am so inspired by the great work taking place every day by our clinicians and team members to expand access to high-quality, affordable and personalized mental health care and feel confident that we are putting the right actions in place to drive long-term value. Mike, Danish and I will now take your questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Craig Hettenbach from Morgan Stanley..

Yes. And Ken, thanks for all the color you provided in the intro remarks. Relative to the prior target of 30% long-term growth, you kind of pointed to some moderation into next year and certainly a stronger emphasis on margins.

Can you maybe just touch on it? Even if it's not a pinpoint guide, just kind of ranges of revenue growth or things where you think maybe the model will settle into?.

Yes, Craig, thanks for your question. You certainly picked up very accurately on the commentary in the prepared remarks.

We are working through both our 2023 business plan and our long-term objectives, so I really can't provide much more precision but the read is that we will moderate growth at least for some period of time so that we can build out the infrastructure and take full advantage of what I see as just an incredible opportunity in front of us..

Understood. And then maybe my follow up, any update on the number of visits happening virtually? And I know previously, I think the expectation was that it goes from what was around 80% to 50% over time. But just curious kind of what you're seeing there.

And then importantly, what that might mean for kind of as you evaluate your footprint on a longer-term basis?.

Yes. So this is Danish. We have recently seen our percentage of telehealth visits run in the high 70s. So though slowly coming down, it still remains at a pretty high level. That being said, the place of where our clinicians are delivering the care may flip back and forth between in-office and in home.

So the overall mix of physical real estate usage, though it tracks total telehealth visits, it is heavier on in person from the clinician standpoint.

So that being said, we're taking that all into account as how we plan our de novos and we'll continue to moderate our new de novos openings around the country while also looking at closing of sites that are either not utilized or underutilized where there are better placement of de novos or existing offices in those markets..

Your next question comes from the line of Lisa Gill from JPMorgan..

Ken, I want to start with a comment that you made around being more selective with payers on a go-forward basis. So as coming from a payer yourself in the past, I'm just -- I generally think of that as translating to reimbursement amount.

So can you talk about, is it reimbursement as to why you're going to be more selective with some payers? And other -- are there other criteria that you're looking at to assess that relationship? And would you think of exiting any types of relationships? Do we need to think about any potential attrition around payer relationships going forward?.

Lisa, one of the surprises when I got here was the number of payer contracts that we had in place. There were more than 400 which, frankly, I wasn't sure that there were that many payers in the country. So the number 1 thing that caught my attention was the administrative complexity that comes with trying to manage all those contracts.

So that's 1 important consideration consistent with the other remarks about looking for every opportunity we can to streamline, standardize, simplify our business so that we can run it at scale. Certainly, reimbursement is part of it. We have, as you might suspect, sort of variability in reimbursement.

We find that there are some that really understand the unique positioning of LifeStance and then others that probably treat us more like they would manage with a much, much smaller behavioral health entity. And then the last is credentialing. We're really looking for partners because credentialing continues to be a challenge.

And frankly, it's been a challenge the 40 years that I've been in this space but it's an impediment to getting our clinicians able to see the patients that are so eager for their services. So those would be the 3 criteria that sort of top of mind as we think about it.

And yes, you're right, I could see us -- in fact, I do see us exiting some of those payer contracts..

Okay, great. And then just my follow up would be for Danish. If you remember in the fourth quarter of last year at our Healthcare Conference, you talked about more people taking vacation around the Christmas holidays than you anticipated.

Both for the capacity but also on the utilization side, I'm just curious what you have built into the guidance for revenue in the fourth quarter.

Is it assuming that things was fairly similar to last year? Do you think that maybe it's a little bit better? Hopefully, we don't have another variant around COVID but I'm just curious as to how you thought about both capacity and utilization for the revenue in the fourth quarter..

Yes. So as far as the fourth quarter goes around the holidays, so we plan for the number of what we refer to as adjusted business days -- basically, the number of days that clinicians are working and how those days look in terms of how many visits they're seeing on those days, to mirror what we saw last year in the fourth quarter.

And so we feel good about that. We pressure tested it. But overall, besides the adjustment for the holiday period, we have flowed through the same productivity levels that we witnessed in Q3 forward into Q4. Though again, we are seeing upticks in utilization.

We've obviously seen capacity offset that and we think it's prudent to continue forward with the current productivity levels that we're witnessing..

Your next question comes from the line of Brian Tanquilut from Jefferies..

I guess my first question relates to the final rule that came out of CMS last week on coverage for behavioral health services. Just curious what your thoughts are in terms of how you benefit from that and how you're positioning to potentially see the benefits over the next few years..

Yes. Brian, I think, obviously, that's an encouraging sign to us. I think it's consistent with the tailwinds that the behavioral health space is experiencing and this is just another affirmation of that. The fact of the matter is, as I said in my opening comments, that we, as a country, simply have underfunded mental health care.

And maybe the pandemic was a catalyst but the reality is way before the pandemic, there were too many Americans both with diagnosed and undiagnosed mental health illness that weren't getting the treatment that they need. So this was an acknowledgment by CMS that we need to build this into the screening that primary care physicians do.

And so I was also enthusiastic to see it because it's another step toward unifying the primary care and behavioral health care treatment..

Got you. And then, Ken, just to your comment about focusing on larger targets on the acquisition side going forward.

As you look at that landscape, I mean, what does that look like in terms of -- how big is that market for scaled assets or midsized assets out there versus like smaller deals?.

Yes, Brian, one of the things that I'm really impressed by is how well this company, far before my arrival, did the acquisitions of scaled assets. I won't say that we acquired them all but we acquired a large number of the scaled assets in a space, as you know, that's highly fragmented.

So the comment about larger assets is really to signal we are simply not going to pursue the 2- and 3- and 5-person practices because, while they may be small, each of them brings their own set of unique characteristics -- perhaps a different set of services that they provide.

And so it's recognition that there really is this, what I'll call, hidden cost of acquisitions. And because of that hidden cost of doing a great job integrating them and bringing them on to the platform, we are simply going to be more rigorous and focus on that higher end.

To your point, there are certainly not as many large assets out there as they were when we started this journey 4 years ago. And again, I view that as a huge positive for this organization.

And I applaud the accomplishment of -- in a highly fragmented industry, this organization has created scale but it's going to be much harder going forward which is why we're going to be looking more to organic growth through our recruiting efforts..

Your next question comes from the line of Ryan Daniels from William Blair..

This is Jack Senft on for Ryan Daniels. I just have a quick question. In terms of your revised guidance, I appreciate the comments on the cause of the revision.

I'm just curious if these headwinds, specifically the visit volume, is this a result of the macro environment pressuring the end market? I mean, I would have thought that the enterprise model would kind of shield you to an extent given that some of the cost is covered for patients.

But just kind of curious if you have any additional color on this front? Or I guess is this just more a factor on the clinician front where they aren't necessarily offering enough or consistent hours?.

Yes, that's correct. So the primary driver there, when you get under productivity in this case is capacity, meaning the clinicians are offering less time or offer less time in Q3 than they did in prior quarters as they took elevated levels of time off.

So we are simultaneously working on utilization, meaning our ability to fill that time that they are giving with patients, reduced cancellation rates, all the middle and bond funnel initiatives that I addressed on the call and on our previous call. But just to be clear, there is no shortage of patient demand in the industry.

So this is not a patient demand issue or an ability at a top of funnel to acquire patients. This is really middle and bottom funnel improvements coupled with overall clinician capacity decline..

Understood. And just as a quick follow up. I think you noted 3 specific items that caused an increase in accounts receivable sequentially.

Do you anticipate all 3 of these headwinds to be resolved in the fourth quarter? Or like where this would only impact the fourth quarter results? Or would this be a gradual kind of impact and change into the beginning of next year?.

Yes, thanks. The increase in DSO of 4.5 days, three days were driven by unique payers and situations around working through an increase in rates and working through changes in coding requirements. It was unique to just a very few payers.

This is somewhat typical when you go through those types of changes and we expect that to be resolved in the fourth quarter. So those -- the driver of those 3 days will be resolved.

Overall, we still have a tremendous amount of opportunity to drive efficiency in our collections process which is why we've been investing in that revenue cycle management team. We've been investing in resources and in optimizing end-to-end processes. And we're quite confident that we'll be able to drive improved productivity over time..

Your final question comes from the line of Jamie Perse from Goldman Sachs..

Ken, maybe a high-level one to start. You described the challenges and opportunities ahead of you.

What would you describe as the low-hanging fruit on that list, however you would define that? Things that are a little bit easier to accomplish, maybe take a little bit less time versus some of the longer-term priorities that are going to take some more work and time to see those benefits?.

Yes. I mean I think the organization has done a good job of getting into the lower-hanging fruit. I think the challenge we have now is, as Danish said in his remarks, we need to assess where we are, look at the pain points and invest to really scale the business, consistent with the total addressable market that we have in front of us.

If I was to point to a couple of things, we saw a little bit of operating leverage but there is substantial room for more operating leverage going forward. I don't want to imply it's low-hanging fruit because actually, it's a lot of hard work.

And we have to do the end-to-end optimization of our processes and then we have to follow that up with automating those processes. So I wish I could tell you there was a lot of easy stuff that we could pick through and you'd see it all in the next 30, 60 days but that's not our reality..

Okay. And my second question, just as you scale the infrastructure and evolve the processes as you described, what does that mean for the cost structure? I'm just trying to understand what the path looks like between where you are today and getting to that point of sustainable operating leverage.

What do costs look like between now and then?.

Well, as I mentioned before, since we're right in the throes of the '23 business planning process and our long-term objectives, I really can't provide more precision and further color. What I can share with you is that we have tried to build out the infrastructure. As we have grown, we have tended to throw people at problems.

And while that has worked to alleviate those pain points, it's not the way that we can function going forward. And so that's why we need to pause. We need to do the difficult work of process improvement, standardization and automation.

But this is a company in a space that has so much upside that we want to make sure we not only solidify the infrastructure but we put ourselves in a position where we can drive that operating leverage in future years..

Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect..