LifeStance Health Group, Inc. (LFST) Earnings Call Transcript & Summary

All right. Thank you. Good morning, everyone. I'm Jamie Perse, the healthcare provider analyst at Goldman Sachs. And our next session today is with LifeStance. We have the CFO, Dave Bourdon; and IR, Monica Prokocki. Thank you guys for joining.

We're glad to be here. Thanks for the opportunity.

Of course. Let's start just with the new strategy you guys are focused on really building the foundations, the operational excellence. How is all that going as you kind of scale that and prepare for future growth?

Yes. So first of all, if you think about the company in a couple of chapters. The first chapter was about growth and getting to scale. And that was the primary focus. And now as we shift to the second chapter, and that's really more of a balance. So with a focus on operational performance, profitable growth and capital and just being smart about how we're using -- the use of capital. When we get into the strategic priorities and improving that foundation, we're making a lot of small investments in areas like clinician recruiting, patient referrals, RCM, but we've had the 3 big strategic initiatives that we've highlighted, which are the HRIS or people management system, our credentialing and onboarding system. And then, we're also doing EHR, exploratory. So the first 2 are going well. We've done -- we already signed contracts with vendors, and we're well underway. And then on the EHR exploratory, that work will be ongoing throughout this year with the idea then of making a call around, do we enhance our incurrence system and stay with that? Or do we look for a different tool? But again, going well and a lot of heavy lifting around improving processes and things like that as a staging to being able to jump to those new tools.

How should we on the outside kind of monitor your progress on all these fronts? Obviously, we look at growth and margins and things like that...

Yes.

But in terms of being at a point where you're ready to kind of go on offense more aggressively, how do we monitor where you are in that direction?

Right, see we're laying a little breadcrumbs, because I know it's -- I can appreciate your perspective around you're saying you're doing all these things, but how do we monitor that progress. And so, an example of we made investments in RCM, you saw the big decline in DSO in the fourth quarter, and we'll see further improvement in DSO throughout this year, so that's an example of that. Something like the credentialing and onboarding, that's going to play through in our clinician starts and our clinician growth. And so, it just depends on which investment you're talking about. HRIS and the people management, that's going to be more behind the scenes. But when you're a company with over 8,000 employees and you don't have a true people management system yet, there is a lot -- there is just a lot of unnecessary manual work. So you're not going to -- you won't see that as easily, but it will be part of our story around operating leverage as we get into '24 and '25 and seeing the bottom line margin improve.

You guys have given some sustainable growth targets over the medium term. I guess, what I'm trying to understand is, as you're putting all these pieces in place, is it building towards a moment where you can step on the gas and there'll be an acceleration?

Yes.

I mean, how should we think about what the later innings of this process has to look like for growth?

Yes. Got it. Yes. So for '23 and '24, we've looked at those as foundational years. As we get into 2025, we said for that year we'll be free cash flow positive. And I feel like that is the transition year where we can -- we start -- where we can start to use your words, we start stepping on the gas. And there's a couple of areas I'd point to. First would be M&A. So once we have our foundation solid, then we'll look at M&A opportunities, again, with the positive free cash flow, being able to fund those. The other area that I would point to around really stepping on the gas would be these higher revenue, higher-margin services. I've talked on the calls about neuropsych testing as an example, but there's a number of kind of these basket of services that we do in little disparate places throughout the country that have come from our acquisitions. But taking those, standardizing them, operationalizing them and then rolling them out -- and, so I think that's how we get from mid-teens organic growth to stepping on the gas to a higher number, though.

Okay. Okay. That's helpful. Let's go a little bit more specific and maybe short term, but can you describe what the clinician funnel looks like? And yes, I'm sure you have a huge database of however many thousands, of course, how do you whittle that down to our prime targets that you think you can approach and convert? Any color on the pipeline?

Yes. Monica?

Yes. Sure. So, we do believe that there's a large clinician market out there of hundreds of thousands of clinicians, and we do have a proprietary database of hundreds of thousands of clinicians. We believe that we probably only tapped 1% of that market, so we really think there's a lot of runway and white space ahead of us there. In terms of how we whittle that down as -- it's really based on the markets that we are focusing on and the clinicians go through a multi-step hiring process, including our clinical and medical leadership who ultimately makes the final decisions on the clinicians who joined LifeStance. And it seems that our recruiting engine has actually been working really well, the efficient hiring process, along with the investments in the recruiting team and the clinician value proposition have driven robust organic growth. And as we kind of put a pause on M&A, that continues to be a key focus area for us.

Okay. I'll definitely come back to the value proposition in a minute. Just in the last few quarters since Ken joined and Danish took on more responsibility, has anything changed in how you're targeting these clinicians and converting them?

I would say that the key change is really focused on the operational performance of the business, kind of how we operate. So improving things like frontline support and billing, all of those things that enhance the clinician experience, those are really the focus area for the long term. So last year, we ran a detailed survey of clinicians to identify pain points and all the operational improvements that we're focusing on -- some of those are to really improve the clinician experience, which will help improve both retention and recruiting in the long run. And I would say that's been kind of the key change.

Okay. What are you seeing competitively? These clinicians are obviously in very, very high demand, I mean, we heard from United yesterday about the demand for mental health. Are you running into folks in the market? Are you seeing anything competitively that you'd call out?

I wouldn't -- so I wouldn't point to anything that's a big change. It remains a highly competitive marketplace. And I think the thing to highlight is our value proposition is resonating with clinicians and you're seeing that in the recruiting process. One other thing I pile on that Monica said about the recurring processes is that, unlike some of our competition who they'll take all comers. We go through a very rigorous hiring process. And once we whittle that down to a shortlist, for every 2 or 3 that are highly qualified, we're only making probably one offer on that. So it's a different model. Again, we are looking for a fit with that clinician. And so, it's just a different approach, but it remains a very highly competitive marketplace.

Okay. I want to go to clinician turnover, which has been a focus for investors with the story and the value proposition and try to make sense of all that. That's probably one of the bigger things that changed quickly out of the IPO. I mean, I guess, do you think you're still ahead of the market in terms of the value proposition that you're offering to clinicians and on turnover specifically?

I wouldn't say that we're ahead of the market. I'll say it a little differently. First of all, we're not trying to be all things to everyone. So there's a subset of the clinician population that we believe our value proposition resonates with. We've seen our turnover stabilize in the back half of last year, and in through the first quarter. And you saw that with the clinician, the clinician growth numbers that we put up in the first quarter. But again, I wouldn't -- from a turnover perspective, I wouldn't say we lead the market. We just feel -- it's stabilized and there's opportunity for improvement as we get into strengthening our value proposition. Monica pointed out that the big pain point for them is really around the support. So these clinicians, they -- one of the reasons they join us is we say, we'll take care of everything for you. All you've got to do is come in and do what you love to do, which is treat patients. We'll take [ our ] billing, front office support, things like that. And that's where we -- with that heavy growth focus and 93 acquisitions, there was noise in the system. And that's a huge focus area for us to improve that support for the clinicians. And we feel if we do that, there's the potential that we could improve our retention even more so in the coming years.

Okay. A couple of follow-ups on that. I mean, you talked about the survey and identifying these pain ports. Can you say those are actually the reasons why these clinicians left? Or maybe it's wage and other things, but these specific things that you're addressing. And then, how soon do you think you'll be at a point where those pain points are addressed across the whole platform, and you can, you know, I know you're not signaling that you're going to reduce turnover, but be in a better position around retaining clinicians.

I think in terms of why clinicians turnover, I think, it's really -- there's kind of a wide variety of reasons and those kind of true across the market to folks -- some folks were just leaving the workforce during the pandemic, for example, all different reasons. I think in terms of when we might turn a corner, I think as we are making these investments over the next couple of years to streamline the business, standardize the business, build scalable infrastructure, just really simplify and automate and make things easier for everybody, for not just clinicians but also for team members. I think we'll see improvements and enhanced experience that should pay off.

Okay. So maybe to rephrase what you had said, you still feel like you're adding incremental value to the value proposition to the clinicians.

Yes.

Absolutely. Absolutely.

Let's go to productivity. The revenue generated per clinician has been down over the last couple of years, high-single digits for the last 2 years. You started to turn a corner in the first quarter. You've broken it down by capacity, the time they make available and your ability to fill that. Where are you sort of from a capacity standpoint, 6,000 clinicians. Is there a theoretical like this is what that body of clinicians should be able to do, and this is what we're getting from them? Just any color on where you're from capacity side?

Yes. So we don't think about it from what's a normal level of capacity or -- we're going at it more of what are we getting today and how can we improve that. And it's less controllable than utilization, which is the other aspect of productivity. But there are things we're doing to improve capacity. So for example, we are rewarding our highest-performing clinicians with equity, so that's a productivity improvement. So we're doing things like that, and we're exploring other ways of trying to incentivize clinicians giving us more capacity, in addition to when we're hiring new clinicians now, we are looking for full-time hires rather than part-time hires, which might have been something we had done in the past, which -- so those clinicians will obviously being full-time would have more capacity than the average clinician in our current 6,000.

I guess, even more specifically, can you say on average, the clinicians you have in your company can do 30 visits per week, 35 visits per week. Any guidepost for...?

Yes, it depends -- so it depends on whether you are a prescriber or whether you're a therapy, because one -- there's different kinds of visits, right? So a prescribing visit could be 15 minutes and a therapy visit could be an hour. So it's a little -- there's a little bit of apples and oranges. But on general, in general, we'd say 30 visits -- about 30 hours of clinician time a week is full time for us.

Okay. On the utilization front, can you talk about what you're doing to reduce cancellation rates and make sure that the time made available by your physicians is being filled as much as possible.

Yes. It's a huge focus area for us because I mentioned earlier, this is something that we have more control over versus capacity. And we have a number of initiatives underway, and we saw some positive signs in the first quarter as our revenue [ beat ], we attributed to improved productivity, and it was specifically the utilization component. And an example of that is the improvements that we saw in no show and cancellation rates, which improved about 200 bps from 14% to 12%. And things we're doing there are improvements in the front office staff and how they're interacting with our patients in advance of the appointment, as well as when we do have a cancellation being able to take advantage of wait less and things like that to get a last minute fill in. And that's how we're able to see an outcome like the improved cancellation rates.

The business still skews more towards telehealth at the moment.

Yes.

Is there a differential cancellation rate? And I know, you get asked all the time about where this mix is going as we think about that. Does that have any implication on the cancellation rate or even just specifically utilization?

So it doesn't. I would not point to anything that is materially different from an in-person versus a virtual as far as the cancellation rates go.

Okay. And just trying to get a sense for the revenue-generating capacity of these clinicians.

Yes.

You're at 42,400 in the first quarter. There's a couple of different ways to measure it, but...

Right.

You can annualize that maybe 170,000. Where is that relative to what a mature clinician looks like? And should we expect continued progress, how to think about the growth algorithm for revenue per clinician?

Yes, I would expect -- I'm not going to say anything for this year because we're -- it's early stages really on our -- on the operational improvements that we're focusing on. But I would expect there to be improvement. And areas that I would point to are, for example, the 2 items that I mentioned, the rewarding of productivity, the -- improving the mix from more full -- part-time to full-time clinicians, so that's going to help. But the other areas where, again, we have more control would be the ramp time for a new clinician. So as we get more sophisticated in boots on the ground in generating primary care referrals or working with payers around getting -- improving the pipeline of their members and for new patients, things like that, they're going to allow us to ramp our new clinicians, which bring down that average that you highlighted. So there are definitely opportunities for us in the future to be able to improve that overall productivity.

Are you able to say at all what mature clinicians on the platform today kind of on average, generate your top 25% of [ visits or ], something like that?

Yes. We don't share that kind of information. I mean, it's certainly something that we look at. But as you would expect with any workforce, you're going to have kind of a distribution around performance. And it's -- for us, it's better understanding why certain clinicians have -- are able to do more visits than others. But if you remember, our model is different than some in that, like a full-time salaried model or something. This is fee-for-service. So there are clinicians who simply want to earn more or like doing just really enjoy care and the treatment of patients. And so, want to do more visits. Then you have others that are looking for a better work-life balance. And so, they're not going to do as many. So it's always -- you have to be careful to say, the top 20% do this many visits, and we can get -- let's get everybody else there. These clinicians are all coming at it, really in a different place in their lives' motivation.

Let's switch topics a little bit, just patient sourcing. You guys recently announced the Gen F partnership. I think, I generally think of a huge imbalance between supply and demand in this market. So why do you need partnerships like this to find the patients?

Yes. The -- it's a channel for us to get new patients. And you think about it, it's a win-win-win, right? The primary care, or in this case, an OB/GYN practice, they're trying to get mental access for their patients to mental healthcare, and that's in-network. So, it's affordable for the patient. And that's a challenge in the current environment because most mental health clinicians are still out of network and only accept cash. So that's a win for the medical practice. It's a win for the patient because they're getting quality care, again, they get to use their insurance card rather than having to go out of network and pay. And then, it's a win for us because this is a no-cost channel of new patients that are -- that we're able to get. So that's our primary channel we've invested in boots on the ground, because that's where we get the most of our new patient referrals. And it's what's going to allow us to ramp new clinicians faster as an example.

Okay. And you've also talked a little bit about online marketing and generating more of a organic kind of funnel of patients. What does this do to the customer acquisition costs -- patient acquisition costs, over time? And again, the question is just like why do you need it if there's so much demand maybe from primary care and your other referral sources?

Yes. It's really about helping the prospective patient find you, right? And which is challenging for patients in the -- prospective patients in the current environment for any of it, I have 4 kids, and one of my kids needed to get tested for ADHD. And then you go to your primary care office and if they don't have some kind of referral program like this, they just print out a list of prospective -- potential mental health companies and you start dialing. And most of them will say they don't accept the insurance or they don't accept new patients, and it can be the same experience over with the payer. So being able to establish programs like the referral that -- again, that's the win-win-win. We also -- our other primary channel is payer. And I think there's -- with the payers needing to find access for their members for in-network care, there's creative things that we're now talking with about with, I'd say, thought-leading payers as a way to get -- kind of, to get that patient flow. Paid marketing, I view as it's our last resort, and it's a very small percentage of our new patients come that way. I would like that to be 0. We really only use it for the most part as a tactical solution when we have hiring of a number of new clinicians in a particular area, and we're not able to get as much patient flow as we would like from those other no-cost sources, then we go to paid marketing as the last resort.

Okay. Let's shift gear again, we talked about the competitive environment for these clinicians. What are you seeing in terms of what you need to pay, just wage pressure more broadly compensation pressure for these clinicians?

So we do see wage growth, and our clinicians have always been in high demand. So that's nothing new for us. It's kind of built into how we design our compensation structure. We plan every year for merit increases, which is well received by our clinicians, but our rates offsets our wage increases. So, that's typically our expectations. So part of our negotiations with insurers, we're very focused on the fact that we need to compensate our clinicians for the good work that they do.

Okay. We can go to the payer side for a minute. Maybe first, you've consolidated your payer base down to -- you've removed, I think, 25%, 30%.

Yes.

It sounds like this won't have any impact on demand or your ability to fill and it's more of a cost initiative. So maybe we can start on the cost side, what does it actually do from a cost perspective, the efficiencies it creates and then we can get into the rates as well?

Right. Yes. The -- so you're right, Jamie. The 30% -- we've reduced our payer contracts by about 30% or 140 contracts. It's a modest amount of revenue. It's less than 1% of the volume for us. And so, this was really done from an efficiency perspective. And how it's playing through is, these are now 140 contracts that we don't need to credential our clinicians with. We don't have to take into account the complexity of these in our patient intake process or our billing RCM teams and things like that. So it's a bigger -- it's a piece of a bigger operating efficiency initiative that we have, so that we can drive operating leverage as we get into '24 and '25 and beyond. So it's a piece of that story. The side benefit or unintended benefit of it is we're getting anecdotal feedback from payers that weren't part of the 140. And again, they're focused on access. And so they're concerned, they're like, are you done? Or am I getting a call tomorrow? And so, it's a bit of a shot across the bow around, hey -- like, we want to work with payers that are going to partner with us. And part of that is rates, and part of that might be some type of value-based contracting, but it's also just administrative simplicity. Like if you're difficult to deal with and you've got low volume that you might be on -- you may be on the next list.

No, it's an interesting point, the 141st the one that didn't get the letter. Do these efforts help you in terms of driving rate increases? And more broadly, how should we think about long-term rate growth? Monica, you mentioned it offsets wage growth. Is there a positive spread at all? Or is it -- should we just think about it as offsetting wage?

Yes. There is a -- so there's a modest positive spread this year. If you look at our guidance and look at center margins, they're modestly improving year-over-year, and that would largely come from that dynamic of payer rate increases being a little bit more than the clinician increases. But that's for this year. As you think about future years, payer is one of the areas where we've invested. And that investment is starting to pay off, and we expect to get low single-digit revenue increase this year as the result of payer -- our payer focus. We would expect that to ramp up in future years. And so, when I've talked about exiting 2025 with double-digit margins, payer rate increase is a -- one of the major levers of that story. So you would expect to be able to both compensate our clinicians appropriately and improve the bottom line margin as well.

I guess, what visibility and confidence you have that you can drive incremental rate updates into the year and beyond? I get -- some of it is just the market and demand for these services, but is there a LifeStance-specific piece in terms of your scale that is giving you this confidence?

There is. So for some of the -- if you're a national payer, we are likely your largest mental health provider and -- for outpatient services. And so, it's a different -- and again, this is about a partnership. This isn't just us beating them up over, we want higher rates. It is about a partnership where they're interested in access and quality, and things like can they even connect their system to our scheduling system to get -- which would improve access for them. There are different kinds of conversations now with payers, especially the national ones or where we have concentrated volume. And so, that is our conversations we have not had in the past. And it's -- so there -- we have confidence, we've seen some positive momentum already this year in like little spots. So I'm not going to say like it's not systemic yet, but we do -- we're seeing enough bright spots that we have confidence that we'll be able to deliver this in the coming years.

Okay. We started with the operational enhancements and the EHR and all the capabilities you guys are building out. I want to tie this to G&A growth -- how should we think about what costs still need to be? What investments still need to be made? And where you're going to start seeing leverage in G&A?

Yes. The -- so G&A, if you're looking at it year-over-year, is up significantly. And then if it's fourth quarter to first quarter, it's more like 13%. So it's not as much as what it is on a year-over-year basis, but we are continuing to make investments. We've said 2023 and 2024 for foundational years, but 2023 was the 1 year where our G&A growth would outstrip revenue growth. But this is the one -- Ken and I've said this is a onetime deal. So we will start seeing operating leverage next year in '24, and even more so in '25. And I think, that's another one of the big levers that gets us to those double-digit margins by end of '25.

I guess, maybe another way to ask it, is the G&A expense in 1Q, does that get reflect kind of many of the investments that you've made? Or should we expect on a dollar basis, continued step-ups this year? And does that -- maybe exit rates for 2023, is that sort of the right level of spend you need for '24 and beyond?

Yes. I mean, I would expect that we will continue to make some invest -- we'll continue to make some investments this year. And then, as we look at next year, meaningfully less investments from a G&A perspective than we made this year. I'm not going to say we're done, but we'll -- but again, you will see operating leverage next year.

Okay. Is there any way to say what -- after this year, what G&A expense should grow at? Or the spread between G&A and revenue growth?

Yes. We're -- other than to say it's going to be lower, right, because -- and that's about as far as we're going to go right now. I would expect the spread between revenue growth and G&A growth to -- that spread will increase as we move from '24 into '25, because there'll still be some investment next year.

Okay. You've talked about this 10% margin exiting 2025. Are there opportunities to pull that forward? Or that's not the priority right now. I just want to gauge where you are in terms of that being a priority to maybe pull it forward versus just focusing on the operational end.

I think, we're focusing on the operational performance. And while there could be a potential that we end up getting to the destination sooner, that would be a nice problem to have if that was the case, but that's not -- that would -- that's not -- I wouldn't say that's the focus. It's more of heads down. We know what we need to do, let's get these big things done and out of the way so that we can -- to your earlier question, we can put our foot on the gas.

And beyond -- I know 2025 is still a couple of years ahead, but even beyond 2025, is there a structural ceiling to margins? I mean, how should we think about where to from there just on a longer-term basis?

Yes. We haven't -- so, we certainly haven't guided to anything, on one hand. On the other hand, we are not saying that when we exit 2025 that we're now at the ceiling, we still believe that we will have room to run as far as improving bottom line margins as we get into '26 and beyond.

Okay. How should we think about the introduction of M&A back into as a growth driver? Is next year too soon to think that could start to be a priority again? Or how should we think about that?

We definitely expect over the longer term for M&A to complement our organic growth. So as David mentioned, we've guided to free cash flow positive in full year 2025. So when we do start doing M&A, again, it will be out of our free cash flow. We also expect that to be very opportunistic and extremely selective. So really ensuring that those acquisitions don't add significant administrative burden on the organization that there are limited exceptions in terms of payer mix or service lines, and that they're profitable. So we do expect to reintroduce M&A, but just be very selective about it and turned it from positive free cash flow.

Okay. Maybe last quick topic here. Just guidance for the year, when I kind of work through it, it sort of implies not a lot of step-up in productivity and all these things that you guys are really focused on the revenue side. Maybe, just any color on things you're considering in your guidance that are preventing further improvement this year?

Yes. So I wouldn't point to there is a problem or a concerned area, that would be number one. Number 2 is, I would remind everyone that now that we've shifted really to organic, you don't have the M&A lumpiness in there. Our revenue is more 50/50, first half/second half, even with clinician growth, which we would expect throughout the year because in the second half of the year, our clinician capacity goes down due to vacation. So you have the summer vacation season and really Thanksgiving through New Year's. And so, we just get -- for the same clinician, you just get less time from them to be able to fill with patients.

Okay.

So it's more of that. And then the third piece I would say is that we were clear in our updated guidance for the full year that the productivity improvements we saw in the first quarter, while we were happy to see them, we did not bake them into the full year. Now we don't have any reason to believe that they won't occur, but we just don't -- we don't have enough of a track record yet to be able to hang our hat on. Those are durable, and will, and stay throughout the year. So it's more that than we see a problem off on the horizon that we were trying to adjust for.

Okay. I know we're over time here, but thinking of one last one. Just on the EBITDA guidance, I know you're not updating guidance here today, but generally do you feel good about the assumptions that you've laid out at a high level?

We do.

Okay. All right. Good [ place then ], and thank you, both, for joining. And thanks, everyone, in the room.

Yes. Thank you for having us.

Thanks, Jamie.