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

All right. Good morning, everyone. We're going to get started with our next session. We have LifeStance and Dave Bourdon, CEO; and Ryan McGroarty, CFO. I think, first, both congratulations on the new roles, and thanks for joining.

Thanks, Jamie. Appreciate you having us.

I wanted to start just with the management transition with Ken having transitioned out of the CEO role, you're taking over CEO and Ryan, you now onboard as CFO. Give us a sense of how this impacts the forward strategy and how you communicate that down to the business.

Sure. So there's a few pieces there. Let me talk kind of at a macro level, and then we'll get into the strategy and the transition. So first of all, for those of you that don't know LifeStance, we're the leader in outpatient mental health services, and we're unique because of a combination of a few things. The first is our scale. So we have about 7,500 clinicians. And we do over 8 million visits or sessions a year. The second thing is our hybrid model. And that's both virtual and in-person, and we can do the in-person across over 550 locations in 33 states. The other is the breadth of our licenses. So we have everything from psychiatrists to therapists and their W-2 employees. They're not 1099. And then the last thing I'd mention is that our primary focus is on taking insurance from the payers, so the commercial payers, we do very little of cash pay. So we feel like that combination really sets us up to be durable and resilient in changing conditions, whether those are economic, changes in patient preferences, regulatory, things like that. So we feel good about that combination, which kind of then goes into our strategy. So the strategy is unchanged. So the -- I had a big part in as CFO of setting the strategy for the company. And we'll continue to be very focused on clinical excellence, operational excellence, the patient and the clinician experience. And we feel like we keep that focus that we will be able to deliver and create long-term value for our shareholders. And so that's the strategy. Now there will be some nuances, Jamie. Like for example, as we're doing that, we've mentioned, we'll start doing M&A. We want to do that to enter into some new geographies, things like that. That's all part of the strategy. We just paused on it for a little while. And then the last piece of your question around the transition, it's really been seamless. I mentioned I've been here for 2.5 years. And so it was pretty seamless to be able to step from the CFO role into the CEO role and then having the luxury of Ken Burdick, our previous CEO, stay on as Exec Chair for a year in support of myself and the management team and the Board. That's been great. And then also really fortunate to get this guy, Ryan McGroarty, onboard within a couple of weeks after Ken and I announced the transition. And he's really hit the ground running and has been with us for a little over a couple of months.

Okay. I guess the strategy is stable, but the life cycle of the company is evolving. The last 2 years has really been focused on kind of building this operational foundation. I guess, just what have been some of the key milestones and things that have been put in place and how you leverage that kind of building to the next 2 to 3 years going forward?

Yes. And to your point, the last 2.5 years, we shifted from a very much a focus on growth to a more balanced approach of profitable growth, disciplined capital deployment, things like that. And we stopped doing M&A 2.5 years ago to really focus on that operational excellence, the simplification, the standardization of the business. And I think as some milestones for us would be we rolled out a consistent operating model across the whole country. So now our clinicians and our front office staff are getting much better support, and it's consistent, no matter which practice you go to. That's one. Another one is we completed the rollout of our digital patient check-in tool, which was essential for us because we do 70% of our visits virtually, and we really didn't have the administrative tools we needed to be able to support those virtual businesses. And like last thing I would point out would be the -- well, I'd say, related to that digital patient check-in tool, is some of the operational processes related to that like cash collections, and you're seeing that in a dramatic improvement in our DSOs. And then that's also helped us improve putting cash on the balance sheet. So those are some of the major milestones from an operational perspective. Obviously, those translated into financial milestones as well. Last year, we saw positive free cash flow for the first time with over $85 million of positive free cash flow. In the fourth quarter, we hit double-digit adjusted EBITDA margins for the first time. And then stepping into this year in the first quarter, not only double-digit adjusted EBITDA margins, but our first time with positive net income in a quarter for the company. So we feel really good about the work that we've been doing. We believe it sets the foundation well for us as we come into the next few years. There's still some simplification and standardization that we'll want to do. There's some tool enhancement that we want. And then I mentioned earlier, we are now [ feeling ] our geographic expansion again.

Okay. And Ryan, just to bring you in here, as we get introduced to the investor community, I mean what should investors understand about what you bring strategically to role and what do you have to fix from the prior CFOs?

A lot. Yes. Always tough taking a CFO role, where the CFO moves into the CEO chair. So I appreciate you kind of referencing that. So good morning, and thanks for hosting us. So I've been, as Dave mentioned, with the organization for a little over 2 months or probably 2.5 months. And so, Jamie, to your question in terms of what I bring to the organization, so starting with that is first and foremost, I have 25 years of health care experience, both on the payer and on the delivery side. So you can think of that as 15-plus in CFO roles. And so I bring a profitable growth mindset to the organization, plus a disciplined capital deployment approach. When you look at just in terms of some of the things that -- like I'll probably frame it just in terms of like things that you want to -- I want to leave my mark on, one would be continuation just in terms of the build that the team has prior to me joining around delivering on the commitments. And then also to -- as you think about the growth algorithm, we've got a lot in front of us just in terms of -- we've stated mid-teens -- as you think about long-term growth, mid-teens revenue growth and then our EBITDA margins in the 15% to 20% range. And so again, that's the things I want to build from, from Dave's tenure into my tenure in this role. Hopefully, that was okay, just in terms of how I shifted that.

Great. Maybe we can go to the growth algorithm. I think in '23, you grew the clinician base like 17%. It was 11% last year, right around 10% in the first quarter. You guys made some comments around reprioritizing filling schedules as opposed to organic hiring. I think there were questions in the market around what you were trying to communicate there. Maybe just provide a little more context in terms of what you're actually changing and the degree to which organic hiring priority is changing or not?

Yes. So I'll start off on that question, and then I'll let Dave kind of jump in with anything he wants to add on top. So overall, and Jamie referenced this in the question, when you look at our net clinician growth in the first quarter, it was like 10%, right? So we added over 150 net new clinicians kind of coming through. So organic clinician growth will continue to be the primary driver. What we've been talking about what we introduced in the last call was really talking about balancing both new clinician adds with scheduling of our existing clinicians. And so this runs through the gamut of what you'd expect, like runs through the practice management gamut, so a lot of things just in terms of that will improve quality, access, scheduling for the clinicians. So it should drive a better experience both for the patient and then also for the clinician just in terms of being able to fill their schedules overall. So we'll always look at net clinic clinician adds as like primary. But again, like we're introducing this productivity, feel really good about where we sit with some of the traction that we're seeing across the initiatives. So Dave, I don't know if there's anything you want to put on as well.

Is there a way to think about like on a quarterly basis, we can fill 150, 200 new schedules per quarter? Like what the -- from the demand that you get and your ability to match patients with clinicians, just what with the right level of kind of quarterly new schedules you can fill?

Yes. I think of that as it comes down to the balancing act that we have, and we've talked about this in the sense of patient demand and clinician supply. And it's at a very local level. So we're always balancing that. And it's tough on a quarterly basis, Jamie, to talk about, I think maybe more on an annual basis. We believe that we're going to need to grow our clinicians probably low double digit for years to come to be able to achieve our mid-teens revenue growth that we talk about as a target because that's always going to be the primary growth driver. And then on top of that, you have a little bit of what Ryan was talking about with productivity, with rate and then some of the growth in the specialty services that kind of gets you the rest of the way. But it's going to be that roughly year-over-year double -- low double-digit clinician growth.

Okay. So that's roughly I think of that as 10% to 12%, which is a little bit higher than -- not much, but a little bit higher than you did in the first quarter. So is that an organic number? Does that include M&A? And just what are the levers to...

I think, over the long run, it will include M&A. But your -- we're in -- we have a little bit of a short-term dynamic where we've made the decision to focus some extra attention on our existing clinicians calendars. As we get those to a more appropriate, from -- in the lens of their eyes, level, then we will get back to normal -- kind of a normal cadence or a growth level when it comes to the number of clinicians. So I think of this as more of a -- will be in the low double digits for years to come. But right now, you're in a little bit of a short-term temporary dislocation as we want to focus on those existing clinicians. And I think that now you've got to take a step back, why are we doing this? And we're doing this because we're focused on retaining our existing clinicians. Obviously, from an economics perspective, it benefits us to have less clinicians working more hours than more clinicians working less hours. That's less clinicians that we have to give health benefits to and 401(k) match. And we have a lot of staffing models that are driven based on the number of clinicians that we have. So it benefits the clinician, also benefits us. And the reason I say it benefits the clinician is as we're trying to improve the retention of our clinicians, they're talking to us about their pain points. And one of the pain points of the existing clinicians was in certain markets is that I'm not getting as much work as I'd like. And they -- while they're W-2, they're fee-for-service. So they get paid based on the volume they do, and we give them a productivity bonus as well. And so they're focused on getting increases to their patient panels. And so that's why we're going through this. But again, once you get them to kind of a stabilized level, then they're going to want -- and -- well, then they're going to be in a good spot, and then we're going to need to continue to start hiring more new clinicians to be able to drive growth.

And you guys have been pretty consistent that the retention turnover dynamic has not really changed in the past couple of years. Do you expect some of these focusing on pain points to drive any improvement in that? Have you seen any of it to date? Just -- is there a way to quantify that?

Yes. So we talk about retention as being stable, and it has been. And that's a little bit frustrating for us because we have been making improvements to the value prop with the clinicians, and we haven't seen it play through yet in improved retention. We still believe that we will see that in the coming years, and we do believe there's upside from where we are today. And some of the initiatives that we've talked about last year, we moved from monthly payroll for our clinicians to buy weekly. And there was -- that was an investment for us from a timing perspective around cash because it took some cash off the balance sheet to be able to accelerate compensation. This year, we rolled out the cash-based productivity and quality bonus. That was something they were asking for. Some clinicians appreciated the stock productivity, bonus, many just didn't understand it, and it was multiyear. There were a lot of aspects to it that they didn't like, and so they were asking for a different program. And then as we were talking about, they also were asking for better utilization of their calendars. So those are some of the big pain points. As we're dealing with those, certainly, we hope that, that will improve retention. What I always remind is there's other variables in play. And we've done things to make our model more sustainable. For example, we are now requiring that a clinician give us what we view as full-time hours to be able to get health benefits, matching 401(k), things like that. There were part-time clinicians that were getting those that was not a satisfier for them, right? So there's some things that have been going the other way that have led to retention or turnover going the other way. So it's been a bit of a balancing act, but we do believe that with the things that we're doing that we will move the needle on retention eventually.

And you talked about improving the value proposition to clinicians and -- but it hasn't translated into improved turnover metrics. I guess, the other dynamic to bring in is the competitive environment. What are you seeing? Has that changed at all? Just what's the lay of the land out there competitively?

Right. So to your point, we haven't moved the needle on retention, but we continue to do really well from a recruiting perspective. And that's really what has powered the growth from the net clinician adds perspective the last couple of years. And we -- our value prop continues to resonate with say, three categories of clinicians. The first is new hires, so new licenses that are coming out of school. We do really well recruiting them. They like our support structure and feel like LifeStance is a great place for them to practice and start their career. The other two would be a clinician who's in private practice or a small mom-and-pop shop, typically 1099 or 1% of collections type economic arrangement. And they want more W-2 benefits and more of the stability and support that LifeStance offers. And then the third category would be clinicians who are salaried today. And while they like the stability and predictability of the compensation, they do not like the lack of flexibility, probably have to be in-person 5 days a week. They've got rigid hours, things like that. And what we offer them is "Hey, you could come to us and [ work ] 35, 48 hours a week, but you can do that Monday through Saturday. You can do that 7 in the morning to 8 at night, just get your hours in wherever you'd like. You can work some from home, you can work from the office and a hybrid schedule." And so our value prop continues to resonate with those three buckets. And the one thing I'll close on is, around this is that our market share of clinicians is low single digits. And so we believe we have a lot of runway to be able to continue to grow our clinician base for years and years to come. I mean still a very highly fragmented industry with a lot of clinicians primarily cash pay or at least partially cash pay. And then they're kind of like Uber, Lyft drivers, where there they've signed up with some of these practice enablement firms to fill out their marginal capacity. And we believe, over time, that those clinicians will come into more of our environment like the rest of health care. So we feel really good about our value prop and that there's still a lot of opportunity in the hundreds of thousands of clinicians that are out there to be able to recruit them to LifeStance.

Okay. That's helpful. And just trying to piece together the mid-teens top line growth algorithm, we talked about the biggest piece, 10 to 12-ish percent coming from clinicians. So 3% to 4% maybe from price. Just talk about what the contracting environment, the demand from the payer side looks like in terms of their needs to create capacity in their networks about behavior health. And any color on the 3% to 4%? How sustainable that is?

Yes. So overall, from a dynamic perspective, like I'd first start off and say there has not been a lot of near-term changes. So we've got really good support and relationships with our payer partners overall. You kind of referenced in your question, our expectations, once we get through this year, is really around low to mid-single digits just in terms of what the rate environment should and could look like. Then again, the reference to this year is we've kind of stated on numerous calls, is just one unique payer just in terms of the third rate decrease that we've taken on, on [ 3 1 ] of this year is flattening out our total revenue per visit this year, but again, expected to grow. The payers see an increasing like amount of demand, which is good from their employers, so their customers and the members, right, just to have access to high-quality, affordable mental health, and that's where we play a really big role with them. I don't know, Dave, if there's anything you want to add to that?

I mean, all that's right. There's still a lot of opportunity for us to partner even more with payers as well. So we're just scratching the surface on value-based contracting. And think of that as you still have your normal rates, but getting bonuses for whether it's access or quality, things like that, we have some in place, they're mostly around access. But I do believe that we are setting the stage with our -- now with our ability to survey our patients to get updates on their health status and see how that's moving over time and just creative or unique partnership opportunities with payers because of our scale. So there's more to come on that. But again, to Ryan's point, we feel good about that low to mid-single digits as from a year-over-year rate increase for years to come.

And then, Ryan, just on an underlying basis, are you seeing that low to mid-single digits this year ex the one payer adjustment? And then just as we think about the cadence this year, can you remind us what that should look like sequentially in 2Q and in the back half of the year from a total revenue per visit?

Yes. So I appreciate the question. So second half of the year, so I'll take the second one first. Like overall, we do have rate assumptions kind of built into our guidance overall, and we feel good about the assumptions that we've baked in. When you think about just how contracting works for us, it's not like you have this heavy [ 2 1 or 3 1 ]. They're kind of spread throughout the year overall. And so we've got a very disciplined and focused approach to our payer contracting strategies and obviously a dedicated team around that, overall. When you think about the book like in general, like it's fair to say when you get outside of the unique payer, we are seeing like those types of increases just in terms of the low to mid-single digits, depending on the geography and the contract and the payers that we're working with.

Okay. And maybe turning to the P&L, and I've asked you guys repeatedly about kind of your gross margin performance, which has been really strong. And I think there's probably two big pieces here. One is just the real estate footprint being a part of it and then second, just clinician compensation. Are there any other -- just to level set, are there any other big pieces that kind of factor in here? Just in terms of the center level cost, is that...

Yes. I mean from -- so you named the two big ones. The third piece would be our front office staff. So any staff that are dedicated to a specific center, they show up in the center cost. If you are a practice group manager, so the manager who sits over 3 to 5 centers, that's now in G&A because they're not tagged specifically to a center. But like you named -- those are the -- so those are the big three components, with obviously the clinician comp being the overwhelming majority.

Right. So let's start there. What are you seeing in terms of just compensation expectations, compensation dynamics for clinicians? Has that changed at all? And how should we be thinking about that as we model forward?

Yes. So like, I mean, the dynamic continues to be competitive, right? So competing for clinicians, going back to what Dave referenced earlier, we feel and we're getting some good traction just as it relates to the new cash based bonus structure in terms of interest in joining the LifeStance team. So it is a fragmented market. It's competitive, but our value proposition continues to resonate with the clinicians to join the organization overall.

Okay. So no real changes now?

Nothing that's like in my mind that is like meaningful from a change in expectations around comp expectations on the clinician side. And I think we continue to do external benchmarking. We've got a lot of feet on the street, making sure we understand what the dynamics are in the local market, but nothing in my mind that's meaningful.

I would say, yes. So to your point, like no change from a cost expectation or compensation expectation, similar to the dynamics we saw on a year-over-year basis in '23 and '24 playing out in '25. And we're not seeing anything different in '26 because again, comp that kind of base comp and then the benefits, that's a piece of the value prop, but it's only one -- it's an important piece, but there's a lot to the value prop.

So yes, how would you decompose it? I think you've had like 460 basis points of gross margin or center margin improvement over the past 2 years. Is that really driven by the real estate footprint optimization? And then, where are we in terms of that cycle? Is there more consolidation opportunity? Or are you going more on offense in terms of expanding the in-person side?

Yes. So I'll start off on this question. So you got it right, just in terms of that there has been some favorable center margin. But if you look at the last several years, central margin has improved. You have the real estate optimization, you got the rate environment, then you also have just efficiencies that we drive through, where day 1 earlier just in terms of the support structure to drive consistency and efficiencies kind of in the business in totality. So center margins kind of go up. This year, they're more flat, and it really is because of the rate environment that we talked about. So we expect center margin to kind of increase when you think about '26 and beyond that is the potential to go up to that mid-30s range overall. From a real estate optimization perspective, so that was mostly complete by the end of 2023. And now we're always fine-tuning our real estate footprint, but the big endeavor is kind of we're behind that. But the intent would be, and I mentioned this on the front end, is that not only you've got leveraging opportunity as it relates to your center margin, but you also have it on G&A in totality based off of the infrastructure that we've been able to build for scalable growth here.

35% is definitely higher than we model on gross margins. Can you add a little more in terms of how you get there over the next couple of years? You're at like 32% today. Is that -- what kind of rate environment do you need to get there? Is that 4%, 5%? What are some of the assumptions that would enable you getting to let's say, 35%?

Yes, to get to the mid-30s, yes, so overall, it's kind of going on to low to mid-single-digit rate growth, which we've talked about overall. You've got the component of just kind of core leveraging that you have because you got the three components that Dave went through are clinician comps, clinician support and then your occupancy costs, the occupancy you're able to leverage kind of going forward. So to me, there's definitely a clear pathway to being able to deliver mid-30s type margin on a center basis.

If you just put it like real estate, today, we still -- with over our 550 centers, we're using those less than 50%. So we don't have a bunch of centers that we want to consolidate like we did in [ '23 ]. Like Ryan said, we're now -- it's now more about tweaks. But within each center, we still have a lot of room to drive more clinician density into them. So like that's an example of the type of leverage that we could drive. And with low to mid-single-digit rate increases, there's likely -- you're also going to have a favorable spread versus what you're passing on to the clinicians as well.

All right. That's helpful. On G&A, there actually hasn't been any operating leverage on G&A the last 2 years. All the EBITDA margin expansion has come from gross margin. How should we think about -- I guess, historically, the last 2 years, the investments you've been making, where are you in that cycle and the degree to which you need to kind of keep investing in some of these support functions to sustain top line growth?

Yes. So I'll start off here. So exactly right. So if you go back through the history, there really hasn't been the G&A leverage today and obviously, a very deliberate strategy from both Ken and Dave just in terms of kind of building out the foundation to support profitable growth. So some of the investments that were made were around HRIS credential. I can go through the list just in terms of like building block practice management type investments, which we feel really good about. So we have a very disciplined approach as it relates to like investments that we will make. And so when you really think about the unlock is getting some leveraging out of your G&A line as you kind of move through this year. So '25, you don't really see it. But in '26 and beyond, you'll start to see the leveraging come through.

And Dave, thinking back, I mean, you were part of the team making these investments. Would you characterize it as like stuff that just wasn't invested in sufficiently before? Or was this more offensive and building kind of a more scalable platform going forward?

It's a blend of both. So on the stuff part of your comment, we didn't have a payer engagement team. And you're like, well, "Geez, engaging with the payers and getting rate increases, that's just core to a big provider practice, that's just normal business." And we didn't have that. Again, we were so focused on just growth and acquisitions that we just didn't have those kinds of things. And then you get into the tools and investments like the digital patient check-in tool, that's a game changer for us. And so those were new capabilities that we didn't have anything for, and it was just a gap. Now the other thing that I would point to when we think about G&A and leverage in the future is everything Ryan said, spot on. And today, we're incredibly inefficient. So we have very little use of technology, whether that's AI or RPA or whatever the case may be. We do very little of that. And so over the -- in recent years, we've thrown bodies at solving problems. And so sure, we're going to make other investments in the business in the future, but we'll have that operating leverage, and we're going to have some opportunities to get all a lot more efficient now that we've standardized, simplified, gotten on to the same EMR, things like that. And we had a new Chief Technology Officer start yesterday, and that's been a big part of his career, is driving those kinds of operational excellence initiatives.

Has he implemented an EHR yet?

Many many times. Many, many times.

I meant for you guys. But in all seriousness, so where are you guys in sort of evaluating the EHR process? I mean you guys described being in the discovery process here in the first quarter call. Obviously, this has the potential to be a very significant investment. How should we think about where you're at? And and how big that investment could potentially be?

Yes. So I appreciate this one, too. So look, we're looking for a solution for the medium and long term. And so within the consideration set is staying with our existing vendor from an EHR perspective. And again, we have a very good evaluation process that we put in place. Really, it's about clinician experience, patient experience, operational efficiencies and kind of pulling those all through. We are really early in the, as you framed it, discovery process on that. So we expect kind of pull through the decisioning by the end of this year, very deliberate process that we're undertaking. And so it's too easy -- too early, excuse me, to put a financial frame to it yet, but we'll look forward to providing updates as we get later in the year.

Okay. And on EBITDA margin, can't remember when you first laid out the target of 10% exiting 2025. You obviously hit that ahead of schedule. How should we think about puts and takes to EBITDA margin this year and the degree to which you can continue kind of sustainably growing EBITDA margin?

Yes. So overall, like the puts and takes, obviously, we're pleased with the delivery of EBITDA in terms of what we've done in Q4 and Q1. If you kind of look at back half versus front half, the key kind of levers to delivering would be around new clinician adds, productivity and then execution on the second half of the year rate, all items where we feel we have line of sight to. But then pleased, as we get it through '25 into '26, as we've kind of referenced a couple of times, being able to expand out those margins higher.

Okay. And I guess trying to tie this all together here in the last minute or so. You talked about mid-30s gross margin, which would be roughly 300 basis points of margin expansion. I think you mentioned at the start, 15% to 20% EBITDA margin longer term. So the balance 200 to something higher from a G&A perspective, is that the right long-term framework? And then how would you kind of from a timing perspective, set expectations around that 15% to 20%?

Yes. So I mean, aligned with the way the frame was pulled through, in regard to timing, like we use this as kind of setting the direction for how the business will be performing we expect in the future versus really laying out specific like milestones and dates at this point. I don't know, Dave, if you want to close with something.

No, it's well said. And I would -- I wouldn't go to 35% center, I'd probably say it's more in the mid-30s. So there's a little bit of flexibility there. But you're doing your math right in regards to thinking about the bulk of the margin expansion as we get to that 15% to 20% will come from operating leverage on the G&A line.

Okay. Great. With that, I think we can end there. And thank you both so much for joining.

We really appreciate the time. Thank you.