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

All right. Great. Good morning, everyone. Thanks for being here at the second day of the conference. I'm Craig Hettenbach, I cover the health tech and provider space at Morgan Stanley. Very pleased to have with us LifeStance this morning. Just before we get started, just from a disclosure perspective, you can see the disclosures at www.morganstanley.com/researchdisclosures. So with that, Dave and Ryan, welcome, appreciate having you guys here.

Thanks for having us. I appreciate it.

Great. I think investors are familiar with the company at this point, but still would be great to just have kind of a refresher in terms of LifeStance? And most importantly, how the company kind of differentiates in what kind of a crowded kind of mental health field.

Yes. It's crowded but highly fragmented mental health space. And we're the leader in outpatient mental health and that leadership for the uniqueness comes from a combination of the first, I'd say, is scale. So we have over 7,500 clinicians. We'll do 8 million to 9 million visits or sessions this year, and we have nearly 1 million patients. So that's the first thing. Second thing is hybrid delivery. Many of the newer entrants in the marketplace are virtual only. We have the capabilities to do both in-person and virtually. We have nearly 600 centers spread across 33 states. Third thing that I'd point to is the broad range of licensure. So we do both psychiatry and therapy, and we have everything from psychiatrists and nurse practitioners, the psychologists and therapists and being able to have all of that in one center to be able to holistically treat the patient is really powerful. And those are W-2 clinicians. They're not 1099. And then the fourth ingredient, I think that makes us unique is that our focus is on the commercially insured population. So we will do an accommodation for cash pay, where that's a very small percentage of our practice. And we are focused on the commercial insurance and seeing patients that have that insurance card. So you add all that up, that's what makes us unique. It also is what allows us to be -- have a very durable model. If you think about the last couple of years, we've had really strong organic growth and margin expansion. And this model, I think, allows us to be flexible and respond in a dynamic environment to regulatory changes or patient preference changes or things like that. So that's -- that answers your question around why we're a little bit unique.

Perfect. And I'd love to dig in on just the clinician side as well, to your point, really good organic growth. It's something that, I think from a retention perspective, there's been stability. I know organizationally since you joined as it's coming up on 3 years now. You guys have put a lot into the organization. And so can you just give us a sense in terms of clinicians, what's really resonating today because that is, I think, a differentiator in the market.

Yes. The clinician, we call the value prop, right, to our clinicians, and why they're attracted to come to LifeStance and stay is first thing you always start out with is a competitive compensation package. And for us, that's a combination of both what we're paying them from further their services. And while we're W2, we are fee-for-service. So they get paid per visit, but also the benefits. So they get matching 401(k), health benefits, those kinds of things, which is differentiated from many of our competitors that are more 1099. So that's one thing. The other would be the support that they get by being at LifeStance, and that's everything from the finding new patients for them to just all the administrative aspects of revenue cycle and collections and things like that. And a big thing for our clinicians is that because it's not -- it's a fee for service, they don't take the risk on collection. So if they see a patient, they get paid. That was a big deal last year with the Change Healthcare environment, where if you were at 1099 percent of collections, you may not have gotten compensated for a couple of months. So that's a big one. And then Third thing that I would point to is what I mentioned around what makes us unique is that broad range of licensure and services. So if you're a therapist and you need your patient to be able to access medication management right in the center, you can refer them to a psychiatrist they're a nurse practitioner and that's not common in our industry to have the combination of both. And then what we've been talking about is the adding of additional specialty services. So neuropsych testing and then for treatment-resistant depression, things like TMS and Spravato. So having that broad range of services and licensure that along with other things is really what it makes us for a strong value proposition.

Got it. And you've recently shifted for clinicians from a bonus perspective, more away from kind of stock to kind of cash base. Can you just talk about the origin of that, what it means to the clinicians in terms of why they find that attractive and then for LifeStance?

Yes. Sure, I'd be happy to jump in on that one. So it was a very deliberate change that we contemplated in our planning process. So Craig, you got the key headlines as we move to a cash-based incentive program from LTIP, so longer-term incentives. And we were really reacting to the desires of the clinician population. They wanted to have a program that was more measurable and outcome-based in terms of being able to get paid within the current period versus the way the LTIP program was constructed was more longer durational, we're seeing really good feedback. So the program was implemented in May, and we're seeing really good feedback from the clinician population in terms of tracking with the program, engagement with the program. And so we're pretty excited just in terms of the implementation of the new incentive program and how it's being received by the clinician.

Great. And how about just from a scheduling and productivity perspective? I know you have some procedures in place. How is that resonating and help in terms of fill clinician schedule?

Yes, yes. It's definitely resonating, although early days, and this goes to that productivity piece. And I always want to make sure we're clear on this because it's different than how we were talking about it 18, 24 months ago in that back then, we were saying, well, the clinicians, they're giving us a certain amount of time and our utilization of that time is pretty high. And so we're asking them for more capacity, more time on their calendar. We've been successful on getting more time on the calendar, so now we're at the point where we have to -- we're back to we need to utilize that time better. And there's a few things that we're focused on. This year, we've talked about more of a balance of filling existing clinicians capacity versus hiring in new clinicians. So our net clinician adds were a little bit lumpier, like first quarter was a little bit lower than traditional, but that was a deliberate choice that we've made. So when a new patient comes in the door instead of the priority being only the new clinicians, it's more of a balance of, yes, we still are hiring new clinicians. That's always going to be the primary growth driver for the business. But there's some marginal capacity with our existing clinicians that we're putting those new patients to. And then there's initiatives around making the clinician -- making the patient stickier with the clinicians. So we rolled out a new patient CRM tool that is sending communications out to patients who maybe saw a clinician for 1 or 2 visits and then dropped off or they've booked an appointment, but we're sending the messages to ensure that they actually show up for the first appointment, things like that. So anything where we're adding an incremental visit to the clinician's calendar will obviously improve the productivity and visits and revenue for the company.

Great. Just wrapping up on clinicians. And again, it's good to see in the last year or 2 kind of stabilization retention. On a longer-term basis, are there things that you think could actually drive retention higher?

Yes, there's no silver bullet on this. The -- that's what we've come to realize over the last couple of years as we listen to the clinicians. And we -- and we've done things like last year, we went from monthly payroll of clinicians to biweekly, like how most of us get paid. That was a big pain point for them. This year, we moved from the stock-based productivity program to cash, as we've talked about previously. Now we're working on filling their calendars better so that they can make the kind of income that they want and see the level -- the number of patients that they'd like to see. So all those things we think will contribute eventually to improved retention, but it's a journey rather than, oh, if we do this one thing, we'll see retention move up 5 points. Now having said all that, we think there's still -- we think there is room to improve retention. We've seen best-in-class with some of these smaller practices that we've either purchased or evaluating for -- purchased a few years ago or are currently evaluating probably in the 90% retention range. The last time we disclosed, we were at about 80%. So think of it as there's -- so there's opportunity. We think the North Star is probably 85 to high 80s as a percent for retention. And that's what we're marching towards in the coming years. But there's no one thing that I would point to that's going to get us there.

Understood. I want to shift gears just to kind of payer dynamics because on the one hand, payers have been under pressure in terms of utilization, the margins have been pressured. On the other hand, they need more access, particularly for mental health. So can you just discuss the puts and takes there, what you're seeing payers. And I think you still expect exiting this year kind of low to mid-single-digit rate increases. What gives you that confidence?

Yes. You just nailed it. You gave me the answer. And it's really -- thanks for the softball. It's really the fact that, yes, payers are under financial duress. This isn't new. It's actually been going on now for at least a couple of years. And so they're having financial challenges. At the same time, they're getting a lot of pressure from their employer clients and their members around access to mental health care. And access to mental health care can come in different flavors. It could be overall access, it could be access to in-person capabilities, which plays well for LifeStance, but they're getting pressure from both sides. I think of it almost similar to -- it's no different than like a hospital system. The payers are under -- they have financial stress. They still need the hospital system in their network. They've got to negotiate. The hospital systems costs are going up. And so there's just going to be that -- there's that trade-off. We think based on all the signals that we see as we do negotiations and have conversations with payers that, that low to mid-single-digit rate increase in the coming years is a reasonable spot for us to assume. And while it's early days for next year, there was a positive signal in the early view of Medicare -- the Medicare rates for next year. We have about 25% of our book of business is tied to Medicare. So we don't get Medicare rates. We get -- it could be 165% of Medicare, but it's tied to Medicare. It's early. So obviously, nothing is final as we know. But right now, that's solidly mid-single digits for a rate increase, which is a much better place to be than last year where we were staring at like a minus 3%. So again, we feel good. There's recognition around the mind body connection that mental health -- improving patients' mental health will contribute to lower total cost of care. Most payers get that and value our services.

Got it. Well, I think exiting this year, we probably won't have to talk about the 1 payer.

Yes. Thank you.

Maybe one last time on that. But why was that unique? Maybe just to kind of set the bed and just kind of what are other discussions like that again gives you that confidence?

Yes. So this was unique. This is a big national payer. Their reimbursement level was materially above market and their peers. And this was an agreement from years ago when LifeStance was significantly smaller. And I can only -- my hypothesis, I'm guessing is that this payer at the time was really trying to build out their mental health network and make sure they had access for their patients, and they had gone with this very high reimbursement. And a couple of years ago, as the companies that have -- the payers that have MA and exposure and things like were starting to feel the financial stress. They looked for opportunities across their corporation to improve earnings to try to offset some of that financial stress. And they looked at their entire provider portfolio for any provider, whether it was a hospital system or a LifeStance that stood out to be well above market. And if they had the contractual right, which they did, they could renegotiate. And so that's what happened. The great thing for us or the silver lining was that we were able to negotiate with them, had a good partnership where they spread it out over 2 years so that we could digest the reduction because it was a sizable reduction. So there were 3 rate cuts, 2 were last year on March 1 and July 1, and then the last one was March 1 of this year. So we're past all those now. And so -- and we've been able to successfully digest those either with margin expansion last year while it was going on. And even this year, we're guiding to some modest margin expansion while digesting that.

Great. I want to touch on just kind of value-based care. I mean I think up into this point is mostly about access in terms of what you're providing and I think the management team has always cautioned that this takes time. But like how do you think about that on a longer-term basis in terms of outcomes and kind of where you fit in that?

Yes. So you're absolutely correct. Today, the value-based contracting with payers really centers around access. And even then, it's only a handful of, I think, of the more thought-leading, forward-leading payers that are even doing that. Most are just -- it's just straight reimbursement. As we look out, let's say, 5 years on the horizon, I believe that there is an opportunity for a company like LifeStance to be the best and to prove it. And the only way you can prove it is by demonstrating outcomes and proving that you're improving patients' health and working with the payers to be able to prove out that, that improvement in mental health is playing through also in the improvement of physical health, so you're lowering total cost of care. And with our size and the volume of patients and visits that we do, I think we're uniquely positioned to be able to have those kinds of conversations with payers. I was just meeting with the Head of Behavioral of one of the big national payers a month ago, and she was frustrated around this topic, where she was like, we just got to do something. We've got to take a first step. And LifeStance, you're like nobody else, let's our 2 organizations partner together and see if we can figure something out. We just got to do -- we know it will be wrong when we start, but let's like get going on the journey. So I think as we get eventually, the value that mental health companies are creating through improved health outcomes will become increasingly important. And that's exciting for us.

Great. Let's shift gears just to kind of more in the near-term 2025 guidance, in particular, kind of the ramp in the back half. And I did feel like you guys did a really good job with details around them on the conference call. So can you just talk about that kind of first half to second half and in particular Q4, the visibility that you have or confidence that you can deliver on that?

Yes. So I appreciate the question. So First of all, we're really pleased with the first half performance that we've had on this year and jumping in the second half. And Dave kind of hit a lot of the initiatives that we have or the buckets of initiatives around increasing productivity. So Craig, as you referenced on the call, we kind of broke it down between -- you can think of second half over first half being -- the step up in revenues, like 90% from revenue, 10% to a little bit of rate in there. And on the revenue side, you get a mix between net clinician adds, which will be always important to our growth algorithm. But this year, we're kind of putting in productivity as well. And so as you kind of step in between Q3, net clinician adds is more important than productivity when you think about the step up getting into Q4. And then in Q4, we have given enough time to be allowed for initiatives to take hold, and that's where you see productivity more of an influencer kind of going into Q4, but net clinician adds will always be important overall.

That's helpful. And margins have come in higher than expected in the first half of the year. What are some puts and takes into the back half on the margin front?

Yes. So overall, so Dave stated a couple of these points. So first and foremost, Q2, we increased our guide by $5 million on adjusted EBITDA perspective, guiding full year margin in double digits, so low 10%. And so we're really pleased with the trajectory of the business. When you think about puts and takes kind of going in second half versus first half, it really is on the ramp as it relates to the revenue in terms of being able to get their productivity from the clinicians. And again, Dave defined productivity, the way we think about it is really filling the capacity that our clinicians are providing us. And I link back to when we think about it from a patient engagement, when we think about it from the incentive program we've discussed, when we think about pure practice management and things we're doing to make the flow of patients easier on the clinical operations and the clinical team, they're all very good markers in terms of being able to get that unlock as it relates to productivity.

Great. And understanding it's early here, right? But when we think about kind of this year and transitioning into 2026, any high-level thoughts in terms of growth algorithm kind of margin.

Yes, absolutely. So you referenced it, Craig, it is early, and we have not guided '26, but we've had a lot of the conversation already. So when you think about the growth algorithm, our intention is to, we believe, will return to low middle single digits as it relates to rate. And then overall kind of thinking about the revenue in the mid-teens overall kind of when you think about it, just putting it all together. And then we expect to be able to continue to leverage G&A and operating expenses, and this is what we'll move from '26 to like the long-term guide is that we feel really good about the trajectory and being able to get to the 15% to 20% on an adjusted EBITDA perspective.

Great segue. Dave, when you and Ken came on board, I mean, margins were kind of mid-single digits, and you've doubled on I know at the time that was kind of an ambitious target, right? And there's a lot of work to be done to get there. So can you talk about just kind of some of the things that have helped margins 5% to 10%, but more importantly, the 15% to 20%, where is the operating leverage in the business from here?

Do you want to take this one?

Yes. So if you look at the historicals, right, so the team did a really nice job of being able to get margin expansion as it relates to center margin, Craig, like overall. So when you think about the opportunity in front of us is there's some leveraging that we expect at a center margin overall. Most of those costs really are related to the service now. So it would be your occupancy type costs. And then when you get to the general and administrative line, it really is from the benefit of deployment of both kind of that can grow scale and then also just technological initiatives and efficiencies to be able to have your revenue grow at a higher pace than what your G&A is growing. So overall, we feel that's the algorithm that kind of gets you from our current margins into the 15% to 20% range in the long-term margin perspective.

And is it incremental from here? Like if I think about a lot of the operating initiatives you took in terms of you reduced your payer network, right, you consolidated some of the physical footprint on centers. So a lot of kind of heavy lifting, so to speak. Are there any other initiatives out there in terms of to get to 15% to 20%? Or is it more just incremental at this point?

So I would look at -- I mean, and Dave can comment on some of what we're doing just around AI in totality, but a lot of it is enablement as it relates to driving efficiencies within your business. And so I don't think there's this big bang, Craig, like where all of a sudden, you get this like huge unlock, right, to be able to kind of step into the 15% to 20%. So there's a bit of just the initiatives taking hold and kind of being able to get to that long-term margin. But Dave, I don't know if there's anything you want to add.

Yes, that's well said. I think if we go back a couple of years ago, it was all about simplification and standardization. And we did things like we reduced the number of payer contracts we had in half. We did things like that. But we still are a very heavily manual people-intensive business from behind the scenes, the administration. And so whether it's AI or RPA or just digital tools like new vendor solutions, there's a lot of opportunity for us to become more efficient and be able to drive operating leverage in the coming years. But it won't be like 400 bps of leverage in 1 year. I think it's going to be, as Ryan is saying, we'll just keep chipping away at it. We feel good about every year, we'll be able to generate operating leverage.

Got it. Maybe just building on that from an AI perspective, any interesting kind of use cases you're evaluating? And then I know you're also evaluating kind of an EHR, kind of how important that is?

Yes. Yes, so first, I'll start with your second part of your question. So we are evaluating an EHR. We talked about it in the last couple of earnings calls. This is a huge decision for us. It's foundational for everything that we want to do. You got to get the EHR right to be able to plug in a lot of the point solutions. And so that's ongoing. We've said we'll decide the new EHR, and it could be our existing EHR vendor, but we'll decide on that new vendor this year. And so that's one thing. The second thing is that just when we think about technology in general, we're not going to build a lot ourselves. This is going to be more about going out partnering with the best-in-class solutions. We did that with digital patient check-in. We've done that with our clinician onboarding and some of these new tools that we've implemented. So we're doing the same thing with the AI vendors. And a lot of these are smaller venture-backed, private equity backed, but they're the ones -- it's moving so fast that we're -- that's our process -- that's our thought process, which is let's just go out and partner. And every year, we can stress test whether that they're still best-in-class or should we move somewhere else. And then to now get to your AI part of your question, a number of use cases. We highlighted in the earnings call, we're doing some things in our phone intake or new patient scheduling team. And as you can imagine, whether that's an AI agent answering the phone and being able to being able to take some work off of the actual -- the people that are answering phones work. So making that more efficient or using AI from a quality perspective. There's a lot that's going on there. And then on revenue cycle, there's just -- there's several use cases. I think those are -- that's going to become standard fare in the industry. It's moving fast, but that's going to be standard fare. The more exciting piece to me is what you can do to augment the clinician. And I'll be clear as I talked about augment or support the clinician, not replace the clinician. And the first use case that's out there is AI, AI Scribe, AI note taking, it's called different things. But that is one where it's going to take mundane work off the clinician's plate. They -- most of them love this concept. The other thing is as we've been piloting it, patients appreciate it because if you think about you're having a conversation with your clinician and you're pouring out your soul to them and they've got their head down in their computer and they're typing, you're not getting like the best connection. So we -- not that every clinician does that, but many do. And so the -- so we're getting great feedback from the patients as well. So we think of AI documentation in 2 buckets. There's for the prescribers and then the ones that are doing therapy. We're looking to roll out company-wide the solution for the prescribers or the clinicians are doing medication management or psychiatrists and nurse practitioners in the back half of this year. And then we're piloting a number of solutions for the therapists. And so -- but again, I think that 6 months from now, a year from now, we'll be talking about other types of use cases that are relevant to be able to support and augment the clinician.

Great. And just going back for a second to your comment on the digital check-in. I know that was an important initiative. I think it also had some positive implications for cash flow and things. Can you just give us an update in terms of how that got rolled out and...

Yes. So fully rolled out. It's -- we went out and we evaluated the various vendors and chose a best-in-class solution, and it's gone really well. But let's take a step back, why did we do this? So today, about 70% of our visits are virtual, 30% are in person. And during COVID, when we went from 100% in-person to 100% virtual, what we did was we made sure that we had the right technology and tools to be able to deliver care to patients. That was really important. But what we didn't do was make sure we had the right tools to be able to do the administration. And that's everything from making sure we had the right forms signed or that they had -- we had their ID card or driver's license. Think of the things that you do when you go into your primary care physician's office and they ask you for that information. We didn't have a good way of doing that if it was a virtual appointment. And so that was the genesis of we need to get to a digital patient check-in tool. And then yes, in addition, it has really changed the game for us on collecting of patients cost share. And it's one of the reasons why we're at -- since we've been public, a record low for us for DSO. We're at 34 days. And I think at the worst last year, we were in the 50s after Change Healthcare, but we were in the 40s typically as more of a stable number, and now we're at 34. And every day is worth $3.5 million, $4 million of cash on the balance sheet to us. And there's still room to improve the 34 days. So that was a contributor to the improved cash collection that you all have seen this year.

Perfect. Just as we wrap things up in the next couple of minutes, I want to spend time on capital allocation. You've been very clear in terms of looking for kind of tuck-in deals and capabilities. What's the latest from the Board in terms of that approach? How do they view that versus buybacks?

Yes. Yes. So really from a -- so capital deployment. So first of all, I love the question because the assumption then is we actually have a strong balance sheet. We've got cash on the balance sheet. We've got some debt capacity. We have really low leverage ratios versus 2.5 years, 3 years ago when I first joined, we were talking about, are you guys going to run out of cash and have to go out into the capital -- out to the debt and capital markets. So we're in a really good spot from that perspective, gives us a lot of flexibility financially in executing on our business strategy. Craig, you and I we've talked about our priorities for the deployment of capital are -- number one is organic -- supporting organic growth. The example there would be building of de novos. Number two would be inorganic, which would be M&A. Right now, that's primarily tuck-ins as we -- for geographic expansion is how we're thinking about those. And the third would be a stock buyback. There's a lot of opportunity for us in those first 2 buckets that we feel really good about the deployment of capital on organic and inorganic, and that's been our focus. What's different this year is the level of the stock price. And we believe as a management team and as a Board that there's a dislocation between where we should be valued and the current stock price. And so I think for the first time, we're having conversations with the Board around does it make sense from a capital deployment strategy to be doing -- to potentially be doing stock buybacks. It's a conversation at this point. So there's nothing that I would be announcing. It's early days, but it is a change in mindset because we do -- because otherwise, we do feel really good about those first 2 buckets on being able to deploy capital in those.

Great. And last one, I don't want to have you speak for Ken, but he did an open market purchase, which certainly was a shot in the arm to the stock. And then I think got a lot of attention. Any thoughts there in terms of whether that's sort of confidence or maybe similar dislocation.

Yes. Yes. I mean I think, Ken, -- so Ken, the previous CEO and is currently Exec Chair for LifeStance was pretty annoyed at where the stock price was. And as an investor, and he had some discretionary funds to invest, he decided that he would invest in LifeStance. And I mean, think of it as it was a vote of confidence on the management team, the business strategy, the performance and also in combination with the stock was really low. And so it was great to see. I appreciate him doing that.

Great. All right. I think we're right at time. So Dave and Ryan, thank you so much for your time today. I appreciate you being here.

Thanks and we're in a great conference. We appreciate the invite.

Thanks for that.

Thank you.