LifeStance Health Group Inc (LFST) 2022 Q1 法說會逐字稿

Good day, and welcome to the LifeStance Health First Quarter 2022 Earnings Call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to turn the call over to Monica Prokocki, Vice President, Investor Relations. You may begin.

Thank you. Good afternoon, everyone, and welcome to LifeStance Health First Quarter 2022 Earnings Conference Call. I'm Monica Prokocki, Vice President of Investor Relations. Joining me today are Mike Lester, Chief Executive Officer; Mike Bruff, Chief Financial Officer; and Danish Qureshi, Chief Growth Officer.

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

Before turning the call over to management for their prepared remarks, please direct your attention to the disclaimers about forward-looking statements included in the earnings press release and SEC filings. Today's remarks contain forward-looking statements, including statements about our financial performance outlook. Those statements involve risks, uncertainties and other factors, including the possible future impact of the COVID-19 pandemic on our business that could cause actual results to differ materially.

In addition, please note that we report results using non-GAAP financial measures, which we believe provide additional information for investors and help facilitate comparison of prior and past performance. A reconciliation to the most direct comparable GAAP measures is included in the earnings press release tables and presentation appendix. Unless otherwise noted, all results are compared to the prior year comparative period.

At this time, I'll turn the call over to Mike Lester, CEO of LifeStance. Mike?

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

To begin, I would like to emphasize the importance of our mission of improving access to trusted, affordable and personalized mental health care. As you may know, May is mental health awareness month, the time when we, as the country, raise the awareness about the importance of our society's mental health. And as always, LifeStance is committed to helping people live healthier, more fulfilling lives as the country's largest outpatient provider of in-person and virtual mental health care.

Turning to results. We are pleased with the team's disciplined execution of our strategy, which drove solid performance in the first quarter even through the recent pandemic surge and ongoing labor market dynamics. We continue to see strong demand for our services and consistent execution by the team, which was reflected in our results. Revenue for the first quarter was $203 million, representing growth of 42% and adjusted EBITDA was positive $12 million.

As we've noted previously, revenue growth is primarily driven by our total clinician count. In the first quarter, we grew our net clinician base to 4,989, representing growth of 51% compared with the prior year and in line with our expectations. We believe that our first quarter performance positions us well for the balance of the year. As a result, we are reaffirming full year guidance for revenue in the range of $865 million to $885 million, Center Margin of $240 million to $255 million, and positive adjusted EBITDA in the range of $63 million to $67 million. Mike Bruff will provide additional detail about our financial performance in his section of our prepared remarks.

Before turning to execution, I would like to remind everyone about what differentiates LifeStance's business model from pure-play telehealth companies in the market. Compared with virtual health care companies, our nearly 5,000 W-2 employed clinicians are able to deliver mental health care services in-person or virtually, a source of sustainable competitive advantage for LifeStance and one of the key drivers of our momentum in the market.

Independent third-party surveys continue to support LifeStance's approach to care. For example, according to our recent BlueCross BlueShield survey, nearly 70% of patients want to see the same clinician both in-person and via telehealth. It is clear that patients and clinicians want convenience, choice and control over plan and how to access or provide mental health services, and we are uniquely positioned to deliver on both patient and clinician preferences due to our flexible hybrid model.

Furthermore, patient demand for our services has never been stronger. Not only are patients attracted to the hybrid model, but we also provide affordable access to care through coverage that is in network with commercial insurers as opposed to cash pay or subscription-based online models.

Additionally, because of our diverse mix of prescribers and therapists, patients can access personalized comprehensive care to meet each individual's unique mental health care needs. And as we have noted previously, our patient acquisition costs remained very low as the vast majority of our patients come directly from sticky primary care referrals, in-network payer relationships and organic online self-referrals. We are not and never have been dependent on direct-to-consumer paid marketing.

Turning to execution. In the first quarter, I'm pleased that we've been able to demonstrate consistent performance and are executing effectively on our profitable growth strategy. We are reimagining how patients receive easy access to affordable mental health care. To deliver on that goal, we continue to focus our growth strategy on 3 core pillars of expanding into new markets, building market density and deploying our tech-enabled services.

In terms of expanding into new markets, we entered into 6 new states in 2021 and are now deepening our presence in our existing 32 states contributing to our mission of improving access. As for building market density, clinicians remain our primary growth driver. And in the first quarter, we grew our clinician base nationwide. We added 199 net clinicians in the first quarter, bringing our total to 4,989, an increase of over 50% year-over-year. This strong growth, especially in the current labor market environment, demonstrates that our value proposition is resonating as we continue steady net clinician growth each quarter.

Our growth in our clinician population is also an indication of our operational capability to onboard and ramp new clinicians within our organization, one of the largest W-2 employee groups and clinicians in the mental health care space. Our clinician growth was driven by our organic recruiting engine as well as our practice acquisition engine. In the first quarter, we opened 41 de novo centers to bolster our physical presence in addition to our virtual service offering, adding to our over 500 centers nationwide.

Additionally, we completed 2 new acquisitions in the first quarter, bringing the total since inception to 79. Both acquisitions were tuck-ins to platforms in existing states in which we operate, Michigan and Massachusetts. Growing our clinician base supports our mission of improving access to affordable, high-quality mental health care.

In terms of deploying our tech-enabled services, we believe that our opportunities to implement digital tools to support patients' ability to navigate their mental health care experience is a significant competitive advantage for LifeStance. As we previously announced, we are rolling out a new improved online booking and intake experience, or OBIE, for short, to better match our new patients with clinicians and to set them up for success in that first visit.

We have continued to deploy OBIE across the country and are now live in 7 states. In these states, we've seen a significant reduction in the number of online cancellations because of improvements in the intake and booking process and an increase in levels of patient satisfaction. This enhancement will continue to be rolled out state by state throughout 2022 and into early 2023 as well as receive additional product improvements over time as we continue to invest in innovation around the booking experience for our patients. I have great confidence in our ability to continue to execute our strategy and take advantage of the considerable market opportunities in front of us.

Finally, in the first quarter, we released a State of Youth Mental Health report, including the results of a survey of 2,000 American parents. We learned that 68% of parents have seen their children face significant mental and emotional challenges during the pandemic and are looking for solutions. To further improve access for youth and support the destigmatization of mental health, we awarded grants through the LifeStance Health Foundation to several nonprofits that directly serve youth and adolescent populations, including the American Foundation for Suicide Prevention.

We are committed to expanding access to mental health care among at-risk populations and directly addressing the alarming increase in young people struggling with their mental health. We're honored to partner with organizations that share our vision of a truly healthy society for mental and physical health care are unified to make lives better.

In closing, we're starting 2022 with strong momentum for the first quarter of continued profitable growth as a public company. I'm confident in our future and our ability to help people on their path to better mental health.

Now I'll turn it over to Mike Bruff, Chief Financial Officer, to provide more detail on our financial performance and outlook. Mike?

Thanks, Mike. Today, going forward, I will frame my comments in the context of our long-term strategy, which includes balancing growth, profitability and liquidity considerations. So let me start with growth. LifeStance continued to deliver solid growth in the first quarter with revenue of $203 million, up 42% year-over-year. We believe that first quarter revenue overachieved our expectations primarily due to Omicron having less of an impact in February and March relative to our initial estimates.

Turning to profitability. In the first quarter, Center Margin of $54 million increased 23% over the same period last year, driven by strong revenue growth. Adjusted EBITDA remained relatively flat year-over-year at $12 million or 6.2% of revenue. Adjusted EBITDA as a percentage of revenue declined due to the decrease in Center Margin as a percentage of revenue, partially offset by improved leverage in G&A expenses. First quarter adjusted EBITDA exceeded our initial expectations, primarily due to the slight revenue favorability and delayed G&A expenses which we expect will be utilized across the remainder of the year on planned investments.

Turning to liquidity. LifeStance continues to be supported by a solid balance sheet. We exited the quarter with cash of $114 million and net debt of $177 million. In the first quarter, we generated positive $3 million of cash from operations. As we announced this afternoon with our earnings release, we entered into a new credit facility in early May. This facility will be used to repay our existing net long-term debt at a more favorable cost of debt than the existing credit facility. And at the close will provide access to incremental capital to fund growth through up to $100 million in delayed draw loans and $50 million in revolving loans, both undrawn at close.

Turning to guidance. As Mike mentioned, we are reaffirming our guidance for the full year. For the second quarter, we expect revenue of $209 million to $214 million, Center Margin of $57 million to $61 million, and adjusted EBITDA of $12 million to $15 million. As we noted last quarter, we expect improvement in profitability in the second half of 2022 based on continued growth in our clinician base and leverage in the second half of the year driven by our strategic decision to moderate our de novo center openings and scale our G&A.

To summarize, we remain focused on delivering on our long-term strategy through balancing growth, profitability and liquidity considerations. With that, I'll turn it back to Mike Lester for a few words before going to Q&A.

Thank you, Mike. Our financial performance, execution and differentiated strategy creates strong momentum going into the balance of 2022 and a clear path to achieve our goals. We have solidified our leadership role in the behavioral health delivery as a trusted partner to patients. As we build upon this trust, we will continue to drive meaningful improvements in the cost of care, access and engagement across our flexible hybrid model.

I'd also like to take a moment to recognize the continued contribution of all of our colleagues at LifeStance, who've played a vital role during the pandemic and are now looking forward to continuing to build our best-in-class platform. We're proud of what they do every day in the lives of our patients. Mike, Danish and I will now take your questions. Operator?

(Operator Instructions) Our first question comes from Ricky Goldwasser with Morgan Stanley.

Yes. Just wanted to get a sense, how is retention -- clinician retentions in the quarter? And sort of what are you seeing in terms of wage inflation and hiring?

Yes, I would say that our clinician retention has remained stable over the last couple of quarters. So we feel good about the value proposition that we have for clinicians, and we haven't seen that change.

And then in terms of wage inflation and kind of like hiring?

I'm sorry, could you say that again, Ricky? Wage inflation?

Are you seeing -- yes, wage inflation and just kind of like the overall cost inflation?

Sure. Go ahead, Danish, you want to answer that?

Sure. Yes, happy to. So we continue to see wages increase year-over-year as we always have. Our clinician type has always been high demand, and we have always recognized that in the way that we set our compensation structure and build and plan for wage increases over time for all of our clinicians. Those sort of increases have always been well received by our clinicians, and they all remain within our planning assumptions. So we feel good about where we're at in the year and how things look.

Our next question comes from Lisa Gill with JPMorgan.

I just want to understand how we should think about the progression of the year. And I think, Mike, I heard you say that the clinicians coming in at 199 were in line with your expectations. But if I look back, it's been averaging like 400 a quarter. So as we think about the back half of the year, do you expect an acceleration in the number of clinicians that you bring in? Or are there more things on the productivity side?

I know you've talked last about technology and some of the opportunities there. And then also, as we think about the clinicians, you talked about the acquisitions that you made. Can you talk about those 10 acquisitions? Did you bring clinicians in with that? And what level of productivity have you seen there?

Sure. Thank you, Lisa. So I guess I would start off by reminding everybody that there are 650,000 clinicians in the country today, and we're still less than 1% of that. So we don't guide to specific clinician count, but expect to see a continued strong growth of our clinician base. And again, I think that reflects the value proposition and that continues to resonate in the market.

Danish, would you like to add anything to that?

Sure, yes. I mean in terms of Q1, our clinician count was right on point with our internal expectations. We're going to experience quarter-to-quarter fluctuations. As you pointed out, last year in Q1, we also had approximately 200 net adds. But from where we stand right now, we have a solid cadence on organic hiring, we continue to have a strong M&A pipeline that we feel good about and retention remains stabilized.

And so if we just think about -- Danish, do you expect that the productivity gains to come as we move -- I'm just looking at kind of first half of -- you just gave us the guidance for the second quarter, and you obviously reported the first quarter. And as I think about that, acceleration into the back half of the year, I'm just trying to understand what the key drivers are going to be there since so much of the model is driven based on clinicians.

So is it really that they become that much more productive? Or do you think we're going to see an acceleration of incremental clinicians in the second quarter that will be productive in the back half of the year? Just if you can help us to think that through in any way.

So we haven't guided on productivity. There are many variables to productivity. So timing of our M&A. There's a geo mix as we expand into newer states. That's generally at a lower rate until we build out density and go renegotiate rates with payers. There's a variation in the number of business days in any given period. As we've reached sort of the scale that we're at today, we see that our performance is becoming more subject to seasonality based on business days. A good example of that being second half of the year has less business days just due to the number of holidays in Q4 alone. So we just -- we still feel good about the way we hire and recruit. Mike, would you like to add to that?

I think, Lisa, from a productivity perspective, when we think about our individual clinician, we haven't made any changes to -- material changes to our ramp assumptions, onboarding, et cetera. The general productivity of a clinician is still within the range of expectations that we've had. But as Mike said, if you look at the overall base on a quarter-to-quarter perspective, you'll see some fluctuation just depending on, again, the timing of certain things or where -- the timing of an M&A or where in the country, we may hire depending on the rates there. So you can see this in some of our history as well. But at the individual clinician base, they're certainly within the range of our expectations.

Our next question comes from Chris Neamonitis with Jefferies.

Great. Congrats on the quarter. So we recognize that in-person is always going to be core to the offering. I don't think there's any dispute to the merits of the hybrid offering. But the way you build the model out, to the KPIs you provide publicly, it all comes down to clinician count, right? So at what point should we think about clinician growth maybe necessitating more real estate? How should we think about the leverage you can get out of your current physical footprint? Would you need to modify existing centers? And if you don't need to modify your footprint, how does that change the long-term outlook for Center Margins?

So we've -- our guidance assumes a very intentional moderation of de novo openings. So -- and we've talked about this in the past. Pre-COVID, we were less than -- 5% of our visits were virtual. That's backed up into the high 90s and has tended to tick down about 1 point a month. It's -- I would say, it's stalled out a little bit in November, December, January because of Omicron and has continued to tick down. We're about 79% in April actually.

And we spent quite a bit of time talking with payers. And we believe as well as the payers believe that in the mental health space, this is going to shake out around 50-50. Does that take a year to get to 50-50, does it take 2 years, we really don't know. But again, we're really agnostic to that because we have negotiated rate parity in the vast majority of our contracts. So we're just trying to be very, very prudent with our capital even at, let's call it, 79% today, we have a long way to go to 50-50.

If you believe 50-50 is the right answer, we can mathematically double the number of clinicians that we have today and not expand our physical footprint at all. So we feel really good about that. We feel good about the leverage that gives us in the market.

Got it. And then I appreciate the commentary on the differentiation versus pure-play telehealth. But can you talk a bit about how your model is different versus those offerings in terms of patient acquisition and prescribing practices? And when you think about the visits that are driven off of referrals, what are you hearing from your referral base in terms of their preferences, in terms of where they redirect patients to?

So I can handle that. So in terms of patient acquisition, our patient demand for our services has never been stronger. Our hyper model and diverse mix of prescribers and the therapists is very comprehensive, and we continue to believe it differentiates us in the marketplace. Our patient acquisition costs remain very low because the majority of our patients come directly from 3 organic levers, one being city primary care referrals. So these are established relationships with PCP networks across the country that remain very healthy. Our in-network relationships with payers that direct membership our way as well as organic online self-referrals.

So if you look at it in terms of the totality of spend, we're -- last year, we spent less than 2% of revenue on marketing. This year, we're trending to less than 1%. So again, we are not -- this is not an acquisition model that is heavily based on bidding on keywords or nonsustainable kind of referral patterns.

Our next question comes from Kevin Caliendo with UBS.

I just want to -- you kind of alluded to this, but I am going to ask it this way. Just want to frame the 200 sort of net adds. Is this a good organic number right now in terms of how we should think about the business going forward? Sort of is this a steady-state? I'm asking in the context of the long-term planning for the business. Interest rates are higher. Inflation is higher. It feels like the job market is a little bit steadier now than it was before. People's net income or net worth is probably not as high as it was a year ago, broadly speaking, at least relative. Is it a fair way to frame your opportunity? Or is this just sort of one data point?

Well, I think it's -- I'll let Danish jump in here. I think it's kind of one data point. I mean in a kind of a perverted sense, inflation could be viewed as our friend. And that from a labor market dynamics, I think people are going to have to go to work -- go back to work. They chose to sit out for a while when they're paying $8 a gallon for milk and gasoline. But historically, we haven't guided to clinician counts for the year, and we still feel good about our ability to hire and retain clinicians. Danish, do you have anything to add?

No, I'd just add that our overall mix of net clinician adds continue to skew heavier and heavier towards organic over time. However, M&A is also -- the pipeline that we have remains robust. And we'll -- between those, we're going to continue to see quarter-to-quarter fluctuations in the number of net adds. So I wouldn't -- again, I wouldn't read too much into a single data point of 199 adds and what that indicates. Again, we feel very confident in the ability of our organic recruiting engine to continue to increase the number of adds and for M&A to be a meaningful contributor as well.

If I can ask one follow-up. For your Center Margin targets, can you take me through sort of what are the pushes and pulls that get you to either side of the range? Like what would matter the most in terms of a margin at the high end or low end of your range?

Kevin is that, are you asking on the full year, I assume? So the main driver on that is going to be revenue growth. So we have already planned our fixed costs in terms of the number of de novo adds. Therein, with our centers, fixed cost of on-site admin, very important administrative staff there. And so this really gets down to driving top line growth and with the unit economics of the clinician is driving that -- those economic -- the growth in those economics over those fixed costs, and that will drive the high and the low end there. It's really about top line growth.

Our next question comes from Jamie Perse with Goldman Sachs.

I wanted to follow up on the clinician productivity question from earlier. Are there any stats you can provide just in terms of what percent of your clinicians are fully ramped and fully productive? And obviously, new clinicians are dilutive to that. So just trying to get a sense of where you are in clinicians ramping to productivity and how that might impact how we think about gross margins for the rest of the year?

Sure. This is Danish. I can cover that in terms of how this plays out at the individual clinician level. So there is a ramp period. As we've talked about in previous calls, there is a ramp period for clinicians regardless of whether they're coming in through organic recruiting or through M&A. On the organic side, there's typically a 4- to 6-month ramp from start to maturity, which is essentially at the point they have a full case load.

And then for M&A, it's more of a step function, but it is also a 4- to 6-month time period from when we get them onto our platform. And you start to enjoy the full benefits of them being on our contracts and the revenue kind of uplift from that. So you see the same kind of time period on both. And then obviously, you can play through the fact that retentions remain stabilized at the same level that we witnessed in previous quarters and kind of the net effect there.

Okay. And then just maybe a follow-up on the contribution to growth from M&A. You guys previously guided to $50 million to $70 million for the year. It looks like you did about $23-or-so million in the first quarter. So a good chunk of that already done. Any change in sort of the cadence of M&A you expect this year? Or if that $50 million to $70 million is still the right number? Should we expect contribution from M&A to come down throughout the rest of the year?

No. We feel very comfortable with the $50 million to $70 million guidance that we've given out there. That just ebbs and flows throughout the year. It's a little bit hard to control. It's just not linear. But we have a very robust pipeline, and that will be -- we think that will be really in our control on how we decide to modulate that. But we feel comfortable with the $50 million to $70 million.

Our next question comes from Ryan Daniels with William Blair.

Nick Spiekhout on for Ryan. I guess kind of going on the inflationary front, I'm just wondering how able are you guys to pass off things like wage inflation on to the payers? And is there kind of like what's the amount of time that would typically take to work that through with contracts?

I'll let Danish talk about wage inflation from the clinician standpoint to begin with, but I'll start off by saying inflation has given us permission to pick up the phone and call every single one of the payers. And so you can be rest assured that we are doing that. There is a lot of pressure on everybody from an inflation standpoint, and we will be using the market power that we have to have those discussions.

Danish, you have anything else to add?

No, that's exactly right. We continue to engage in consistent conversations with all of the payers that we're in network with about this exact topic. They're very receptive and acknowledge the fact that this is something that everyone in health care needs to be focused on. But again, we've always planned for this, and we feel very comfortable that our planning assumptions take into account this year any expected wage inflation and that we've passed appropriate increases on to our clinicians and that we have an appropriate pipeline of increases coming from payers to keep us in a good time.

Okay. Great. And then regarding your argument, kind of that those pressures are going to push a couple of people back in the workforce, looks like definitely a preshow. I am just wondering have you guys seen any providers that might have left LifeStance a year or so ago, now reassessing where they're at and actually coming back to LifeStance? Basically trying to think of, are we just getting clinicians back in the workforce? Are we giving specifically former LifeStance clinicians back in?

Yes. We really haven't seen that. There are lots of little anecdotes out there, but we haven't seen that in any significant way yet.

Our last question comes from Gary Taylor with Cowen.

I wanted to ask about DSO, which has been creeping up for about 4 quarters in a row and just see what was driving that? What would help bring that back down? And then just secondly, to put a finer point on Lisa's question, if you're doing $26 million EBITDA in the first half for your guidance, you've got to do $39 million in the second half to get to the midpoint of guidance, which means quarterly EBITDA has to move up towards almost $20 million a quarter. I just wanted to understand better what you thought the drivers of that were going to be? A little bit of that is revenue, but it really does look like the margin estimates or expectations have to be a fair amount higher in the second half.

Gary, this is Mike Bruff. For the first question around DSO, accurate observation there. Our DSO has crept up and meaningfully settled off here in the first quarter. And this has to do mostly with the increased pace of M&A that we saw toward the end of last year. And when we bring in that M&A and we work through integrations, we will, at times, intentionally hold claims until we work through the integration process and move that clinics and those clinicians onto our rates.

If we don't do that, then we might be reprocessing a lot of claims. So this is a little bit to do or actually quite a bit to do with the timing of some of our acquisitions. It was a large driver of the increase in accounts receivable here in the first quarter. So this is more to do about the timing of acquisitions, and we would expect, relative to last year, this to be a little bit more tempered this year and our expectations is to acquire between $50 million and $70 million -- or deploy $50 million to $70 million of capital for acquisitions this year.

The second question with respect to adjusted EBITDA significantly increasing half-over-half, it is really 2 things. One, as I said, the growth expectation in half-over-half in terms of revenue and our decreasing or slowing the ramp -- or not ramp, pardon me, slowing the pace of de novo center openings. So we will get a profitability boost by doing that in the back half of the year.

And as I mentioned already in the prepared statements, in the first quarter, we had a leverage in our G&A expenses, which were about 150 basis points lower than the first quarter last year in terms of percentage of revenue. So those 2 things, driving increasing revenue over fixed center costs and slowing fixed center costs and then continuing to be maniacally focused on driving leverage in our operating expenses. And that's what we believe will get us to our full year guidance range.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Everyone, have a great day.