Good afternoon. My name is Lauren, and I will be your operator for today. At this time, I would like to welcome everyone to the LifeStance Health Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Monica Prokocki, Vice President of Investor Relations. You may begin your conference.

Thank you. Good afternoon, everyone, and welcome to LifeStance Health's Second Quarter 2022 Earnings Conference Call. I'm Monica Prokocki, Vice President of Investor Relations. Joining me today are Mike Lester, Chief Executive Officer; Danish Qureshi, Chief Operating Officer; and Mike Bruff, Chief Financial Officer. We issued the earnings release and presentation after the market closed today. Both are available on the Investor Relations section of our website, investor.lifestance.com. In addition, a replay of this conference call will be available following the call. Before turning the call over to management for their prepared remarks, please direct your attention to the disclaimers about forward-looking statements included in the earnings press release and SEC filings. Today's remarks contain forward-looking statements, including statements about our financial performance outlook. 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 to help facilitate comparison of prior and past performance. A reconciliation to the most directly comparable GAAP measures is included in the earnings press release tables and presentation appendix. Unless otherwise noted, all results are compared to the prior year comparative period. At this time, I'll turn the call over to 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. We are playing an integral role in the expansion of access to and delivery of personalized mental health care. In the rapidly changing U.S. health care environment, we have demonstrated that we can provide solutions at scale to meet individual needs in person or via telehealth. Fundamentally, we serve patients where they are and when they need us. That is a key driver of our success and the continued expansion of demand we are seeing. LifeStance is committed to helping people lead healthier, more fulfilling lives as one of the country's largest outpatient providers of in-person and virtual mental health care. In recent weeks, we've seen strong market validation of our hybrid business model through the acquisition of one of our primary care counterparts in the tech-enabled multisite provider space. This event highlighted the value and importance of innovative, patient-focused health care businesses to enhance the speed and efficacy of health care delivery relative to traditional providers while delivering a differentiated value proposition to payers, clinicians, and patients. The hybrid tech-enabled patient-focused model is at the heart of what we do at LifeStance in the behavioral health space and continues to resonate with the market. We often refer to LifeStance as primary care for your mind. We are focused on building the Company for the long term to deliver on our mission of providing access to affordable high-quality care through our hybrid delivery model. We are laser-focused on delivering the best care for our patients through a network of over 5,000 W-2 employed clinicians and the technology platform focused on providing clinicians and patients…

Thank you, Mike. In my new role as COO, I've spend my first few weeks doing three things. First, meeting with our clinicians to learn how we can improve the support we provide to them. Second, meeting with our operations teams to identify areas of opportunity as we continue to grow in scale. And third, diving deeper into our operational data to understand key trends and use that information to better drive our business going forward. These activities have energized me around the immense opportunity we have in front of us as well as reminding me of the critical role LifeStance plays as a leader in bringing mental health solutions to our patients nationwide. Let me first start by providing a quick update on our second quarter operating results as well as our core planning assumptions for the back half of 2022. In the second quarter, we continued our intentional focus on deepening our presence in our existing 32 states. So we will continue to selectively evaluate entry into new states in the back half of 2022 and currently anticipate one to two new state entries. We plan to focus the majority of our attention on building density in our existing markets to further enjoy the benefits of scale and begin driving operational leverage. As we've stated previously, clinicians remain our primary growth driver. In the second quarter, we grew our clinician base nationwide to 5,226, an increase of 237 net clinicians. Importantly, we achieved these results while continuing to shift our focus towards more organic growth. Year-to-date, over 70% of our gross clinician adds have been brought on board via our industry-leading recruiting engine, and we expect that mix to continue to shift more organic in the back half of the year. In terms of de novo, we opened…

Thanks, Danish. As usual, I will frame my comments in the context of our long-term strategy, which includes balancing growth, profitability, and liquidity considerations. In terms of growth, the Company delivered solid growth in the second quarter with revenue of $210 million, up 31% year-over-year, driven by growth in our clinician base. Turning to profitability. In the second quarter, Center Margin of $60 million increased 17% over the same period last year, driven by revenue growth. Sequentially, Center Margin as a percentage of revenue expanded 187 basis points primarily driven by timing of payroll taxes in the first quarter and expected operational expansion in the second quarter. Adjusted EBITDA grew slightly year-over-year at $15 million or 7% of revenue. Sequentially, adjusted EBITDA as a percentage of revenue improved 84 basis points, driven by the improvement in center margin and continued operating expense discipline. Turning to liquidity. LifeStance continues to be supported by a solid balance sheet. We exited the quarter with cash of $97 million and net long-term debt of $203 million. In the second quarter, we generated positive $8 million of cash from operations compared with $3 million in the first quarter. Our free cash flow of negative $18 million improved by approximately $7 million quarter-over-quarter. We expect to continue to improve free cash flow in the back half of the year. Operationally, we are continuing with planned investments to improve our days sales outstanding, which slightly increased by one day quarter-over-quarter. After transitioning the revenue cycle management team to report to me at the end of the first quarter, we hired a seasoned Chief Revenue Officer with a track record of delivering results in a scaling company. Our priorities include improving our billing and collections performance through scaling the team appropriately and driving productivity enhancements through process efficiency, technology, and automation. With cash on the balance sheet, access to our new credit facility, our focus on capital efficiency and the underlying unit economics of the hybrid model, we feel that we are in a strong position to drive the long-term growth and value creation of the Company. Turning to guidance. Mike has already covered the full year. As for the third quarter, we expect revenue of $216 million to $221 million, Center Margin of $61 million to $65 million, and adjusted EBITDA of $16 million to $19 million. With that, I'll turn it back to Mike Lester for a few words before going to Q&A.

Thanks, Mike. I would like to recognize the continued efforts of our approximately 7,000 colleagues who remain focused on delivering high-quality, affordable, and accessible mental health care to our patients across the country. Their unwavering dedication and support inspire all of us. On behalf of the team, I would like to extend my gratitude for all they do as well. I'm proud of what we have achieved as a company to date, but there is so much more opportunity in front of us. Mike, Danish and I will now take your questions. Lauren?

[Operator Instructions] Our first question comes from Craig Hettenbach with Morgan Stanley.

Can you provide an update on clinician retention and any changes you're seeing on the wage inflation front?

Danish?

Sure. Yes. So on the retention front, we continue to maintain our prior planning assumptions for retention through year-end, which is 80% quarterly -- excuse me, 80% annualized within the quarter. And that's been consistent in the first half of the year as well.

And wage inflation, Danish?

Sorry. On the wage inflation front, we're not seeing anything unusual on the wage inflation side. Our clinicians have always remained in high demand, and we've always planned to appropriately compensate them in line with the competitiveness of the market and all the wage inflation that we've witnessed stays within our existing guidance assumptions.

And if I could follow-up, Danish. When I think about the long-range planning that you're embarking on, certainly, there's been a lot of cross currents in the market in the backdrop for the last couple of years. So at a high level, anything you're thinking about in terms of how that might change the mid- to longer-term trajectory of the business or margin profile?

Right now, I'm heads down on making sure that we put in place the action plans that we need to start to position us for the long-term growth that we see in front of us. What I know is that we are right now putting our attention against all the right action plans. So again, as you think back to my remarks here a minute ago, we are very focused on net clinician adds, impacting that through our organic recruiting team, continuing to shift that more organic as well as getting under retention and controlling what we can control outside of any market dynamics, and then further driving clinician productivity. At this point, I think it's all a question of timing and the ultimate effectiveness of those actions, but we've got our focus on the right areas.

We'll take our next question from Lisa Gill with JPMorgan.

Danish, congrats on the new role. Really, I just want to go back to your comments around removing one business day for June, July, and August. And just really understand how you're thinking about the fourth quarter. I remember when we talked last January, things were a little bit slower in December because the people taking vacation around the holidays, et cetera. So one, I just want to confirm that you've accounted for that in the full year and have something there in the fourth quarter? And then secondly, as we think about the clinicians, I think one of the other issues we've talked about historically is the fact that they like working virtually. So I was wondering if you could maybe talk about some of the new clinicians you're bringing on? Are they center focused? And then if you could just give us an update on virtual versus in person.

So in terms of Q4 seasonality, yes, we witnessed that last year. We've carried forward those assumptions in Q4 for this year. And we believe that we have appropriately accounted for any winter or holiday time off in Q4. So again, feeling pretty good and confident about where we're at with those assumptions. In terms of our new clinician adds as well as where our existing clinicians are looking to focus their time, if you look at our actual visits, meaning online versus in person are taking place right now, the visits still remain at about 80% online. However, when you look at our clinicians, they are shifting more of their time back into the office. And so a clinician may be working out of an office. But throughout the day, some of those visits are going to be in person, some of them are going to be online even if the clinician is based out of the office. So we are starting to see that trend back. But overall, the total mix of where the actual appointments are delivered or where the actual care is being delivered, it still remains heavily online. And I think that is why we continue to moderate the number of de novo openings to make sure that we drive that additional operational flexibility.

And if I could just understand one other thing, like does that have any impact on the margin? So I know you talked about patient billing and frontline office. So if people are doing more things online, does that mean that you have less people at the front of your facility and therefore, you have less costs? Or is that more of an opportunity as you bring more people into the office to leverage some of those costs? Like how do I think about that going forward?

So on a go-forward basis, the right way to think about it is that we will continue to have kind of a positive effect on our capital deployment because we do not have the need to open up as many de novos as we used to, where we may have -- historically, we built de novos to make sure there is one exam room for every clinician. Now we can expand the four walls of our physical sites by sharing office space and, again, getting more leverage out of that. So you'll see some positive effects over the long term around capital deployment against de novos. The other piece will be, again, over the long term, you should see some improvements in Center Margin related to better leveraging, both rent and some of the frontline support that would otherwise -- is only required for in-person visits.

We'll take our next question from Stephanie Schiller Wissink with Jefferies.

Wanted to follow-up on your comments on productivity per clinician. If you could talk a little bit about some of the strategies you're putting in place, whether it's using technology or eliminating some of the administrative burden, accelerating some of the processing and billing? Anything you can share with us on productivity would be great.

Sure. Yes, happy to. So really, the way that we think about clinician productivity is around how can we ensure that the capacity they're giving us, meaning the time that they are providing to us to see patients, is fully utilized. We are not right now going to our clinicians and asking them to give us more time, but focus very narrowly on ensuring the time they've already given us is filled to the fix capacity, which ensures that they are happy with their workload, they continue to maintain flexibility, and we're able to drive both their incomes to the levels that they're hoping to achieve as well as drive revenue for the Company. As we look to how to impact that above and beyond what we have historically done, we're really taking actions across what I characterize as the top, middle, and bottom of the funnel. And so at the top of the funnel, it's all around additional boots on the ground marketing efforts to ensure that we shore up and continue to grow our primary referral source, which are primary care physicians as well as local hospital systems and other community referrals. At the middle of the funnel, we are continuing to invest on the digital side to make sure that we take advantage of all the tech-enabled services that we have at our fingertips, primarily through our online booking experience, which we term internally as OBIE, further investments in our clinician profiles to improve the overall experience for both patients and ultimate matching for the clinicians, and improvements on our credentialing and phone intake systems. And then the bottom of the funnel, that's all about cancellation and no-show rates and ensuring that when you have an appointment booked on the calendar that is taking up time that those patients actually come through and eventually convert into a visit. And so we believe that there is significant opportunity in unlocking that and taking that number from the 15% it is today to kind of more of a best-in-class number, and we've already seen some improvements in the pilot states where we're taking action.

Our next question comes from Ryan Daniels with William Blair.

This is Jack Senft on for Ryan Daniels. Just to start off. So you added 237 clinicians during the quarter, which is up modestly compared to the number of clinician adds in the first quarter of this year. But it doesn't seem to be quite the 400 clinicians you added -- or it doesn't seem to be quite the 400 clinician adds you saw at the end of last year in the third and fourth quarter. So just curious here how we should kind of think about the cadence of clinician adds for the second half of the year, if you can comment? And then for the second part here, are you finding that you have to change your recruiting and retention strategy as a result of the increased competition seen in the market? Or maybe are you finding that you're a safe haven for clinicians. Just kind of curious how that may impact recruitment for clinicians.

So in terms of the first part of your question, we don't guide on specific clinician count, but we do expect to continue our strong growth of the clinician base. We have made investments in the first half of the year around our organic recruiting team that we believe will allow for continued incremental improvement in the number of net clinician adds sequentially as you look through the remainder of the year. And as I mentioned in the prepared remarks, net clinician adds is the top priority that all of our teams are focused on, whether that is the actual organic recruiting side of it or looking at areas where we can incrementally improve retention. So feeling really good about where we're at and the trajectory here for the back half of the year going into 2023. In terms of the second part of your question around are we seeing any changes in either retention or the ability to recruit based on competitiveness of the market, we're really not. The market from the very beginning has been competitive. There -- our clinician type has always been in short supply as compared with the patient demand that exists in the marketplace. And so this isn't a new dynamic for us. And we have built both a best-in-class recruiting engine as well as a best-in-class M&A team that's able to bring on board new clinicians at the pace that we planned for, and we see no risk there. Same with the retention. Our retention rates have remained stabilized for the past year. And we haven't seen any impact as it relates specifically to competition. And again, if you think back to my prepared remarks, this is one of the key areas that we'll be focused on to see are there ways to incrementally improve retention beyond what we've seen here for the last year.

Just as a quick follow-up then, when it comes to the one to two new states in the second half of the year, will OBIE be rolled out automatically in these new states? Or is this something that will be implemented over time in these states? And then two, if this is rolled out in the new states, do you see an immediate reduction in cancellations? Or does it take some time for the clinicians, patients, new users to get used to the new implementation?

So when we enter a new state, we enter through an acquisition. Though any acquisition regardless of whether it's a new state or an existing state goes through an integration period of typically 120 days, during which we move them over to our systems. And that then includes our electronic medical record or HRIS, et cetera. So there's not an immediate change over to our systems or does -- there is that period of approximately four months where you see that. The question specifically around OBIE and whether we would flip new state entries directly on to OBIE or not, I don't think we've decided that. We are, right now, have our work plan around rolling that out to all of our existing states and our existing groups through the end of 2022 into 2023. But we'll need to make a decision depending on the timing of any additional states where we prioritize that in the overall plan to move people. If you fast forward beyond 2023 once all of our existing states are already on to OBIE, then yes, the answer would be everyone within those four months would flip to utilizing OBIE.

Do we see an immediate impact?

Yes. When we -- I mean, in general, when we move over to our systems, we do see an impact to productivity. We also see an impact on synergies related to rates that kind of flow through at the end of that integration, again kind of that four-month time period.

We'll take our next question from Kevin Caliendo with UBS.

I have two. The second half guidance does imply a little bit better EBITDA margin just given the revenue guidance and the sustained EBITDA guidance. Is that something we should expect going forward? Was there any flex spending there that you had that maybe prompted this? Is this the impact of Danish already in the role and finding savings? That's my first question as to how to think about that. And then the second one is, it doesn't sound like it, but have you seen any impact yet on demand for behavioral from the economy? I know most of your customers are fully insured and so the out-of-pocket might not be that meaningful. Just wondering if you're seeing anything at all, whether it's in certain geographies or demographics or even in your cash pay, if you're seeing any demand impact from inflation in the broader macro economy.

Can you take the first one, I'll take the second?

Sure. Yes, from an adjusted EBITDA perspective, it has been part of our guidance assumptions for this year to improve adjusted EBITDA through the year. Our strategy around that has been to moderate de novos and their openings in the back half of the year, which we're doing. And then from a G&A perspective, just be very disciplined around our deployment of G&A around the critical few priorities that Danish spoke about in his prepared remarks. I will say that we're starting to find some efficiency in the G&A that we were deploying last year. So that's playing out in the P&L as well. But there's nothing that we're doing unnaturally in G&A to drive adjusted EBITDA. This is really around operational discipline and investing in the right areas.

The one comment I'll add there is, from a head space perspective, that is exactly how we're looking at driving the business going forward, meaning that continuous incremental EBITDA margin expansion over time is an underlying principle that will continue to be part of kind of the LifeStance story here going forward.

As far as patient demand, we haven't seen any decrease whatsoever in patient demand. I mean it continues -- the demand continues to far outstrip the supply. As you know, we're essentially a commercial insured network model. So we don't really see cash pay. So that really hasn't affected us at all. But the demand, the mental health crisis continues to be exacerbated, and we just see a continued strong patient demand.

And we'll take our final question from Jamie Perse with Goldman Sachs.

Just -- I wanted to go back to the comments on focusing on productivity. We've seen that go from $44,000 to $45,000 range to $41,000 per quarter per clinician over the last year. As you annualize some of the retention headwinds and implement this new focus on productivity, is that a level you think you can get back to and when?

So we're not going to guide on productivity because there's a lot of different variables that can drive revenue per average clinician, for example, the timing of M&A or geo mix, the number of business days in any given period. As an example, the second half of 2022 has several fewer business days than in the first half, driven by summer vacations in the Q4 holiday season. So what I can tell you is that we are focused on the right areas, head down on driving and improving clinician productivity and making sure that we are filling out their open time where they want to see patients. So right now, it's purely a question of how much of an impact those action plans have and the timing that they take effect. But again, we're right now heads down focused on the right things.

Okay. And then just on center-level costs, they were sequentially pretty flat in the quarter. Street seems to be modeling a big step-up in 3Q and 4Q there. Maybe just some perspectives on what that trend might look like, particularly as you slow the de novo ramp in the second half.

Yes. I think from a center cost perspective, we do expect those costs -- the rate of increase in those costs to decline as we moderate the de novo centers openings in the third and fourth quarter. The overall cost will continue to increase as we bring on clinicians, but that will be offset by the revenue that they bring in as well. So all told here, we expect to drive improvement in Center Margin in the back half of the year as we expected to early in the year, our plan remains intact and in motion. The only mild effect will be the impact of the $8 million in the second half on revenue. But from a cost perspective, Jamie, yes, we would expect to slow the rate of increase.

And we have no further questions at this time. This does conclude today's conference call. You may now disconnect.