Good day, and welcome to the LifeStance Health First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks will be a question-and-answer session. [Operator Instructions] Finally, I would like to advise all participants that this call is being recorded. I’d now like to welcome Monica Prokocki to begin the conference, Monica, over to you.

Good morning, everyone and welcome to LifeStance Health’s first quarter 2023 earnings conference call. I am Monica Prokocki, Vice President of Investor Relations. Joining me today are Ken Burdick, Chief Executive Officer; Dave Bourdon, Chief Financial Officer; and Danish Qureshi, Chief Operating Officer. We issued the earnings release and presentation before the market opened this morning. 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, business model, and strategy. Those statements involve risks, uncertainties, and other factors, as noted in our periodic filings with the SEC, 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’s comparative period. At this time, I’ll turn the call over to Ken Burdick, CEO of LifeStance. Ken?

Thanks, Monica, and thank you all for joining us today. We are in the early innings of executing on our strategy, and we are making progress on improving operational performance. While we focus on operational improvement, we also continue to grow our clinician base, now approaching 6,000 W2-employed clinicians who deliver on LifeStance’s mission to provide access to trusted, affordable, and personalized mental health care. Our hybrid model provides tremendous flexibility to our patients and clinicians and uniquely positions us to respond to changes in the industry. For example, with the public health emergency, or PHE, ending tomorrow, May 11, we are pleased to share that we’ve been preparing for this for months now as we knew the PHE would eventually sunset. Our psychiatric clinicians have been working with our practice operations staff to ensure that all appropriate patients being prescribed a controlled substance are scheduled for an in-person visit. May is also mental health awareness month. To promote the importance of mental health, LifeStance launched our newest iteration of our not-one-face marketing campaign with a focus on real people sharing their experiences with anxiety. As leaders in the mental health care space, we have learned that mental health is non-discriminating. Mental health conditions may be associated with stereotypical images, but the truth is these conditions have no one face. There are literally tens of millions of faces. Reimagining mental health to help people live healthier, more fulfilling lives is at the heart of everything we do here at LifeStance. As we’ve previously stated, we are committed to partnerships that support our vision of a truly healthy society where mental and physical health care are unified. In alignment with this vision, we are excited to announce that LifeStance has partnered with Gen F, a unified women’s healthcare subsidiary that utilizes…

Thank you, Ken. I would like to echo Ken’s comments regarding the team’s solid performance so far this year, both operationally and in our financial results. In the first quarter, we produced strong top-line results with revenue of $253 million, representing growth of 24% year-over-year. This outperformance was primarily driven by higher-than-expected clinician productivity. Visit volumes of $1,665,000 increased 20% year-over-year, primarily driven by a higher net clinician count. Total revenue per visit increased 4% year-over-year to $152, primarily driven by payer rate improvement. The outperformance on revenue flowed through to the center margin, the center margin of $70 million in the quarter increased by 28% year-over-year. Adjusted EBITDA of $10 million was slightly above our expectations. Turning to liquidity. In the first quarter, free cash flow was negative $16 million, a $9 million improvement year-over-year, and cash from operating activities was negative $8 million. Both were in line with our expectations. As we stated previously, cash flow in the first quarter was impacted by: one, compensation costs such as higher payroll taxes and bonus payments and two, temporarily higher DSO driven by an increase in patient responsibility as deductibles reset every year in January. In the first quarter, DSO increased by 2 days sequentially to 42 days, in line with our expectations. We exited the quarter with cash of $68 million and net long-term debt of $225 million. As of the end of Q1, we had additional debt capacity from a delayed draw term loan of $66 million as well as a $50 million revolving debt facility, providing us with sufficient financial flexibility to run the business until we get the positive free cash flow in 2025. In terms of our outlook for 2023, we are raising the lower end and narrowing our full-year revenue range to $990 million to $1.02 billion and raising the lower end and narrowing our full-year center margin range to $274 million to $290 million. We are reiterating our adjusted EBITDA guidance range of $50 million to $62 million. While we are encouraged by early signs that the operational improvements we have been making to strengthen our performance are bearing fruit. We believe it’s still too early to revise our assumptions for the remainder of the year. As a result, we are reflecting the higher Q1 revenue in our full-year guidance, but we believe that it is prudent to maintain our original assumptions for Q2 through Q4 until we have more evidence to support that higher productivity will persist, especially during the summer vacation season. For the second quarter, we expect revenue of $250 million to $260 million, center margin of $69 million to $76 million, and adjusted EBITDA of $10 million to $16 million. With that, I’ll turn it over to Danish for additional color with respect to operations.

Thank you, Dave. In addition to executing on the operational improvements and administrative simplification described by Ken and Dave, we continue to align our teams around 2 growth priorities: net clinician adds and clinician productivity. In terms of clinician growth, we delivered 330 net clinician adds in the first quarter, bringing our total to 5,961 clinicians, an increase of 19% year-over-year. We completed 3 small acquisitions at the beginning of the year and consistent with our shift towards organic growth, we are not planning for additional M&A this year. Regarding clinician productivity, we saw positive trends in both clinician capacity and utilization. Clinician capacity or the time our clinicians make available to see patients trended slightly higher compared to the last two quarters. As a reminder, last year, we saw capacity in the first half of the year run higher with the back half of the year moderating due to time off taken during the summer vacation and fourth quarter holiday periods. This seasonality is reflected in our full-year guidance. In terms of utilization or our ability to appropriately fill the time clinicians make available to see patients, we observed encouraging signs of improvement. However, it is still early in the year, and we would like to see these productivity trends continue before updating our go-forward assumptions. We are driving these improvements in utilization through operational discipline at the top, middle, and bottom of the patient funnel. At the top of the funnel, we continue to attract new patients in line with the overall growth of our clinicians and their related capacity. We also continue to do this at an extremely low cost for acquisition with minimal reliance on paid marketing. For example, we are seeing benefits from our investment in boots-on-the-ground, primary care referral teams as they continue to…

Thank you, Danish. This is a multiyear journey. We are in the very early phase of building the muscle to run a highly effective business commensurate with the immense market opportunity in front of us. The need for accessible and affordable mental health care in our society has never been greater, and our vision of aligning mental and physical health care energizes us everyday. We will now take your questions. Operator?

Thank you, speakers. [Operator Instructions] Our first question comes from the line of Craig Hettenbach of Morgan Stanley. Craig, please go ahead.

Yes. Thank you. It was a good start to the year on net clinician ads. Can you just talk about the organic recruiting efforts and what you’re seeing in the marketplace more broadly for ads?

Yes, sure. This is Danish. From a recruiting perspective, we continue to see great momentum with our in-house clinician recruiting team. Our value proposition in the marketplace continues to resonate and our ability to both attract new clinicians in the states that we currently have a presence as well as continue to scale that as we grow throughout the year remains strong, so feeling very good about the overall environment there.

Got it. And then a follow-up for Ken, on just value-based care, and interesting to see that the women’s health announcement this morning. Just more broadly, and I know it’s early days. Can you just touch on the tight integration of physical mental health and just any other anecdotes from conversations you’re having in the marketplace?

Sure, Greg. You’re right. This is in the very early days. We’re thrilled with this Gen F partnership as 2 million women annually reach menopause, and the kind of integrated care that we can provide working collaboratively with Gen F we think is exactly what’s needed. As it relates to our value-based pilots, I would say it’s still too early for me to be descriptive or definitive about the insights. But what I can tell you is that this is a core strategy for us. And so I suspect this will not be the last time we announced this type of partnership.

Got it. Thank you.

Our next question comes from the line of Lisa Gill from JPMorgan. Lisa, please go ahead.

Great. Good morning. First, I just really wanted to start with Ken, your comments around the contract termination 30% versus 25% with the previous call. Just two things. One, will there be more payer concentration post this? And is there any single payer that makes up a large percentage of your business today? And then secondly, any findings as you’re going through those contracts as far as regional concentration or anything else that we should be aware of as you’re thinking about what it will look like on a go-forward basis?

Lisa, thanks for the question. I want to just reiterate that while this is a big number in terms of contracts, as I say, approximately 30%, it really is de minimis as it relates to patient visits. And so I guess, consistent with the prepared remarks and the script, what I would say is that we had a lot of administrative complexity and work associated with maintaining these contracts and loading them, etcetera, that was just way out of whack with the actual value that was being derived from these particular payers. So we can do all of this, and it still has less than a 1% impact on our total visits, which means it’s really not changing the concentration at all. To the other part of your question, as you might suspect, when we look at national payers, they would represent a significant percentage of our total volume. And then it drops off pretty substantially after the first dozen or so if that provides you with some helpful color.

No, that’s really helpful. And then just as a follow-up to that. So if we look at the margin in the first quarter, roughly 4%, the midpoint moves the margin to about 5.1% for the year. Can you maybe just help me to think about cadence? I mean previously, they were roughly 7%. How do we think about the cadence of the margin as we move throughout this year? And maybe remind us of some of your longer-term goals on the margin side?

Sure, Lisa. This is Dave. So as far as the margin and how it will play out throughout the year, well, what we discussed when we were giving our full-year guidance was that we would start out Q1 being the lowest margin of the year, and then it would increase as payroll taxes were less impactful after the first quarter as well as things like payroll – excuse me, as payer rate increases started to kick in, which will be mostly in the back half of the year as well as the third item being some of our higher revenue, higher-margin services that are low in the first quarter. And then from a seasonality perspective, they ramp up throughout the year. So that’s how I think about 2023. As far as longer-term guidance, what we talked about last quarter was that by the end of 2025, as we’re exiting 2025, we expect to be at double-digit margins.

Great. Thank you.

Our next question comes from the line of Brian Daniels from William Blair. Brian, go ahead.

This is Jack Zenon on for Ryan Daniel. Thanks for taking my question and congrats on the quarter. First on the guidance, specifically on the top line, if we assume the midpoint for the second quarter guidance, that would mean that first-half revenue would come in at more than 50% for the full-year midpoint. Can you maybe talk about this a bit more and how we should think about this? I know historically, I believe the second half is typically higher than the first, but not sure if you’re planning a slowdown for this year, if it’s just strictly conservatism and more consistency when it comes to clinician productivity. Any additional commentary on the cadence here would be appreciated?

Sure. Good morning, Jack, this is Dave. I’ll take this one. So when you think about the seasonality of revenue and you’ve looked at our historical performance, what you have to take into account is that the significant number of acquisitions that we did masked the underlying organic true seasonality of the business, which is what you’re going to see more of this year since we had three acquisitions in the first quarter, and we’re not planning on doing any more throughout the remainder of the year. So as a result, when we gave our full-year guidance, what we talked about was roughly 50-50 from a revenue perspective, first half, second half. Now it’s a little bit more first half than second half. But again, we’re still in that roughly 50-50. And the big dynamic that I would point you to is that while we’re still growing clinicians throughout the year, the second half of the year has a lot more – we assume a lot more vacations. You have the summer vacation season. You’ve got the holiday vacation season. And so as a result, we have less capacity from our clinicians as a result of them taking vacations, and we bake that into how we build revenue for the year.

Perfect. And then just as a quick follow-up. It looks like your total visits increased pretty nicely sequentially, but total revenue per visit decreased a TAD. Is this more a factor of onboarding newer patients and it’s more of a heavier lift in the beginning of their journey? Or is it stemming more from the clinician’s side?

Yes. I wouldn’t point to either of those. So it did see TRPV or total rate per visit did drop from the fourth quarter to the first quarter. Two things that I would point you to. The first is that we’ve talked about a lot of this higher revenue, higher-margin services, and the seasonality there. And so with the patient deductible reset in January, so those kinds of services are less prevalent in the first quarter and then they ramp throughout the year. So that’s the first thing where you get – that drives a sequential decrease. Then the other is we had some modest payer rate pressure, specifically related to Medicare rates, which isn’t a big percentage of our book, but that did also cause TRPV to go down a little bit in the first quarter. And again, we would then expect TRPV to build throughout the year as payer rate increases, other pay-to-rate increases go into effect.

Wonderful. Thanks, guys.

Our next question comes from the line of Kevin Caliendo from UBS. Kevin, please go ahead.

Thanks for taking my question. Just wanted to talk a little bit about recruitment and also just about retention and churn. Those are numbers we haven’t really talked about lately, and it was an overhang a year or so ago. Just wondering how that’s matured. And what are you finding is most important in terms of retaining your clinicians and attracting new clinicians? Is it compensation? Is it a lifestyle? I’m just wondering how the world has changed as we’re sort of lapping the year of the great resignation.

Yes. Thanks for the question, Kevin. This is Danish. I’ll tackle that. So in terms of the recruiting side of things, like I mentioned earlier, we continue to see strength in our organic recruiting team and our ability to attract new clinicians to LifeStance. Our value proposition really does continue to resonate in the marketplace. It is not just about compensation for clinicians, so that’s obviously a key component. It really is about the overall value proposition that we offer in flexibility, both in the ability to do in-person as well as telemedicine, the collegiality that we build here within the ability for clinicians to work with each other across multiple subspecialties inside the same office or state, all of the digital investments that we make and the tools that we give them, etcetera. So there is a broader value proposition that continues to stand out in the marketplace and is demonstrated in our ability to continue to attract new clinicians here and our net clinician ad numbers. As far as retention goes, our retention remained stable in Q1. And from a planning perspective, we continue to expect consistent performance throughout the remainder of the year. That being said, for us, our focus is making sure that we have a phenomenal clinician experience, not just in how we attract our clinicians here, but how we deliver on that value proposition once they are here. And so that includes things like we’ve spoken about before around frontline support in our administrative staff, additional attention on billing and the service that we’re providing, not just to our clinicians, but to the patients and how they interact with our teams, etcetera. So a lot to still do there, but we feel good at where we’re at today.

Has there been any change to the mix with in-person versus remote just, even in the last 3 months or 6 months? I know it was always a little bit higher than what was originally anticipated. And I’m wondering if it’s just going to – the anticipation just maintains that level going forward, I think it was 75%, if I’m not mistaken.

Yes. We continue to see a slow return to in-person as far as our overall mix. In Q1, it was 75% virtual 25% in person. That was about a 2 to 3-point shift back towards in-person versus the previous quarter, and that’s been approximately the rate that we’ve seen at returning to in-person every quarter. So we fully expect that trend will continue. We have seen patient demand for in-person increase as well as, again, our clinicians returning more in person over time.

Great. Thanks, guys.

Our next question comes from the line of Jamie Perse from Goldman Sachs. Jamie, please go ahead.

Thank you. Good morning. Question first on the center level margin, it seems like the margin progression there has been a bit faster than expected. Can you just remind us the initiatives you have in place this year? I think there is some around real estate, how much of those are already starting to come through in the first quarter performance versus still ahead of us in the remaining portion of the year?

Yes. James, this is Dave. The center margin performance in the first quarter, I would think of being largely driven by the revenue beat and just getting some additional scale benefit. And we do expect center margins to improve modestly throughout the year. And certainly, the benefit of the real estate consolidation helps. Just to size that for you, that would – we expect about roughly $1 million of benefit from the real estate consolidation this year and about a $2 million run rate of those savings into next year.

Okay. Thank you. That’s helpful. And then you guys mentioned the expiry of the public health emergency and the changes you’re making or preparations you’re making for that. Can you tie that to the broader landscape, if you think the expiration of the public health emergency changes anything competitively even in the short-term in terms of where clinicians end up or just more broadly, how you’re thinking about any competitive changes from that? Thank you.

Yes. This is Ken. I’ll take that. So very recently, there was an announcement that there is going to be some flexibility and essentially about a 6-month extension of the PHE or public health emergency accommodations. So I’ll speak to the longer-term. I think in the longer-term, there is clearly an advantage of having a hybrid model that offers both patients and clinicians the choice and the flexibility of either an in-person visit or a remote visit. So as it relates to patients that are receiving these controlled substances on a go-forward basis, once the extension has expired, there is no choice, but they will have to visit with a clinician prescribing one of these controlled substances in person.

Hello, Jamie, are you still there?

Yes. That was enough for me. Thank you for that.

Our next question comes from the line of Brian Tanquilut from Jefferies. Brian, please go ahead.

Hey, good morning, guys. Congrats on the quarter. I guess just a couple of quick questions. As I think about payer rate improvement, how much runway do you guys see to drive that going forward?

Well, we think that there is a great deal of runway. It’s not going to be sort of a flip-the-switch. But as we continue to demonstrate the value of the services that our clinicians provide and with the increased understanding of the importance of mental health integrated with physical health. We think it’s absolutely critical that the reimbursement follows the value that’s being created. Now in the short-term, we are able to provide some limited data in terms of what the value means in terms of quality of life and absenteeism, etcetera. Some of those pilots that we’ve referenced, we hope, will build a database that is statistically valid that can demonstrate a true reduction in in-person, or excuse me, inpatient visits and emergency room visits and total cost of care. But as I said right at the outset of the Q&A, we are still a ways away from that. But that’s the goal, that’s the intent that we can demonstrate that there are meaningful improvements, obviously, in the quality of life, but it’s also a more efficient way to utilize health care resources.

Got it. No, that makes sense. And then maybe, Dave, just a quick question, I don’t know if I just missed this, but in your revenue guidance raise, how much of that on the clinician ads? How much of that was from the addition of acquired clinicians versus just organic?

We didn’t parse that out, Brian. But think of the clinician ads being roughly 80% organic and 20% from the acquisition in the first quarter.

Alright. Got it. Awesome. Thank you, guys.

There are no further questions at this time. I turn the call back over to our presenters.

Well, I want to thank you for the questions. And I’d be remiss if I didn’t take this opportunity to say that we really appreciate the tremendous work that’s being done by the 8,000 employees across LifeStance. Danish and Dave, and I have the privilege of being able to report these results, but they are created by the hard work, the collaboration, and the passion that these 8,000 individuals demonstrate each and every day. So my opportunity on behalf of Dave, Danish and the executive leadership team to thank each and every one of them. And that will conclude our call for this quarter.

This concludes today’s conference call. You may now disconnect.