Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the LifeStance Health Fourth Quarter 2023 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Monica Prokocki, Vice President of Investor Relations.

Thank you, operator. Good morning, everyone, and welcome to LifeStance Health's fourth quarter 2023 earnings conference call. I'm 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 current 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 comparable period in the prior year. 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. I'd like to begin by highlighting what we stand for here at LifeStance. Every day we are focused on three foundational pillars: the patient experience, clinical quality, and developing an inclusive, purpose driven culture. First, we are committed to putting the patient experience at the forefront of everything we do. Since the start of the pandemic, the country has experienced an alarming increase in the rates of anxiety and depression and as well as deaths resulting from overdose and suicide. More than 150 million people live in an area with a shortage of mental health professionals, and only 56% of psychiatrists accept commercial insurance. Tens of millions of Americans are unable to access mental health care treatment, with devastating effects on families and communities. In 2023, LifeStance's team of over 6600 clinicians helped address these access challenges by providing mental health services to over 880,000 patients who depend on our care. With our differentiated hybrid model of in-person and virtual visits, we meet patients where they are. By accepting insurance, we provide patients with affordable access to mental health care. Whereas much of the market is cash pay and therefore out of reach for the majority of Americans. The exceptional care provided by our clinicians is reflected in the feedback we receive from our patients. In 2023, LifeStance received a patient net promoter score of 82, and our average Google review score across all LifeStance centers stood at 4.5 out of five stars. As you will hear in our prepared remarks, we continue to focus on enhancing the end to end experience for our patients. Second, we're dedicated to clinical quality. LifeStance and our team of multi-disciplinary clinicians are committed to providing patients with personalized, high quality care with clinical…

Thanks, Ken. Like Ken, I'm pleased with the team's operational and financial performance in 2023 exceeding our expectations for the full year. In the fourth quarter, we achieved strong top-line results with revenue of $281 million, representing growth of 22% year over year, with outperformance in the quarter driven primarily by positive visit volumes as our clinicians delivered more visits during the holiday season than expected. Visit volumes of 1.8 million increased 20% year over year, primarily driven by organic clinician growth and modest productivity improvements. Total revenue per visit increased by 2% year over year to $157, primarily driven by payer rate increases. For the full year, we delivered revenue of $1.56 billion, up 23% year over year. Regarding profitability, the better than expected top-line results flowed through to center margin. Center margin of $83 million in quarter increased by 33% year-over-year. Full year center margin of $302 million grew 27% year-over-year. Adjusted EBITDA of $20 million in the quarter was strong and consistent with our expectations. Our fourth quarter adjusted EBITDA increased 99% year-over-year. For the full year, adjusted EBITDA was $59 million, representing 5.6% of revenue. Turning to liquidity. In the fourth quarter, we generated positive free cash flow of $5 million and $17 million in cash from operating activities. These improvements in cash flow were driven by higher collections with DSO improvement of eleven days from 52 in Q3 to 41 in Q4. Each one of these days represents approximately $3 million in cash. As expected, DSO improved in Q4 as we released claims that we had intentionally held in Q3 due to positive updates from rate negotiations with several large payers. Free cash flow and cash from operating activities were negatively impacted in the quarter due to the shareholder litigation settlement. As disclosed in an…

Thanks, Dave. We continued to line our teams around two growth priorities, net clinician ads and clinician productivity. We grew by 227 net clinician ads in the fourth quarter and 1014 for the full year, bringing our total clinicians to 6645, an increase of 18% year over year. Importantly, our growth in Q4 remains 100% organic for the third consecutive quarter. Our clinician value proposition remains strong and we are proud of our clinician recruiting and operations team's great work in delivering clinician growth in 2023. Turning to clinician productivity, for 2023 on a visits per average clinician basis, we saw productivity increase by 2%, driven by many of the operational actions we took throughout the year. As a reminder, productivity is a function of two components, clinician capacity or the time clinicians give us and utilization our ability to fill clinician time with patients. In 2023, we put our focus towards utilization, delivering on our core commitment to our clinicians to fill their schedules by driving operational discipline throughout the patient funnel. At the top of the funnel, we made enhancements to our primary care referral team, organic search traffic, internal clinician referrals and enterprise referral partnerships. These actions delivered improvements in attracting new patients above the growth of our clinician base demonstrated by our growing waitlist for services. I will note that our cost per new patient acquisition continued to decline year over year and we spend a de minimis amount on paid advertising as part of our top of funnel strategy. Second, at the middle of the funnel in terms of converting patients to scheduled appointments, we continued to leverage our digital capabilities to improve patient matching via our Online Booking experience, OB which we rolled out nationwide. Additionally, we enhanced the patient experience with better online…

Thanks, Danish. In closing, I am encouraged by the progress made in 2023. We remain focused on operational improvements, profitable growth, and disciplined capital deployment. Our 2024 guidance reflects the strong positive momentum of the organization, and we look forward to continuing to invest in the patient and clinician experience while at the same time delivering margin expansion. In particular, I am thrilled that we expect to achieve the important milestone of positive free cash flow for 2024. Along with Dave and Danish, I offer my thanks and appreciation to our 9500 colleagues who demonstrate their dedication to our vision, mission and values in the work they do every day. It is due to their collective efforts that we have made significant strides toward realizing LifeStance's potential. Operator, please open up the line for Q&A.

Thank you. [Operator Instructions] We'll go first to Craig Hettenbach at Morgan Stanley.

Great. Thank you. Ken, despite the comments of improved track record that you've seen in the last five quarters, there's still some noise out there in terms of clinician turnover and growth. So I'd love to get your take in terms of things you've done to kind of steady the ship and expectations going forward on those metrics.

Sure. I'm going to let Danish respond to the clinician turnover. Generally, what I would say is obviously, we posted a strong fourth quarter. And as Danish, Dave and I have all said in our prepared remarks, there's plenty of work that remains to do. And I'll let Danish perhaps elaborate on some of his comments as it relates to clinician growth and retention.

Sure. Hey Craig, so in terms of clinician retention, it continues to remain stable. We have wins throughout 2023 and feel really good about what we've been able to accomplish there. But as I indicated in my prepared remarks, we are continuing to focus on enhancing our value proposition to our clinicians through the way that we are investing in the practice group, things like I mentioned around increasing our front office staffing to have a very tangible and direct feeling of support for our clinicians across the country as one specific example. But as indicated by our net clinician adds of over 1,000, which we're very proud of, our ability to both attract and retain clinicians remains strong. We continue to be able to do that despite moving to what has essentially been for the last three quarters, 100% organic and delivered net clinician ads above 2022 while moving towards 100% organic strategy. So all in all, we feel great about where we're at today.

Got it. And then just a follow up question for Dave, just on operating leverage. I know whether it's footprint consolidation, payer consolidation, there's a number of things at play. But this year in particular, are there any that you would single out in terms of that's going to be important for you to deliver upgrade leverage and then maybe as you go into 2025, does that look the same or different things that come into the fold?

Craig, it's Dave. I think I got the gist of your question, which was focused on operating leverage. You were cutting out pretty bad. As far as the operating leverage, yes, we're guiding to improvements in operating leverage in 2024. I mean 1 of the ways we're doing that is if you look at our Q1 guide and our full year guide on G&A, it's pretty flat throughout the year. And the way I explain that is, in the first quarter you're going to get a pop up in G&A as a result of the resumption of the payroll taxes. And then as that goes away in the subsequent quarters, it's being replaced by some of the investments that Danish talked about, digital check-in tool and things like that. But having said that, we're able to keep G&A spend relatively flat because of the efficiencies that we've been working on as we've been strengthening and fortifying the business. So we feel really good about the margin expansion that we're seeing both in the bottom line as well as incentive margin for 2024.

Good. Thanks for that.

We'll move to our next question from Lisa Gill at JP Morgan.

Thanks very much and good morning. Ken, I was wondering if you could give us an update on where you are in the managed care payer check-in strategy. How much is left to be done here in 2024? And then when I look at the revenue per clinician, I think you talked about rates getting better in the fourth quarter and holding some claims until the fourth quarter. How do I think about that progression of revenue per clinician going into 2024?

Sure. Lisa, I'll take the first part of that and let Danish speak to the revenue per clinician. Our payer strategy really is going to continue the work that we started in 2023, which is I was very surprised to see the number of payer contracts we had. It was well in excess of 400. We reduced that by about 30% last year. We will do an additional reduction this year, probably not quite as large. But I think what's most important is sharing the underlying rationale of why we're doing it. So when we think about our payer contracts, first and foremost, we found that we had many, many where there was such little volume. It just didn't make sense administratively to maintain the work, to reload the rates, to do the credentialing, et cetera. So that's important. Beyond volume, we look at the administrative terms that we have with the payer and look to try to make them simple and straightforward and not overly complex and onerous. We also look at whether or not we have delegated credentialing because we have found there's a dramatic reduction in the time it takes to onboard a clinician when they grant us delegation. And then the last two things are we certainly look at the reimbursement that we're paid and their desire and willingness to partner with us with strategic initiatives such as value-based care and integrated care between physical and mental health.

Lisa, this is Dave. I'll take your -- the kind of the TRPV growth question. So in the fourth quarter, as you noted, we had a material step-up in our rates or the revenue we were collecting per clinician. The primary drivers of a TRPV improvement in the fourth quarter were driven by the higher -- increase in the higher margin, higher revenue services. We've talked about like neuro-psych testing and services like that. In addition, we did get some nice increases in payer rates in the fourth quarter. I'd have you think about that as largely we were getting increases for 2024, just a few months earlier. So that's what drove the increase in the total rate per visit in the fourth quarter. You mentioned the holding of claims, that was more of a cash phenomenon. So that impacted our cash. We were still booking to appropriate levels of revenue. So that didn't impact our TRPV. It was really more an impact on DSO. And as you noted, we did release those claims, and you saw DSO come down significantly in the fourth quarter as we expected.

And if I can just squeeze in a quick follow-up. Just you talked about full-time employees and the capacity opportunity there. Can you talk about how many of your clinicians are full time today and what the ultimate goal would be?

Yes, this is Danish. So our long-term goal is to always make sure that we're creating an environment where clinicians feel like they can dedicate their full caseload in time to LifeStance, and we continue to enhance our benefits, create incentives and rewards for clinicians to do that. However, we do have both clinicians that are providing what you consider a full time on the higher end of hours, and we have ones that are more part time. And our value proposition though different to each continues to resonate for both. The point in our prepared remarks was that we continue to focus our energies around incentivizing and rewarding clinicians to really build their careers here and have this be their primary or only source of income.

Okay, thanks for the comments.

We'll go next to Ryan Daniels at William Blair.

Yes. Hey guys, this is Jack Senft on for Ryan Daniels. Congrats on the quarter. Just for a clarification, for 2024, I know you aren't expecting to open more than 20 clinics. I guess just what is your expectation for consolidating clinics this year? Are you completely past that hurdle now? Or is this kind of an ongoing situation?

Yes, this is Danish. So I can talk about that. So again, as we mentioned in the prepared remarks, we consolidated 82 centers in 2023. At this point, kind of a broad scale consolidation like that, we would consider complete and behind us. On a go-forward basis as leases come up for renewal every year, we will continue to evaluate each and renew or close as it makes sense, but it will not be a large-scale effort like what we saw in 2023. We will drive further optimization primarily through monitoring the pace of our de novos and placing those in markets where in-person demand continues to increase beyond the footprint we have in any of those markets as well as building further clinician density within the existing 575 centers that we have today. I would note that in-person continues to be a very important part of our overall hybrid strategy and is a significant differentiator for us versus others that are out there, and we continue to believe firmly in the hybrid model and that we have done the large lift in optimizing our footprint in 2023.

Okay, perfect. Thanks. As a quick follow-up to Lisa's question, in the prepared remarks, you did mention the shifting your focus towards clinician capacity,; that you want to reward and incentivize clinicians offering full-time hours. Can you just dive a bit deeper on this a little bit more. Are clinicians coming from private practices or competitors desiring these type of benefits more? Or is there anything you've learned with incoming hires that you can kind of talk about with these incentives?

Sure. Yes. This is Danish. I can cover that. So yes, as we look at where we attract clinicians, it tends to fall into three areas. One is clinicians that are looking for improved lifestyle and are moving away from typically inpatient physicians or hospital-based positions with heavy case-loads, and they are looking to have benefits as part of that transition because that's typically what they're receiving in the other environment. The other area you see is new grads coming out of training that are looking for -- to start their careers and -- or looking for someone that can provide overall employment inclusive of benefits as they begin to start operating as a practicing clinician. And then the third is clinicians that are coming either out of solo practice or other small group practices that are typically 1099 in nature and do not offer benefits. And so particularly for that group, though, across all three, it resonates, but particularly for that group of clinicians, being able to incentivize and reward them through benefits like health care, 401(k) match, et cetera, is something that is unique that we offer and continues to be a differentiator for our value proposition.

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

Thank you very much. This is actually Dylan Finley on for Kevin Caliendo. As you guys are approaching '25 and your prior comments on exiting that year with double-digit margins, I guess, first of all, that's still a reasonable objective as of today? And then secondly, based on the improvement indicated in '24, it seems like '25 might be a year with a little more of a heavier lift. I'm just wondering if you could break out the sources of that margin expansion. Does that contemplate further Center Margin improvement versus a reduction in certain operating expenses?

Yes, as we look at the guidance for '24 and our previous comments relative to exiting '25 at double-digit margins, I would describe this is right on track. We've said in the past, it wouldn't necessarily be completely linear. And we're really pleased that as compared to our sort of long-term comments where we were projecting and committing to free cash flow for full year 2025. In this call this morning, we're announcing that a year early, such that 2024, we are now expecting a full year that we will generate free cash.

Great. Thank you. No follow-ups for me.

We'll move to our next question from Brian Tanquilut at Jefferies.

Hey, good morning, guys. Maybe just to Danish's point on increasing incentive offers to clinicians, how should we be thinking about the impact of that on SWB as you roll that out?

SWB? We didn't catch out the last part of your question.

Yes, Just on the impact of rolling out a new incentive program on the salaries, wages and benefits line.

So this would be a new benefits program. This is just simply shaping the overall benefits program that we administer to help lean heavier towards incentivizing clinicians that are offering full-time hours versus those that remain part-time or very part time. So there's not a growth in the overall cost structure as it relates to benefits, just again a shaping of how we are aligning that between part-time and full-time clinicians.

Got it. Okay. And then maybe, Ken, just any thoughts that you can share with us on your view on the fundamental trends within behavioral health in your patient population. Because as we look at your growth rate, right? I mean you've seen it in the high teens to low 20% range, just your thoughts on the sustainability of that level of volume growth, especially given the backdrop that we see in the mental health space. Thanks.

Yes, certainly, on a macro basis, the demand for outpatient mental health services has not subsided at all. So we have a very significant long-term tailwind there. Specifically to LifeStance, obviously as we continue to grow larger and larger, the days of 75% and 100% year-over-year growth are behind us. We continue to feel strong conviction around our estimates around mid-teen organic growth and then obviously, when we go back to pursuing acquisitions that will drive it beyond the mid-teens. So we think there's plenty of opportunity for continued growth in the business even as we sort of double down and focus on margin expansion and profitability and efficient capital deployment.

Awesome. Thank you.

We'll move next to Stephanie Davis at Barclays.

Hey guys, Congrats on the quarter and thanks for taking my question. First, Danish, we've seen some pretty rapidly changing trends over the past few years around patient acquisition, efficiency and cost. I was hoping we could dig in a little more to that patient acquisition strategy you touched on your comments. Talk to me about top of funnel versus middle funnel versus bottom of the funnel and kind of how much mine share each is taking and maybe what areas you could be focusing less on versus some of the prior years?

Sure, Stephanie, thanks for the question. So as I mentioned in our prepared remarks, we continue to be focused on all three top, middle and bottom of the funnel. However, as I think back to 2023, considerable amount of our effort went into improvements in the bottom of the funnel, which we talked about each quarter in the improvements we saw in our no show and cancellation rates by approximately five to six points over the kind of the year plus that we've been talking about that. And so though there remains some additional opportunity there over time, I largely view the work in optimizing the bottom of the funnel as complete and stable. And so we will continue to shift our attention towards -- particularly the middle of the funnel where we are improving our matching capabilities, both online through the rollout of OBIE and through improving our phone intake and matching experience by leveraging a lot of the capabilities first developed for OBIE. And then top of the funnel, that will always be a focus. We have been able to demonstrate not just patient acquisition in terms of volume above the pace of growth of our clinician base, but we've also been able to deliver that while bringing down the cost of acquisition for each new visit over time. And so it will, by the nature of the business require us to remain focused there. But over the last year and what we would view at least for 2024 and be likely beyond is patient demand will continue to outstrip supply. So an area of focus, but middle of the funnel between the three is going to be the most focus on area for 2024.

And when I think about the forward for kind of your patient acquisition strategy, is this something where it's being tweaked and you're making some of these last year was bottom of funnel, and now you're doing middle, top of funnel more. And then it's kind of a more stable process in the out years? Or is this something that has to be continuingly improved up on?

I mean I view anything as you continue to scale as a business that you are forever optimizing. And so whether there are significant -- whether there's significant room for improvement over a longer trajectory will remain to be seen. But I mean, we will always be optimizing around the edges for both top, middle and bottom of the funnel. But at least as it pertains to the bottom, the heavy lift is done. I think '24 will be a middle of the funnel focus. And then at that point, just optimization as the business continues to scale over the coming years.

I'll just add that I think one of the most powerful things that Danish has shared in his remarks is the extent to which we are able to rely on referrals from physicians and such that our paid advertising to acquire new patients is quite tiny, frankly, compared to some others in our space.

Super helpful. Thank you, guys.

And there are no further questions at this time. I would like to turn the conference over to Ken Burdick for closing remarks.

Thank you. As I've shared previously, the founders of LifeStance designed a great model to achieve an exceptional growth and have given newcomers like myself and Dave an opportunity to evolve and scale a great business. I want to remind everyone, we are still in the early stages. We are a young business. We have grown through both acquisition, approximately 100 acquired independent practices and thousands of clinicians hired one by one. And as we continue to emphasize these phrases like operational improvement and plenty of work to do, I want you to understand that is not faculty that is a realistic acknowledgment of where we are in our multiyear journey. We have more work to do. We continue to improve our focus on execution, prioritization, standardization so that we can run a more efficient business. Recognizing that there's more work to do, I do want to be sure to call out that I could not be more proud of my teammates across LifeStance. The passion that they demonstrate, the work ethic that they display has not only been key to our past accomplishments, but it's going to be the source of our future achievements as we continue to realize the potential of our business. Thank you for your interest in LifeStance, and thanks for joining us today.

And this does conclude today's conference call. Thank you for your participation. You may now disconnect.