LifeStance Health : Q3 2022 Earnings Script

LifeStance Third Quarter 2022 Earnings Script

Monica Prokocki, VP of Investor Relations

Good afternoon, everyone, and welcome to LifeStance Health's third quarter 2022 earnings conference call.

I'm Monica Prokocki, Vice President of Investor Relations. Joining me today are Ken Burdick, Chairman and Chief Executive Officer; Danish Qureshi, President and Chief Operating Officer; and Mike Bruff, Chief Financial Officer.

We issued the earnings release and presentation after the market close 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, business model and strategy.

Those statements involve risks, uncertainties, and other factors 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 helpful information for investors to 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 Ken Burdick, CEO of LifeStance. Ken?

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Kenneth Burdick, Chairman & CEO

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

Over my four decades in healthcare, I have observed how we as a country have underfunded mental healthcare and underserved millions of individuals with both diagnosed and undiagnosed mental health conditions and I have witnessed firsthand the need for an integrated approach to physical and mental health treatment.

Informed by these experiences, I am thrilled to have joined LifeStance, a company with a Vision of a truly healthy society where mental and physical healthcare are unified to make lives better.

What the LifeStance team has accomplished over the past five years is extraordinary. From a standing start, they have built a uniquely positioned national business with over 5,400 clinicians and approximately $820 million in trailing-twelve-month revenue.

But some of the successful initiatives that brought LifeStance to where it is today must evolve for the company to grow to multiples of its current size, expand profitability and deliver on long-term value creation for patients, clinicians and shareholders.

I look forward to building on the successful trajectory set by the founders at a time when our services are needed more than ever.

Turning to financial results, we are lowering expectations for the year based on our third quarter performance and fourth quarter outlook.

Third quarter revenue was $218 million, on the low end of our expectations, primarily due to lower than expected visit volume. Center Margin of $60 million and Adjusted EBITDA of $15 million were primarily affected by revenue being on the low end of expectations as well as higher than expected costs associated with our employee health benefits program.

As for guidance, I'd like to share my perspective on how we intend to set financial expectations going forward. Our business, especially in this dynamic labor environment, produces some variation. As a service business, our revenue is driven by our number of visits, which is in turn driven by the number of clinicians, their capacity, and their schedule utilization. Danish will touch on each of these in detail. Recognizing this inherent variability in a relatively young company that is early in its journey, going forward we will present ranges reflective of this variability.

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We are lowering our expectations for the remainder of the year. We now expect Revenue of $845 to $850 million, Center Margin of $229 to $232 million and Adjusted EBITDA of $50 to $53 million. These lower ranges are primarily due to lower than expected visit volume and the higher costs of our employee health benefits relative to our prior forecasts. Mike and Danish will provide additional color in their prepared remarks.

It is clear to me that we are not performing to our full potential. In taking on leadership of LifeStance, I am laser-focused on execution, profitability, and operational excellence. This will be our formula for long-term value creation.

Since joining the company in September, the leadership team and I have been working through our strategic planning process. We will provide an update on our multi-year targets and deliver guidance for 2023 during our fourth quarter earnings call.

Through these planning processes, as well as countless conversations with management, clinicians, and other team members from all across the company, I have some initial observations.

First, I believe that the business model and strategy are sound.

Therefore, we will continue to differentiate ourselves with our hybrid in-person and virtual care model, with a multi-disciplinary approach through which we can treat all types of mental health diagnoses.

We will also continue to expand access to mental healthcare through commercial in- network coverage, and primarily source our patients through referral partnerships with primary care providers.

And finally, we will continue to march toward our long-term vision of unifying mental and physical healthcare.

LifeStance succeeded in developing a unique business model that overcame historic industry challenges in the mental health space-developing relationships with commercial payors and increasing access to trusted, affordable, and personalized mental healthcare at scale.

There is no shortage of patients seeking the services we offer, and we believe that our ability to attract new clinicians to LifeStance remains unparalleled.

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This company has the potential to become a unique and valuable component of the broader healthcare ecosystem.

Furthermore, our immediate priorities remain unchanged.

I am impressed with the quality of the people and their passion for our mission, and I believe we can deliver on our near-term goals as well as our long-term ambitions.

We have the right strategy, the right near-term priorities, and team; however, I also see opportunities to better position LifeStance to have the greatest positive impact on society while delivering superior long-term value.

LifeStance was founded in 2017, and the company has grown revenue at a compound annual growth rate of nearly 90% from 2018 through 2021. Like many growth companies, LifeStance has experienced natural growing pains as we have begun to outgrow certain processes and systems.

We need to evolve and build a platform that can meet the needs of a large, national business, that can scale to support LifeStance's full potential as the premier destination for clinicians and patients.

I have led companies with similar opportunities and challenges. These experiences have taught me that while it may not be easy and will not happen overnight, making the right investments and maintaining focus on the key priorities can establish the foundation for a long-term trajectory of growth and profitability.

We have a tremendous runway ahead of us-we've been in an all-out sprint. We now need to build processes and systems worthy of the huge opportunity before us.

Several areas will receive greater emphasis going forward.

First, we will further focus on long-term profitability, capital discipline and generating free cash flow.

Second, we will focus on simplifying administrative complexity and will make strategic investments in enterprise-level scalable infrastructure over the next few years- beginning in 2023.

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When we refer to scalable infrastructure, we mean strengthening our underlying platform through end-to-end process optimization, standardization, and automation to reduce manual processes and drive operating leverage.

For example, through the implementation of an enterprise workforce management solution, we expect to retire multiple systems and drive significant operational efficiencies while better supporting our clinicians and their patients.

Additionally, we will continue to make digital investments, such as a new virtual care platform, continued rollout of our online booking and intake experience, which we call OBIE, and launch new digital products to reinvent the entire patient care journey beginning with finding the right clinician and continuing through the entire treatment plan.

Third, our payor strategy will become more selective. Today we support hundreds of payor contracts. Streamlining our commercial payor contracts will reduce administrative burden and allow us to better align with payor partners who share our vision of expanding access to mental health care and improving the coordination between physical and mental health care. These partners invest in that vision with rates commensurate with the value that LifeStance clinicians provide.

Finally, we will continue our shift toward organic growth through expansion of our clinician recruiting team and a much more focused approach to M&A. Now that we've built a broad national presence, we plan to do fewer deals, aligned with some of the priorities I just referenced.

We will focus primarily on larger practices with a minimum clinician count, as each incremental acquisition adds administrative demands. We will further emphasize profitability and market density in the businesses that we acquire. And, we will ensure that new acquisitions bring in minimal exceptions when it comes to things like payor mix, service line adjacencies and operational processes and policies.

In summary, we're evolving from a purely growth mindset to creating a balanced set of objectives that include operational excellence, profitable growth, and disciplined capital deployment.

In closing, I am excited about what the future holds for LifeStance. Psychiatrists, nurse practitioners, psychologists, and therapists form the backbone of LifeStance. Whether

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