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spk01: Thank you for standing by. My name is Liz, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Lifestands Health Third Quarter 2024 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. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Monica Prakowski, Vice President of Investor Relations. Please go
spk04: ahead. Thank you, operator.
spk05: Good morning, everyone, and welcome to Lifestands Health Third Quarter 2024 earnings conference call. I'm Monica Prakowski, Vice President of Investor Relations. Vice President of Investor Relations. Joining me today are Ken Burdick, Chief Executive Officer, and Dave Borden, Chief Financial 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, .lifestands.com. 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 that help facilitate comparison of current 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 comparable period in the prior year. At this time, I'll turn the call over to Ken Burdick, CEO of Lifestands. Ken?
spk02: Thanks, Monica, and thank you all for joining us today. Last month, on October 10th, we observed World Mental Health Day. Within our own country, the growing disconnect between the demand and supply of mental health services remains one of the largest challenges facing Americans today. Through our mission of providing affordable and accessible mental health care, we at Lifestands relentlessly fight each day to mitigate this crisis. Turning to financial performance, we are very pleased with the team's continued execution in the third quarter. For the eighth consecutive quarter, we have met or exceeded our expectations. Our revenue growth of 19% and our disciplined execution created solid operating leverage that yielded a .8% profit margin. Based on the strong performance in the third quarter, we will again be raising our full year guidance for all financial metrics. I cannot emphasize enough the role that our clinicians have played in our achievements in the third quarter and throughout the year, as well as the value they deliver every day in providing high quality patient care. We now have a team of over 7,200 clinicians, an increase of 285 just this quarter. Turning to operational execution, we continue to make progress on our initiatives to streamline the business and improve performance. First, we continued the implementation of our new operating model. As a reminder, this initiative standardizes our organization with consistent staffing and processes across our 33 states and over 550 centers. We are confident that this higher level of administrative and clinical support will position the business to scale efficiently in 2025 and
spk04: beyond.
spk02: Additionally, we continue to roll out our new digital patient check-in tool. We have implemented it successfully in 11 states and expect to complete the national rollout by mid-year 2025. While still in the early stages, we are seeing higher patient satisfaction, operational efficiencies, and significant improvements
spk12: in
spk02: patient collections where this tool has been deployed. Shifting to payer strategy, we are proud of the success that our payer engagement team has had in securing improved rates. While this represents progress, we still have a long way to go to achieve parity with physical health reimbursement. As previously communicated, the third quarter is the first one where the decrease in rates from a single outlier payer with above market reimbursement is reflected in our results. However, much of the impact of this initial rate decrease was mitigated by negotiated rate increases with other payers. Many of the new rate increases went into effect sooner than we had expected, which drove the outperformance in total revenue per visit. Before concluding, I wanna take a moment to comment on the recent hurricanes, Helene and Milton. My thoughts go out to each and every one of the LifeStans patients, clinicians, team members, and the communities we serve that have been impacted by these storms. Dozens of our centers were affected, and all but two were back up and running within one week. The remaining two centers reopened by mid-October. I am proud and appreciative of the way that our teams responded to these disasters. Yet another testament to the resilience of the team and dedication to putting our patients first. With that, I'll turn it over to Dave to provide additional commentary on our financial performance and outlook. Dave?
spk12: Thanks, Ken. Like Ken, I'm pleased with the team's operational and financial performance in the third quarter. We delivered strong top-line results with revenue of $313 million, representing growth of 19% year over year. The outperformance was driven by higher total revenue per visit and increased visit volumes. Visit volumes of 2 million increased 15% year over year, driven primarily by clinician growth. In the third quarter, we added 285 net clinicians, which exceeded our expectations. This brings our total clinician base to 7,269, representing growth of 13% year over year. There's variability in the pace of clinician ads throughout the year. Similar to last year, we expect a lower number of net clinician ads in the fourth quarter. With regard to clinician productivity, it came in slightly ahead of our expectations in the third quarter. Total revenue per visit increased 3% year over year to $159, primarily driven by pay or rate increases that came in earlier than our previous expectations and to a lesser extent, one-time favorability.
spk04: Regarding profitability, the better than expected top
spk12: -line results flowed through the center margin. Center margin of $100 million in the quarter increased 32% year over year, primarily due to higher total revenue per visit, higher visit volumes, and operating leverage and center costs. Outperformance in the quarter, relative to our expectations, was primarily driven by higher total revenue per visit, higher visit volumes, and lower than expected spending. Adjusted EBITDA of $31 million in the quarter was very strong and exceeded our expectations, increasing 110% year over year. This is the fourth consecutive quarter of doubling our adjusted EBITDA year over year. Adjusted EBITDA as a percentage of revenue grew over four points year over year to 9.8%. The outperformance in the quarter was primarily attributable to the improvement in center margin, as well as lower than planned spending in GNA. Turning to liquidity, in the third quarter, we generated solid free cash flow of $18 million. We exited the quarter with $103 million in cash and net long-term debt of $279 million. In the fourth quarter, we have generated approximately $30 million of free cash. In the fourth quarter, we are making an enhancement to our clinician value proposition by implementing a biweekly payroll cycle for our clinicians who were previously paid on a monthly basis. This will have a roughly $15 million negative impact on cash and Q4 related to the change in pay periods. Even with the impact of this payroll change, we expect to be free cash flow positive in the fourth quarter and now expect to finish the full year with meaningful positive free cash flow due to stronger year over year operating results, disciplined capital deployment, and progress towards resolving collection issues. DSL improved two days sequentially to 47 days in the quarter. We are continuing to work through the impact from the change healthcare collections disruption, along with some delays from a couple of payers updating their systems to reflect higher negotiated rates. These are all timing issues that we are actively working through and we expect DSL to further improve in the fourth quarter. We continue to see improvement in our leverage ratios with both our net and gross leverage ratios improving nearly 50 basis points sequentially to 1.7 and 2.7 times respectively. This represents a significant decline from 4.4 net and 5.3 gross leverage in Q3 of last year. In terms of our outlook for 2024, we are raising our full year revenue range by $17 million at the midpoint to ,000,000 to ,000,000. We are also raising our full year center margin range by $17 million at the midpoint to $382 to $398 million, and the full year adjusted EBITDA range by $15 million at the midpoint to $105 to $115 million. For the fourth quarter, we expect revenue of $302.5 to $322.5 million, center margin of $89 to $105 million, and adjusted EBITDA of $18 to $28 million. Due to some of the one-time rate favorability in the third quarter, we expect modest quarter over quarter decline in total revenue. We also expect a new per visit. As previously stated, based on the adjusted EBITDA outperformance so far this year, we continue to give ourselves flexibility through the remainder of the year to make additional investments to better position us to achieve our 2025 growth objectives. Additionally, we continue to expect stock-based compensation to be at or below the bottom of our previously guided range of $80 to $95 million. This represents a significant reduction from $99 million last year. We will open six de novos in 2024 with an additional five to 10 originally planned for this year shifting into early next year. As a result, we expect substantially higher de novo openings in 2025 and will provide specifics when we deliver guidance next quarter. Looking ahead to 2025, I'd like to provide an early view on headwinds and tail-ends for the business. In regards to headwinds, as a reminder, we stated we would experience downward pressure in total revenue per visit, not only in the back half of 2024, but also the first part of 2025 due to the single outlier payer negotiating their reimbursement to be more in line with our overall book of business. In the first quarter, we expect the last rate drop related to that same payer negotiation. In addition, the current CMS rate proposal for 2025 is a reduction of almost 3%. We expect to be able to offset both of those decreases by improving reimbursement with other payers and now anticipate that our overall rate growth next year will be roughly flat. In regards to tail-ends, we continue to see strong growth of clinicians and patient demand which will drive visit volumes. In addition, we expect continued operating leverage. As a result of these headwinds and tail-ends, we expect minimal margin improvement next year. We feel good about our ability to navigate and absorb challenges such as the rate dynamic while also delivering on our commitments regarding mid-teens revenue growth and exiting 2025 with double-digit margins. With that, I'll turn it back to Ken for his closing remarks.
spk02: Thanks, Dave. As we enter the final stretch of 2024, I'm looking forward to maintaining the momentum of the last eight quarters. Thanks to the tremendous dedication and commitment of the team, we have outperformed our expectations on nearly every metric this year, including revenue, adjusted EBITDA, and free cashflow. In a year with significant disruption to collections and an unprecedented rate reduction by an outlier payer, I'm incredibly proud of the resilience demonstrated by our entire team. We acknowledge that 2025 will be a particularly challenging year due to the rate dynamics that Dave highlighted. 2024 is shaping up to be a year of very strong margin expansion. We are well ahead of schedule in delivering on our multi-year financial commitments. As this is our last earnings call in the current calendar year, I'd like to take a moment to express my appreciation to our 10,000 colleagues who delivered the results that Dave and I have the privilege of sharing with all of you today.
spk04: We will now take questions. Operator?
spk01: At
spk03: this time, I would like to remind
spk01: everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
spk04: Your first question comes from
spk03: the line of Craig
spk01: Hedendak with Morgan Stanley. Please go ahead.
spk09: Yes, thanks. Ken, just on the point of total revenue per visit, you know, you managed to put up flat sequentially, still up 3% year over year despite that large pay headwind. So can you just give some context in terms of the payer engagement team, some of the success you're seeing there, and what rate increases are looking like at other payers?
spk02: Sure, Craig. I'm really, really proud of the payer engagement team. They've done a heck of a job this year. And as you might recall, this team didn't even exist until the early part of last year. So they've sort of gotten their sea legs and they are executing beautifully. We had some very meaningful increases from other payers who were quite a bit below the average reimbursement. And that certainly helped to offset as Dave described. So I would describe the sort of the payer environment as positive, constructive, but it's not lost on us that the payers right now are going through some unique challenges between the V28 risk scoring, coding changes, higher than expected utilization, and Medicaid rate disconnect because of the acuity difference between the pre-COVID and then the post-redetermination demographic. So we take none of this for granted. We feel really good about the relationships that we are building, but we do recognize that it is a difficult time in the payer space.
spk09: Understood. And then just to follow up, you touched on before the supply, demand, and balance for the industry. So clearly the demand is there. For Lifestand specifically, can you hit on just some of the efforts to continue to grow clinicians and importantly, just the mix of clinicians working more full-time, like what that means for you?
spk02: Yeah, that's clearly our long-term strategic intent. We would like to have the vast majority of our clinicians working full-time. But given this supply-demand imbalance, we're being really thoughtful and quite careful about how we do it. I've mentioned before that we've put some incentives in place to make it more attractive to work full-time. We have not seen this massive shift. We thought there might be, it hasn't worked out. We're seeing sort of modest movement. So I expect it's gonna be sort of a multi-year effort. One of the things that we probably don't talk enough about, Greg, is the fact that we do an awful lot of hiring of people that have recently graduated. So we have become a significant training ground for those folks that graduate and are looking to obtain their license. And that serves, in my mind, two very positive things. Number one, we're adding to the number of practicing clinicians in the mental health space. Number two, we can sort of teach them, and if you will, orient them to the life stance way of doing things. And that makes it, we think, much, much easier for them to get ramped up and establishing
spk04: a career at life stance. Got it, thank you.
spk03: Thank you. And your next question comes from the line of Ryan Daniels
spk01: with William Blair. Please go ahead.
spk11: Hey, everyone. Congrats on the quarter. This is Jack Sumpton for Ryan. First, maybe on your capital allocation strategy going forward, your cash balance seems to be in a pretty good spot, and I know you're reiterating the free cash flow positive guidance for the year. But you also have some long-term debt on the balance sheet. Are you planning on paying that down at all, or will you look at opening more De Novo clinics and maybe even M&A before that in 2025? Just wondering if you can kind of dig a bit deeper into what your priorities for capital are going forward. Thanks.
spk12: Hey, good morning, Jack. This is Dave. I'll take that one. So as you mentioned, we feel good about our financial flexibility. Now I have over 100 million of cash on the balance sheet. We have the 50 million of revolver still. So we feel good about our flexibility. When I think about capital deployment and our priorities as we step into 2025, 2026, the primary use of that flexibility is, number one, is gonna be funding internal growth. So as you mentioned, it was De Novo's technology projects, things like that. Number two would then be acquisitions. We said we would be more acquisitive once we were positive free cash flow and that we would be funding acquisitions from our balance sheet. I think of those as the two primary uses of capital. I do not anticipate buying down debt, especially when you look at our leverage ratios being so healthy right now. Okay,
spk11: perfect. Understood, thank you. And then just another follow-up to, you mentioned offsetting the negative rate impacts with other payer rate increases. Just kind of wondering how those rate negotiations and talks have gone with the other payers that are helping you to offset the impact. I think you, I mean, as you noted, that the payers are kind of in a tough environment now. So just kind of curious how those conversations have gone. You know, if there has been a good amount of pushback or just if you can give us any detail on that. Thanks.
spk02: Yeah, Jack, this is Ken again. I'll just reiterate that the team that we have built is doing a really good job so that we have sort of ongoing conversations with payers as opposed to, you know, there's no communication until it's time for one party or the other to renegotiate rates. So I think that's really healthy. I wouldn't say it is easy, but I would say that the continued loud and sustained cry from employers to gain better access for their employees and dependents is probably our single greatest lever as we have these conversations. And the fact that there really is a shortage in many, many instances, somebody tries to access mental health care and gets exhausted before they ever get their first appointment because they go through a long list and too often they find out that these clinicians are not open to seeing new patients. So that is a very legit dynamic that frankly hasn't improved in spite of sort of more attention and more focus on the issue. So they are not simple. These are not sort of one conversation and done. These conversations can often take months, but as I've said, encourage that they continue to be very constructive and productive in spite of the fact that payers are going through a challenging time right now for all the reasons I mentioned earlier.
spk11: Perfect, makes sense, thanks. If I can just sneak one final really quick one in here. GNA had a nice sequential decrease. Is this kind of a level we should expect going forward and maybe into 2025? Can you just touch on GNA expectations?
spk12: Yeah, so I'll certainly give more specifics on 2025 at the fourth quarter call when we're doing our guide for next year. But as you think about GNA and there's an implied step up in our fourth quarter guidance, and that's related to two things that I would point to. The first being some increased hiring related to our operating model and just the overall business in general. And then the second being some investments that will position us better for achieving our 2025 targets. So you should see a step up from the
spk04: Q2, Q3 level as we finish the year. Okay, perfect, thank you again and congrats again. Thanks, Jay.
spk03: Your next question comes from the line of
spk01: Jamie Perse with Goldman Sachs, please go ahead.
spk08: Hey, good morning. I was hoping you could focus on the clinician recruiting environment for a minute. Obviously, a pretty healthy number here in the third quarter. But maybe just an update on the COVID-19 situation and maybe an update on how many clinicians are in the markets you're actively recruiting, what the funnel and conversion rate looks like these days and maybe some thoughts on the competitive environment including remaining independent.
spk02: Yeah, Jamie, I'll take that. I would say it's fairly stable. We have not noticed a dramatic change either that has become much, much easier to recruit or more difficult. We obviously have a particular compensation model so it attracts those that are more entrepreneurial and if somebody wants sort of straight salary that this is not gonna be the location for them. So that takes out some portion but we continue to find significant interest on the part of both, as I mentioned earlier, people coming right out of school as well as people that are in a smaller independent practice because of some of the benefits that they will receive by coming to LifeStance. Not the least of which is that we have multiple license types so that they are in a position where they can learn and have a collegial environment with clinicians. We surround them with tools that most independent practices can't afford. And the professional development opportunity that we offer is something that we're gonna continue to weigh into because we get a lot of feedback that that's highly desirable. So I would say we continue to be pleased with the pipeline and with our conversion.
spk08: Okay, great. And then you've had improvement really all year in center cost per visit. How should we think about that progressing going forward in light of some of the de novo comments next year, that ramping and then just relatedly, I mean, how are you thinking about in person versus telehealth as you start to ramp up de novo openings next year? Thank you.
spk12: Yeah, I'll take that one, Jamie. There's a couple of pieces there. So first of all, address the de novo question. So as I mentioned in my prepared remarks, we're only gonna open six this year, but we had five to 10 that just because of timing and how long it takes for the approval process and construction or pushing in the first quarter of next year, and that there would be a meaningful step up next year. Now we're not at a point of guiding, but I wanna make the point that we're not going back to the old days of building like 100 de novos next year. You could think of it, it's gonna be in the zone of something like what we started this year with, make roughly 20 de novos and then add the five to 10 that are delayed from this year pushing into next year. So it's gonna be in that zone, but we'll tighten that up again on the fourth quarter call when we're giving guidance. In regards to the in-person utilization, it's pretty stable second quarter to third quarter, just a little bit over 70%, virtual 30% in-person. And for new patients, we're still seeing that in-person level being about 10% higher than the average, so about 40% in-person for the new patient
spk04: visit. Okay, really helpful, thank you. And
spk03: your next question comes from the line of Brian Tankowitz with Jeffreys, please go ahead.
spk10: Roblay in for Brian, thanks for taking my question. Center margin in the quarter came in really strong and Dave in your remarks, you noted you expect them to be relatively stable into 25 and I'm just curious if you all think the implied Q4 center margin is a good run rate for the business, as we look over the next six to 12 months?
spk12: Yes, it's Dave, I'll take that one. The way I think about 2025 is that overall we will see some minimal margin expansion versus 24 because of the big outperformance we're seeing here in the back half of the year. And the components of that is I actually expect to see some modest compression on the, or pressure downward on center margin margin next year because we'll have flat TRPV and we're still gonna, you know, we'll increase our clinician costs so you're gonna have some pressure on center margin. At the same time, we will see the benefits of operating leverage on the GNA line and then you can net those two together and you end up with a minimal increase in overall margins.
spk10: Got it, thank you. And then Congress has been waffling on whether to permanently extend telehealth Medicare reimbursements and just curious on your outlook on the extension of these reimbursements considering the government funding deadline next month?
spk02: Yeah, the, yeah, obviously with the new administration, we don't know exactly how it'll play out but as we monitor this, the increased recognition of the importance of improving access to mental health and the effectiveness of telehealth visits, we believe that there is a high, high degree of likelihood that the telehealth visit reimbursement will be sustained and maintained on into the future. So I would probably describe it as it's a discussion but I don't sense that there's a lot of waffling sort of back and forth as to whether there should be a change especially given the environment that we've described the disconnect between supply and demand.
spk04: All right, thank you.
spk03: And your final question comes from the line of Stephanie Davis
spk01: with Barclays, please go ahead.
spk07: Hey guys, thanks for taking my questions. I saw you had some really solid improvements in your clinician count and we've been hearing some of your more virtual peers on the public and private side talk about access clinician capacity. So I wanted to hear if that is more a function of platform improvements or kind of the backdrop in the market improving and because of the excess capacity comments I've heard from the private peers, have you looked at their platform improvements and considered borrowing any learnings from them or have you borrowed any learnings from them in order to kind of improve your clinician retention?
spk02: So Stephanie, maybe you can help. The excess capacity, can you explain what your reference is?
spk07: So we've heard of virtual only peers actually having more inbound applications from clinicians than they're able to hire or able to have utilization for, which is very opposite from what you've been seeing. And they've attributed it to platform improvements. So I've been curious if this is a function of the market or if this is a function of platform improvement and if it is platform improvement, maybe what learnings you guys could borrow?
spk02: Yeah, well that's actually new information to us. We have, I mean the number of people sort of graduating and going through training, we have not seen a substantial uplift based on your question. We'll obviously look into that but
spk06: sounds like we need to go and do a little more deeper diving in the call background. We'll be sure to go help you on that one.
spk02: Yeah, again, we don't see a change. I'd love to see a change in the disconnect between the demand for outpatient mental health and the supply of clinicians able to provide that as your question suggests. Perhaps as you talk about some of these virtual only companies, they're just at a scale where, whether it's their platform, whether it's their compensation model, et cetera, they are seeing more interest. I have so much respect and appreciation for the work that our clinical recruiting team does because as we talk about 285 net clinicians, obviously that means we've hired substantially more than that given that on a base of 7,000, we do have meaningful turnover that has stabilized but it's nonetheless a factor. So I hope that what I find when we research this further is that there is an increase in professionals that wanna go into the mental health practice but that is not something that we've seen and frankly it's not something that I've heard or read in the literature. So we will follow up on that. That would be very good news.
spk07: And a follow up, I guess, related to that. When you think about some of the investments you're making in order to improve clinician retention, have you considered any of the GenAI tools that can kind of take the back end and documentation burdens off of folks or is that price point just not an area where you'd wanna be investing?
spk02: Oh no, no, that is squarely within our fairway and very much on our radar screen. So we are piloting some of that right now. I would describe it as machine learning where we can provide tools that dramatically improve the experience of note taking and documentation after a visit. So again, it's one of the advantages of our size that we can access the very best in tools that are out there but we're being thoughtful in the way we deploy it. We're being really disciplined in our change management initiatives but we are not only improving the tools and look to continue to do that but as we've talked about this new model, the model is improving the support that we provide our clinicians. So both in terms of increased administrative support and then increased clinical leadership support. So we think that while I would never say we're done, we actually still have more to do towards the back half of this year and certainly into next year, we're gonna be creating an even more positive environment within which our clinicians perform their
spk04: valuable services.
spk03: Awesome, thank you guys.
spk04: All right, if that was the last question, I just have
spk02: a couple of closing remarks. Again, I appreciate everybody's interest in LiveStance. I don't think I talk enough about the incredible work that our clinicians do. So I'll simply share that the very best part of my work week is when I read through the patient testimonials. We get literally several hundred every week and it's a bright spot my day. The impact that we're having on lives is extraordinary. And then finally, what I'd say is we're finishing 24 strong. I'm incredibly appreciative of the work that's done. Sometimes I have to remind myself that this company is only seven years old. We've gone through a hyper growth phase and more recently we've been in what I'll call the three S's, stabilize, standardize and strengthen. But what the future holds is incredibly exciting. The industry tailwinds are palpable and I don't see any change. And so the best is yet to come. Once again, I wanna thank 10,000 of my teammates who have gone through this two year period where we are fortifying the foundation and strengthening the platform so that we can grow profitably and look forward to the years to come. So thank you operator and this could conclude the call.
spk03: Thank you, ladies and gentlemen. That concludes today's call. Thank you all for joining.
spk01: You may now disconnect.
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