Thank you for holding. My name is Jermanie, and I will be your conference operator today. I would like to welcome everyone to LifeStance Health's Second Quarter 2024 Earnings Call. I will now turn the call over to Monica Prokocki. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to LifeStance Health's second quarter 2024 earnings conference call. I'm Monica Prokocki, Vice President of Investor Relations. Joining me today are Ken Burdick, Chief Executive Officer; and Dave Bourdon, 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, 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. We continue to execute on our plan in the second quarter. This is now our seventh consecutive quarter of meeting or exceeding expectations. The team delivered revenue growth of 20% or $312 million and adjusted EBITDA of $29 million. Based on the strength of the quarter, we are once again raising our full year guidance for all financial metrics. Our value proposition and differentiated hybrid model of in-person and virtual care continues to resonate with both our clinicians and patients as we see increasing demand for in-person services. We are now approaching 7,000 employee clinicians with year-over-year growth of 14% and 118 net clinician adds in the quarter. For the past five quarters, this growth has been 100% organic. Additionally, our clinicians continue to provide excellent care to our patients as reflected in our Net Promoter Score of 86 and average Google reviews across LifeStance centers at 4.6 out of 5 stars. Regarding operational execution, we continue to make progress on initiatives to streamline the business and improve our performance. I'll share three tangible examples with you. First, we are finalizing the rollout of our digital matching tool for booking new patients by phone, improving efficiency and the user experience for our customer care specialists. Second, we continue to roll out our new digital patient check-in tool. We have successfully implemented the first six states and are actively implementing the tool in five additional states. While still in the early stages, we are seeing higher patient satisfaction, operational efficiencies and improvements in patient collections where this tool has been deployed. Third, the redesign of the operating model was launched on July 1. This represents an investment in improved patient and clinician experience by standardizing the operational model across our 33 states. This includes enhancing the staffing levels of front office support and increasing the dedicated clinical leadership focused on coaching and supporting our clinicians. The quarter is straightforward with solid performance, including stronger-than-expected free cash flow. We expect this cash generation to remain strong for the remainder of the year as we continue to recover from the disruption of the Change Healthcare cyberattack. With that, I'll turn it over to Dave to provide additional commentary on our financial performance and outlook. Dave?

Thanks, Ken. Slide 10, I'm pleased with the team's operational and financial performance in the second quarter. We produced strong top line results with revenue of $312 million, representing growth of 20% year-over-year. The outperformance was driven by higher total revenue per visit and increased visit volume. Visit volumes of 2 million increased 15% year-over-year, primarily driven by clinician growth. In the second quarter, we added 118 net clinicians, which met our expectations. This brings our total clinician base at 6,984 clinicians, representing growth of 14% year-over-year. In addition, similar to last year, we expect our net clinician growth to seasonally step up in the third quarter. With regard to clinician productivity, it was slightly ahead of our expectations in the second quarter. Total revenue per visit increased 4% year-over-year to $159, primarily driven by payer rate increases. Regarding profitability, the better-than-expected top line results flowed through to center margin. Center margin of $98 million in the quarter increased by 34% year-over-year. The year-over-year improvement was primarily due to higher total revenue per visit and operating leverage in center costs, mainly driven by real estate optimization. Outperformance in the quarter was primarily driven by favorable spending and higher total revenue per visit. Adjusted EBITDA of $29 million in the quarter was strong and outperformed our expectations, increasing 103% year-over-year. Adjusted EBITDA as a percentage of revenue grew nearly 4 points year-over-year to 9.2%. The outperformance in the quarter is attributable to the improvement in center margin. Turning to liquidity, in the second quarter, we generated strong free cash flow of $39 million. We exited the quarter with $87 million in cash and net long-term debt of $279 million. We are pleased to have finished the first half of 2024 free cash flow positive. In the third quarter, we will see a cash impact of approximately $18 million from the payment of the 401k match. We remain confident that we will finish the full year with positive free cash flow due to stronger year-over-year operating results, disciplined capital deployment and resolution of collection issues with payers. As a result, we continue to have sufficient financial flexibility and have no intention of raising additional debt or equity. DSO improved four days sequentially to 49 days in the quarter. We are continuing to work through the impact from the Change Healthcare collections disruption. We still believe this is a timing issue that will be resolved by the end of the year. We continue to see improvement in our leverage ratio with net leverage improving sequentially over 90 basis points to 2.2 times. We are pleased with our current net leverage ratio and expect it to continue to improve over the remainder of the year. In terms of our outlook for 2024, we are raising our full year revenue range by $6 million at the midpoint to $1.200 billion to $1.242 billion. We are also raising our full year center margin range by $10 million at the midpoint to $363 million to $383 million, in the full year adjusted EBITDA range by $2 million at the midpoint to $90 million to $100 million. Based on the adjusted EBITDA outperformance in the first half of the year, we are giving ourselves flexibility through the back half of the year to make additional investments to better position us to achieve our 2025 objectives. For the third quarter, we expect revenue of $290 million to $310 million, center margin of $83 million to $95 million and adjusted EBITDA of $15 million to $21 million. Additionally, we now expect stock-based compensation to land towards the lower end of our originally guided range of approximately $80 million to $95 million in 2024, compared with $99 million last year. As compared with our original expectations of opening no more than 20 de novos in 2024, we now expect to open fewer than 10 by year-end. These updates reflect our increased emphasis on profitable growth and disciplined capital deployment.

Thanks, Dave. In closing, I'm pleased with the progress made this quarter. We beat and raised on each of our guided financial metrics for the year, delivered another quarter of strong organic revenue growth and operating leverage and achieved positive free cash flow for the first half of the year. The operational improvements and investments that we've been making in people, processes and systems over the past two years are starting to give us greater consistency and visibility into the performance of the business, while also improving the experience for patients, clinicians and team members. Operator, we're now ready for questions.

Thank you. The floor is now open for questions. Your first question comes from Craig Hettenbach with Morgan Stanley. Please go ahead.

Thanks. Ken, can you provide an update on payer rates, what you're seeing at large payers broadly? And then also, any anecdotes you can share in instances where you're seeing rate increases if you can touch on that?

Sure. We are very pleased with the results of our payer negotiations. As we've said before, we just put this team in place in the early half of last year, and they are doing a tremendous job. We're trying to build a partnership mindset with our payers so that we're having ongoing conversations, not just about the rates, but also about the administrative terms and delegated credentialing. Ultimately, we hope to have meaningful discussions about value-based arrangements. So there is the one single exception that we spoke about at length last time, and that was a payer that was out of market in terms of the level of reimbursement and had substantial volume. Other than that single exception, I would say our payer rates and payer contracting is going quite well.

Got it. And just to follow up on clinician growth, Dave, you mentioned expecting seasonal strength in Q3. Do you have any updates on your plans to shift the mix more towards full-time clinicians? How is that progressing and what might it mean for capacity next year?

Sure, Craig. I'll take that as well. The pipeline for clinician growth continues to be robust. Our value proposition resonates. As we did share last quarter, second quarter tends to be sort of the low watermark in part based on when new clinicians are graduating from school, but it continues to be an important component of our growth story. While we are doing things, as you mentioned, like skewing towards more full-time employment and making sure that we are recruiting clinicians with the license-type needed in a specific geographic market. Even with that refined approach, as I say, we expect that clinician growth will be an ongoing part. Our recruiting engine is extremely strong, and our team is doing a fantastic job.

Got it. Thanks for that.

Your next question comes from the line of Lisa Gill with JPMorgan. Please go ahead.

Hey. Good morning. Thank you for the question and congratulations on the results. Ken, I just want to follow-up on what you just talked about with the clinician adds, and you talked about the value proposition. Has anything materially changed from a competitive standpoint in the marketplace? I know over the last several years, there were times where things ebbed and flowed because clinicians were looking to be more virtual or working from different locations. Is there anything that's changed from a competitive standpoint from your perspective when we think about the clinician market?

I think there's been, from a competitive standpoint, some movement back toward in-person visits. We saw this quarter about a 1.5% bump toward in-person versus virtual. In terms of the competitive environment, obviously, there's still a great demand for mental health clinicians, but we will continue to work on both, bringing in the right clinicians through the front door and trying to mitigate the outflow on the back door. To that point, our retention has stabilized. It's slightly better than where it was last year, but it's not where we want it to be. So we will continue to work on that.

And where were you in the quarter on virtual versus in-person?

Let's see. Roughly, I'm going to say, 71% virtual, 29% in-person. As I say, interestingly, during 2023, we saw that kind of quarter-over-quarter change. For about three quarters, it had stabilized. It's only this past quarter that that trend seems to be continuing with about a 1.5 point bump quarter-over-quarter.

That's helpful. And then just as a quick follow-up. Dave, you mentioned investments in the back half of the year. Can you give us an idea of what some of the investments are that you're making for 2025?

Hey, good morning, Lisa, it's Dave. We are giving ourselves some flexibility to make some additional investments in the back half of the year based on the strong performance through the first half. Really the intent is to position ourselves even better for success in 2025 and beyond. So we're accelerating some things that we would have been doing next year, like, for example, accelerating the hiring of some business development boots on the street, individuals that go in and sign up new referral sources for us with the local medical community. Those kinds of things, but we're still working through the list, but I'd say, an emphasis on growth and achieving 2025 targets as well as non-recurring spend where it makes sure that we're positioning ourselves for success around the delivery of our strategic initiatives and things like that.

Your next question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Hey, everyone. This is Jack Senft standing in for Ryan Daniel. I appreciate the opportunity to ask a question. This relates to Lisa's earlier inquiry. If we examine the midpoint of the third quarter guidance, it appears that EBITDA margins are declining by approximately 300 basis points sequentially. Is this drop in margins primarily due to the increased investments you mentioned, or is there anything else notable regarding the margin contraction? Thank you.

Hey, Jack, it's Dave. I'll take that one. In the third quarter, revenue at the midpoint is down about $12 million compared to the previous quarter, driven by two factors: lower visit numbers and the impact of the vacation season, which affects productivity and adds some variability. There are fewer visits in Q3 than in Q2. Additionally, we previously mentioned the calendar performance of TRPV, which was expected to decline in the second half of the year. These two elements are responsible for the $12 million revenue drop from one quarter to the next, with approximately half of that attributed to TRPV and half to visits. When you factor in the increase in general and administrative expenses due to investments, this leads to the adjusted EBITDA decline quarter-over-quarter.

Okay. Perfect. Thank you. And if I can just ask one more. In your prepared remarks, too, you mentioned the redesign of the operating model that was launched in early July, and it included the enhancing of the staffing levels and front office support. I think you said too that this was only rolled out to a few states so far. As we kind of look to the remainder of the year, how should we think about this maybe impacting the cadence of OpEx growth or just maybe the general impact to just operating expenses going forward? Thanks.

Sure. I'll take that one. This is Ken. We call this our one stance operating model, and there were several things that we intended to accomplish. In large part, it was rolled out, call it July 1. There will be some phasing, but think of this really as a national initiative. Unlike our digital check-in tool where we're sort of going state by state, this one, we felt it was a burden to do it within a 60 or 90-day period and had spent more than six months of planning for it. It is certainly a contributor to increased expenses in the back half of the year versus the first half of the year. But we're excited about it because what we're accomplishing here is a level of standardization across all of our markets so that people have the same job description, there's the same level of staffing, there are standardized processes. In addition, we made a very conscious intentional move to put more resources in the local market to support both our patients and our clinicians. We are already starting to see some positive impact from that change.

Your next question comes from the line of Kevin Caliendo with UBS. Please go ahead.

Thank you and congrats on the quarter. This is Dylan Finley on for Kevin. As you guys look at your center footprint today, how do you feel about your relative capacity there to end up? Do you think that footprint is something that you'll need to grow on in 2025 as you add on? Or do you think you still have a lot of leeway?

Thanks. Good morning, Dylan. This is Dave. We feel good about the footprint that we have right now. As you're aware, we did some rightsizing of that last year with the consolidation of centers. We're only going to add less than 10 de novos this year. So we're pretty stable footprint this year. There is still a lot of capacity in our footprint. When you look across the country, there are local geographies where we've been successful with recruiting as well as have higher in-person patient utilization, where those are the areas where we'll continue to need to grow de novos. I would expect that it will be more of the same next year, where we'll have a modest amount of de novo adds while we continue to grow into our footprint.

Thank you. That's helpful. And then just for a follow-up. You talked to the explanation of why EBITDA margin might be depressing a bit in the back half with those discrete investments. As we kind of look towards 2025, knowing that you haven't provided any outlook there. Should we still look at that exit rate double-digit margin at the end of '25 as achievable? Or do you think anything has changed maybe with regards to the investments that you want to put into the business today and keep today?

Yeah, this is Ken. I want to jump in on that. It's a really important point. I want to, on behalf of Dave, myself and the entire organization, emphasize that we are absolutely committed to those three goals that we set last year, one of which was that we would exit 2025 at double-digit margins; one of which was that we would maintain a mid-teens growth trajectory; and the third was about positive cash flow. At that time, we committed to positive cash flow in 2025 for the full year. As you know from our prior quarter, we have moved that up, and we are now committing to positive cash flow for the full year 2024.

Thank you. Appreciate it.

Your last question comes from the line of Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning. This is Jack Slevin on for Brian. Congrats on the quarter. Similar question, but maybe ask it a little bit differently in regards to the 2025 margins. The color so far has been helpful, I think, on how to think about that back half step down and appreciate the investments, but I guess, maybe as we look at it, given some of the moves on the contracts, is the back half the right sort of starting point to bridge towards those 2025 goals, especially the exit rate on margin? And from the current standpoint, how do you think about the building blocks here to get to that margin level? Thanks.

Yes, it's Dave. I'll take that. The back half of the year, if not for the investments, we would have been round numbers around 7% adjusted EBITDA margin. That's consistent with our initial guide for 2024. We're feeling very good about where we're finishing the year from a margin perspective. If you take a step back, remember, when we talk about 2024 and 2025, we said in 2024, we would see some margin expansion. The midpoint of our guide right now is 220 bps of margin expansion year-over-year, but that we would see even more margin expansion in 2025, where we're able to realize the benefits of all of the investments that we were making in 2023 and 2024. We're finishing the year where we wanted to in our multiyear journey to exiting 2025 with double-digit margins. The same building blocks that are getting us the margin expansion in 2024 will apply, but with a little more enhancement, especially around operating leverage. You'll see strong operating leverage in 2025. We'll continue to grow our specialty services, things like neuropsych testing that have higher margin profiles. Even with the one outlier payer situation that we've discussed at length, we expect to achieve low single-digit increases in total revenue per visit next year. Those building blocks will get us to exiting next year with the double-digit margins, again, all basically according to plan what we've laid out for you from a three-year journey.

Got it. Appreciate that. Really helpful. Congrats again on the quarter.

Thanks.

Your last question comes from the line of Stephanie Davis with Barclays. Please go ahead.

Hi, guys. Congrats for the quarter and thanks for taking my question. I was hoping to dig a little bit into your ramp and your credentialing platform. Just how you're thinking about the timeline? Thinking about credentialing processes, is it often a clinician by clinician blocking and tackling process? Is there any recredentialing process with the new platform that we should factor in to that timeline?

So Stephanie, we have certainly made improvements. We're migrating to a new platform. You're right. A lot of our credentialing right now is the recredentialing of our existing clinician base. One of the things that we're feeling quite positive about is the continued progress that we've had with our payers, persuading them that if they delegate credentialing to us, we can dramatically increase the speed with which our clinicians can come online and see patients. That has been a very positive development that perhaps we haven't spoken enough about. So thanks for the question.

And a follow-up, the other side of the competitive landscape question, just we're seeing some of the mental health solutions evolve to more of a fee-for-service insurance product. Given that uptick, how are you thinking about your go-to-market for patients or maybe how you're advertising to them a little bit differently?

Yes. We have a very, very different model. We spend a de minimis amount of marketing in terms of patient acquisition. We are heavily reliant on the referrals that come from primary care and specialists, and that has served us well. When we talk about business development, we have a team that's continuing to nurture and expand those relationships with primary care and specialists. That really is the heart of our mission and vision. We're looking to unify the mind and body treatment, especially of chronic conditions because we think the kind of value that that's going to bring to the overall health care system is enormous. We do that primarily because it's consistent with our overall strategy, but it does have the benefit of being far less expensive than having to pay significant amounts of money for patient acquisition.

That concludes today's Q&A session. I will now turn the conference back over to Ken Burdick, CEO for closing remarks.

Thank you, operator. Just a few brief comments. Obviously, Dave and I report the numbers, and this was yet another really solid quarter with a beat and raise. It's our seventh quarter, but we don't lose sight of who's doing the work, and it's the nearly 9,500 employees across LifeStance who are working hard, first and foremost, to make sure that patients and our clients get the care that they deserve and that they need. It takes a village, and the entire team is rallying, and I have great confidence and tremendous appreciation for the work that's being done by our associates across the company. So, an opportunity to thank them for their great work and a great deal of excitement about the future, and I love being able to put up quarters like we've just done this morning. Thank you everyone for your interest in LifeStance, for your time this morning. With that, I hope you have a great day.

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