Hello and welcome to the LifeStance Health Second Quarter 2025 Earnings Conference Call. I will now hand the call over to Monica Prokocki. You may begin.

Thank you, operator. Good morning, everyone, and welcome to LifeStance Health's Second Quarter 2025 Earnings Conference Call. I'm Monica Prokocki, Vice President of Finance and Investor Relations. Joining me today are Dave Bourdon, Chief Executive Officer; and Ryan McGroarty, Chief Financial Officer. Ken Burdick, our Executive Chairman, is also with us. 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 will be available following the call. Before turning 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. 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 Dave Bourdon, CEO of LifeStance. Dave?

Thanks, Monica, and thank you all for joining us today. I'm incredibly proud of the LifeStance team for the strong results achieved in the second quarter. We met or exceeded each of our guided metrics. We grew our clinician base by over 170 clinicians, while at the same time improving productivity. We delivered double-digit organic revenue growth, along with 10% adjusted EBITDA margins. Given the outperformance in the first half of the year, we are raising full year guidance for adjusted EBITDA. We now expect to achieve double-digit margins for the full year. We also delivered exceptionally strong free cash flow of $57 million, our highest in LifeStance's history which provides additional capacity to further invest in the business. Our model with the ability to deliver both in-person and virtual care along with a focus on patients covered by commercial payers continues to demonstrate its resilience and differentiation. We remain well positioned to navigate a dynamic health care environment as we focus on expanding access to high-quality and affordable mental health care. This quarter, we made meaningful progress to drive improvements in the performance of the business. From an operational perspective, our clinicians' commitment to delivering high-quality patient care continues to be the driving force behind our success. We're proud to have a team of over 7,700 clinicians, an increase of 173 just this quarter, which is further validation that our value proposition is continuing to resonate. We previously shared that this year, in addition to continuing to grow our clinician base, we have a number of initiatives to better fill clinicians' calendars to drive improved productivity. For example, in May, we launched our clinician cash incentive program to reward clinicians for improving access and quality. We have recently implemented a patient engagement platform that improves acquisition and retention by fostering a stronger connection with the patient. Additionally, we are enhancing our Care Matching capabilities to support an even better clinical fit between patients and providers. This is another important step toward delivering the right care with the right match from the very beginning. When the clinical match is strong, we see better patient engagement, fewer cancellations and no shows and a more satisfying experience for both clinicians and patients. These are just a few examples of the concerted effort within the organization to ensure that we effectively utilize the capacity of our talented and dedicated clinicians. In the second quarter, we saw improvement in productivity and believe there will be further improvement in the back half of the year as a result of these and other initiatives. From a technology perspective, we're entering a new chapter of our tech enablement, including a greater emphasis on AI and digital solutions. For example, as part of our continued focus on operational efficiency and effectiveness, we have begun to leverage AI tools to improve accuracy and automate tasks in our revenue cycle processes and to improve the quality and responsiveness of our patient scheduling team. We're also investing in AI solutions to help our clinicians be more effective with documentation. While we're still evaluating options, this will ultimately enhance clinician satisfaction and allow clinicians to focus on what they love; providing excellent, compassionate care to our patients. We are confident that these investments in technology will unlock value by improving the patient and clinician experience while also driving operating leverage. Also on the technology front, I would like to highlight the recent appointment of Vaughn Paunovich as our new Chief Technology Officer. Vaughn has extensive expertise in leading digital transformation initiatives, enabling AI-powered insights and streamlining digital tools to enhance health care delivery. His experience and commitment to innovation makes him the right individual to lead our technology organization, ensuring that LifeStance delivers a best-in-class experience for our patients and clinicians. In closing, this was a strong quarter and we feel good about the momentum heading into the second half of the year. As we look ahead to 2026, we remain confident in our ability to deliver on mid-teens revenue growth while expanding margins. We expect a low to mid-single-digit rate improvement, continued organic growth of our clinician base and strong visit volumes as the demand for mental health services continues to increase. In addition, with the efficiencies we're driving, we expect to generate further operating leverage.

Thanks, Dave. I am pleased with the team's operational and financial performance in the second quarter. We delivered strong growth across revenue, visit volume and clinician count. Revenue grew 11% year-over-year to $345 million. This outperformance was driven by slightly better-than-expected clinician productivity and total revenue per visit. Visit volumes of $2.2 million increased 12% year-over-year, driven primarily by clinician growth. We added 173 clinicians this quarter, an 11% increase year-over-year, bringing our total to 7,780 clinicians. With regard to clinician productivity, it was slightly ahead of our expectations in the second quarter. While it is still early, we're encouraged by the initial progress on our productivity initiatives. Total revenue per visit decreased year-over-year as expected. It was $157, which was down 1%, driven by the impact from the single outlier payer dynamic that we previously disclosed, partially offset by rate increases with other payers. Turning to profitability. Center margin of $108 million increased 11% year-over-year and was 31.4% as a percentage of revenue. The outperformance in the quarter was driven by the modest revenue beat. The expense for our new cash-based clinician incentive program, which launched in May, is reflected in these results. Adjusted EBITDA of $34 million in the quarter exceeded our expectations. This 19% year-over-year increase brings our adjusted EBITDA as a percentage of revenue to 9.8%. The outperformance in the quarter was primarily attributable to favorable center margin and slightly lower G&A spending than expected. Turning to liquidity, in the second quarter, free cash flow was exceptionally strong at $57 million, the highest we've delivered in any quarter to date. We exited the quarter with a solid cash position of $189 million and net long-term debt of $273 million. We have additional capacity from an undrawn revolver of $100 million. DSO for the quarter improved significantly to 34 days, a sequential improvement of 4 days. We remain confident in our ability to generate meaningful positive free cash flow for the full year. Our leverage ratios are strong and continue to improve with net and gross leverage of 0.7 and 2.2x, respectively. This represents meaningful progress from the 2.2 net and 3.2x gross leverage in Q2 of last year. We have significant financial flexibility to run the business and fully execute on our strategy, including potential acquisitions. In terms of our outlook for the full year, we are maintaining our guidance range of $1.4 billion to $1.44 billion for revenue. We are raising our guidance range for center margin to $441 million to $465 million. Given the outperformance in the first half, we are raising our adjusted EBITDA guidance range by $5 million at the midpoint to $140 million to $150 million. This puts us on track for 60 basis points of margin expansion year-over-year and double-digit margins for the full year. In addition, we continue to expect stock-based compensation of approximately $70 million to $85 million. For the third quarter, we expect revenue of $345 million to $365 million, center margin of $105 million to $119 million and adjusted EBITDA of $33 million to $39 million. As previously communicated, our annual guidance assumes year-over-year revenue growth driven primarily by higher visit volumes with total revenue per visit being roughly flat. For the second half, we expect modest rate improvement and continued growth in clinicians. Additionally, as noted, we are also focused on better filling existing clinician calendars. Our guidance contemplates a step-up in productivity in the third quarter with further improvements in the fourth quarter, driven by the ongoing initiatives Dave mentioned earlier. The combination of these drivers will lead to higher revenue in the back half of the year. As we shared last quarter and as implied in our guidance, we expect earnings to build in the back half of the year, driven by modest rate improvement, increased visit volumes and growth in specialty revenue. We expect to see a step-up in adjusted EBITDA margins in the second half over the first half. We previously guided to exiting the year with double-digit margins and are now pleased to expect to achieve double-digit margins for the full year. Looking ahead, we feel confident in 2026 and the coming years. We expect to benefit from industry tailwinds, including increasing demand for mental health services and patient trends from cash paid towards commercial insurance. At LifeStance, we are well positioned to take advantage of the macro trends and anticipate growing revenue in the mid-teens through increased visit volumes, rates and specialty services. We remain confident that 15% to 20% margins are achievable in the long term as we drive center margin expansion and operating leverage in the business.

Thanks, Ryan. In closing, this was a great quarter for LifeStance. We met or exceeded each of our guided financial metrics, delivered strong organic revenue growth and adjusted EBITDA margins and generated our highest quarter of free cash flow ever. Our progress to date and the incredible dedication of each of our clinicians and team members serve to reinforce our confidence in the future as we focus on expanding access to high-quality affordable mental health care. Operator, we'll now take questions.

And your first question comes from the line of Craig Hettenbach with Morgan Stanley.

Just a question on the implied ramp for Q4. And I appreciate all the color in the prepared remarks, but you should probably have some improvement from as the payer reduction headwind abates and you talked about productivity. So just looking for kind of your confidence level into that back half ramp and things that you're seeing in the business that builds that.

Perfect. This is Ryan. I appreciate the question. So going to the point of your question, we're super pleased with our performance in the first half for the year, and we have meaningful momentum going into the second half of the year, driving up a step-up in revenue as you kind of acknowledged in your question. In addition to revenue contribution from clinician rate, we continue to plan to drive productivity in the second half of the year. So to help to mention this, from the first half to the second half, we expect roughly $60 million of revenue growth and the way you can think about that is driven by 10% from rate and 90% from visit volume. And so kind of further to mention that, when you think of 90% that's related to visit volume, you can think of that as approximately 60% is coming from clinician ads and then 40% is coming from productivity. As we mentioned in previous quarters and our prepared comments, we're prioritizing filling existing clinician calendars, which we believe will result in increased productivity in the second half. Dave went through a number of initiatives that we have in place to drive the filling of the schedules in his prepared comments. And then to your question, just in terms of Q3 versus Q4, clinician ads will be a meaningful driver in both quarters. When you get to Q4, you will see a higher contribution for productivity as the initiatives that are in play have more time to make a meaningful impact. And then from a rate perspective, going to that part of your question, we expect modest growth in rates in first half to second half. And it really is driven by further rate negotiations with some specialty services in there. So then overall, we've absorbed the one unique payer dynamic. And so overall, we're still guiding to flat TRPV for the year. But as you get into future years, we expect to return to low to mid-single digits from a rate perspective. So to close the comments on here, we feel really good about our growth in the first half and the momentum going into the second half.

Very helpful details. And then just as my follow-up, can you just talk about the backdrop in terms of clinician ads and retention, kind of what you're seeing in the marketplace? And maybe what are some of the things that are resonating to the LifeStance platform?

Craig, it's Dave. I'll take that one. Regarding the clinician recruiting and retention dynamics, we are pleased with our clinician net additions in the first and second quarters, as they aligned with our expectations. This success is attributed to stable retention and robust recruiting, which have been consistent trends for some time. There’s nothing new to highlight about the overall environment; it remains highly competitive for recruiting and retaining clinicians. The net growth we are experiencing serves as further validation that our value proposition is resonating.

I just wanted to go back to a couple of things. One, on your comment, Ryan, I think that you made around cash pay shifting towards commercial. Do you have any updates on managed care contracting, contracting around that? And just curious, is it that we're seeing expansion of the benefit that that comment was made around what you're seeing for cash pay going into the commercial volumes?

Lisa, it's Dave. I'll take that one. So in Ryan's remarks about the tailwinds that we're seeing in the industry, and we expect to see as we step into '26, '27, there were two things you referenced. The first was increasing demand overall for mental health services. And the second, which is what you're referencing, is a shift from cash pay to insurance. And the point we're making there is that you still have a very high percentage of clinicians today who do not accept insurance. And that is a financial challenge, makes it less affordable for patients. And so what we've seen in recent years and we expect to see in coming years is further migration of the patients from a cash pay environment to using their insurance. And obviously, that trend would benefit LifeStance as we focus on patients that have insurance. We feel confident about the capacity we have with our existing clinicians. This is why we are concentrating on improving productivity and better utilizing their schedules. In many markets, we could likely hire additional clinicians if we were certain that patient demand would be sufficient. However, we must balance the number of clinicians we hire, ensuring we bring them on at a manageable pace to prevent dissatisfaction and turnover. This is an area we are actively looking to enhance through better retention strategies.

I wanted to follow up on the first question around implied guidance for 4Q. I think if we take the midpoint of 3Q and the full year, that implies about 19% revenue growth in the fourth quarter. You said about 90% of that is coming from volume, so high teens volume growth. Can you just comment on sort of the sustainability of that? And you mentioned some of the productivity initiatives you're putting in place that support the ramp to that type of volume growth exiting the year. Can you just spend a minute on what those are and your assumptions around how those initiatives translate into the improved volume growth?

Yes, I'm Ryan, and I'll begin, after which Dave will elaborate on some of our initiatives. Regarding the revenue progression, it increased by $12 million from Q1 to Q2, and we anticipate an increase of $10 million from Q2 to Q3, followed by roughly $30 million from Q3 to Q4. Approximately 75% to 80% of this growth will come from clinician ads and productivity, with about 50-50 split within that. We have several initiatives underway, including an incentive program, Care Matching, and enhancements to practice operations that improve our ability to fill clinician schedules. We are encouraged by our productivity improvement in Q2 compared to the same quarter last year and the momentum we're seeing through Q3 into Q4 as these initiatives take effect. Dave, would you like to add anything regarding the initiatives?

That was well said. One thing I'd just close on is just a reminder of why we're doing this. So we're trying to improve retention of our clinicians, and we're listening to them around where their pain points are. And one of the big ones that they've highlighted for us is they'd like their calendars to be more full. And so that's the focus on productivity. This isn't something we're forcing on them. This is something they're asking for. Now the additional benefit to us as LifeStance's, obviously, that makes us more efficient, if we're able to have our existing clinicians be more productive.

Okay. That's helpful. And then just one on the free cash flow, you guys mentioned this a couple of times in the script, $57 million generated in the quarter. It looks like there was a pretty good working capital performance on things like accounts payable and accrued payroll. Just anything to call out there in terms of being onetime. And then if I look at free cash flow on a year-to-date basis, conversions around 68%. I think that normalizes for some of these timing elements. How would you just generally frame free cash flow outlook going forward, free cash flow conversion on a sustainable basis?

Yes, Jamie. This is Ryan again. You highlighted some of the key points. We saw outstanding free cash flow in the first half, and we are optimistic about the direction as we consider the full year. In the first half, we generated $46 million year-to-date, which included $57 million in Q2. However, I want to note that in Q3, we expect it to decline significantly from the strong Q2 cash flow due to the 401(k) match. The timing and phasing of our new store rollouts will also lead to higher capital expenditures, along with some timing adjustments related to payroll. Overall, we are confident about the cash flow trajectory for the business. Last year marked our first year of positive free cash flow, and we are pleased to enter our second year of strong cash flow generation, which gives us the flexibility to pursue our strategic priorities.

Yes. And one thing I'd pile on to Ryan's comments is that I want to make sure we don't walk past it is the strength of the operational performance of the team with DSO now at 34 days, and we were over 50 at one point last year. And just tremendous work by our team. And each one of those days is worth roughly $3.5 million to $4 million of cash.

This is Matthew Mardula on for Ryan Daniels. And this is more of a top-level question. But in the past few weeks, we've seen a noticeable increase in state-level legislation around the use of AI in therapy sessions and just broader AI participation in the mental health industry. I'm curious, do you believe this evolving regulatory environment poses any potential headwinds or opportunities for your business?

Matthew, it's Dave. It's a great question, and it's really early days around AI and its impact on health care in total and then specific to the mental health space. The way we think about AI and technology in general is that we're going to be able to use that to support our clinicians and how they practice care and improve their experience and the patient experience. We do not view AI as a replacement for the care that our clinicians provide. And so I think that's really the bottom line for us.

Just curious, I mean, are you seeing any dynamics in the recruitment front that are impacting some of these metrics that you're seeing? I understand some of the comments from earlier, but anything we should be thinking about that could be changing fundamentally in terms of what's happening in the clinician side.

It's Dave, I'll take that. As mentioned earlier, the environment for recruiting of clinicians remains very competitive and we're successful in that environment by providing a comprehensive value prop, everything from compensation and benefits to clinical and administrative support to the clinicians. And that recruiting of new clinicians has been the primary driver of our net clinician growth in the last couple of years, including this quarter, while we've gotten the retention to a stable level. So nothing new that I would point to in the market.

Got it. And then maybe as I think about cash flows, strong performance during the quarter, anything to call out there that I should be thinking about as we model for the back half of the year on free cash flow.

Yes. Regarding cash flow, we experienced strong performance in the first half of the year with $46 million year-to-date. For Q3, we anticipate a significant decline in cash flow due to factors such as the 401(k), increased capital expenditures for new developments, and timing issues related to accrued payroll. However, this should not overshadow the fact that this is our second consecutive year of robust cash performance, and we are optimistic about our cash generation capabilities moving forward.

Yes. Thanks for the questions. Obviously, higher mental health utilization has been called out a handful of times here by managed care in the quarter, in the first half. You seem pretty positive on the rate environment and the tailwinds in your business. I guess I'm just curious your thoughts on the potential for managed care trying to rein in the rising cost trends in mental health and just you come from that side of the business previously. Just curious what your perspectives are.

Richard, it's Dave. I'll respond to that. First, I'd like to mention that there hasn't been a significant change in the payer environment. Payers are facing financial pressure, which is not a new situation, and it may be even more pronounced for some of them. However, this is something we've been addressing for a while. Additionally, as payers work on improving access for both their employer clients and their members, this serves as a counterbalance to the financial challenges they face. Furthermore, a few forward-thinking payers are beginning to emphasize quality in mental health, and we anticipate that the market will gradually shift towards prioritizing access, quality, and outcomes in the coming years. We welcome this change and feel that we are well-positioned to adapt if the market moves in that direction. To answer the initial part of your question, as stated previously, we are confident in our ability to negotiate reimbursements that reflect the value our clinicians provide, and for next year, we expect to achieve a low to mid-single-digit rate increase.

Okay. That's helpful. And then maybe as a follow-up, just back on the productivity programs that you implemented. Just a clarification, on the patient engagement, is that the same offering that you rolled out earlier in the year. You had mentioned acquisition and retention. Just want a clarification there. And then on the care management capabilities that you talked to or talked about, is that new? Is that something new? And do you have any like details on any pilots that you did in terms of the improved productivity? Any maybe percentage improvement or whatnot would be helpful.

This is Dave. I'll take that. There are a number of pieces there. So first of all, on the patient engagement, this is different than the digital patient check-in tool, which I think is what you were referencing, think of that as more administrative in nature for patients as they're checking in both for a virtual appointment or for an in-person appointment. It allows us to get insurance cards and ID cards, updated addresses, form sign, things like that. So that's more what that tool was, so it was administrative in nature. This is really more of a patient CRM marketing tool, and it's allowing us to communicate with patients in a more systematic way, a more structured standardized way, both engaging with a new patient before they've showed up to their first appointment as well as existing patients and ongoing communications with them around mental health and allowing the clinician to engage with the patient as well. So there's a lot to that. We're very excited. It's something that we don't do today in a standard way throughout the country. And then in regards to the matching, we do matching today. And we do a decent job on matching our patients and our clinicians. However, we believe there is opportunity for improvement in improving that match. And if we're able to do that, what we'll end up with is patients will be stickier with their clinicians and stay with the care, which will improve their health outcomes. It will also reduce cancellation, no-show rates and things like that. I wouldn't quote any stats, but we have looked at this from a number of different angles, and we do believe that as we roll this out in the second half of the year, that it will improve, again, that clinician experience, the patient experience, the stickiness and will drive improved productivity as it better fills our clinicians' calendars.

Last quarter, you mentioned the possibility of initiating the M&A process again. It seems there were no activities this quarter. Could you discuss your current position on that, how valuations and opportunities compare to when you were actively pursuing M&A years ago, and what the pipeline looks like?

Thanks for the question, Kevin. We indicated in the last quarter that we are actively exploring mergers and acquisitions. Our current focus is on smaller acquisitions in new geographical areas for us or in markets where we have a limited presence. This is primarily about establishing a footing and expanding geographically, which presents exciting opportunities, such as entering new MSAs and states. We have a strong pipeline and are working through various opportunities, but I can't provide a timeline for when you'll see these developments. However, this is a major focus for us, and we are experiencing a lot of positive momentum in this area. That's correct.

Yes. So I'd be happy to answer that one. I appreciate the question. So if you kind of think through like, yes, so we're pleased with the margin expansion that we've achieved here in 2025, even given the fact the meaningful decrease from the one unique payer to kind of flatten out your TRPV but still being able to expand margin, we're pretty proud of that. And that's on top of expansion of last year, 400 bps just in terms of expansion. As we start thinking through the long-term kind of growth algorithm that we have here, we definitely see a path to margins to 15% to 20% from an adjusted EBITDA perspective, which will be done both through center margin expansion, through rate growth, a little bit of operating leverage on center margin and specialty services, but then there's still further opportunity to expand our leverage through the G&A line. And so overall, kind of getting to that long-term destination of 15% to 20%. Again, we feel really good in terms of what the growth algorithm and even proven out like in a difficult year, still being able to expand out margins year-over-year.

Congratulations on the good quarter. So for the digital patient check-in solution, is that 100% deployed or is it maybe 50% deployed? How far along are you in that process? And then you also used the phrase CRM. Is there a technology administrative solution that will assist in like a scheduling process to facilitate filling calendars, those 2 technology components, I think, are very important.

I'll take your questions. First of all, the digital patient check-in has been fully rolled out, and that process was completed earlier this year. Regarding the patient CRM, I see it more as a marketing tool; it is not integrated with our scheduling system. In other words, the scheduling aspect is not included in that. Scheduling is more related to the enhanced matching initiative that I was discussing. So this really focuses on marketing and communication with our patients.

Yes. The last of the three rate decreases took effect on March 1 of this year, which is the main reason for the relatively flat TRPV projection from 2025 to 2024. In terms of the future, we are currently engaged in rate negotiations across our entire payer portfolio. However, not all of our contracts align, so they are distributed throughout the year.

This is Dave. I’ll take those questions. First, regarding the Medicare rates, you're interpreting the signals accurately. However, it's still early, and we'll see how things develop. We'll get the final numbers as we approach the end of the year. The good news is there seems to be strong bipartisan support for mental health, and early indications suggest a positive rate increase for next year, but we’ll wait for the final decisions. Concerning the other legislation, the worry about that bill relates to the cuts to exchange and Medicaid, and we have limited involvement in those areas. Just a reminder, around 5% of our total revenue comes from government payers. We also have some exchange and Medicaid business through commercial payers, but this contributes only a small percentage to our overall revenue.

I want to ask about the AI tools you mentioned in your prepared remarks, when do you expect to see the full cost reduction of those benefits going to effect from those tools? And then as a follow-up, I was hoping you could give an update on your new EHR initiative.

Steve, this is Dave. I'll respond to those questions. Regarding AI, we mentioned several points in our prepared remarks. First, from an efficiency standpoint, we have begun implementing AI within our revenue cycle and our patient scheduling team. Some of this is aimed at improving efficiency, while other aspects focus on quality and effectiveness. We're beginning to see cost savings, but I want to emphasize that it’s not solely about costs; improving quality is also a key goal. We're still in the early stages, but we anticipate that this will contribute to our operating leverage as we move into 2026, 2027, and beyond. Additionally, we mentioned another AI application related to clinician documentation. I wouldn't categorize this primarily as a cost-saving measure; instead, it enhances our value proposition for clinicians. Documentation is a repetitive task that many find tedious, and we believe that implementing AI for documentation will enhance their daily work and allow them to concentrate on what they excel at—providing excellent patient care. As for your second question about the EHR, there’s nothing new to report. We are still evaluating different solutions, and we expect to reach a decision in the second half of this year.

And there are no further questions at this time. I will now turn the call back over to Dave Bourdon, Chief Executive Officer, for closing remarks.

Thank you, operator. I'd like to thank our over 10,000 mission-driven teammates who make sure that our patients get the quality care that they need and deserve. I continue to be inspired by the passion and the resilience that you all bring every day. Our services are needed more than ever, and we look forward to furthering the positive impact that we can have on the millions of Americans whose lives can be improved by the high-quality mental health care services that LifeStance provides. Thank you for joining us today.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.