Lifestance Health Group - Q2 2024

Executive Summary

• Strong Q2: Revenue rose 20% to $312.3M and Adjusted EBITDA more than doubled to $28.6M (9.2% margin), with Center Margin up 34% to $97.8M; management raised full-year revenue, Center Margin, and Adjusted EBITDA guidance and reiterated positive free cash flow for 2024.
• Operating momentum: Clinician base grew 14% YoY to 6,984 (net +118 in Q2), visits rose 15% to 2.0M, and total revenue per visit (TRPV) increased 4% to $159; NPS reached 86 and Google reviews averaged 4.6/5, underscoring patient satisfaction.
• Outlook and near-term cadence: Q3 guide (revenue $290–$310M; Adjusted EBITDA $15–$21M) implies sequential step-down on seasonality and a planned H2 TRPV headwind from one payer, plus incremental investments to support 2025 targets; FY24 guidance raised across all financial metrics.
• Capital and leverage: Q2 free cash flow was $39M with $87M cash and 2.2x net leverage; management does not intend to raise debt or equity, expecting continued leverage improvement through year-end.
• Estimates note: S&P Global consensus estimates were unavailable due to API limits; company results landed at the high end of prior Q2 guidance ($297–$315M revenue), supporting a “beat and raise” narrative vs internal targets.

What Went Well and What Went Wrong

• What Went Well

  • “Seventh consecutive quarter of meeting or exceeding expectations,” with Q2 revenue $312M and Adjusted EBITDA ~$29M; raised guidance across key FY metrics.
  • Operational execution: TRPV +4% YoY to $159 and visit volumes +15% to 2.0M, driving Center Margin +34% to $98M and Adjusted EBITDA +103% to $29M (9.2%).
  • Cash generation: “Strong free cash flow of $39M” in Q2; $87M cash and net long‑term debt of $279M; “no intention of raising additional debt or equity”.

• What Went Wrong

  • Sequential Q3 margin step‑down expected (~300 bps at midpoint) due to seasonality (vacation-driven lower visits), H2 TRPV step‑down from one payer, and higher G&A from growth investments.
  • Continued GAAP net loss: Q2 net loss was $(23.3)M (EPS $(0.06)), though improved YoY from $(45.5)M; stock‑based compensation remains a material non‑cash expense.
  • Residual Change Healthcare collections timing: DSO improved to 49 days but payor collections normalization remains an H2 focus (management expects resolution by year‑end).

Transcript

Operator (participant)

Thank you for standing by. My name is Hermione, and I will be your conference operator today. At this time, I would like to welcome everyone to LifeStance Health Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question, press Star 1 again. I would now like to turn the call over to Monica Perkowska. Please go ahead.

Monica Prokocki (VP of Investor Relations)

Thank you, operator. Good morning, everyone, and welcome to LifeStance Health Second Quarter 2024 Earnings Conference Call. I'm Monica Perkowska, 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?

Ken Burdick (CEO)

Thanks, Monica, and thank you all for joining us today. We continued 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 employed 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 3 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 6 states and are actively implementing the tool in 5 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 cyber attack. With that, I'll turn it over to Dave to provide additional commentary on our financial performance and outlook. Dave?

David Bourdon (CFO)

Thanks, Ken. Like Ken, 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 to 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 401(k) 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 4 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 ratios, 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 $1.2 billion-$1.242 billion.

We are also raising our full-year Center Margin range by $10 million at the midpoint to $363 million-$383 million, and the full year Adjusted EBITDA range by $2 million at the midpoint to $90 million-$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-$310 million, Center Margin of $83 million-$95 million, and Adjusted EBITDA of $15 million-$21 million.

Additionally, we now expect stock-based compensation to land towards the lower end of our originally guided range of approximately $80-$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. With that, I'll turn it back to Ken for his closing remarks.

Ken Burdick (CEO)

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.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue, and your first question comes from the line of Craig Hettenbach with Morgan Stanley. Please go ahead.

Craig Hettenbach (Analyst)

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?

Ken Burdick (CEO)

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, about delegated credentialing, and ultimately, we hope to have meaningful discussions about value-based arrangements. 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.

Craig Hettenbach (Analyst)

Got it. Then just as a follow-up on clinician growth, Dave, you mentioned seasonal strength expected in Q3. Any update on just. I know there's plans, you guys are trying to shift the mix more towards full-time clinicians, how that's working out and, you know, what that could mean for capacity into next year?

Ken Burdick (CEO)

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, and while we are doing things, as you mentioned, like skewing toward 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.

Craig Hettenbach (Analyst)

Got it. Thanks for that.

Operator (participant)

Your next question comes from the line of Lisa Gill with J.P. Morgan. Please go ahead.

Lisa Gill (Analyst)

Great. 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?

Ken Burdick (CEO)

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 of 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.

Lisa Gill (Analyst)

Where were you in the quarter on virtual versus in-person?

Ken Burdick (CEO)

Let's see. Roughly, I'm gonna say 71% virtual, 29% in person. As I say, interestingly, during 2023, we saw that quarter-over-quarter change, and then for about 3 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.

Lisa Gill (Analyst)

That's helpful. 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?

David Bourdon (CFO)

Yeah. 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. We're accelerating some things that we, you know, we would have been doing next year, like, for example, accelerating the hiring of some business development boots on the street individuals that go and sign up new referral sources for us with a local medical community. Those things, but we're still working through the list.

I'd say an emphasis on growth and achieving 2025 targets, as well as non-recurring spend, where it makes sure that we, you know, positioning ourselves for success around the delivery of our strategic initiatives and things like that.

Ken Burdick (CEO)

Great. Thank you very much.

Operator (participant)

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

Jack Senft (Analyst)

Hey, guys, this is Jack Senft for Ryan Daniels. Thanks for taking the question. This is similar to Lisa's last question there, but, if we look at the midpoint of the third quarter guidance, even the margins look like they're contracting by about 300 basis points sequentially. Is this decrease in margins just largely related to the increased investments you mentioned, or is there, is there really anything additional to call out on the margin contraction? Thanks.

David Bourdon (CFO)

Hey, Jack, it's Dave. I'll take that one. There's a few things going on in the third quarter. First of all, I would start with revenue at the midpoint is down approximately $12 million quarter over quarter, and that's driven by two things: lower visits. As you're aware, with our model, we have to get into vacation season, and that impacts productivity as well as introduces a little bit more variability. You have lower visits in Q3 versus Q2. The other thing is what, you know, we talked about on the last quarter around the calendar, the calendar performance of the TRPV, and then it was going to step down in the second half of the year. Those two things are driving the $12 million revenue step down quarter over quarter.

I would dimension that for you at roughly half half, half TRPV, half visits. You take that, combined with the increase in G&A related to investments, then that's how you get to the Adjusted EBITDA step down quarter-over-quarter.

Jack Senft (Analyst)

Okay, perfect. Thank you. 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 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.

Ken Burdick (CEO)

I'll take that one. This is Ken. So we call this our One Stamp operating model, and there were several things that, we intended to accomplish. In large part, it was rolled out, about July 1. There will be some phasing, but think of this really as, 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 important to, to do it, pretty much, within a 60- or 90-day period and had spent more than six months of planning for it. Let me speak to. It is certainly a contributor to increased expenses in the back half of the year versus the first half of the year.

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, and we are already starting to see some positive impact from that change.

Jack Senft (Analyst)

Okay, great. Thank you, and, congrats again on the quarter.

Ken Burdick (CEO)

Thank you.

Operator (participant)

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

Dylan Finley (Analyst)

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

David Bourdon (CFO)

Yeah, Dylan, this is Dave. I'll, I'll take that one. First of all, we feel, we feel good about the footprint that we have right now. As you, as you are aware, we did some right sizing of that last year with the consolidation of centers, and as I mentioned in my prepared remarks, we're only gonna add less than 10 de novos this year. So we're, we're pretty, 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 that, where we've been successful with recruiting, as well as have higher in-person patient utilization, where, you know, those are the areas where we'll continue to need to grow de novos.

Again, I would expect that it'll 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.

Dylan Finley (Analyst)

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

Ken Burdick (CEO)

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 25 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 free cash for the full year 2024.

Dylan Finley (Analyst)

Thank you. Appreciate it.

Operator (participant)

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

Jack Slevin (Analyst)

Hey, good morning. It's Jack Slevin on for Brian. Congrats on the quarter. Similar question, but it may be asked a little bit differently as 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. Maybe as we look at it, it, given some of the moves on the contracts, is the back half the right sort of starting point to bridge toward those 2025 goals, especially the exit rate on margin? From the current standpoint, how do you think about the building blocks here to get to that margin level? Thanks.

David Bourdon (CFO)

Yeah, it's Dave. I'll take that. The back half of the year, if not for the investments, just so we would've been round numbers around 7% Adjusted EBITDA margin, and that's consistent with our initial guide for 2024. So we're feeling very good about where we're finishing the year from a margin perspective. If you take a step back and remember, we, when we talked about 2024 and 2025, we said in 2024, we would see some margin expansion in our, the midpoint of our guide right now is 220 basis points 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 multi-year journey to exiting 2025 with double-digit margins. If you step into 2025, it's the same building blocks that are getting us the margin expansion in 2024, just a little bit, but more enhanced, 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 the higher margin profiles. Then the third is even with the one outlier payer situation that we've discussed at length, we expect to achieve low single-digit increase in TRPV next year. So we'll get some margin expansion from rates as well. Those building blocks will get us to exiting next year with the double-digit margins.

Again, all basically according to plan and what we've laid out for you, from a three-year journey.

Jack Slevin (Analyst)

Got it. Appreciate that. Really helpful, and congrats again on the quarter.

David Bourdon (CFO)

Thanks.

Operator (participant)

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

Stephanie Davis (Analyst)

Hey, guys. Congrats on the quarter, and thanks for bringing me in the queue. I was hoping to dig a little bit into your ramp and your credentialing platform and just how you're thinking about the timeline. Then thinking about credentialing processes, it's often a clinician by clinician blocking and tackling process. Is there any re-credentialing process with the new platform that we should factor in to that timeline?

David Bourdon (CFO)

Stephanie, we, we have certainly made improvements. We're migrating to a new platform. You're right. A lot of our credentialing right now is the re-credentialing 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 probably a very positive development that perhaps we haven't spoken enough about. Thanks for the question.

Stephanie Davis (Analyst)

A follow-up, the other side of the competitive landscape question, just we're seeing some of the D2C mental health solutions evolve to more of a super 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?

Ken Burdick (CEO)

We have a very, very different model. We spend a de minimis amount in 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, and that really is a heart of sort of our mission and vision. We're looking to unify the mind and body treatment especially of chronic conditions, because we think the value that that's going to bring to the overall healthcare 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 by the ones.

Craig Hettenbach (Analyst)

Awesome. Thank you.

Operator (participant)

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

Ken Burdick (CEO)

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. An opportunity to thank them for their great work and a great deal of excitement about the future.

I love being able to put up clean quarters like we've just done this morning. Thank everyone for your interest in LifeStance, for your time this morning, and with that, I hope you have a great day.

Operator (participant)

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