All right, good morning, everyone. We're going to get started with our next session. We have LifeStance and Dave Bourdon, CEO, and Ryan McGroarty, CFO. I think first, both, congratulations on the new roles, and thanks for joining.
Thanks, James. Appreciate you having us.
I wanted to start just with the management transition, with Ken having transitioned out of the CEO role. You're taking over CEO, and Ryan, you're now on board as CFO. Give us a sense of how this impacts the forward strategy and how you communicate that down to the business.
Yeah, sure. There's a few pieces there. Let me talk kind of at a macro level, and then we'll get into the strategy and the transition. First of all, for those of you that don't know, LifeStance, we're the leader in outpatient mental health services, and we're unique because of a combination of a few things. The first is our scale. We have about 7,500 clinicians, and we do over 8 million visits or sessions a year. The second thing is our hybrid model, and that's both virtual and in person, and we can do the in person across over 550 locations in 33 states. The other is the breadth of our licenses. We have everything from psychiatrists to therapists, and they're W-2 employees. They're not 1099.
The last thing I'd mention is that our primary focus is on taking insurance from the payers. The commercial payers, we do very little of cash pay. We feel like that combination really sets us up to be durable and resilient in changing conditions, whether those are economic changes in patient preferences, regulatory things like that. We feel good about that combination, which kind of then goes into our strategy. The strategy is unchanged. I had a big part as CFO of setting the strategy for the company, and we'll continue to be very focused on clinical excellence, operational excellence, the patient and the clinician experience. We feel like if we keep that focus, we will be able to deliver and create long-term value for our shareholders. That is the strategy.
Now, there'll be some nuances, Jamie, like, for example, as we're doing that, we've mentioned we'll start doing M&A. We want to do that to enter into some new geographies, things like that. That's all part of the strategy. We just paused on it for a little while. The last piece of your question around the transition, it's really been seamless. I mentioned I've been here for two and a half years, and so it was pretty seamless to be able to step from the CFO role into the CEO role, and then having the luxury of Ken Burdick, our previous CEO, stay on as exec chair for a year in support of myself and the management team and the board, that's been great.
Also really fortunate to get this guy, Ryan McGroarty, on board within a couple of weeks after Ken and I announced the transition, and he's really hit the ground running and has been with us for a little over a couple of months.
Okay. I guess the strategy is stable, but the lifecycle of the company is evolving. The last two years has really been focused on kind of building this operational foundation. I guess just what have been some of the key milestones and things that have been put in place and how you leverage that kind of building to the next two to three years going forward?
Yeah. To your point, the last two and a half years, we shifted from very much a focus on growth to a more balanced approach of profitable growth, disciplined capital deployment, things like that. We stopped doing M&A two and a half years ago to really focus on that operational excellence, the simplification, the standardization of the business. I think some milestones for us would be we rolled out a consistent operating model across the whole country. Now our clinicians and our front office staff are getting much better support, and it's consistent no matter which practice you go to. That's one. Another one is we completed the rollout of our digital patient check-in tool, which was essential for us because we do 70% of our visits virtually, and we really did not have the administrative tools we needed to be able to support those virtual businesses.
The last thing I would point out would be the, I'd say related to that digital patient check-in tool is some of the operational processes related to that, like cash collections, and you're seeing that in a dramatic improvement in our DSOs, and that's also helped us improve putting cash on the balance sheet. Those are some of the major milestones from an operational perspective. Obviously, those translated into financial milestones as well. Last year, we saw positive free cash flow for the first time, with over $85 million of positive free cash flow. In the fourth quarter, we hit double-digit adjusted EBITDA margins for the first time. Stepping into this year in the first quarter, not only double-digit adjusted EBITDA margins, but our first time with positive net income in a quarter for the company.
We feel really good about the work that we've been doing. We believe it sets the foundation well for us as we come into the next few years. There's still some simplification and standardization that we'll want to do. There's some tool enhancement that we want. I mentioned earlier, we are now geographic expansion again.
Okay. Ryan, just to bring you in here, if you get introduced to the investor community, what should investors understand about what you bring strategically to the role, and what do you have to fix from the prior CFOs?
A lot. Yeah.
Always tough taking a CFO role where the CFO moves into the CEO chair, so I appreciate you kind of referencing that. Good morning, and thanks for hosting us. I've been, as Dave mentioned, with the organization for a little over two months, so probably two and a half months. Jamie, to your question in terms of what I bring to the organization, starting with that is first and foremost, I have 25 years of healthcare experience, both on the payer and on the delivery side. You can think of that as 15-plus in CFO roles. I bring a profitable growth mindset to the organization, plus a disciplined capital deployment approach.
When you look at just in terms of some of the things that I'll probably frame it just in terms of things that I want to leave my mark on, one would be continuation just in terms of the build that the team has prior to me joining around delivering on the commitments. Also, as you think about the growth algorithm, we've got a lot in front of us just in terms of we've stated mid-teens, so as you think about long-term growth, mid-teens revenue growth, and then EBITDA margins in the 15%-20% range. Again, that's the things I want to build from Dave's tenure into my tenure in this role.
Okay.
Hopefully, that was okay just in terms of how you shifted that.
That was great. Maybe we can go to the growth algorithm. I think in 2023, you grew the clinician base like 17%. It was 11% last year, right around 10% in the first quarter. You guys made some comments around reprioritizing filling schedules as opposed to organic hiring. I think there were questions in the market around what you were trying to communicate there. Maybe just provide a little more context in terms of what you're actually changing and the degree to which organic hiring priority is changing or not.
Yes. I'll start off on that question, then I'll let Dave kind of jump in with anything he wants to add on top. Overall, and Jamie, you referenced this in the question, when you look at our net clinician growth in the first quarter, it was like 10%, right? We added over 150 net new clinicians kind of coming through. Organic clinician growth will continue to be the primary driver. What we've been talking about, what we introduced in the last call, was really talking about balancing both new clinician adds with scheduling of our existing clinicians. This runs through the gamut of what you'd expect, like it runs through the practice management gamut. A lot of things just in terms of that will improve quality, access, scheduling for the clinician.
It should drive a better experience both for the patient and then also for the clinician just in terms of being able to fill their schedules overall. We'll always look at net clinician adds as primary, but again, like we're introducing this productivity, feel really good about where we sit with some of the traction that we're seeing across the initiatives. Dave, I don't know if there's anything you want to put on top of that.
No, that was well said.
Is there a way to think about on a quarterly basis, we can fill 150-200 new schedules per quarter, like from the demand that you get and your ability to match patients with clinicians, just what the right level of kind of quarterly new schedules you can fill?
Yeah, I think of that as it comes down to the balancing act that we have, and we've talked about this in the sense of patient demand and clinician supply. It's at a very local level. We're always balancing that. It's tough on a quarterly basis, Jamie, to talk about. I think maybe more on an annual basis. We believe that we're going to need to grow our clinicians, probably low double digit, for years to come to be able to achieve our mid-teens revenue growth that we talk about as a target, because that's always going to be the primary growth driver. On top of that, you have a little bit of what Ryan was talking about with productivity, with rate, and then some of the growth in the specialty services that kind of get you the rest of the way.
It's going to be that roughly year-over-year low double-digit clinician growth.
Okay. So roughly, I think of that as 10%-12%, which is a little bit higher than, not much, but a little bit higher than you did in the first quarter. Is that an organic number? Does that include M&A? And just what are the levers to sustain?
Yeah, I think.
Sustain?
Over the long run, it'll include M&A, but we have a little bit of a short-term dynamic where we've made the decision to focus some extra attention on our existing clinicians' calendars. As we get those to a more appropriate, from the lens of their eyes, level, we will get back to kind of a normal Cadence or growth level when it comes to the number of clinicians. I think of this as more of a, we'll be in the low double digits for years to come. Right now, you're in a little bit of a short-term temporary dislocation as we want to focus on those existing clinicians. I think that you got to take a step back. Why are we doing this? We're doing this because we're focused on retaining our existing clinicians.
Obviously, from an economics perspective, it benefits us to have fewer clinicians working more hours than more clinicians working fewer hours. That's fewer clinicians that we have to give health benefits to and 401(k) match. We have a lot of staffing models that are driven based on the number of clinicians that we have. It benefits the clinician, but also benefits us. The reason I say it benefits the clinician is as we're trying to improve the retention of our clinicians, they're talking to us about their pain points. One of the pain points of the existing clinicians was in certain markets is that I'm not getting as much work as I'd like. While they're W-2, they're fee for service. They get paid based on the volume they do, and we give them a productivity bonus as well.
They're focused on getting increases to their patient panels. That's why we're going through this. Again, once you get them to kind of that stabilized level, they're going to be in a good spot, and then we're going to need to continue to start hiring more new clinicians to be able to drive growth.
You guys have been pretty consistent that the retention turnover dynamic has not really changed in the past couple of years. Do you expect some of these focusing on pain points to drive any improvement in that? Have you seen any of it to date? Just is there a way to quantify that?
Yeah. We talk about retention as being stable, and it has been. That is a little bit frustrating for us because we have been making improvements to the value prop with the clinicians, and we have not seen it play through yet in improved retention. We still believe that we will see that in the coming years, and we do believe there is upside from where we are today. Some of the initiatives that we talked about last year, we moved from monthly payroll for our clinicians to biweekly. That was an investment for us from a timing perspective around cash because it took some cash off the balance sheet to be able to accelerate compensation. This year, we rolled out the cash-based productivity and quality bonus. That was something they were asking for. Some clinicians appreciated the stock productivity bonus.
Many just did not understand it, and it was multi-year. There were a lot of aspects to it that they did not like, and they were asking for a different program. As we were talking about, they also were asking for better utilization of their calendars. Those are some of the big pain points. As we are dealing with those, certainly we hope that will improve retention. What I always remind is there are other variables in play, and we have done things to make our model more sustainable. For example, we are now requiring that a clinician give us what we view as full-time hours to be able to get health benefits, matching 401(k), things like that. There were part-time clinicians that were getting those. That was not a satisfier for them, right?
There are some things that have been going the other way that have led to retention or turnover going the other way. It has been a bit of a balancing act, but we do believe that with the things that we are doing, we will move the needle on retention eventually.
You talked about improving the value proposition to clinicians, but it hasn't translated into improved turnover metrics. I guess the other dynamic to bring in is the competitive environment. What are you seeing? Has that changed at all? Just what's the lay of the land out there competitively?
Right. To your point, we haven't moved the needle on retention, but we continue to do really well from a recruiting perspective. That's really what has powered the growth from the net clinician adds perspective the last couple of years. Our value prop continues to resonate with, say, three categories of clinicians. The first is new hires, so new licenses. They're coming out of school. We do really well recruiting them. They like our support structure and feel like LifeStance is a great place for them to practice and start their career. The other two would be a clinician who's in private practice or a small mom-and-pop shop, typically 1099 or a percent of collections type economic arrangement, and they want more W-2 benefits and more of the stability and support that LifeStance offers. The third category would be clinicians who are salaried today.
While they like the stability and predictability of the compensation, they do not like the lack of flexibility. They probably have to be in person five days a week. They have got rigid hours, things like that. What we offer them is, hey, you can come to us and work 30, 35, 40 hours a week, but you can do that Monday through Saturday. You can do that 7:00 A.M. to 8:00 P.M. Just get your hours in wherever you would like. You can work some from home. You can work from the office in a hybrid schedule. Our value prop continues to resonate with those three buckets. The one thing I will close on around this is that our market share of clinicians is low single digits.
We believe we have a lot of runway to be able to continue to grow our clinician base for years and years to come. I mean, it's still a very highly fragmented industry with a lot of clinicians primarily cash pay or at least partially cash pay. They are kind of like Uber Lyft drivers where they've signed up with some of these practice enablement firms to fill out their marginal capacity. We believe over time that those clinicians will come into more of our environment like the rest of healthcare. We feel really good about our value prop and that there's still a lot of opportunity in the hundreds of thousands of clinicians that are out there to be able to recruit them to LifeStance Health.
Okay. That's helpful. Just trying to piece together the mid-teens top-line growth algorithm, we talked about the biggest piece, 10%-12% coming from clinicians. 3%-4% maybe from price. Just talk about what the contracting environment, the demand from the payer side looks like in terms of their needs to create capacity in their networks for behavioral health. Any color on the 3%-4%, how sustainable that is.
Yeah. Overall, from a dynamic perspective, I'd first start off and say there has not been a lot of near-term changes. We've got really good support and relationships with our payer partners overall. You kind of referenced in your question, our expectations once we get through this year is really around low to mid-single digits just in terms of what the rate environment should and could look like. Again, the reference to this year, as we've kind of stated on numerous calls, is just one unique payer just in terms of the third rate decrease that we've taken on on March 1 of this year is flattening out our total revenue per visit this year, but again, expect it to grow.
The payers see an increasing amount of demand, which is good from their employers, so their customers and the members, right, just to have access to high-quality, affordable mental health. That is where we play a really big role with them. I don't know, Dave, if there's anything you want to add to that.
Yeah. I mean, I think all that's right. There's still a lot of opportunity for us to partner even more with payers as well. We're just scratching the surface on value-based contracting. Think of that as you'd still have your normal rates, but getting bonuses for whether it's access or quality, things like that. We have some in place. They're mostly around access. I do believe that we are setting the stage now with our ability to survey our patients, to get updates on their health status and see how that's moving over time, and just creative or unique partnership opportunities with payers because of our scale. There's more to come on that. Again, to Ryan's point, we feel good about that low to mid-single digits from a year-over-year rate increase for years to come.
Ryan, just on an underlying basis, are you seeing that low to mid-single digits this year X the one payer adjustment? Just as we think about the Cadence this year, can you remind us what that should look like sequentially in 2Q and in the back half of the year from a total revenue per visit perspective?
Yeah. I appreciate the question. Second half of the year, I'll take the second one first. Overall, we do have rate assumptions kind of built into our guidance overall, and we feel good about the assumptions that we've baked in. When you think about just how contracting works for us, it's not like you have this heavy season or 2/1 or 3/1. They're kind of spread throughout the year overall. We've got a very disciplined and focused approach to our payer contracting strategies and obviously a dedicated team around that overall. When you think about the book in general, it's fair to say when you get outside of the unique payer, we are seeing those types of increases just in terms of the low to mid-single digits depending on the geography and the contract and the payer that we're working with.
Okay. Maybe turning to the P&L, and I've asked you guys repeatedly about kind of your gross margin performance, which has been really strong. I think there's probably two big pieces here. One is just the real estate footprint being a part of it, and then second, just clinician compensation. Are there any other, just to level set, are there any other big pieces that kind of factor in here? Just in terms of the center-level cost, is that?
Oh, go ahead.
Yeah. You named the two big ones. The third piece would be our front office staff. Any staff that are dedicated to a specific center show up in the center cost. If you are a practice group manager, the manager who sits over three to five centers, that's now in G&A because they're not tagged specifically to a center. You named those, so those are the big three components, with obviously the clinician comp being the overwhelming majority of it.
Right. Let's start there. What are you seeing in terms of just compensation expectations, compensation dynamics for clinicians? Has that changed at all? How should we be thinking about that as we model the forward?
Yeah. So I mean, the dynamics, so it continues to be competitive, right? Competing for clinicians. Going back to where Dave referenced earlier, we feel and we're getting some good traction just as it relates to the new cash-based bonus structure in terms of interest in joining the LifeStance team. It is a fragmented market. It's competitive, but our value proposition continues to resonate with the clinicians to join the organization overall.
Okay. So no real changes now?
Nothing that's in my mind that is meaningful from a change in expectations around comp expectations on the clinician side. I think we continue to do external benchmarking. We've got a lot of feet on the street making sure we understand what the dynamics are at a local market, whatever, but nothing in my mind that's meaningful.
Okay. Yeah. Go ahead.
I would say, yeah, similar to your point, no change probably from a cost expectation or a compensation expectation similar to the dynamics we saw on a year-over-year basis in 2023 and 2024 playing out in 2025, and we're not seeing anything different in 2026. Because again, that kind of base comp and then the benefits, that's a piece of the value prop, but it's only one, it's an important piece, but there's a lot to the value prop.
How would you decompose? I think you've had like 460 basis points of gross margin or center margin improvement over the past two years. Is that really driven by the real estate footprint optimization? Where are we in terms of that cycle? Is there more consolidation opportunity, or are you going more on offense in terms of expanding the in-person side?
Yeah. So I'll start off on this question. You got it right just in terms of that there has been some favorable center margin. If you look at the last several years, center margin has improved. You got the real estate optimization. You got the rate environment. Then you also have just efficiencies that we drive through where Dave went earlier just in terms of the support structure to drive consistency and efficiencies kind of in the business in totality. Center margins kind of go up. This year, they're more flat, and it really is because of the rate environment that we talked about. We expect center margins to kind of increase when you think about 2026 and beyond. The potential to go up to that mid-30s range overall. From a real estate optimization perspective, that was mostly complete by the end of 2023.
Now, we're always fine-tuning our real estate footprint, but the big endeavor is kind of we're behind that. The intent would be, and I mentioned this on the front end, is to not only you've got leveraging opportunity as it relates to your center margin, but you also have it on G&A in totality based off of the infrastructure that we've been able to build for scalable growth here.
35% is definitely higher than we model on gross margins. Can you add a little more in terms of just how you get there over the next couple of years? You're at like 32% today. What kind of rate environment do you need to get there? Is that 4%, 5%? What are some of the assumptions that would enable you getting to, let's say, 35%?
Yeah. To get to the mid-30s. Yeah. Overall, kind of going on to low to mid-single digit rate growth, which we've talked about overall. You've got the component of just kind of core leveraging that you have because you got the three components that Dave went through are clinician comp, clinician support, and then your occupancy costs. The occupancy, you're able to leverage kind of going forward.
In that cycle and the degree to which you need to kind of keep investing in some of these support functions to sustain top-line growth?
Yeah. I'll start off here. Exactly right. If you go back through the history, there really hasn't been the G&A leverage to date, and obviously a very deliberate strategy from both Ken and Dave just in terms of kind of building out the foundation to support profitable growth. Some of the investments that were made were around HRIS, credentialing. I can go through the list just in terms of building practice management type investments, which we feel really good about. We have a very disciplined approach as it relates to investments that we will make. When you really think about the unlock, it is getting some leveraging out of your G&A line as you kind of move through this year. 2025, you don't really see it, but in 2026 and beyond, you'll start to see the leveraging come through.
Dave, thinking back, I mean, you were part of the team making these investments. Would you characterize it as stuff that just was not invested in sufficiently before, or was this more offensive and building kind of a more scalable platform going forward?
It's a blend of both. On the stuff part of your comment, we did not have a payer engagement team. You are like, "Well, geez, engaging with the payers and getting rate increases, that is just core to a big provider practice. That is just normal business." Yet we did not have that. Again, we were so focused on just growth and acquisitions that we just did not have those kinds of things. You get into the tools and investments like the digital patient check-in tool. That is a game changer for us. Those were new capabilities that we did not have anything for, and it was just a gap. The other thing that I would point to when we think about G&A leverage in the future is everything Ryan said, spot on. Today, we are incredibly inefficient.
We have very little use of technology, whether that's AI or RPA or whatever the case may be. We do very little of that. Over the recent years, we've thrown bodies at solving problems. Sure, we're going to make other investments in the business in the future, but we'll have that operating leverage, and we're going to have some opportunities to get a lot more efficient now that we've standardized, simplified, gotten on to the same EMR, things like that. We had a new Chief Technology Officer start yesterday, and that's been a big part of his career is driving those kinds of kind of operational excellence initiatives.
Has he implemented an EHR yet?
Many, many times.
I meant for you guys. In all seriousness, where are you guys sort of valued in the EHR process? I mean, you guys described being in the discovery process here in the first quarter call. Obviously, this has the potential to be a very significant investment. How should we think about where you're at and how big that investment could potentially be?
Yeah. So appreciate this one too. Look, we're looking for a solution for the medium and long term. Within the consideration set is staying with our existing vendor from an EHR perspective. Again, we have a very good evaluation process that we put in place. Really, it's about clinician experience, patient experience, operational efficiencies, and kind of pulling those all through. We are really early in the, as you framed it, discovery process on that. We expect to kind of pull through the decisioning by the end of this year. Very deliberate process that we're undertaking. It's too early to put a financial frame to it yet, but we'll look forward to providing updates as we get later in the year.
Okay. On EBITDA margin, I can't remember when you first laid out the target of 10% exiting 2025. You obviously hit that ahead of schedule. How should we think about puts and takes to EBITDA margin this year and the degree to which you can continue kind of sustainably growing EBITDA margin?
Yeah. So overall, the puts and takes, obviously, we're pleased with the delivery of EBITDA in terms of what we've done Q4, Q1. If you kind of look at back half versus front half, the key kind of levers to delivering would be around new clinician adds, productivity, and then execution on the second half of the year rate. All items where we feel we have line of sight to. Please, as you get it through 2025 into 2026, as we've kind of referenced a couple of times, being able to expand out those margins higher.
Okay. I guess trying to tie this all together here in the last minute or so, you talked about mid-30s gross margin, which would be roughly 300 basis points of margin expansion. I think you mentioned at the start 15%-20% EBITDA margin longer term. The balance 200 to something higher from a G&A perspective. Is that the right long-term framework? How would you kind of, from a timing perspective, set expectations around that 15%-20%?
Yeah. So I mean, aligned with the way the frame was pulled through. In regard to timing, we use this as kind of setting the direction for how the business will be performing that we expect in the future versus really laying out specific milestones and dates at this point. I don't know, Dave, if you want to close with something.
No, it's well said. I wouldn't go 35% center. I would probably say it's more in the mid-30s. There's a little bit of flexibility there, but you're doing your math right in regards to thinking about the bulk of the margin expansion as we get to that 15%-20% will come from operating leverage on the G&A line.
Okay. Great. With that, I think we can end there, and thank you both so much for joining.
We really appreciate the time.
Yeah. Thank you. Thanks so much.