Q3 2022 Lifestance Health Group Inc Earnings Call

November 8, 2022

Okay.

Ladies and gentlemen, thank you for standing by and walking through the lifespan health third quarter 2022 earnings call I would now like to turn the call over to Monica Pro Koskey VP of Investor Relations. Please go ahead.

Thank you.

Good afternoon, everyone and welcome to lifestyle Health third quarter 2022 earnings Conference call I'm Monica Borkowski, Vice President of Investor Relations. Joining me today are Ken Burdick, Chairman and Chief Executive Officer Donnish Karachi.

Didn't and Chief operating Officer, and Mike Brock Chief Financial Officer.

We issued the earnings release and presentation after the market closed today.

These are available on the Investor Relations section of our website investor got lifestyle Dot 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 that could cause actual results to differ materially in.

In addition, please note that we report results using non-GAAP financial measures, which we believe provide helpful information for investors to facilitate comparison of prior 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 prior year comparative period.

At this time I'll turn the call over to Ken Burdick C E O of lifestyle, Ken. Thank you Monica and my thanks to all of you for joining us today.

Over my four decades in health care.

We have observed how we as a country have underfunded mental health care and underserved millions of individuals with both diagnosed and undiagnosed mental health conditions.

And I witnessed firsthand the need for an integrated approach to physical and mental health treatment.

Informed by these experiences I am thrilled to have joined lifespans, a company with a vision of a truly healthy society, where mental and physical health care, our unified to make lives better.

What the life stance team has accomplished over the past five years is extraordinary.

Some are starting from a standing start they have built a uniquely positioned national business with over 5400, clinicians and approximately $820 million and trailing 12 months revenue.

But some of the successful initiatives that Brook life stance to where it is today must evolve.

The company to grow to multiples of its current size expand profitability and deliver on long term value creation for patients clinicians and shareholders.

I look forward to building on the successful trajectory set by the founders.

At a time when our services are needed more than ever.

Turning to financial results.

We are lowering expectations for the year based on our third quarter performance and fourth quarter outlook.

Third quarter revenue was $218 million on the low end of our expectations, primarily due to lower than expected visit volume.

And our margin of.

$60 million and adjusted EBITDA of 15 million were primarily affected by revenue being at the low end of expectations as well as higher than expected costs associated with our employee health benefits program.

As for guidance I'd like to share my perspective on how we intend to set financial expectations going forward.

Our business, especially in this dynamic labor environment produces some variation.

As a service business our revenue is driven by our number of visits which has in turn driven by the number of clinicians their capacity and their schedule utilization.

<unk> will touch on each of these in detail.

Recognizing this inherent variability and a relatively young company that is early in its journey.

Going forward, we will present ranges reflective of this variability.

We are lowering our expectations for the remainder of the year.

We now expect revenue of $845 million to $850 million.

Center margin of 229% to $232 million and adjusted EBITDA of $50 to $53 million.

These lower ranges are primarily due to lower than expected visit volume and higher cost of our employee health benefits relative to our prior forecast.

Mike <unk> will provide additional color in their prepared remarks.

It is clear to me that were not performing to our full potential.

And taking on leadership of life stance.

Hi, I'm laser focused on execution.

Profitability and operational excellence.

This will be our formula for long term value creation.

Since joining the company in September the leadership team and I have been working through our strategic planning process.

We will provide an update on our multiyear targets and deliver guidance for 2023 during our fourth quarter earnings call.

Through these planning processes as well as countless conversations with management clinicians and other team members from all across the company.

Some initial observations first.

I believe that the business model and strategy are sound.

Therefore, we will continue to differentiate ourselves with our hybrid in person and virtual care model with a multi disciplinary approach through which we can treat all types of mental health diagnosis.

We will also continue to expand access to mental health care through commercial in network coverage and.

And primarily source our patients through referral partnerships with primary care providers.

And finally, we will continue to March toward our long term vision of unifying mental and physical health care.

Yeah.

Life stance succeeded in developing a unique business model that overcame historic industry challenges and the mental health space.

Developing relationships with commercial payers.

And increasing access to trusted affordable and personalized mental health care at scale.

There is no shortage of patients seeking the services we offer and.

And we believe that our ability to attract new clinicians to life stance remains unparalleled.

This company.

Has the potential to become a unique and valuable component of the broader healthcare ecosystem.

Furthermore, our immediate priorities remain unchanged I'm impressed with the quality of the people and their passion for our mission and I believe we can deliver on our near term goals as well as our long term ambitions.

We have the right strategy, the right near term priorities and team.

However, I also see opportunities to better position lifespans to have the greatest positive impact on society, while delivering superior long term value.

<unk> was founded in 2017 and the company has grown revenue at a compound annual growth rate of nearly 90% from 2018 through 2021.

Like many growth companies life stance has experienced natural growing pains as we have begun to outgrow certain processes and systems.

We need to evolve.

And build a platform that can meet the needs of a large national business.

That can scale to support life stance full potential as the premier destination for clinicians and patients.

Yeah.

I have led companies with similar opportunities and challenges.

These experiences have taught me that while it may not be easy and will not happen overnight.

Making the right investments and maintaining focus on our key priorities.

And establish the foundation for a long term trajectory trajectory of growth and profitability.

We have a tremendous runway ahead of us.

We've been in an all out sprint, we now need to build processes and systems worthy of the huge opportunity before us.

Several areas will receive greater emphasis going forward.

<unk>.

We will further focus on long term profitability capital disciplined and generating free cash flow.

<unk>.

We will focus on simplifying administrative complexity.

And we will make strategic investments in enterprise level scalable infrastructure over the next few years beginning in 2023.

When we refer to scalable infrastructure, we mean strengthening our underlying platform.

Through end to end process optimization standardization and automation.

To reduce manual processes and drive operating leverage for example.

Through the implementation of an enterprise workforce management solution, we expect to retire multiple systems and drive significant operational efficiencies, while better supporting our clinicians and their patients.

Additionally, we will continue to make digital investments.

Such as a new virtual care platform continued.

Rollout of our online booking and intake experience, which we call Obi.

And launch new digital products to reinvent the entire patient care journey, beginning with finding the right clinician and continuing through the entire treatment plan.

Third.

Our payer strategy will become more selective.

Today, we support hundreds of payer contracts streamlining our commercial payor contracts will reduce administrative burden and allow us to better align with payer partners, who share our vision of expanding access to mental health care and improving the coordination between physical and mental health care.

These partners invest in that vision with rates commensurate with the value that life stance clinicians provide.

Finally.

We will continue our shift toward organic growth.

Through expansion of our clinician recruiting team and a much more focused approach to M&A.

Now that we've built a broad national presence, we plan to do fewer deals.

Aligned with some of the priorities I just referenced.

We will focus primarily on larger practices with a minimum clinician count as each incremental acquisition adds administrative demands.

We will further emphasize profitability and market density and the businesses that we acquire and we will ensure that new acquisitions bring in minimal exceptions. When it comes to things like payer mix service line, Adjacencies and operational processes and policies.

In summary.

We're evolving from a purely growth mindset to creating a balanced set of objectives that include operational excellence.

Profitable growth and disciplined capital deployment.

In closing I am excited about what the future holds for lifespan.

Psychiatrist.

Nurse practitioners psychologists and therapists form the backbone of lifespan.

Whether we recruited them, where they joined us through acquisition, they make an extraordinary commitment to our patients.

We will honor that commitment by providing them with the operational support and technology to optimize their ability to improve patients' lives.

This is our calling at lifespan.

2023 will be a year of transition for the company.

With likely slower growth.

And our focus on investing in strategic initiatives that will build scalable infrastructure.

I believe that these and other initiatives will set life stance up for long term growth and profitability acceleration beyond 2023, while remaining disciplined with capital deployment.

With that I'll turn it over to Mike to provide additional color on our financial performance and expectations Mike.

Thanks, Ken.

As usual I will frame my comments in the context of our long term strategy, which includes balancing growth profitability and liquidity considerations.

Starting with group revenue of $218 million was up 25% year over year, driven by clinician growth of 24%.

Turning to profitability.

<unk> margin of $60 million increased 16, 16% over the same period last year, driven by revenue growth, partially offset by growth in center occupancy costs.

Sequentially, we did not achieve the expansion that we anticipated in center margin as a percentage of revenue.

This was driven by lower than expected revenue.

And higher than expected employee health benefit costs that impacted center margin in the quarter by $1 3 million or 70 basis points.

While our actuarial models for our self insured program included assumptions for increased utilization during 2022.

Actual magnitude of increase and the persistent inflationary environment have resulted in costs coming in higher than the models estimated last year.

Total G&A costs were in line with expectations and improved 95 basis points sequentially as a percentage of revenue.

Adjusted EBITDA grew 44% year over year to $15 million or seven 1% of revenue up 90 basis points.

Driven by center margin growth combined with generating leverage in G&A.

Adjusted EBITDA was impacted by $1 7 million or 95 basis points of higher health benefits cost relative to expectations.

Turning to liquidity.

<unk> continues to be supported by a solid balance sheet.

Exited the quarter with cash of $90 million and net long term debt of $212 million.

In the third quarter, we generated positive $6 million of cash from operations.

Cash flow from operations was negatively impacted by an increase in accounts receivable, resulting in a $4 five day increase in DSO sequentially.

The increase in DSO.

It was primarily driven by approximately three days of payer specific items.

For example, we had some holds in short pays related to the implementation of rate increases and new coding requirements, which we expect to be substantially resolved in the fourth quarter.

We are continuing with planned investments to standardize and optimize our billing and collections processes over time. These initiatives will drive improvement in cash collections efficiency.

Our free cash flow of negative $9 million.

Improved by $9 million sequentially.

Merely driven by lower capital expenditures from the planned moderation of de Novo Center openings.

Turning to guidance Ken.

Ken covered our full year expectations for the fourth quarter, we expect revenue of $215 million to $220 million.

<unk> margin of $55 million to $58 million and adjusted EBITDA of seven five to $10 5 million.

Revenue is below prior expectations due primarily to lower forecasted visit volume.

Fourth quarter Center margin and adjusted EBITDA are below prior expectations.

Due to lower revenue as well as the higher than expected costs associated with our employee health benefits.

Representing $3 3 million of impact to adjusted EBITDA.

170 basis points.

Which $2 6 million will impact center margin or 135 basis points.

Now I'll turn it over to Don to provide additional operational color.

Thank you Mike regarding financial performance, let me be clear that I am disappointed with our third quarter results and full year expectations.

The company has been in hyper growth mode for the past five years and we are now taking the time to more closely examine the underlying drivers of our performance to ensure that we are maximizing long term value creation.

Despite being a cofounder since stepping into the CFO role my understanding of our practice operations has evolved significantly in the last quarter.

We have insights into the business now that we didn't have four months ago and the team and I will continue to work exhaustively to dig deeper and ensure that we have the right data kpis and predictive capabilities to drive the business.

Like Ken I feel that we are not yet delivering on our full potential.

I am confident that with a greater focus on execution and operational excellence as well as strong leadership and the commitment of our dedicated team members across the organization, we will be better positioned to drive long term value.

With that let me provide an update on the various areas of operational improvement we discussed on our last earnings call.

My first order of business is COO was to align our teams on a focused set of narrow priorities that can drive the highest impact first net clinician growth and second clinician productivity.

As Ken said these priorities remain unchanged.

In terms of net clinicians we grew our clinician base of 5431 with the addition of 205 net clinicians relatively in line with prior quarters.

Importantly, this growth was driven by sequential improvements in organic starts and retention, partially offset by an intentional moderation of acquired clinicians via M&A activities.

Regarding organic starts we continue to invest in our recruiting teams in the third quarter year.

Year to date, approximately 80% of our gross clinician adds where organic rather than acquired and we will continue to further invest in our teams in the fourth quarter to give us hiring momentum going into 2023.

Regarding retention.

We saw a small improvement driven by our previously stated initiatives around frontline staffing enhancements in patient billing customer service as well as beginning to infuse the mantra of ramping our clinicians would support into the culture of everything we do here at <unk>.

Though encouraging it is too early and the relative improvements too small to change. Our previously stated planning assumptions of approximately 80% quarterly annualized retention.

Regarding acquired clinicians, we completed three acquisitions in the quarter.

As previously stated we are intentionally moderating M&A as we continue our shift toward organic growth.

The sequential clinician gains this quarter from organic starts and retention were offset by fewer ads via M&A.

So we may see fluctuations in this trend as the timing of acquisitions can be lumpy, we will continue to direct greater effort toward growth via recruiting and incremental improvements to clinician retention as the primary drivers of net clinician adds.

Turning to our second area of focus clinician productivity.

This call I want to go deeper and explaining how we now think about productivity <unk> license.

Clinician productivity is driven by a combination of two things one the time clinicians make available to see patients what we internally refer to as capacity.

And two our ability to fill that time appropriately with patients what we internally refer to as utilization.

While we are seeing early indications of improvement in utilization driven by the top middle and bottom funnel actions I spoke about on our last call.

Those gains were offset by a decrease in capacity from clinicians as they continue to take elevated levels of time off in the third quarter versus prior periods.

Let me first touch on utilization and provide an update on the actions we've taken to drive greater operational discipline and impact the productivity levers most directly within our control.

First at the top of the funnel in terms of attracting new patients. We did four things one built out our boots on the ground primary care referral team.

<unk> made enhancements to our organic search traffic three.

Three focus on improving internal referrals between our clinicians and four began conversations with enterprise referral partners about potential multi stage collaborations.

These actions delivered improvements sequentially at the top of the funnel.

Second at the middle of the funnel in terms of converting patients to scheduled appointments. We did four things one we leverage the capabilities of our digital team to improve patient matching via Obi, which is now live in 14 states and will be fully rolled out nationwide by the end of Q2 2023.

With patients raising the booking experience an average of four four out of five year to date.

Two we enhanced our overall provider profile systems to create a better user experience a project we call connect me.

We launched the colectomy pilot in September and quickly pivoted to a nationwide rollout in October with the planned completion date of December 31.

Third.

Three we reduced the complexity of our scheduling system to open up hidden capacity and four we improved our phone intake answer rates and reduce our credentialing timelines to drive faster ramps.

These middle funnel actions were slower to take hold in the third quarter, but recent data indicates they are beginning to gain traction and should have a more meaningful impact in 2023.

Finally at the bottom of the funnel in terms of scheduled appointments converting to completed visits are patient cancellation in no show rates were running at approximately 15%.

In the quarter, we drove a small but meaningful improvement in this rates of 14% by putting a focus spotlight on this kpis across all operational teams.

Based on these early results, we have put together a new task force to drive further acceleration of improvements in this area with the goal of having an impact in 2023.

Through these top middle and bottom funnel efforts to better field clinician schedules, we have seen overall utilization tick slightly higher in the third quarter.

It is still early days for these initiatives and because of that we have not assumed any incremental improvements to productivity from utilization as part of our Q4 guidance.

Turning to capacity in the third quarter, we found that on average clinicians made less time available for patient visits than in the second quarter.

As previously discussed in our Q2 earnings call clinicians increase their time off in June and we carry those planning assumptions forward into the remaining summer months of July and August .

Though clinician time, often September declined compared with the summer months. It did continue to run at slightly elevated levels relative to the first half of 2022 and versus the prior year comparable period.

This summer we conducted a detailed survey across our thousands of clinicians to better understand their preferences.

This future of work study revealed that clinicians value the flexibility we offer that on average they may want to work slightly less overtime.

We recognize that this labor dynamic is potentially not just a short term post COVID-19 issue the desire for flexible work and flexible schedules is consistent across many industries and life sciences value proposition was purposely built to support a range of clinician work preferences.

It's still too early to confirm whether slightly lower capacity will persist and for now we are rolling forward into the fourth quarter. The productivity trends, we observed in the third quarter, which is the key factor driving down our revenue expectations for the near term.

Longer term, we will focus on strategic actions to meet clinicians, where they are and provide clinicians who would like to work fewer hours or take more time off with part time options that appeal to them, but are still financially sound for the business.

In closing as we continue to learn more and gain deeper insights my confidence in our ability to execute has never been stronger.

Operationally, we will focus on the key priorities within our control such as organic clinician growth and optimizing clinician utilization through our top middle and bottom funnel actions as well as taking a more focused approach to M&A and payer partnerships.

We expect these efforts to give us to get us to higher levels of revenue and profitability over the long term.

In terms of leadership I want to note that we are also enhancing our teams by recruiting top talent.

For example, we welcomed Lisa Miller in September as senior Vice President for the North Division lease.

<unk> has a strong track record of operational excellence in health care services, having most recently served as COO for info healthcare and Division Vice President at Davita.

I am now more than ever excited about the future of life and look forward to driving operational improvements across the business.

With that I'll turn it back to Ken for a few words before going to Q&A. Thanks, Josh.

I'd like to comment on the announcement, we made last week aligned with our objectives of building long term scalable infrastructure, we are establishing a business transformation office dedicated to end to end process optimization standardization and automation.

<unk> will take on a new role as business transformation officer, leading this initiative.

I'd like to thank Mike for his contributions as CFO and building a stronger finance organization, demonstrating strategic company leadership and leading with integrity.

I would also like to welcome to the team, Dave Barden, who is succeeding Mike as CFO Dave.

Dave has extensive knowledge of the health care and behavioral health industries.

And two decades of experience.

Leading finance organizations, including as CFO of a $45 billion business unit at Cigna as well as CFO of Magellan health.

I have the utmost confidence in his ability to take over the reins of our talented finance organization.

In closing I am so inspired by the great work, taking place every day by our clinicians and team members to expand access to high quality affordable and personalized mental health care.

And feel confident that we are putting the right actions in place to drive long term value.

<unk> will now take your questions operator.

The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad.

Any point you would like to withdraw from the queue. Please press star. One again, you will be provided the opportunity to ask one question and one further follow up questions. We will take a moment to render our roster.

Your first question comes from the line of Craig Het embark from Morgan Stanley . Your line is open.

Yes. Thank you so much and Ken Thanks for all the color you provided in Indian for a remark.

Relative to the prior target of 30% long term growth you've kind of pointed to a moderation in connect here and it's certainly a stronger emphasis on margins can you maybe just touch on it even if it's not a pinpoint guide just kind of ranges of revenue growth if things, where you think maybe that the model will settle into.

No.

Yes, Greg Thanks for your question Youre certainly picked up.

Very accurately on the commentary in the prepared remarks.

We are working through both our 2023 business plan and our long term objectives.

So I really can't provide much more precision, but the read is that.

We will moderate growth at least for some period of time, so that we can build out the infrastructure and take full advantage of what I see is just an incredible opportunity in front of us.

Understood and then maybe my follow up any update on the number of visits happening virtually I know previously I think the expectation was that.

Those from what was around 80% to 50% over time, but just curious kind of what you're seeing there and then importantly, what that might mean for kind of as you evaluate your footprint on a longer term basis.

Yes. So this is Don ish.

<unk>.

We have recently seen our percentage of telehealth visits run in the high <unk>, So, though slowly coming down it still remains at a pretty high level.

That being said.

<unk>.

Place of where our commissions are delivering the care may flip back and forth between in office and in home. So the overall mix of physical real estate usage, though attracts total telehealth visits it is heavier on in person from the clinician standpoint, so that being said, we're taking that all into account is how we plan our de novo's and will can.

<unk> to moderate our new de novo's openings around the country. We're also looking at closing of sites that are either not utilized or under utilized where there are better placement of de novo's or existing offices in those markets.

Got it thanks, so much.

Your next question comes through the line of Lisa Gill from JP Morgan Your line is open.

Thanks, very much thanks for taking my question.

Kevin I wanted to start with a comment that you made around being more selective with payers that on a go forward basis. So is that coming from a payer yourself in the past.

I generally think of that as translating to reimbursement amount. So can you talk about is it reimbursement as to why youre going to be more selective with some harrison out there.

Are there other criteria that you're looking at to assess that relationship and what you think of exiting any any type of relationships do we need to think about any potential attrition around.

We provide our employee payer relationships going forward.

Yes.

This is one of the surprises when I got here was the number of Payor contracts that we had in place there were more than 400.

Which frankly I wasn't sure that there were that many payers in the country. So.

The number one thing that caught my attention was the administrative complexity that comes with trying to manage all of those contracts.

So thats one important consideration consistent with the other remarks about looking for every opportunity we can to streamline standardize simplify our business. So that we can run it at scale certainly reimbursement as part of it we have as you might suspect sort of variability in reimbursement we find that there are some.

That really understand the unique positioning of life stance, and then others that probably treat us more like.

Wood.

Manage with a much much smaller.

Behavioral health entity.

And then the last is Credentialing, we're really looking for partners.

<unk>.

Credentialing continues to be a challenge that frankly, it's been a challenge the 40 years that I've been in this space, but it's it is an impediment to getting our clinicians able to see the patients that are so eager for their services. So those would be the three criteria sort of top of mind as we think about it and yes sure.

Right.

I could see us in fact, I do see us exiting some of those payer contracts.

Okay, Great and then just my follow up would be forgotten us.

You remember in the fourth quarter of last year at our healthcare conference you talked about more people taking vacation around the Christmas holidays than you anticipated.

Where that capacity, but also on the utilization side I'm just curious what you have built into the guidance for revenue in the fourth quarter is it assuming that things fairly similar to last year.

Do you think that maybe it's a little bit better hopefully we don't have another variant around COVID-19.

Just curious as to how you thought about both capacity and utilization for the revenue in the fourth quarter.

Yes, so as far as the fourth quarter goes around the holidays. So we.

We plan for the number of what we referred to as adjusted business stays basically the number of days that clinicians are working and how those days look in terms of how many business we're seeing on those days.

To mirror, what we saw last year in the fourth quarter.

And so we feel good about that we pressure tested it but overall besides the adjustment for the holiday period.

We have flowed through the same productivity levels that we witnessed in Q3 forward into Q4.

Though again, we are seeing upticks in utilization, we've obviously seen capacity offset that and we think it's prudent to continue forward with the current.

The current productivity levels that we're witnessing.

Your next question comes from the line of Brian <unk> from Jefferies. Your line is open.

Hey, good afternoon guys.

My first question relates to the final rule that came out of CMS last week on coverage for behavioral health services. Just curious what your thoughts are in terms of.

How do you benefit from that and how you are positioning to potentially.

See the benefits over the next few years.

Yes, Brian I think.

Obviously, that's that's an encouraging sign to us I think it's consistent with.

The tailwind that the behavioral health space is experiencing.

And this is just another affirmation of that the fact of the matter is as I said in my opening comments that.

We as a country simply have underfunded.

Mental health care.

And maybe the pandemic was a catalyst, but the reality is way before the pandemic.

There were two too many Americans.

Both with diagnosed and undiagnosed mental health illness that werent getting the treatment that they need so.

This was an acknowledgement by CMS that.

We need to build this into the screening that primary care physicians do and so I was also enthusiastic to see it because it's another step toward.

Unifying the primary care and behavioral health care.

Treatment.

Gotcha, and then Ken just to your comment about focusing on larger targets on the acquisition side going forward.

You look at that landscape I mean, what does that look like in terms of.

How big is that market for scaled assets are mid sized assets out there versus like smaller deals.

Yes, Brian one of the things that I'm really impressed by is.

How well this company far before my arrival.

Did the acquisitions of scaled assets.

I won't say that we acquired them all but we acquired a large number of the scaled assets in our space as you know that's highly fragmented.

So the comment about.

Larger assets is really to signal.

We are simply not going to pursue the two and three and five person practices because while they may be small each of them brings their own set of unique characteristics.

<unk> a different set of services that they provide and so it's it's.

Ignition that there really is.

This what I'll call.

Hidden cost of acquisitions, and because of that hit cost of doing a great job integrating them and bringing them onto the platform.

We are simply going to be more rigorous and focus on that higher end to your point.

There are certainly not as many large assets out there as they were when we started this journey four years ago, and again I view that as a huge positive for this organization and I applaud the accomplishments.

And Ah.

Highly fragmented industry.

This organization has created scale, but it's going to be much harder going forward, which is why we're going to be looking more to organic growth through our recruiting efforts.

Your next question comes from the line of Ryan Daniels from William Blair. Your line is open.

Hey, guys. This is Jack on for Ryan Daniels.

A quick question in terms of your revised guidance I appreciate the comments on the cause of the revision.

These headwinds specifically the visit volume is this a result of the macro environment pressuring the end market.

I would've thought that the enterprise model.

Shield you to an extent given that some of the cost is covered for patients, but just kind of curious if you have any additional color on this front.

Or I guess, it's just.

It's just more of a factor on the clinician front, where they arent necessarily offering.

Consistent hours.

Yes, Thats correct. So the primary driver there when you get under productivity in this cases capacity, meaning the clinicians were offering less time or offer less time in Q3 than.

And then they did in prior quarters as.

<unk>.

They took elevated levels of time off.

So.

We are simultaneously working on utilization, meaning our ability to fill that time that they are giving.

With patience reduce cancellation rates all the the middle and bottom funnel initiatives that I addressed on the call and on our previous call.

But just to be clear there is no shortage of patient demand in the industry. So this is not a patient demand issue or an ability at a top of funnel to acquire patients. This is really.

Middle and bottom funnel improvements coupled with overall clinician capacity decline.

Understood. Thanks, and just as a quick follow up I think you noted three specific items that caused an increase in accounts receivable sequentially do you anticipate all three of these headwinds to be resolved in the fourth quarter or like where this would only impact the fourth quarter results or would this be a gradual kind of impact and change into the beginning of next year.

Yes. Thanks.

The increase in DSO of four five days.

Three days were driven by unique payers and situations around.

Working through an increase in rates and working through changes in coding requirements. It was unique to just a very few payers. This is somewhat typical when you go through those types of changes and we expect.

That to be resolved in the fourth quarter.

So those the driver of those three days will be resolved.

Overall, we still have a tremendous amount of opportunity to drive.

Efficiency in our collections process, which is why we've been investing in that.

That revenue cycle management team.

<unk> been investing in resources and in optimizing end to end processes, and we're quite confident that we'll be able to drive it.

Improved productivity over time.

Your final question comes from the line of gaming Paris from Goldman Sachs. Your line is open.

Okay. Thank you.

Ken maybe a high level one to start you described the challenges and opportunities ahead of you.

What would you describe as the low hanging fruit on that list.

However, you would define that things that are a little bit easier to accomplish maybe take a little bit less time versus some of the longer term priorities that are going to take some more work in time to see those benefits.

Yeah.

Yes, I mean, I think the organization has done a good job of getting it settled in at the lower hanging fruit I think the challenge we have now is.

As Dan has said in his remarks, we need to.

Assess where we are look at the pain points and invest.

To really scale the business.

Consistent with the total addressable market that we have in front of us.

If I was to point to a couple of things we saw a little bit of operating leverage.

But.

There is there is substantial room for more operating leverage going forward I don't want to imply it's low hanging fruit because actually it's a lot of hard work and we have to do the end to end optimization of our processes and then we have to follow that up.

<unk>.

Automating those processes so.

I wish I could tell you there was a lot of easy stuff that we could pick through and you'd see it all in the next 30 to 60 days, but.

That's not our reality.

Okay.

My second question just has the scale the infrastructure and evolve the processes as you described.

What does that mean for the cost structure and I'm just trying to understand what the path looks like between where you are today and getting to that point of sustainable operating leverage.

What are the costs look like between now and then.

Well as I mentioned before since we're right in the throes of the 'twenty three business planning process and our long term objectives, I really can't provide more precision and further color.

What I can share with you is that.

We have.

Tried to build out.

The infrastructure as we have grown we have tended to throw people.

Problems.

And while that has worked too.

Alleviate those pain points its not the way that we can function.

Going forward and so that's why we need to pause we need to do the difficult work of process improvement standardization and automation.

But.

This is this is a company in our space.

That has so much upside.

That we want to make sure we not only solidify the infrastructure, but we put ourselves in a position where we can drive that operating leverage in future years.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

Okay.

[music].

Yes.

[music].

Okay.

Ladies and gentlemen, thank you for standing by and walking through the lifespan health third quarter 2022 earnings call I would now like to turn the call over to Monica.

Pro Kaki VP of Investor Relations. Please go ahead.

Thank you.

Good afternoon, everyone and welcome to lifestyle health third quarter 2022 earnings conference call.

I'm Monica Borkowski, Vice President of Investor Relations. Joining me today are Ken Burdick, Chairman and Chief Executive Officer Donnish Karachi.

President and Chief operating Officer, and Mike Brock Chief Financial Officer.

We issued the earnings release and presentation after the market closed today.

They are available on the Investor Relations section of our website.

<unk> got lifestyle Dot com.

In addition, a replay of this conference call will be available following the call.

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 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 helpful information for investors to facilitate comparison of prior and past performance.

A reconciliation to the most directly comparable GAAP measures is included in the earnings press release tables and the presentation appendix.

Unless otherwise noted all results are compared to the prior year comparative period.

At this time I'll turn the call over to Ken Burdick CEO of lifespan, Ken. Thank you Monica and my thanks to all of you for joining us today.

Over my four decades in health care.

We have observed how we as a country have underfunded mental health care and underserved millions of individuals with both diagnosed and undiagnosed mental health conditions.

And I've witnessed firsthand the need for an integrated approach to physical and mental health treatment.

Informed by these experiences I am thrilled to have joined life stance, a company with a vision of a truly healthy society, where mental and physical health care, our unified to make lives better.

But the life stance team has accomplished over the past five years is extraordinary.

Starting from a standing start they have built a uniquely positioned national business with over 5400, clinicians and approximately $820 million and trailing 12 months revenue.

But some of the successful initiatives that broth lifespans to where it is today must evolve.

The company to grow to multiples of its current size expand profitability and deliver on long term value creation for patients clinicians and shareholders.

I look forward to building on the successful trajectory set by the founders.

At a time when our services are needed more than ever.

Turning to financial results.

We are lowering expectations for the year based on our third quarter performance and fourth quarter outlook.

Third quarter revenue was $218 million on the low end of our expectations, primarily due to lower than expected visit volume.

And our margin of.

$60 million and adjusted EBITDA of $15 million were primarily affected by revenue being at the low end of expectations as well as higher than expected costs associated with our employee health benefits program.

As for guidance I'd like to share my perspective on how we intend to set financial expectations going forward.

Our business, especially in this dynamic labor environment produces some variation.

As a service business our revenue is driven by our number of visits which has in turn driven by the number of clinicians their capacity and their schedule utilization.

<unk> will touch on each of these in detail.

Recognizing this inherent variability and a relatively young company that is early in its journey.

Going forward, we will present ranges reflective of this variability.

We are lowering our expectations for the remainder of the year, we now expect revenue of $845 million to $850 million.

Center margin of 229% to $232 million and adjusted EBITDA of $50 to $53 million.

These lower ranges are primarily due to lower than expected visit volume and higher cost of our employee health benefits relative to our prior forecast.

Mike <unk> will provide additional color in their prepared remarks.

It is clear to me that were not performing to our full potential.

Taking on leadership of life stance I.

Hi, I'm laser focused on execution.

<unk> ability.

Operational excellence.

This will be our formula for long term value creation.

Since joining the company in September the leadership team and I have been working through our strategic planning process. We will provide an update on our multiyear targets and deliver guidance for 2023 during our fourth quarter earnings call.

Through these planning processes as well as countless conversations with management clinicians and other team members from all across the company I have some initial observations first I.

I believe that the business model and strategy are sound.

We will also continue to expand access to mental health care through commercial in network coverage and.

And primarily source our patients through referral partnerships with primary care providers.

And finally, we will continue to March toward our long term vision of unifying mental and physical health care.

Life stance succeeded in developing a unique business model that overcame historic industry challenges and the mental health space.

Developing relationships with commercial payers.

And increasing access to trusted affordable and personalized mental health care at scale.

There is no shortage of patients seeking the services we offer and.

And we believe that our ability to attract new clinicians to life stance remains unparalleled.

This company.

<unk> has the potential to become a unique and valuable component of the broader healthcare ecosystem.

We have the right strategy, the right near term priorities and team.

However, I also see opportunities to better position life stance to have the greatest positive impact on society, while delivering superior long term value.

Life Science was founded in 2017, and the company has grown revenue at a compound annual growth rate of nearly 90% from 2018 to 2021.

Like many growth companies life stance has experienced natural growing pains as we have begun to outgrow certain processes and systems.

We need to evolve.

And build a platform that can meet the needs of a large national business.

That can scale to support life stance full potential as the premier destination for clinicians and patients.

Okay.

I've led companies with similar opportunities and challenges.

These experiences have taught me that while it may not be easy and will not happen overnight.

Making the right investments and maintaining focus on our key priorities.

Can establish the foundation for a long term trajectory trajectory of growth and profitability.

We have a tremendous runway ahead of us.

We've been in an all out sprint, we now need to build processes and systems worthy of the huge opportunity before us.

Several areas will receive greater emphasis going forward first.

We will further focus on long term profitability capital disciplined and generating free cash flow.

<unk>.

We will focus on simplifying administrative complexity.

And we will make strategic investments in enterprise level scalable infrastructure over the next few years beginning in 2023.

When we refer to scalable infrastructure, we mean strengthening our underlying platform.

Through end to end process optimization standardization and automation.

To reduce manual processes and drive operating leverage for example through.

Additionally, we will continue to make digital investments.

As a new virtual care platform.

Continued rollout of our online booking and intake experience, which we call Obi.

And launch new digital products to reinvent the entire patient care journey, beginning with finding the right clinician and continuing through the entire treatment plan.

Third.

Our payer strategy will become more selective.

We support hundreds of payer contracts streamlining our commercial payor contracts will reduce administrative burden and allow us to better align with payer partners, who share our vision of expanding access to mental health care and improving the coordination between physical and mental health care.

These partners invested that vision with rates commensurate with the value that life stance clinicians provide.

Finally.

We will continue our shift toward organic growth.

Through expansion of our clinician recruiting team.

A much more focused approach to M&A.

Now that we've built a broad national presence, we plan to do fewer deals.

Aligned with some of the priorities I just referenced.

We will focus primarily on larger practices with a minimum clinician count as each incremental acquisition adds administrative demands.

We will further emphasize profitability and market density and the businesses that we acquire and we will ensure that new acquisitions, bringing minimal exceptions. When it comes to things like payer mix service line, Adjacencies and operational processes and policies and.

In summary.

We're evolving from a purely growth mindset to creating a balanced set of objectives that include operational excellence.

Profitability growth and disciplined capital deployment.

In closing I am excited about what the future holds for life stance.

Psychiatrist.

Nurse practitioners psychologists and therapists form the backbone of lifestyles.

Whether we recruited them, where they joined us through acquisition, they make an extraordinary commitment to our patients.

We will honor that commitment by providing them with the operational support and technology to optimize their ability to improve patients' lives.

This is our calling at lifespan.

2023 will be a year of transition for the company.

With likely slower growth.

And our focus on investing in strategic initiatives that will build scalable infrastructure.

I believe that these and other initiatives will set life stands up for long term growth and profitability acceleration beyond 2023, while remaining disciplined with capital deployment.

With that I'll turn it over to Mike to provide additional color on our financial performance and expectations Mike.

Thanks, Ken.

As usual I will frame my comments in the context of our long term strategy, which includes balancing growth profitability and liquidity considerations.

Starting with group revenue of $218 million was up 25% year over year, driven by clinician growth of 24%.

Turning to profitability.

Better margin of $60 million increased 16, 16% over the same period last year, driven by revenue growth, partially offset by growth in center occupancy costs.

Sequentially, we did not achieve the expansion that we anticipated in center margin as a percentage of revenue.

This was driven by lower than expected revenue.

Higher than expected employee health benefit costs that impacted center margin in the quarter by $1 3 million or 70 basis points.

While our actuarial models for our self insured program included assumptions for increased utilization during 2022.

The actual magnitude of increase and the persistent inflationary environment have resulted in costs coming in higher than the models estimated last year.

Total G&A costs were in line with expectations and improved 95 basis points sequentially as a percentage of revenue.

Adjusted EBITDA grew 44% year over year to 15 million were seven 1% of revenue up 90 basis points.

Driven by center margin growth combined with generating leverage in G&A.

Adjusted EBITDA was impacted by $1 7 million or 95 basis points of higher health benefits costs relative to expectations.

Turning to liquidity.

<unk> continues to be supported by a solid balance sheet.

Exited the quarter with cash of $90 million and net long term debt of $212 million.

In the third quarter, we generated positive $6 million of cash from operations.

Cash flow from operations was negatively impacted by an increase in accounts receivable, resulting in a $4 five day increase in Dsos sequentially.

The increase in DSO.

It was primarily driven by approximately three days of payer specific items.

For example, we had some holds in short pays related to the implementation of rate increases and new coding requirements, which we expect to be substantially resolved in the fourth quarter.

We are continuing with planned investments to standardize and optimize our billing and collections processes over time. These initiatives will drive improvement in cash collections efficiency.

Our free cash flow of negative 9 million.

Improved by $9 million sequentially.

Merely driven by lower capital expenditures from the planned moderation of de Novo Center openings.

Turning to guidance Ken.

Ken covered our full year expectations for the fourth quarter, we expect revenue of $215 million to $220 million.

Center margin of $55 to $58 million and adjusted EBITDA of seven five to $10 5 million.

Revenue is below prior expectations due primarily to lower forecasted visit volume.

Fourth quarter Center margin and adjusted EBITDA are below prior expectations.

Due to lower revenue as well as the higher than expected costs associated with our employee health benefits.

Representing $3 3 million of impact to adjusted EBITDA or 170 basis points.

Which $2 $6 million or impacts center margin or 135 basis points.

Now I'll turn it over to Dominic to provide additional operational color.

Thank you Mike regarding financial performance, let me be clear that I am disappointed with our third quarter results and full year expectations.

Despite being a cofounder since stepping into the CFO role my understanding of our practice operations has evolved significantly in the last quarter.

Like Ken I feel that we are not yet delivering on our full potential.

However, I am confident that with a greater focus on execution and operational excellence as well as strong leadership and the commitment of our dedicated team members across the organization, we will be better positioned to drive long term value.

With that let me provide an update on the various areas of operational improvement we discussed on our last earnings call.

My first order of business is COO, what's the aligner teams on a focused set of narrow priorities that can drive the highest impact first net clinician growth and second clinician productivity.

As Ken said these priorities remain unchanged.

In terms of net clinicians we grew our clinician base of 5431 with the addition of 205 net clinicians relatively in line with prior quarters.

Importantly, this growth was driven by sequential improvements in organic starts and retention, partially offset by an intentional moderation of acquired clinicians via M&A activities.

Regarding organic starts we continue to invest in our recruiting teams in the third quarter.

Regarding retention, we saw a small improvement driven by our previously stated initiatives around frontline staffing enhancements and patient billing customer service as well as beginning to infuse the mantra of wrapping our clinicians with support into the culture of everything we do here at life stance.

Though encouraging it is too early and the relative improvements too small to change. Our previously stated planning assumptions of approximately 80% quarterly annualized retention.

Regarding acquired clinicians, we completed three acquisitions in the quarter.

As previously stated we are intentionally moderating M&A as we continue our shift toward organic growth the.

The sequential clinician gains this quarter from organic starts and retention were offset by fewer ads via M&A.

So we may see fluctuations in this trend as the timing of acquisitions can be lumpy, we will continue to direct greater effort toward growth via recruiting and incremental improvements in clinician retention as the primary drivers of net clinician adds.

Turning to our second area of focus clinician productivity.

This call I want to go deeper and explaining how we now think about productivity out license.

Clinician productivity is driven by a combination of two things one the time clinicians make available to see patients what we internally refer to as capacity.

And two our ability to fill that time appropriately with patients what we internally refer to as utilization.

While we are seeing early indications of improvement in utilization driven by the top middle and bottom funnel actions I spoke about on our last call.

Those gains were offset by a decrease in capacity from clinicians as they continue to take elevated levels of time off in the third quarter versus prior periods.

Let me first touch on utilization and provide an update on the actions we've taken to drive greater operational discipline and impact the productivity levers most directly within our control.

First at the top of the funnel in terms of attracting new patients. We did four things one built out our boots on the ground primary care referral team.

<unk> made enhancements to organic search traffic three.

Three focus on improving internal referrals between our clinicians and four began conversations with enterprise referral partners about potential multi stage collaborations.

These actions delivered improvements sequentially at the top of the funnel.

With patients raising the bookings experienced an average of four four out of five year to date.

Two we enhanced our overall provider profile systems to create a better user experience a project we call connect me.

We launched the connect me pilot in September and quickly pivoted to a nationwide rollout in October with the planned completion date of December 31.

Third.

Three we reduce the complexity of our scheduling system to open up hidden capacity and four we improve their phone intake answer rates and reduce our credentialing timelines to drive faster ramps.

These middle funnel actions were slower to take hold in the third quarter, but recent data indicates they are beginning to gain traction and should have a more meaningful impact in 2023.

Finally at the bottom of the funnel in terms of scheduled appointments converting to completed visits are patient cancellation in no show rates were running at approximately 15%.

In the quarter, we drove a small but meaningful improvement in this rates of 14% by putting a focused spotlight on this kpis across all operational teams.

Based on these early results, we have put together a new task force to drive further acceleration of improvements in this area with a goal of having an impact in 2023.

Through these top middle and bottom funnel efforts to better fill clinicians schedules, we have seen overall utilization tick slightly higher in the third quarter.

It is still early days for these initiatives and because of that we have not assumed any incremental improvements to productivity from utilization as part of our Q4 guidance.

Turning to capacity in the third quarter, we found that on average clinicians made less time available for patient visits than in the second quarter.

As previously discussed in our Q2 earnings call clinicians increase their time off in June and we carry those planning assumptions forward into the remaining summer months of July and August .

No clinician time, often September declined compared with the summer months it did.

<unk> continued to run at slightly elevated levels relative to the first half of 2022 and versus the prior year comparable period.

This summer we conducted a detailed survey across our thousands of clinicians to better understand their preferences.

This future of work study revealed that clinicians value the flexibility we offer and that on average they may want to work slightly less over time.

We recognize that this labor dynamic is potentially not just a short term post COVID-19 issue the desire for flexible work and flexible schedules is consistent across many industries and life sciences value proposition was purposefully built to support a range of clinician work preferences.

In closing as we continue to learn more and gain deeper insights my confidence in our ability to execute has never been stronger.

Operationally, we will focus on the key priorities within our control such as organic clinician growth and optimizing clinician utilization through our top middle and bottom funnel actions as.

As well as taking a more focused approach to M&A and payer partnerships we.

We expect these efforts to give us to get us to higher levels of revenue and profitability over the long term.

In terms of leadership I want to note that we are also enhancing our teams by recruiting top talent.

For example, we welcomed Lisa Miller in September as senior Vice President for the North Division lease.

<unk> has a strong track record of operational excellence in health care services, having most recently served as COO for info healthcare and Division Vice President at Davita.

I am now more than ever excited about the future of life science and look forward to driving operational improvements across the business.

With that I'll turn it back to Ken for a few words before going to Q&A. Thanks Donna.

I'd like to comment on the announcement, we made last week align with our objectives of building long term scalable infrastructure, we are establishing a business transformation office dedicated to end to end process optimization standardization and automation.

<unk> will take on a new role as business transformation officer, leading this initiative.

I'd like to thank Mike for his contributions as CFO and building a stronger finance organization, demonstrating strategic company leadership and leading with integrity.

I would also like to welcome to the team, Dave Gordon, who is succeeding Mike as CFO .

Dave has extensive knowledge of the health care and behavioral health industries, and two decades of experience.

Leading finance organizations, including as CFO of a $45 billion business unit at Cigna as well as CFO of Magellan health.

I have the utmost confidence in his ability to take over the reins of our talented finance organization.

In closing I am.

So inspired by the great work, taking place every day by our clinicians and team members to expand access to high quality affordable and personalized mental health care and.

And feel confident that we are putting the right actions in place to drive long term value.

Mike Don and I will now take your questions operator.

The floor is now opened for your questions to ask a question at this time. Please press star one on your telephone keypad.

Any point you would like to withdraw from the queue. Please press star. One again, you will be provided the opportunity to ask one question and one further follow up question.

We will take a moment to render our roster.

Your first question comes from the line of Craig Hudson Bach from Morgan Stanley . Your line is open.

Yes. Thank you so much and Ken Thanks for all the color you provided in Indian for a remark.

Relative to the prior target of 30% long term growth you kind of pointed to some moderation into next year.

Certainly a stronger emphasis on margins can you maybe just touch on it even if it's not a pinpoint guide just kind of ranges of revenue growth of things, where you think maybe that the model will settle into.

Yes, great. Thanks for your question Youre certainly picked up.

Very accurately on the commentary in the prepared remarks.

We are working through both our 2023 business plan and our long term objectives.

So I really can't provide much more precision, but the read is that.

We will moderate growth at least for some period of time, so that we can build out the infrastructure and take full advantage of what I see is just an incredible opportunity in front of us.

Understood and then maybe my follow up any update on the number of visits happening virtually I know previously I think the expectation was that.

Those from what was around 80% to 50% over time, but just curious kind of.

What youre seeing there and then importantly, what that might mean for kind of as you evaluate your footprint on a longer term basis.

Yes. So this is Don ish.

We have recently seen our percentage of telehealth visits run in the high <unk>.

Though slowly coming down it's still remains at a pretty high level.

That being said the.

Yes.

To moderate our new de novo's openings around the country. While also looking at closing of sites that are either not utilize our under utilized where there are better placement of de novo's or existing offices in those markets.

Got it thanks, so much.

Okay.

Your next question comes to the line of Lisa Gill from JP Morgan Your line is open.

Thanks, very much thanks for taking my question.

Ken I wanted to start with a comment that you made around being more selective with payors on a go forward basis.

Coming from a payer yourself in the past I'm just.

I generally think of that as translating to reimbursement amounts. So can you talk about is it reimbursement as to why youre going to be more selective with some personnel there.

Are there other criteria that you're looking at to assess that relationship and what you think of exiting any any type of relationships do we need to think about any potential attrition around.

Our I'm, sorry, payer relationships going forward.

These are one of the surprises when I got here was the number of Payor contracts that we had in place there were more than 400.

Which.

I wasn't sure that there were that many payers in the country. So.

The number one thing that caught my attention was the administrative complexity that comes with trying to manage all of those contracts.

That really understand the unique positioning of life stance and then others that.

Probably treat us more like.

They would.

Manage with a much much smaller.

Behavioral health entity.

And then the last is Credentialing, we're really looking for partners because.

Credentialing continues to be a challenge that frankly, it's been a challenge the 40 years that I've been in this space, but it's it's an impediment to getting our clinicians able to see the patients that are so eager for their services. So those would be the three criteria sort of top of mind as we think about it and yes.

You are right I could see us in fact, I do see us exiting some of those payer contracts.

Okay, Great and then just my follow up would be forgotten us.

If you remember in the fourth quarter of last year at our healthcare conference you talked about more people taking vacation around the Christmas holidays than you anticipated.

For the capacity, but also on the utilization side I'm just curious what you have built into the guidance for revenue in the fourth quarter is it assuming that being fairly similar to last year.

You think that maybe it's a little bit better hopefully we don't have another varian around COVID-19, but I'm just curious does Ted.

Have you thought about both capacity and utilization for the revenue in the fourth quarter.

Yes, so as far as the fourth quarter goes around the holidays. So we.

We planned for the number of what we referred to as adjusted business stays basically the number of days that clinicians are working and how those days look in terms of how many visits we're seeing on those days.

To mirror, what we saw last year in the fourth quarter.

And so we feel good about that we pressure tested it but overall besides the adjustment for the holiday period.

We have flowed through the same productivity levels that we witnessed in Q3 forward into Q4.

Though again, we are seeing upticks in.

Utilization, we've obviously seen capacity offset that and we think it's prudent to continue forward with the current.

The current productivity levels that we're witnessing.

Your next question comes from the line of Brian Tank Colette from Jefferies. Your line is open.

Hey, good afternoon, guys I.

I guess my first question relates to the final rule that came out of CMS last week on coverage for behavioral health services. Just curious what your thoughts are in terms of.

How you benefit from that and how you are positioning to potentially.

So you see the benefits over the next few years.

Yes, Brian I think.

Obviously, that's that's an encouraging sign to us I think it's consistent with.

The tailwind that the behavioral health space is experiencing.

And this is just another affirmation of that the fact of the matter is as I said in my opening comments that.

We as a country simply have underfunded.

Mental health care.

And maybe the pandemic was a catalyst, but the reality is way before the pandemic.

There were two too many Americans.

Both with diagnosed and undiagnosed mental health illness that werent getting the treatment that they need so.

This was an acknowledgement by CMS that.

We need to build this into the screening that primary care physicians do and so I was also enthusiastic to see it because it's another step toward.

Unifying the primary care and behavioral health care.

Treatment.

Gotcha, and then Ken just to your comment about focusing on larger targets on the acquisition side going forward.

You look at that landscape I mean, what does that look like in terms of.

How big is that market for scaled assets are mid sized assets out there versus like smaller deals.

Yes, Brian one of the things that I'm really impressed by is how well this company far before my arrival.

Did the the acquisitions of scaled assets.

I won't say that we acquired them all but we acquired a large number of the scaled assets in our space as you know that is highly fragmented.

So the comment about <unk>.

Larger assets is really to signal.

We are simply not going to pursue that two and three and five person practices.

While they may be small each of them brings their own set of unique characteristics.

Perhaps a different set of services that they provide and so it's.

Its recognition that there really is.

This what I'll call.

Hidden cost of acquisitions, and because of that hidden cost of doing a great job integrating them and bringing them onto the platform.

We are simply going to be more rigorous and focus on that higher end to your point.

There are certainly not as many large assets out there as they were when we started this journey four years ago, and again I view that as a huge positive for this organization and I applaud.

The accomplishment of.

Sure.

No.

Highly fragmented industry.

This organization has created scale, but it's going to be much harder going forward, which is why we're going to be looking more to organic growth through our recruiting efforts.

Your next question comes from the line of Ryan Daniels from William Blair. Your line is open.

Hey, guys. This is Jack on for Ryan Daniels I just have a quick question in terms of your revised guidance I appreciate the comments on the cause of the revision.

I'm just curious if these headwinds specifically the visit volume is this a result of the macro environment pressuring that end market.

I would've thought that the enterprise model.

What kind of shield you to an extent given that some of the cost is covered for patients, but just kind of curious if you have any additional color on this front.

I guess just this.

Just more of a factor on the clinician front, where they arent necessarily offering or.

Or consistent hours.

Yes, that's correct. So the primary driver there when you get under productivity in this cases capacity, meaning the clinicians are offering less time or offer less time in Q3.

Then they did in prior quarters as.

<unk>.

They took elevated levels of time off.

So.

We are simultaneously working on utilization, meaning our ability to fill that time that they are giving.

With patience reduce cancellation rates all of the the middle and bottom funnel initiatives that I addressed on the call and on our previous call.

But just to be clear there is no shortage of patient demand in the industry. So this is not a patient demand issue or an ability at a top of funnel to acquire patients. This is really.

Middle and bottom funnel improvements coupled with overall clinician capacity decline.

Yes. Thanks.

The increase in DSO of four five days.

Three days were driven by unique payers and situations around.

Working through an increase in rates and working through changes in coding requirements. It was unique to just a very few payers. This is somewhat typical when you go through those types of changes.

And we expect.

That to be resolved in the fourth quarter.

So those the driver of those three days will be resolved.

Overall, we still have a tremendous amount of opportunity to drive.

Efficiency in our collections process, which is why we've been investing in that.

And that revenue cycle management team.

We've been investing in resources and in optimizing end to end processes, and we're quite confident that we'll be able to drive.

Improved productivity over time.

Your final question comes from the line of Jamie <unk> from Goldman Sachs. Your line is open.

Okay.

Ken maybe a high level one to start you described the challenges and opportunities ahead of you.

What would you describe as the low hanging fruit on that list.

However, you would define that things there a little bit easier to accomplish maybe take a little bit last time versus some of the longer term priorities that are going to take some more work in time to see those benefits.

Okay.

Yes, I mean, I think the organization has done a good job of getting that settled in at the lower hanging fruit I think the challenge we have now is.

As Dan has said in his remarks, we need to.

Assess where we are look at the pain points and invest.

To really scale the business.

Consistent with that total addressable market that we have in front of us.

If I was to point to a couple of things we saw a little bit of operating leverage.

But.

There is there is substantial room for more operating leverage going forward I don't want to imply it's low hanging fruit because actually it's a lot of hard work.

And we have to do.

Do the end to end optimization of our processes and then we have to follow that up with.

Automating those processes so.

I wish I could tell you there was a lot of easy stuff that we could pick through and you'd see it all in the next 30 60 days, but.

That's not our reality.

Okay.

My second question just has the scale the infrastructure and evolve the processes as you described.

What does that mean for the cost structure and I'm just trying to understand what the path looks like between where you are today and getting to that point of sustainable operating leverage.

What are the costs look like between now and then.

Well as I mentioned before since we're right in the throes of the 23 business planning process and our long term objectives, I really can't provide more precision and further color.

What I can share with you is that.

We have.

Tried to build out.

The infrastructure as we have grown we have tended to throw people.

Problems.

And while that has worked too.

Alleviate those pain points its not the way that we can function.

Going forward and so that's why we need to pause we need to do the difficult work of process improvement standardization and automation.

But.

This is this is a company in our space.

That has so much upside.

That we wanted to make sure we not only solidify the infrastructure, but we've put ourselves in a position where we can drive that operating leverage in future years.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

Q3 2022 Lifestance Health Group Inc Earnings Call

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