U.S. Markets close in 5 hrs 22 mins

Edited Transcript of EVH earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 Evolent Health Inc Earnings Call

ARLINGTON Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Evolent Health Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Frank J. Williams

Evolent Health, Inc. - Co-Founder, CEO & Chairman

* John Paul Johnson

Evolent Health, Inc. - CFO

* Nicholas McGrane

Evolent Health, Inc. - EVP of Corporate Performance

================================================================================

Conference Call Participants

================================================================================

* Charles Rhyee

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mohan A. Naidu

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Richard Collamer Close

Canaccord Genuity Corp., Research Division - MD & Senior Analyst

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Ryan Scott Daniels

William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Stephanie July Demko

Citigroup Inc, Research Division - VP & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Evolent Health earnings conference call for the quarter ended June 30, 2019. As a reminder, this conference call is being recorded.

Your host for the call today is Mr. Frank Williams, Chief Executive Officer of Evolent Health. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations.

Here is some important introductory information. This call contains forward-looking statements under the U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to its second quarter news press release issued earlier today.

As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the company's press release issued today and posted on the Investor Relations section of the company's website, ir.evolenthealth.com, and the 8-K filed by the company with the SEC earlier today.

At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [2]

--------------------------------------------------------------------------------

Thank you, and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health; and I'm joined by John Johnson, our Chief Financial Officer; and Nicky McGrane, our Executive Vice President of Corporate Performance.

I'll open the call this evening with a summary of our recent financial results as well as an update on the market, our current pipeline and progress on Evolent's key strategic priorities for the year. I'll then hand it to John to take us through a more detailed financial review of the second quarter. I'll close with a summary of our key differentiators and how they drive tangible value for our partners, and as always, we'll be happy to take questions at the end of the call.

In terms of our results, total adjusted revenue for the quarter ended June 30, 2019, increased 32.9% to $192.1 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended June 30, 2019, was negative $7.7 million compared to $4.9 million for the quarter ended June 30, 2018.

As of June 30, 2019, we had approximately 3.5 million total lives on the platform. And with 3 partner additions this quarter, we've welcomed 6 new partners to the Evolent national network already this year. Overall, we're pleased with our top line results for the second quarter and the progress we've made in meeting our key strategic objectives for 2019.

With strong operational and clinical performance across our network, we're seeing solid same-store growth as well as one of the strongest new business pipelines in our history. As a result, we entered the second half of the year with increasing visibility into significant growth, both on the top and bottom line, as we head into 2020.

In terms of the macro environment, we're pleased to see continued strong momentum in the core markets that we serve. In Medicaid and Medicare, the administration's actions demonstrate a core commitment to moving the market to value-based reimbursement. Over the past 9 months, CMS rebalanced its Medicare shared savings program, Pathways to Success, launched the Primary Cares Initiative and is in the final stages of creating a direct contracting model with providers. All of these offerings create several paths forward for providers interested in pursuing risk-based reimbursement for their Medicare patient populations.

On the Medicare Advantage side, where total enrollment is expected to double over the next decade, we continue to see strong policy support, program improvements and consistent annual rate increases from CMS. Our health policy team continues to serve as a convener for our partner network to work closely with the administration on new program concepts as well as modifications to existing programs that will encourage broad industry participation.

For example, we're currently weighing in on the next version of CMS' Oncology Care Model, which aims to provide higher quality, integrated oncology care at a lower cost to Medicare. Based on our extensive experience in cancer care with New Century Health, we have an exciting opportunity to drive financial and clinical results for organizations participating in the Oncology Care Model, and we look forward to driving demonstrable improvements in clinical and financial outcomes.

We're also seeing the same trend in specialty care management with national and regional payers. Both cancer and cardiovascular care represent significant pain points for payers that struggle to manage a broad network of physicians, complex drug regimens, rapidly evolving clinical pathways and appropriate site of service given the high variability in cost.

New Century's deep expertise in total cost of care management, through innovative data analysis, pathway development and specialist-to-specialist engagement, offers a unique solution to address rapid increases in medical trend and suboptimal clinical outcomes.

Given the market dynamics and fact that oncology and cardiology represent 25% of Medicare spend, we expect government policy will continue to be an additional catalyst in spurring ongoing demand for these services in the market.

It's the combination of increasing cost pressure, administrative and clinical complexity and the inability to effectively engage providers and patients that's opening up significant opportunities for Evolent across all lines of business. The breadth of our current offering, which serves the population health, health plan services and specialty care management markets, has doubled our total addressable market while ensuring we have multiple entry points and cross-sell opportunities across our partner network.

You can see the diversification of our solutions reflected in several of our last partnership announcements: a Blue Cross plan, where we're helping to manage an exchange population; existing Medicaid plans, where we're providing our full suite of health plan services; Medicare ACOs that need integrated solutions to effectively engage patients with chronic conditions; and comprehensive oncology specialty management services for a Medicaid plan with rapidly rising drug costs and above-market cost trends.

As a result, the breadth of our offering and market leadership position have translated into one of the largest weighted pipelines in our history, with several opportunities either recently closed or in late-stage evaluation.

In terms of new partners, one area of recent focus has been identifying high-performing physician groups in markets where we can add a significant number of lives and leverage our integrated platform to deliver market-leading clinical and financial performance.

The new ACO programs sponsored by CMS are an excellent catalyst for market expansion. And to that end, I'm excited to announce new partnerships with 3 provider organizations: Michigan Health Professionals (sic) [Michigan Healthcare Professionals], Integrated ACO and The South Bend Clinic. These organizations are high-performance provider groups that have a line of sight to significant Medicare lives in their respective markets.

Michigan Healthcare Professionals is a network of nearly 400 independent physicians in the Detroit area, who support nearly 25,000 Medicare beneficiaries in its Medicare ACO.

Integrated ACO is a network of 55 physician practices spread across several major markets in Texas. Over the years, Integrated ACO has earned a strong reputation for delivering efficient high-quality care to more than 10,000 Medicare beneficiaries and has significant growth opportunities in the Austin and San Antonio markets.

The South Bend Clinic is an independent employee provider group in Indiana that currently manages over 7,000 Medicare beneficiaries in its Medicare ACO. Also in the Medicare ACO segment, WakeMed Key Community Care has decided to evolve its partnership with Evolent by agreeing to enter an MSSP next year. Over the last several years, WKCC has earned a fantastic reputation as a market leader that consistently provides high-value care to the population it serves. Entering the Medicare ACO program is not only a vote of confidence in our partnership, but will also make a significant impact on the lives of Medicare beneficiaries in North Carolina.

Across those 4 partners in 2020, we anticipate supporting more than 60,000 lives initially in CMS' Pathways to Success program and expect to substantially increase the number of Medicare risk lives under management across the next several years.

Along with WKCC, we're currently in the midst of one of the largest same-store growth cycles in our company's history as several partners are expanding their service base with Evolent or adding new populations. This obviously represents an exciting vote of confidence in our partnership model as well as the broader movement to value-based care.

A few examples include: 2 partners entering the Medicare Advantage segment, leveraging Evolent's platform to support market entry and operations; a large ACO adding several payer delegated risk arrangements to substantially expand total premiums under management; addition of well over 300,000 Medicaid lives for New Century Health across several markets for both oncology and cardiovascular services; supporting an existing health system partner to develop a clinically integrated network to rapidly expand its value-based footprint. Having this level of same-store sales and new partner additions at this time of the year gives us high visibility into an exciting revenue outlook for next year.

To that end, in terms of setting up 2020 for strong revenue and margin expansion and solidifying our market leadership position, we've made steady progress towards our 3 key priorities for the year: driving top line growth, stabilizing and improving performance at Passport Health Plan and aligning our cost structure to reflect our approach to the market.

On the top line, our focus for the year has been to achieve double-digit year-over-year growth by Q4 and set up a resumption of mid-teens organic growth in 2020. Given the positive market dynamics that I referenced earlier and a great effort by our business development team, we're on track to achieve those goals. In the fourth quarter, we expect our top line to be north of 10% growth versus Q4 of last year, and we have high visibility given that over 90% of our estimated revenues for Q4 are currently under contract.

The building blocks of the sequential growth in the year include: higher transformation revenues, as we expect to step up in implementations in Q3 and Q4 as we prepare for ACO and Medicare Advantage launches in 2020; continued ramp-up of partnerships already announced this year. Empower, River City Medical Group and Premera will all be fully operational by the fourth quarter, and these 3 partners will add over 375,000 lives to the platform.

Same-store sales across our partner network, most notably with New Century, successfully cross-selling into Passport and other clients in Q4. Passport kicked off on August 1 and will be fully up and running in the fourth quarter.

Lastly, we have a few late-stage pipeline opportunities that we expect to start within the calendar year. All in, we have a diverse and balanced set of new business coming on in the second half and Q1 of next year that sets us up well for a resumption of mid-teens growth in 2020.

Our second priority has been around returning Passport to profitability and responding to the recently released Medicaid RFP. As of June, we've seen an 8 percentage point improvement in margins and anticipate an additional 4 points of improvement to continue in the third quarter. The improvement has been generated through multiple medical expense initiatives, higher payment rates, lower admin spending and a more integrated approach to behavioral health, dental and pharmacy. We've also been (sic) [gotten] incredibly positive feedback from members, which is a reminder as to why Passport has had consistently strong member satisfaction scores over the years, according to consumer assessment of health care providers and system survey data.

We've also seen incredibly positive service feedback from members, which is a reminder as to why Passport has had consistently strong member satisfaction scores over the years, according to consumer assessment of health care providers and system survey data.

As we look to Q4 and our goal of positive contribution, we will have an additional modest rate increase effective in Q3 as well as the full complement of medical expense initiatives in place. Improvement in both of these metrics gives us a clear line of sight for meeting our goal of driving a positive margin in the plan.

In terms of the RFP, Passport submitted a comprehensive response on July 3 and anticipates the award decision to come in the month of October. Last week, the Attorney General announced that his office has approved the transaction, and while other approvers are still needed, we remain on track to close the deal in Q4 of this year.

Lastly, Passport's Board announced that they are dropping their lawsuit with the state regarding retroactive rate relief, which we believe is a very positive step in establishing a collaborative and productive relationship with the Commonwealth. Clearly, an incredible effort and tremendous progress by the team in a short period of time with an exciting opportunity to build on Passport's 20-year history as a leading Medicaid plan in Kentucky.

Our last objective for this year has been to enter 2020 with a leaner cost structure, which combined with strong top line growth will drive significant margin expansion. Across this year, we've worked to streamline operations, eliminate unnecessary redundancy, leverage AI and machine learning in our core processes and focus on improved contract profitability with select partners.

As we look to Q4, we remain focused on achieving a run rate adjusted EBITDA of $40 million to $50 million, which implies a $20 million improvement versus the second quarter. The sources of that improvement are twofold. First, our Q4 top line forecast is substantially contracted with $40 million higher revenue than in Q2, and we expect to see a flow-through of approximately 25%. That implies that 1/2 of the EBITDA improvement in the back half of the year is coming from revenue growth. The other half of the EBITDA improvement is coming from cost initiatives through Q2 that have already lowered operating expenses by $11 million in the quarter and will contribute roughly $10 million of additional improvement, with a full quarter impact by Q4.

All in all, we're well on our way to achieving our key objectives for setting up 2020 with mid-teens growth and strong margin expansion. With 6 new partners this year, a strong new partner pipeline and strong same-store growth, we feel very good about our overall growth strategy and continued position as a market leader.

We've also made excellent progress with Passport providing significant cost reductions, strong clinical outcomes and high levels of service satisfaction for its members.

With that overview, I'll turn it over to John to speak about our financial performance on the quarter and our outlook for the remainder of the year.

--------------------------------------------------------------------------------

John Paul Johnson, Evolent Health, Inc. - CFO [3]

--------------------------------------------------------------------------------

Thanks, Frank, and good evening, everyone. Today, I will cover our financial results for the second quarter of 2019 and will finish with an overview of our 2019 outlook.

Overall, as Frank mentioned, we made significant progress during the second quarter towards our goal of $40 million to $50 million in run rate adjusted EBITDA by the end of the year. And our second quarter results tracked according to our expectations across revenue, operating expenses and adjusted EBITDA.

Beginning with our consolidated second quarter results, adjusted revenue increased 32.9% year-over-year to $192.1 million, mostly through the impact of the New Century acquisition as well as growth within our True Health segment from the previously announced reinsurance agreement with New Mexico Health Connections. Adjusted EBITDA decreased $12.6 million year-over-year to minus $7.7 million. Adjusted loss available for Class A and Class B common shareholders was minus $21.4 million or minus $0.26 per share for the quarter compared to minus $2.3 million or minus $0.03 per share in the same period of the prior year.

As of August 5, 2019, there were 83.8 million shares of our Class A common stock outstanding and 0.7 million shares of our Class B common stock outstanding. Within consolidated adjusted EBITDA, adjusted cost of revenue, which includes claims expenses, increased to $142.7 million or 74.3% of adjusted revenue for the second quarter compared to $86.6 million or 59.9% of adjusted revenue in the same quarter of the prior year.

Adjusted SG&A expenses increased to $57.1 million or 29.7% of adjusted revenue for the second quarter compared to $53.0 million or 36.7% of adjusted revenue in the same quarter of the prior year. The increase in both adjusted cost of revenue and adjusted SG&A expenses year-over-year was due primarily to the cost assumed from the assets acquired as part of the New Century transaction as well as additional personnel costs and third-party support services across the organization.

Combined, our total adjusted cost of revenue and adjusted SG&A expenses as a percentage of total adjusted revenue increased to 104% in the second quarter of 2019 compared to 96.6% in the same quarter of the prior year.

Now I will take you through the second quarter results by segment. In our services segment, second quarter adjusted services revenue increased 19.4% to $149.7 million, up from $125.4 million in the same period of the prior year. Adjusted transformation revenue in the second quarter accounted for $1.9 million or 1.3% of our total adjusted services revenue for the second quarter compared to $8.2 million in the same quarter last year.

Adjusted platform and operations revenue accounted for $147.8 million or 98.7% of our total adjusted services revenue for the second quarter compared to $117.2 million in the same quarter last year. On a year-over-year basis, the increase in adjusted services revenue was primarily driven by the impact of the acquisition of New Century. As of June 30, 2019, we had approximately 3.5 million lives on our services platform. Our average PMPM fee for the quarter was $14.22 compared to $13.24 in the same period of the prior year.

Adjusted EBITDA from our services segment for the quarter was minus $8.8 million, down $14.4 million from $5.6 million in the prior year. Our performance in the second quarter was on track relative to our expectation with adjusted EBITDA increasing by $6.7 million sequentially versus the first quarter.

With the combined effect of revenue growth and the impact of cost reduction efforts, we expect to achieve a run rate target of $40 million to $50 million in adjusted EBITDA by Q4, driving a material turnaround in profitability from the first half of the year.

Turning to our True Health segment, we had premium revenue of $45.8 million in the second quarter, up $22.8 million from the same quarter last year, largely due to the amended reinsurance agreements with New Mexico Health Connections entered into during the fourth quarter of 2018.

Our owned health plan, True Health, served an average of just over 17,000 large and small group members in New Mexico in the quarter, generating $22.4 million of the total $45.8 million of premium revenue in the quarter. Adjusted EBITDA from True Health for the quarter was $1.1 million. Our combined medical cost ratio was 78.8% in the second quarter and in line with the 79.8% MCR we experienced in the first quarter.

Turning to the balance sheet, we finished the second quarter with $110 million in cash and cash equivalents and investments, a decrease of $74.7 million relative to the end of the first quarter of 2019. The principal uses of cash in the second quarter were a $40 million loan to Passport Health and a $15 million investment in our True Health JV with Global Health in Oklahoma.

With regard to Passport, commensurate with formally filing the RFP, we chose to increase our planned advance to $40 million to put some extra cushion on the balance sheet. Long-term debt at quarter end consisted of $225.6 million net carrying value of our 2021 and 2025 convertible senior notes.

For the second quarter, cash used by operations was $13.5 million. Cash used in investing activities during the quarter was $65.3 million and largely attributable to approximately $8.3 million of capitalized software development expenses and purchases of PP&E, $3.3 million of purchases of investments, $15 million of investments associated with the previously announced Global Health partnership and $40 million advanced to Passport for regulatory capital requirements.

Cash used by financing activities during the quarter was $11.4 million and predominantly due to decreases to restricted cash accounts held on behalf of our partners for claims processing purposes.

In summary, as Frank laid out in his comments, we are on track to achieve our top line and adjusted EBITDA targets for the fourth quarter, thus marking a material improvement over the first half of the year. However, timing delays on contract start dates and realization of cost savings is impacting on our third quarter and thus full year outlook, and we are adjusting our guidance accordingly. We are now forecasting total revenue of $825 million to $850 million for the calendar year 2019. The components of revenue are as follows: For the full year 2019, we expect adjusted services revenues to be in the range of $664 million to $684 million; for the full year 2019, we are forecasting True Health segment revenues of $175 million to $180 million; for the full year, we are forecasting intercompany eliminations of minus $14 million.

With respect to full year adjusted EBITDA, we are now forecasting a range of minus $10 million to minus $2 million. For the third quarter specifically, we are forecasting total revenue of $213.5 million to $225.5 million. The components of revenue are as follows: For the third quarter of 2019, we expect services revenues of $175 million to $185 million; for the third quarter of 2019, we are forecasting True Health segment revenues of $42 million to $44 million; for the third quarter, we are forecasting intercompany eliminations of minus $3.5 million. We are forecasting adjusted EBITDA of $2 million to $6 million.

With that, I will turn it back over to Frank.

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [4]

--------------------------------------------------------------------------------

Thanks, John. I want to close with a brief recap of our primary sources of differentiation that drive value for our partners and establish our position as a leader in the market.

First, the level of clinical, administrative and operational integration in our core platform is highly unique in what is a very fragmented industry. If you're a provider or a health plan managing a value-based risk business, it's critical to have an integrated platform that pulls in a variety of data to drive clinical workflow, including claims and comprehensive medical information on the population that you're serving. For instance, if you have members at risk for an acute care episode, are you able to identify them early and then provide the appropriate level of support and follow-up to avoid a hospital stay or further health deterioration? The ability to have a consolidated view into claims, individual benefits information and important clinical details allows you to take the right action in a matter of hours instead of weeks.

This ability to pull together comprehensive datasets in one easy place to drive clinical workflow and prospectively impact the course of care has been a struggle historically for most payers. The issue is even more difficult for providers that many times have completely different systems and reporting requirements for the variety of payers that they serve. Having an integrated platform as a one-stop shop that can work across payers, pull in critical claims and clinical data and essentially act as a connector between payer and provider is a real differentiator and drives significant improvements in clinical and financial performance.

Second, Evolent brings a wealth of health plan, clinical and operational expertise in serving Medicaid, Medicare, commercial and exchange populations, experience we've amassed serving over 35 partners and 3.5 million lives. The uniqueness in our role and acting as a bridge between payers and providers to facilitate much more collaborative and effective approaches to managing complex patient populations. This takes deep expertise, experience working with both providers and payers and collaborative solutions which balance the objectives of payers, providers and patients. Our employee base, over 3,000 strong, is one of the most talented groups assembled in the health care services world and is absolutely committed to improving the health of the partner communities we serve.

Lastly, patients with chronic conditions drive a substantial portion of health care spending in the U.S. and require a thoughtful and evidence-based approach driven by sophisticated data analytics, comprehensive clinical program development and unique modalities for effective provider and patient engagement. Across the last 8 years, Evolent has developed deep expertise in managing chronic-condition patients and driving improved health outcomes and significant reductions in total cost. In part, this is the result of our continued investment in sophisticated analytics, predictive patient identification and selecting the correct modality to most effectively engage and graduate patients in our clinical programs.

These are critical competencies to managing large complex patient populations, and ultimately represent the difference in market-leading performance in a health care world increasingly focused on driving reimbursement systems based on demonstrable outcomes.

Thank you, again, for participating in tonight's call. With that, we'll end our formal remarks and take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Ryan Daniels of William Blair.

--------------------------------------------------------------------------------

Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [2]

--------------------------------------------------------------------------------

I wanted to dive into the pipeline in a little bit more color. Frank, I think you've talked about the weighted pipeline being the largest or one of the largest in company history. So I'm curious if you can talk about that in several aspects. One, is it really around care management, TPA? Two, is it kind of the core Evolent or more of the New Century? And then three, any specific payer categories that you're seeing particular strength in?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [3]

--------------------------------------------------------------------------------

Great. Thanks, Ryan. So one of the things that we've talked about recently is the fact that we really have diversified our service portfolio. If you think about our original market being in population health, that's obviously where we built up a lot of infrastructure and capability, still a lot of growth and momentum with what's going on with the CMS ACO programs and new launches there. We also have the health plan services side, which serves existing provider plans as well as regional health plans. And then we have specialty care management, which goes all the way from provider plans to regional plans to national plans. What that's effectively done is increased our addressable market and obviously given us a much more diverse approach to the market.

If you step back, one, obviously you feel good about the fact that we have 6 partners and again, very diverse set of partners in the beginning of the year across that spectrum that I just mentioned. And then if you look in the late-stage pipeline and sort of what you see there, I would say across all of them, so we still have a number of organizations that are interested in the government ACO programs and see that as a good way to enter Medicare. We have organizations focused on Medicare Advantage and see possibilities there between now and the end of the year.

On the health plan services side, continued opportunities with regional Medicaid plans that already have lives and scale, but want greater sophistication in terms of infrastructure and the clinical tie that we have to the Identifi platform. And then if you look at New Century, I would say a very diverse pipeline, really spanning Medicaid and Medicare, which is nice because that's been a new addition since the acquisition is seeing very strong application in Medicaid, but also across both regional and national plans.

So if you step back and again, look at the weighted pipe and how we think about it, I would say, one, we've already closed enough business to give us very strong confidence in mid-teens growth for next year. So that's highly visible based on where we sit today. And then you look at the additional things we have in the pipeline, and I would say we closed a few of what are very large opportunities in late stages and we see even accelerated growth over that level. So we don't need to sweep the pipeline -- when you basically have nothing to add or very little to add to feel very confident in mid-teens, and I would say a few of the things in the pipeline that close would give us confidence to go beyond that going into next year.

So I would say one of the best 6 months that we've had from a pipeline perspective. And also what I feel good about is the fact that a lot of it's coming from our existing partner base. So to have substantial growth at NCH, across a few of our Medicaid partners, across several hundred thousand lives, that's big -- a big add in terms of revenue. I mentioned the Medicare Advantage additions with 2 of our partners, some delegated risk arrangements. So very diverse across almost all segments that we serve and again, very strong visibility going into next year.

--------------------------------------------------------------------------------

Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner and Healthcare Analyst [4]

--------------------------------------------------------------------------------

Okay. Very helpful color. And then as a follow-up here, and this may be difficult to discuss on a public earnings call. But largest pipeline you've seen, one of the best same-store growth outlooks in company history, which is a great data point. Passport clearly improving, yet your stock is sitting here at an all-time low. So I'm curious what the Board has thought of potential strategic alternatives or ways to create value, share repurchases. Anything of that nature that you can share with the investment community?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [5]

--------------------------------------------------------------------------------

Yes. I think we've been very focused obviously on a specific agenda we have this year. One was returning top line growth to double-digit growth by the second half of the year and then teens growth next year, driving significant margin expansion. If you do all of that, you have a service business approaching $1 billion in revenue, which, again, we believe on a comparable basis, surely drives a lot of equity value.

Second, we realized there was a lot of questions about the investment in Passport, whether that was a shift in strategy, whether that was going to be a good investment for us. We believe we're proving out the thesis that we can drive strong financial performance that surely the investment, from a value perspective, if Passport wins the RFP, will be seen as a very strong investment and obviously a lot of strategic options as to how we evolve our relationship there, how we leverage the network, how we continue to collaborate with our provider partners. But we think it's a very valuable asset in Kentucky and that it can have massive economic benefit for us over time.

So our immediate focus has been executing on that. And we feel very strongly that as we deliver against that, that we'll see a rebound in the stock price and, generally, in investor confidence. And then hopefully some of the things we're talking about on the call today in terms of visibility and really achieving the main tenets of our plan by the fourth quarter and into next year is going to help to build that confidence.

But what I would say is we're always mindful of lifting up our heads and seeing where we sit strategically in the market. Where are we from a value perspective? Where do we sit vis-à-vis the various players in the market? Are we building a valuable and differentiated asset? Are we thinking through the options for how to take advantage of that and monetize it? Then I would just say that we've got a Board that is obviously highly experienced. And if we didn't see a rebound to the equity and yet the strong performance that we anticipate, then obviously that might open up various options, some of the ones that you described, whether that's strategic positioning of the company or that's stock repurchase, all of those things would be on the table based on where we sit.

But right now, I think it's been building confidence in our plan, executing on it, getting to where we wanted to get by the fourth quarter, setting up a service business approaching $1 billion in revenue with mid-teens, potentially higher growth and strong margin expansion. And then having demonstrated that we could invest in an asset that we believe is a very valuable asset and begin to demonstrate that value, and it obviously has its own stand-alone asset value, and I think a smart investor will look at that and say, "I add up these pieces, particularly relative to comparable companies and the addressable market that Evolent has," and we will be back to where we want to be from a stock price perspective. So that's, right now, our current focus.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Robert Jones of Goldman Sachs.

--------------------------------------------------------------------------------

Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [7]

--------------------------------------------------------------------------------

Frank, just wanted to go back to your expectations for mid-teens growth next year. Clearly, it sounds like a lot of confidence, good line of sight into getting to at least that number. But I wanted to ask on a few of the assumptions behind some key swing factors. So maybe just throw out 3 of them and just hear what you guys are thinking as far as how they play out relative to that expectation.

So I guess the first obvious one would just be Passport and the success level assumed in the Kentucky RFP process. I know it's midyear, but I'm sure it would have some impact on next year.

The other one would be just be, what are you assuming around the incremental Medicaid enrollment in Florida?

And then just the last one would be around the expectation around Beacon Health in light of the proposed acquisition of that plan. So just kind of -- even directionally, how you're thinking about those 3 swing factors relative to that mid-teens growth would be helpful.

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [8]

--------------------------------------------------------------------------------

Yes. Great question. First, on Passport, if we win the RFP, based on what we see today with largely things that are contracted, we would be at high-teens, potentially higher, with Passport winning. With Passport losing, we'd be more in the neighborhood of low teens. So either way, we still see very strong revenue growth heading into next year.

With Florida, we do believe that we have the opportunity to increase membership growth there, but we're not assuming that in any of the assumptions that I just gave you about growth. So any upside there would be upside on the numbers that I just gave you.

And then on Beacon, Beacon has reiterated their commitment to Evolent and our partnership. We work together in several markets. We're value -- we're viewed as a very important strategic partner for them. We actually work together at Passport, which, as you can imagine, is a very large contract. They would be part of our RFP response. We work with them in Arkansas. We work with them in New York. So we see that as something that has been going well, that will expand over time. We obviously want to make sure that we have a very integrated approach with our offering. So that's very important that we're delivering seamless service to members and that we're being innovative there. So there's a lot we ask of them in terms of how they evolve. And obviously, we need to work together well, but we see that as a very strong relationship and, if anything, that's been reiterated since the acquisition.

So that, hopefully, gives you a sense. We're not, again, depending on a bunch of new and different things to get us to where we need to get to from a revenue perspective for 2020.

--------------------------------------------------------------------------------

Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [9]

--------------------------------------------------------------------------------

No. No, that makes a ton of sense. Now I guess just on the EBITDA and clearly the confidence to exit the year at the run rate that you guys have been pointing to. But obviously, yet in the quarter, you're lowering the expectations for the year. Next quarter, I think looks, based on the guidance, not as robust as where you expect to be in 4Q.

Can you maybe just talk a little bit about how EBITDA has played out? And what's kind of been impacting the profitability, causing a little bit more volatility? And then obviously as it relates to that, the -- what gives you the confidence that the year-end exit rate is still very much intact?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [10]

--------------------------------------------------------------------------------

Yes. I'll start and then I'll have John comment on specifics. And if you think about where we started the year, we had a relatively ambitious agenda. We wanted to get to double-digit growth and $40 million to $50 million in contribution by the fourth quarter. That was really our goal. And what we really care about is the setup for 2020, ongoing growth and margin expansion. I think the message you're getting on the call is we are very confident in our path towards our objectives in 2020 and that we feel very good about Q4.

What you do see in our business when you're driving that kind of increase from Q1 to Q4 is as you're bringing on new top line revenue, start dates really matter. So we had a couple of contracts that we expected to start mid-Q2, one at the beginning of Q3, and those moved a couple of months because of regulatory approvals, again, some things outside of our control. So you have a couple of things move. They are fairly large opportunities. We have another thing again expected to start mid-Q3, which will start at the beginning of Q4, and that can then influence the flow of EBITDA in Q2 and Q3. The good news is all of those things are contracted. We have a clear line of sight on start dates. There is no ambiguity of those starting and running through Q4.

And then John will comment on this, but on the cost side, you'll also have some things that you anticipate are going to be fully in place by the second quarter and a certain part of it slips into the third quarter. And so we've had a little bit of that in the middle of the year.

I would say on overall targets and what we needed to do, we obviously took on a lot at the beginning of the year and I feel very good about where we are, but you will see some of those quarter-to-quarter fluctuations.

John, anything you want to add to that?

--------------------------------------------------------------------------------

John Paul Johnson, Evolent Health, Inc. - CFO [11]

--------------------------------------------------------------------------------

Yes. I just want to add one piece of color around the cost side. If you look at the OpEx on the services line, from Q1 to Q2, we saw an $11 million sequential improvement there. That did not fully reflect the full impact of the initiatives and actions we've put in place during the quarter. And so as Frank indicated, we will see incremental improvement flowing into Q3 and then again into Q4 from actions that have already been taken.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

Our next question comes from Jamie Stockton of Wells Fargo.

--------------------------------------------------------------------------------

James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [13]

--------------------------------------------------------------------------------

Maybe just one more on where Bob started as far as the kind of mid-teens outlook for next year. The premium piece of the revenue, is it reasonable to assume that in the mid-teens growth number that you're assuming that the premium piece is really maybe just growing mid-single digits or something like that?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [14]

--------------------------------------------------------------------------------

So on the premium piece, we're not assuming significant growth on the premium piece. So I wouldn't -- really, when we're talking mid-teens growth, we're really talking the service part of our business. On the New Mexico side, we do anticipate some growth, but I'm not really factoring that in into the mid-teens, but we're really talking about the core service business.

--------------------------------------------------------------------------------

James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [15]

--------------------------------------------------------------------------------

Okay. That's great. And then my other question is about the balance sheet. I think John may have thrown out like a $110 million cash number. You guys haven't closed the Passport deal, which is going to be $70 million. If you could just talk about how -- what are your thoughts on how kind of you manage the balance sheet from here? Obviously, you are seeing an improvement in adjusted EBITDA, which presumably is going to have a beneficial impact on kind of what free cash flow looks like, but just what your thoughts are on the balance sheet from here would be great.

--------------------------------------------------------------------------------

Nicholas McGrane, Evolent Health, Inc. - EVP of Corporate Performance [16]

--------------------------------------------------------------------------------

Hey, Jamie. It's Nicky. I would say, on that point, 2 things. One is, as you said, I mean we would expect to be cash flow-neutral between -- for the remainder of the year based on the dynamics in the business, so that's one thing.

And secondly, as we talked about before, we would look to replenish the balance sheet and add more cash to the balance sheet. We've looked at debt options and debt. With the Passport timing likely a Q4 event, we will -- we sort of lined that up -- that action up with -- closer to the timing there.

But we are comfortable with where we sit, with what the outlook is on a cash flow basis for the year-end and our options to replenish the balance sheet. So all-in-all, we feel comfortable with where we sit.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Our next question comes from Sean Wieland of Piper Jaffray.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [18]

--------------------------------------------------------------------------------

So I've got a follow-up on Bob's line of questioning on the growth rate. You characterized Passport as taking you from a high-teens growth to a low-teens growth, which, if that's maybe 500 basis points of revenue, would size Passport in the maybe $40 million to $50 million range. I thought it was more than that. And so can you set me straight on that?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [19]

--------------------------------------------------------------------------------

Yes. And John can chime in. If you think about Passport, we've -- we'll have added New Century as you go into next year. We've also expanded our service offerings, so that's an increase off our base. So that contract in total was well over $150 million in revenue.

If we lose the RFP, Passport will still serve out the membership through the middle of the year. So you'd still get 50% of your full run rate revenue for the year. And you'd still have some run out probably in revenue. So you'd have a portion of that revenue come off, and that's the difference between a high-teens and a low-teens range.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [20]

--------------------------------------------------------------------------------

Okay. Got it. So -- but the overall Passport contribution to revenue is in the $150 million range, or will be once it's all built out?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [21]

--------------------------------------------------------------------------------

We'll be -- as NCH ramps, it could be higher than that. I mean we're just starting that contract in August, so we need to see the number of lives that the NCH services apply to. And we'll have better visibility on that as we get towards the end of the year, but we'd sort of set our base, as I remember, it was in the $80 million to $90 million range. Initially, we thought New Century as well as some of the additional services we're adding this year would add to that. And so I would think about it as well over $150 million, but in that zone with potential to grow beyond that as we go into next year.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [22]

--------------------------------------------------------------------------------

Okay. And is it fair to ask what the contribution to EBITDA is?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [23]

--------------------------------------------------------------------------------

Yes. I'd say, on EBITDA, I mean it has similar contribution margins to our overall business. So I mean John, you can -- just in terms of overall contribution margin, it's similar. It's not an outsized contract from that perspective. But if you run the math, then obviously it's important from a contribution margin perspective.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And one more, if I could. What was the $9.6 million gain in the quarter? Did I miss something?

--------------------------------------------------------------------------------

John Paul Johnson, Evolent Health, Inc. - CFO [25]

--------------------------------------------------------------------------------

Yes. That was related to the Global transaction, and it's the gain on the assets that we contributed to the JV.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Matthew Gillmor of Robert Baird.

--------------------------------------------------------------------------------

Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

--------------------------------------------------------------------------------

Wanted to get an update on Passport's financial position. You made some comments about their margin trajectory that seem very positive. Were those profitability metrics on an EBITDA basis or net income? And then you also talked about the $40 million plan advance. Just given their trajectory on margins, can you give us some sense for when you'd recoup that loan?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [28]

--------------------------------------------------------------------------------

Yes. I would say the plan is a nonprofit. So they're not a taxpayer. If you look at the margin improvement that's occurred, it's been about 8 points of improvement if you look at January run rate to June run rate, so that's pretty significant. Some of that coming from the rate increase that was effective April 1, the other portion coming from expense initiatives, clinical programs that we'd put in place, which are engaging a higher proportion of patients and therefore having an impact on hospitalizations and medical costs.

We expect an additional 4 points of margin improvement coming into this quarter. Some of that is based on a small rate improvement that will be effective in Q3, so additional to the one that happened in April. We'll also have a full quarter of our expense reduction initiatives coming in for the quarter. And then New Century, which will take a little while to ramp, but launched August 1. So we probably won't get the full benefit of that until the fourth quarter.

But right now, we're feeling pretty good about exiting Q3 at breakeven at least, and then as we head into Q4, with New Century taking hold and a few other initiatives, being at a positive contribution level. So I would say right on plan. The team is very focused. We've built a lot of confidence just in terms of the expertise we've brought. We're working very closely with the Passport team. And again, I feel very good about where we are.

On your last question, going into the RFP, I think we wanted to top off the balance sheet so that we have appropriate cushion there from a capital perspective as we entered that process. And as we begin to generate positive contribution on a monthly basis, that would obviously lessen the level of ongoing balance sheet support. We won't likely close the transaction until the very end of the year and so you need to sort of balance those 2 things. And we think we'll be at roughly where our original estimates were in terms of capital contribution.

--------------------------------------------------------------------------------

Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

--------------------------------------------------------------------------------

All right. Fair enough. And then on the pipeline side, Frank, you mentioned there's several sort of late-stage deals that could close and potentially get launched. It sounded like those were relatively chunky opportunities. Can you at least give us some sense for sort of where they would sit in the business? Is that more on the health plan services side or more specialty management or pop health?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [30]

--------------------------------------------------------------------------------

Yes. And just to be clear, what we've said is that 95% of our Q4 run rate is contracted, so high visibility. Those are contracts that we know are starting in between now and the fourth quarter. So we're really talking about a small amount of incremental revenue in terms of our Q4 run rate. So what I'm really referring to is we want to add additional growth in setting up '20 and '21 beyond mid-teens. It's been looking to what's in the late-stage pipeline. And I would say they're a combination of a few things. A few existing plans that are looking to improve the sophistication of their health plan services platform that wants the tie-in to Identifi so they can continue to innovate clinically. I would say those make up a few. And some of those are Medicaid-oriented, but also in Medicare.

And then the second piece is New Century, where I would say, for what has been a short time since we acquired the business in the fourth quarter of last year, I think we've put a pretty strong team against it. We've leveraged our existing network as we talked about, and then also been really thoughtful about our go-to-market approach. And I would say we have a very strong pipeline there as well. Some of those opportunities, because you're working with existing regional plans that have a large number of lives, have the potential to be quite significant in terms of their revenue contribution. They will generally have an implementation cycle, so those probably wouldn't implement until the end of the first quarter of next year, but those could be substantial contributors to '20 and 2021.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from Richard Close of Canaccord Genuity.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [32]

--------------------------------------------------------------------------------

Just on the same-store growth, I was wondering, Frank, if you can just maybe talk a little bit about the total number of lives that you're talking about with all that business and maybe the timing of when all that comes on?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [33]

--------------------------------------------------------------------------------

Yes. I would say if you look at a few segments, the MA lives with 2 partners that I mentioned would come on in January. I don't have an exact estimate, but again, there you're going to be ramping new plans. So probably, it would be under 10,000 lives, but they're Medicare lives, so a higher PMPM, probably about 10,000 there. I mentioned that we have some that we've already announced, which are over 300,000 lives, which will come on by the fourth quarter. Actually, some of those are new, so to be fair, not same-store.

If you look at NCH, at Passport and the couple of the other opportunities we see in the Medicaid segment and with one of our Medicare clients, it's probably 300,000 lives, over 300,000 lives across those plans. That's obviously a higher PMPM, so that's a substantial revenue generator. And then we have a partner, an ACO, that's expecting to add a pretty substantial book of delegated risk lives. That could be -- again, hard to estimate, but that could be over 100,000. It could range from 50,000 to 150,000 lives from that perspective.

So if you add all that up, it's a substantial growth in the next year coming from same-store, which, again, we feel very good about. It's obviously easier to scale when you already have the relationship. And then with 6 new additions this year on the new side as well as the pipeline that I just referenced, we have the potential to go beyond that growth estimate for next year.

--------------------------------------------------------------------------------

Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [34]

--------------------------------------------------------------------------------

Okay. And a follow-up maybe on the Pathways program. How are you seeing that shake out? Obviously, you had some success in adding new people or new clients this quarter. How do you think that trends as we enter 2020?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [35]

--------------------------------------------------------------------------------

Yes. I would just say our plan has been to be highly selective in terms of new partners we add in that program and the ACO programs in general. We want partners that have a strong historical track record of MLR performance with their Medicaid populations, that have a large geographic area and potential population to scale to, that potentially have interest in other populations so we don't end up with a -- in a situation where we're working with 5,000 lives and we're really not driving scale in those markets. So we want to be working with winners that ultimately can add tens of thousands of lives, over 50,000 lives, over 100,000 lives, in their markets across time. And so I would say we're less focused on numbers there and number of partners, but selecting the right ones and having ones that successfully scale and grow over time. So I think you'll see some additional announcements there as we continue to add organizations to that program, but we're not planning on building a very large cohort of ACOs that have a small number of lives. That's not where our business focus is.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question comes from Mohan Naidu of Oppenheimer.

--------------------------------------------------------------------------------

Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [37]

--------------------------------------------------------------------------------

Frank, first, on the pipeline trend and the 6 partnerships that you have signed so far. Can you talk about your implementation capacity to handle that, and especially as you see more pipeline converting towards the second half of this year?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [38]

--------------------------------------------------------------------------------

Yes. That's a good question. Obviously, when we have this kind of growth to accommodate across a variety of different segments, we need to make sure we're ready to launch, that we have the capacity that we can hit the ground running on day 1. I would say we feel good about our capacity at this point and ability to deliver based on the opportunities that I just talked about.

I would say if we get additional wins, we probably will need to think about staffing up for those implementations, that we have the accurate lead time because we're obviously stretched to accommodate the growth going into next year. So that's something we've dealt with in the past. We obviously have a very strong pipeline in our overall recruiting effort and feel like we can accommodate that, but we would need to respond quickly. And we definitely would need to do some incremental hiring as we head into next year.

--------------------------------------------------------------------------------

Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [39]

--------------------------------------------------------------------------------

Maybe one quick one on Cook CountyCare. Any updates on the program position? What you're seeing in that program so far? And given that the state budget position is not such an envious position right now, how do you see that program sustaining?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [40]

--------------------------------------------------------------------------------

Yes. I would say we really have had a strong relationship with CountyCare. They've got a very strong leadership team in place in the health plan. We've expanded our relationship across time. I think they're a very highly regarded plan in the community. And we think that they will continue to be a great partner for us going into the future.

The state is obviously under economic pressure. There has been a lot of speculation about what's going to happen in the state Medicaid plan, et cetera. It's our belief that it's a very important community asset. It contributes a lot to the broader health system, that it's incredibly important to beneficiaries in the county and has a lot of political support. And we think they will be a strong plan going forward. And I think if you ultimately look at how they are performing, how they contribute to the overall health system that they are a part of, they make a very important and significant contribution if you look at the full picture of the economics they drive for the health system.

So I think a very valuable asset. Again, one we've had a strong working relationship with. Obviously, we want them to be as efficient as we can. I mean I think that's one of the reasons we have the partnership we do, because of the scale we bring, the additional ways we can add value for them, things like New Century, which, frankly, for all of our partners that are in the risk business, can add value over time and looking for those types of opportunities. But again, strong relationship and we think they will be around for a long time.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Our next question comes from Charles Rhyee of Cowen.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [42]

--------------------------------------------------------------------------------

Just had a quick question. I think you talked about investing capital of $40 million into Passport. Is that separate from the $20 million line of credit that was announced in the original deal?

And then secondly, any kind of color you can give around sort of the bid submission? I guess I would assume from this investment as well as the line of credit, you met any kind of requirements needed for bidding on Passport.

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [43]

--------------------------------------------------------------------------------

Yes. Just to clarify, the $40 million is inclusive of the $20 million. The RFP happened after we announced the deal. Going into the RFP, I think we wanted them to have some more balance sheet cushion, and so we put an additional $20 million in commensurate with the RFP process.

The RFP responses were due July 5. Passport submitted a comprehensive response. We expect to hear in the October time frame based on what we've heard from the Department of Medicaid.

No comment on the potential winners or anything like that. We don't obviously have any information nor could we comment on that. We obviously feel that Passport is a real asset in the community, strong track record across the last 20 years, incredible member satisfaction ratings. We think that it's an important plan that's having a really important impact on the Medicaid recipients that they serve. And we're hopeful and looking forward to try to build on that, but no specific comments on the RFP.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [44]

--------------------------------------------------------------------------------

Great. And if I can just follow-up. You talked about sort of the investments you're making to also help drive the growth next year as well. When -- the investments you're making on the Passport side, is that captured off income statement, sort of as part of the equity line? Or is that -- are you carrying costs on the sort of the Evolent income statement P&L that would benefit sort of the Passport side? Just to -- trying to understand that a little bit.

--------------------------------------------------------------------------------

Nicholas McGrane, Evolent Health, Inc. - EVP of Corporate Performance [45]

--------------------------------------------------------------------------------

Yes. No. Right now, we don't own the brand, Charles. So any investments are on our side of the ledger because obviously this is in the context of the services we provide today. So as we -- clinical programs, NCH successes. So kind of normal course in our line of business and on our side of the ledger.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [46]

--------------------------------------------------------------------------------

So then would that change once the transaction closes in the fall? And let's assume that you -- Passport gets renewed. Would some of the costs that you're carrying now on the Evolent side, would that shift over because it would be ostensibly part of operating the plan?

--------------------------------------------------------------------------------

Nicholas McGrane, Evolent Health, Inc. - EVP of Corporate Performance [47]

--------------------------------------------------------------------------------

Again, I think, I mean the -- probably not, just because these are services. We're a service provider to them, so we keep that relationship. So I would say those capabilities would sit on our side.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our next question comes from Stephanie Demko of Citi.

--------------------------------------------------------------------------------

Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [49]

--------------------------------------------------------------------------------

Just kind of dovetailing on the strategic alternatives question from before, is there anything structurally or philosophically that you would keep you from [a state] private, like an advantage as [selling] as a public buyer?

--------------------------------------------------------------------------------

Nicholas McGrane, Evolent Health, Inc. - EVP of Corporate Performance [50]

--------------------------------------------------------------------------------

Hey, Stephanie. This is Nicky. I mean it's not something we can really comment on at this point in terms of -- I think Frank talked about it earlier with -- in response to Ryan's question about how we look at the world and how we think about it and where we're focused right now, but in terms of [structural order] issues, it's not really something we comment on. Just as Frank said, we're heads-down, focused on delivering value. And we've got a lot in front of us and that's where we're focused today and not really something that we can comment on.

--------------------------------------------------------------------------------

Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [51]

--------------------------------------------------------------------------------

Understood. So there's nothing like [you can pitch that you are one of the] only public buyers [that are selling in the state]?

--------------------------------------------------------------------------------

Nicholas McGrane, Evolent Health, Inc. - EVP of Corporate Performance [52]

--------------------------------------------------------------------------------

No. There's nothing of that, no. Nothing specific like that, no.

--------------------------------------------------------------------------------

Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [53]

--------------------------------------------------------------------------------

Okay. Understood. And then just following up on the last question (inaudible) performance (inaudible). Could you tell me a little bit about how that impacted EBITDA for the year and how we sort of thought about EBITDA without that level of [sense]?

--------------------------------------------------------------------------------

Nicholas McGrane, Evolent Health, Inc. - EVP of Corporate Performance [54]

--------------------------------------------------------------------------------

I would say that, if I go back to John's comments of sort of looking at the arc of the year, really the point we are referring to here is in Q3, and that's timing primarily to do with how these contracts started. So yes, I mean I think you're seeing some impact in Q3 of the combination effect of when the contracts started and some of the expenses that went against them. So we were sort of ready to go, expenses in place, the contracts and the revenue recognition came a little bit after -- later than we expected. So it's a combination -- it's really just to do with the timing. I don't think there's an undue level of investment into Passport that was not anticipated. It's more just to do with when these contracts started up and you're seeing the -- that Q3 is when we're seeing the impact of that primarily versus Q4. We are -- contracts are up and running for a full quarter, et cetera. So I think more timing than investment would be the issue at hand in Q3.

--------------------------------------------------------------------------------

Stephanie July Demko, Citigroup Inc, Research Division - VP & Senior Analyst [55]

--------------------------------------------------------------------------------

Right. That is helpful. And one last quick one. Just given some of the attrition that you did see earlier this year, should we still think about that 7 to 9 new wins as the number you need to hit your growth target? Or is that sort of [picking up]?

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [56]

--------------------------------------------------------------------------------

This is Frank. I mean I would say we've made it pretty clear that we don't really need a lot of new wins to hit our growth target and are set up for next year. We obviously want to keep growing our partner network, given the fact we're at 6 for the year. I think we upped our range into the 8 to 10 range, just given our overall size. So right now, we feel comfortable being in that range of 8 to 10 across this year.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Frank Williams for any closing remarks.

--------------------------------------------------------------------------------

Frank J. Williams, Evolent Health, Inc. - Co-Founder, CEO & Chairman [58]

--------------------------------------------------------------------------------

We appreciate everyone participating in the call. We'll obviously see many of you at up-and-coming conferences and on the road across the next couple of weeks. And again, thanks for participating.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.