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Edited Transcript of EVH.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·39 min read

Q3 2020 Evolent Health Inc Earnings Call ARLINGTON Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Evolent Health Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John Paul Johnson Evolent Health, Inc. - CFO * Seth Barrie Blackley Evolent Health, Inc. - Co-Founder, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Alexander Yearley Draper Truist Securities, Inc., Research Division - MD of Equity Research * Charles Rhyee Cowen and Company, LLC, Research Division - MD & Senior Research Analyst * Jessica Elizabeth Tassan Piper Sandler & Co., Research Division - Research Analyst * Matthew Dale Gillmor Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Robert Patrick Jones Goldman Sachs Group, Inc., Research Division - VP * Ryan Scott Daniels William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to Evolent Health's earnings conference call for the quarter ended September 30, 2020. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, 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 historically experienced 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, 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. Seth Blackley. -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [2] -------------------------------------------------------------------------------- Thank you, and good evening. I'm Seth Blackley, Chief Executive Officer of Evolent Health; and I'm joined by John Johnson, our Chief Financial Officer. We hope that you and your families are remaining healthy and safe. Thank you again for those that were able to join us virtually for our fifth annual Investor and Analyst Day on September 29. For those of you that were unable to join, the webcast replay and presentation are available on the Investor Relations portion of our website. I'll open the call this evening with a summary of our recent results, including an update on the key elements of our strategic plan communicated at the Investor Day, which are: one, strong organic growth in the core; two, scaling our EBITDA margins; and three, strategic portfolio and balance sheet optimization. Next, I'll provide an update on the market and the macro environment, including our thoughts on the election. After that, I'll share a few highlights from each of our 3 solutions: our specialty platform, New Century Health; our total cost of care solution, Evolent Care Partners; and our administrative solution, Evolent Health Services. I'll then hand it to John to take us through a more detailed financial review of the third quarter as well as provide guidance. We'll close with a summary of our key messages. As always, we'll be happy to take questions at the end of the call. In terms of our results for the quarter, we're pleased that we have exceeded the midpoint of our range on the top and bottom line. Total revenue for the quarter was $264.6 million, up 20.2% as compared to the third quarter of 2019. Adjusted EBITDA for the quarter was $12.7 million. As of September 30, 2020, we had approximately 3.5 million total lives on the platform. And as John will discuss later, based on our performance and momentum, we now expect adjusted EBITDA to be at the higher end of our previously raised full year guidance range for 2020. With respect to our first focused theme of strong organic growth, we continue to be on or ahead of our plan for growth objectives as we utilize our core solutions to serve as a bridge between health care providers and payers. As we mentioned at our Investor Day, we signed 2 new partners in the third quarter. Additionally, we are excited to announce an agreement we recently signed with Florida Blue Medicare for our specialty management platform, New Century Health. This brings our total new partners for the year to 8, at the high end of our previously communicated range of 6 to 8 new partners expected for 2020. Florida Blue Medicare is the Blue Cross Blue Shield plan of Florida and is a highly innovative organization. They're one of the largest Blue plans in the country and serve more than 5 million members in the state. So this is an important announcement for us, and we'll discuss it in more detail later. Further, the momentum in our pipeline remains strong as our solutions are increasingly necessary in the market and we continue to anticipate 6 to 8 new partnerships per year going forward and a long-term target of mid-teens organic top line growth. In addition to adding new customers, we are seeing strong engagement across our partner network. And as a result, we continue to drive strong same-store growth. We've made continued progress with national partners such as Molina and Centene, who are both utilizing our newly announced New Century technology-enabled solution. For states where we are live, we are seeing strong return on investment for our planned partners, and we are seeing positive provider feedback. Those outcomes give us confidence that we'll have the opportunity to continue expanding the new states in the future. Additionally, I'm excited to announce that we have expanded our partnership with Somos to include Medicaid innovator contracts with 2 new large payers in New York state. These 2 arrangements represent the maturing of the value-based care model in New York from an upside-only model, funded by the delivery system reform initiative to more fulsome value contracts. Next, with respect to our second theme of driving enhanced margins, we continue to make strong progress. The dedicated overhead cost initiative led by John and his team that we launched the beginning of the third quarter is accelerating and the results thus far are exceeding our expectations. Further, we're seeing expanding gross margins and fixed cost leverage and continue to have confidence in reaching our medium-term goal of mid-teens EBITDA margins. And with respect to our third theme, I want to provide a short update on our balance sheet and our strategic portfolio review. We previously communicated our intent to monetize our health plan assets and use that capital to delever and also to focus on our 3 core solutions. As we previously announced, we have closed the Passport transaction, and the Lighthouse health plan has signed a definitive agreement with Anthem. We also continue to make progress on our exploration of strategic options for True Health New Mexico and are hopeful that we'll have an update there soon. Passport continues to perform well. The lives have been moved to Molina, and we expect to receive $130 million to $170 million of return of capital. Obviously, capital return from other planned assets would be in addition to this $130 million to $170 million. We continue to be on track for the deleveraging that we mentioned at the Investor Day, and we continue to feel confident that in aggregate, the capital return from all health plan investments will well exceed the capital invested. So we've made a lot of progress on our 3 focused objectives that helps set up 2021. Based on this strong execution, we now have visibility to our goal of mid-teens growth on our services business, excluding Passport, which, as we've discussed, would translate to in excess of $900 million of revenue for 2021, with services revenue in the $800 million range. With the contracts signed in place, we also have high visibility into these numbers. Further, on the margin side, we do expect reasonable adjusted EBITDA margin expansion versus our 2020 results. This margin expansion is due both to our targeted overhead cost initiative as well as expanding gross margins. So the business is scaling, and we look forward to continue building towards a strong 2021, and we continue to have confidence in reaching mid-teens adjusted EBITDA margins in the medium term. Before providing highlights from each of our businesses, I'd like to provide an update on the overall macro environment. We obviously just had an election in the United States. And as we mentioned at our Investor Day, everything we do is towards the goal of controlling health care costs and addressing the $1 trillion of waste in the U.S. health care system. This work is bipartisan. And to be clear, we are confident in our medium-term targets and our outlook regardless of the policy outcomes, regardless of who wins the White House or who controls the Senate. And if either a Trump or a Biden administration accelerated the pace of value-based care, there is upside to our medium-term revenue and EBITDA targets. If you step back and think about the pace of the move to value-based care, a lot of the work we do is with managed care organizations or around evergreen programs with providers. To that point, less than 10% of our current pipeline is dependent on the pace of value-based care. That said, there are 3 macro themes that we do believe are incredibly important and will support our business in the years ahead. First, we believe the pressure we're seeing on state, federal and employer budgets, which have been exacerbated by COVID, will cause purchasers of health care services to continue to enhance their focus on cost and value. This will continue to sustain a pipeline of opportunities to expand our payer and provide our partner base as industry players look for value-based arrangements to diversify their revenue models and reduce health care spending growth. Second, any policy-based acceleration and the shift to value would open up additional opportunities for us and could accelerate our targets. But again, our targets are intact regardless of the pace of value-based care adoption and regardless of who controls Washington. For example, while it's not part of the pipeline today given the nascency of the program, the Trump administration's direct contracting model could be an accelerator for our total cost of care solution, Evolent Care Partners. And there certainly would be policy accelerators if Biden wins the White House. So policy is for us mostly upside and limited downside. And third, we're starting to see increased pressure on managed care plans as the impacts from COVID and unemployment continue and even accelerate into the future. This pressure is creating sales opportunities for all 3 of our solutions as those managed care plans look for ways to contain costs and improve quality by collaborating with providers. And with respect to COVID, we continue to feel that a prolonged pandemic will be neutral to slightly positive for our business. In summary, the macro environment will continue to reward any organization that can be disruptive in attacking the $1 trillion of waste in the health care system. Organizations like Bright Health and Clover are gaining traction as disruptive health plans. Organizations like Oak Street have established themselves as disruptive providers. And we continue to feel we are the market leader for payer provider enablement, creating disruptive results by enabling collaboration between payers and providers. Shifting gears. I want to spend some time highlighting the great work from the leaders who deliver on our 3 solutions. First, New Century Health, our specialty management offering, has seen strong growth with regional and national payers with solid potential to continue to build across geographies, membership and through cross-sell. As shared at IR Day, the differentiation of this solution continues to be very strong, and we are extending our market leadership through the results across 2020. We're particularly excited about the relationship with Florida Blue Medicare. Under the terms of our partnership, we'll be supporting approximately 125,000 medical lives with our New Century oncology platform. While we expect contracted revenue to ramp across the year after we go live during Q1, we expect this relationship to exceed $75 million in annualized run rate revenue by the second half of the year just on the Medicare population and just with the oncology solution. So this partnership reinforces the large market size we communicated at the IR day. This partnership is also important because it is our first Blue Cross plan on the New Century platform, and we believe that we've now opened up that segment for New Century Health. There are 36 total Blue Cross plans in the country, serving 106 million members and we look forward to the opportunity to add additional Blue Cross plans in the future. But for now, we are laser-focused on delivering excellent results for our partner, Florida Blue Medicare. Second, Evolent Care Partners, our total cost of care management offering, had 2 partner wins in the quarter, driven by a strong track record in Medicare ACOs and provider engagement performance. Our differentiation in the market particularly with independent physicians is strong, and we see an exciting run ahead for this solution. Further, our operational results continue to be strong. For example, through Q2, 85% of Evolent Care Partner practices were meeting or exceeding their performance targets. We're able to reach these levels on key operational indicators based on our proven clinical programs, our proprietary technology platform, Identifi and based on our efficient services platform. With respect to Identifi, we did recently release an important update for our Identifi practice module. By tightly linking to provide our workflows and by rigorously prioritizing targeted interventions, our Identifi practice module allows us to reach leading engagement levels with our 600 primary care providers in our Evolent Care Partners Network. Last but not least, Evolent Health Services, our administrative simplification offering, is continuing to perform well. I mentioned the expansion of Somos earlier. The Somos partnership highlight the unique ability of our Evolent Health Services platform to serve as the bridge between payers and providers, including enabling true delegation of functions like claims payment, utilization management and care management to Somos in order to unlock superior performance. I'm also happy to share that Maryland physicians care implementation is on track to go live at the beginning of 2021 to support more than 200,000 Medicaid beneficiaries in Maryland. Overall, we feel very good about our performance thus far in 2020 and have strong momentum heading into 2021. With that, I'll turn it over to John to give some more details about our financial performance in the quarter as well as to provide guidance. -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [3] -------------------------------------------------------------------------------- Thanks, Seth, and good evening, everyone. Our third quarter results were right in line with our expectations on revenue and adjusted EBITDA largely as a result of strong performance across our customer base, the strength of our performance-based arrangements and our overall cost reduction efforts. We now expect to be at the higher end of our previously increased guidance range on adjusted EBITDA for the full year. This quarter's strong results demonstrate that we are executing on our attractive financial model as we continue to build momentum into 2021. We drove 33% organic services revenue growth in the third quarter relative to the same quarter last year through our focus on multiple channels of growth. We have executed on new partner wins, having now signed up 8 in the year, and continue to drive strong same-store growth, as demonstrated by the expansion with Somos. Our growth, combined with our cost control, drove adjusted EBITDA margins in the quarter of 4.8% of revenue, up about 100 basis points from Q2 and over 300 basis points from the third quarter of 2019. We also continue to make progress on our strategic review of health plan assets while we focus squarely on our 3 core services. As Seth mentioned, we recently partnered with Florida Blue Medicare and will initially be supporting over 125,000 Medicare Advantage members with our New Century oncology platform beginning next year. We will earn fixed per member per month fees on that membership. As the first Blue Cross plan that we have added as a partner for our specialty care solution, this further expands our differentiation, serves as an important validation of the strength of our model and lays the foundation for future expansion not just in oncology but in cardiology as well. Finally, we continue to focus on operational discipline and again drove positive cash flow for the quarter. We continue to expect cash flow to be positive for the full year of 2020. We also continue to make progress on the additional efficiencies we mentioned at Investor Day, which we expect to contribute at least another $20 million to $25 million of gross SG&A savings by 2021. With regard to the COVID-19 pandemic impact on our operating results, we experienced modest net positive increases in our Medicaid membership across the quarter, principally as a result of new state prohibitions on revalidation of Medicaid enrollees that were put into place during the declared public health emergency. We continue to be focused on serving our members and our partners during this unprecedented time. Now let me take you through our detailed results for the quarter before turning to guidance. Beginning with our consolidated results, revenue increased 20.2% year-over-year to $264.6 million, driven by growth in core services. Adjusted EBITDA grew to $12.7 million, up from $3.3 million in the third quarter of 2019, benefiting from top line growth and operational discipline. Adjusted loss attributable to common shareholders was minus $2.7 million or minus $0.03 per common share for the quarter compared to minus $7.7 million or minus $0.09 per common share in the third quarter of 2019. Turning to our segment results. In our services segment, third quarter revenue increased 33.2% to $239.7 million, up from $179.9 million in the third quarter of 2019. The increase was primarily driven by new partner additions and cross-sell expansions within our existing partner base. As of September 30, we had approximately 3.5 million lives on our full services platform, which excludes members covered by our life service offering. Our average PMPM fee for the quarter was $23.73 compared to $16.20 in the third quarter of 2019 and $21.92 in the second quarter of 2020. Adjusted EBITDA from our services segment for the quarter was $13.8 million compared to $3.1 million in the prior year. As we continue to progress on our strategic review of our health plan assets, including True Health New Mexico, this quarter, we had premium revenue of $29.5 million, down $14.3 million from the same quarter last year, a decrease principally driven by the termination of a reinsurance agreement we had during 2019. Claims expense as a percentage of premium revenue was 72.1%. Adjusted EBITDA from True Health for the quarter was a loss of $1.1 million. As expected, upon the close of the sale of certain of Passport's assets and transfer of the plan membership to Molina on September 1, we consolidated the remaining assets of Passport into Evolent's reported financials. The plan continues to perform well with 9/30 year-to-date operating income margin of 2%, excluding certain wind-down accruals. Statutory capital in the plan on September 30 was in excess of $140 million. We have begun the process to return capital out of the regulated entity to enable debt pay down according to our plans, and we continue to expect a portion of the cash to transfer this fall with the remainder coming in the spring. Turning to the balance sheet. We finished the third quarter with $387 million in cash and cash equivalents and investments, which included $228 million in cash held in regulated accounts related to the wind-down of Passport. Excluding cash held for Passport, this represents an increase of $43.8 million relative to the end of the second quarter, principally driven by our adjusted EBITDA results and working capital dynamics. Cash deployed for capitalized software development was $5.6 million. In terms of cash uses going forward, we plan to prepay our senior term loan with proceeds for the Passport transaction. We have minimal other maturities due for 2024 and continue to expect adjusted EBITDA less CapEx to be positive in 2021 and beyond, which will give us the ability to invest in differentiating our core services and maintain a strong balance sheet. Overall, we are pleased with our progress against our financial objectives for the year so far. We now expect total adjusted revenue to be in the range of $1 billion to $1.014 billion for the full year 2020. The components of full year 2020 adjusted revenue are as follows. We expect adjusted services revenues to be in the range of $903.3 to $913.3 million. We are forecasting True Health segment revenues of $116 million to $120 million, and we are forecasting intercompany eliminations of minus $19.3 million. With respect to full year adjusted EBITDA, we are now forecasting a range of $35 million to $38 million. For the fourth quarter specifically, we are forecasting total adjusted revenue of $249.5 to $263.5 million. The components of adjusted revenue for the third quarter of 2020 are as follows. We expect adjusted services revenues of $225 million to $235 million. We are forecasting True Health segment revenues of $28.5 to $32.5 million. We are forecasting intercompany eliminations of minus $4 million. And for the fourth quarter, we are forecasting adjusted EBITDA of $10 million to $13 million. With that, I will turn it back over to Seth. -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, John. I'd like to close by quickly reiterating the 3 main takeaways from our recent Investor Day. First, we have confidence in our organic growth strategy and our mid-teens growth target. Signing Florida Blue Medicare and opening up the Blue Cross segment is an important step, and the outlook for New Century Health is strong. Our other 2 solutions are also making important contributions, highlighted by our expansion at Somos as well as the 2 new physician group partners announced in the quarter. Second, the business is scaling. The cost initiative has been a success, and we see a clear path to mid-teens adjusted EBITDA over time, starting with margin expansion in 2021. And finally, we are efficiently deploying capital as evidenced by the focused effort to monetize our health plan assets and use the capital to delever, as communicated at IR day. So in summary, we are executing and you can see that the company is at an inflection point. I'm proud of our talented and committed team, and I'm excited about the bright future we have ahead of us, particularly with the strong momentum that we are seeing headed into 2021. Thanks, everyone, for participating in tonight's call. And with that, we'll end our formal remarks, and we're happy to take questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Ryan Daniels with William Blair. -------------------------------------------------------------------------------- Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [2] -------------------------------------------------------------------------------- I want to hit a little bit more on the Blues win that you announced tonight. Obviously, there's a significant market potential there more broadly. And I'm curious how you think about targeting that opportunity kind of across the country if this is something where an initial Blues relationship can be leveraged. or if you'll need some time to kind of ramp this up and get case studies with the Blues that they can share with other plans. And then any particular sales force investments you might make to target that big opportunity? -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Ryan. I'm happy to take that one. Look, the Blues segment is one where, I think, having a proof case with the Blue is helpful. And so I think just the fact that we have had this relationship in place with Florida Blue Medicare will be certainly helpful. I'd say second, though, that for some time now, we've been developing those relationships. And probably the most important thing is, frankly, being able to show and prove that the outcomes are robust from other partners around the country. And we have a lot of that data now and feel very good about being able to share that data. And so I think the combination of those 2 things gives us pretty much everything we need with our existing sales force and an approach. Certainly, there are some things that we're doing incrementally that are what I would think of as blocking-and-tackling sales and marketing activities to get those executives together, share the quality and value stories that we are seeing. But in general, I think we have everything we need to kind of pursue that segment aggressively at this point. -------------------------------------------------------------------------------- Ryan Scott Daniels, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [4] -------------------------------------------------------------------------------- That's helpful color. And then pipeline commentary sounds good as it's been most of the year. I'm curious if you could dive into a little bit more detail in regards to the 3 offerings and kind of which of those, in your view, is seeing the most momentum or has the most potential for either net new client growth or for same client growth as we head into 2021. -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [5] -------------------------------------------------------------------------------- Sure. Yes, happy to, Ryan. I think there's a macro comment on the market that really affects all 3 of the solutions, Ryan, that I'll start with, which is that our mission is really around improving cost and quality. There's these $1 trillion of waste, and that's an evergreen opportunity. I think COVID is creating additional pressure on the buyers of health care: states, federal government, employers. And so I'd just say, in general, that pressure is something that creates while COVID is a very difficult situation for vulnerable patients and for the patients that we're taking care of, it does create a tailwind for our pipeline overall. And then with respect to the differentiation, I would say that there's differentiation for each. For New Century Health, I think there's a lot there that really hinges upon proven results. And oncology and cardiology, we have fabulous data that says that we can help patients receive better care at a lower cost in a way that is clinically differentiated, and that comes from the clinical IP, the technology and the way we deploy the services. So that's New Century. It's pretty evergreen. A lot of opportunity there. Second, on Evolent Health Services, I would say, again, the pressure in the pipe from the market is a part of it. But I think the other part of it is we now I think increasingly also have good evidence, Ryan, that if you're particularly a regional plan or a provider looking to take and manage value, we have a lot of proof cases across Somos. So what we're doing with Maryland Physicians Care that we're an ideal partner for organizations that have that profile and that makeup. There's a pretty big market there for that segment. And then with Evolent Care Partners, Ryan, I'd say the differentiation is -- comes from our technology, from our clinical approach and from our service model. But I'd say that the one piece to add would be that the value-based care landscape, while we don't need any new programs, we don't need any policy changes, I think just what's there in front of us, particularly with COVID, there's a lot of providers that are thinking, "Gosh, this model is important. I'm interested in value," and that's created, I think, an uptick, what we're seeing in the pipeline there. I think a Biden administration, there could be some accelerators even beyond what we have in our outlook but that would be kind of upside to how we're thinking about things. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from Robert Jones with Goldman Sachs. -------------------------------------------------------------------------------- Robert Patrick Jones, Goldman Sachs Group, Inc., Research Division - VP [7] -------------------------------------------------------------------------------- Great. I guess maybe just to go back to the Florida Blue win, I think you mentioned 125,000 lives, and you also said the plan, I think, in totality is like 5 million lives. So just curious about the opportunity as far as go forward and thinking about a ramp into a bigger portion of that population? And then just relatedly, based on the math you shared, Seth, it seems like the PMPM there would be quite a bit higher than average, if I'm thinking about it correctly. Just curious if, a, if that's right; and, b, what might be driving the better PMPM dynamics around that customer? -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [8] -------------------------------------------------------------------------------- Yes, why don't I -- I'll take the first part of that, and I'll pass it to John for the second part. So just in terms of Florida Blue, it's 125,000 lives. It's Medicare. It's oncology. And that will ramp across the first part of the year. And as I mentioned in the prepared remarks, it will be $75 million annualized run rate or more by the second half of the year. Obviously, that's just the Medicare lives and it's just oncology. So I think the opportunity is to go to additional lives. Whether it's commercial or other populations is there and certainly the opportunity for cardiology across all. I think speaking for the New Century Health team, we are really impressed with the Florida Blue Medicare team and Florida Blue generally. It's a fabulous plan, very innovative and our first job -- most important job is to deliver and execute. And so we're very focused there. I'll pass it to John for your other question. -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [9] -------------------------------------------------------------------------------- Bob, you're right on the math. The PMPM is a little higher, and that's largely driven by the aggregate scope that is in this initial contract with Florida Blue Medicare. Just a little bit more [expensive] than some of the other New Century arrangements. -------------------------------------------------------------------------------- Robert Patrick Jones, Goldman Sachs Group, Inc., Research Division - VP [10] -------------------------------------------------------------------------------- Okay. No, that's helpful. And I guess, just, John, maybe one more quick one just on the guidance. It seems like there's obviously momentum in the business. And if I just look at the implied 4Q guide on both revs and EBITDA, it seems like it's calling for a sequential downtick from what you posted this quarter. Just curious if there's any timing dynamics, anything around churn, just what might help bridge that gap from what you posted in 3Q to what you're pointing to for 4Q. -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [11] -------------------------------------------------------------------------------- Yes, yes. Good question. It's all about timing of some onetime revenues. I think I might have mentioned this in the August call. We had some visibility into onetime revenue that we expected to hit in either 3Q or 4Q and it did hit in 3Q. That's why you see the slightly higher revenue here. Nothing else really going on between third and fourth quarters. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from Matthew Gillmor with Baird. -------------------------------------------------------------------------------- Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [13] -------------------------------------------------------------------------------- Just a couple of clarifications. I think on some of the 2021 commentary, I believe you said that you continue to expect revenue in excess of $900 million, but the Florida Blue and maybe some of the other pipeline activity enhances your visibility around that. Is that how we should be thinking about sort of the 2021 view at this point? -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [14] -------------------------------------------------------------------------------- You got it, Matt. This is John. Obviously, it's still too early to guide. But as we've gone across the year, I think the continued strong performance on the growth front has given us incremental confidence in starting to exceed that $900 million number. -------------------------------------------------------------------------------- Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [15] -------------------------------------------------------------------------------- Okay. And then I think there was a mention of another $25 million to -- or $20 million to $25 million of expense savings. Was that sort of incremental to what you've discussed previously? And can you remind us where those savings are generally bucketed? -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [16] -------------------------------------------------------------------------------- Yes. Not incremental. We talked about that a little bit at the end of September at the IR Day. And it's principally related to getting the cost structure in the right place after the exit of Passport. And so most of those costs are related to the areas that were serving that business. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Our next question comes from Sean Wieland with Piper Sandler. -------------------------------------------------------------------------------- Jessica Elizabeth Tassan, Piper Sandler & Co., Research Division - Research Analyst [18] -------------------------------------------------------------------------------- It's Jess on for Sean. I think we were just curious if you could talk a little bit about the dynamics behind lives on platform year-to-date, just the sequential dip from Q4 to Q1 than the growth Q2 to Q3, if -- whether that's all just Medicaid reverification suspension and if the Passport lives are still on platform and to what extent. -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [19] -------------------------------------------------------------------------------- Yes. Jess, the lives on platform across the year have performed pretty close to our expectations that we set out at the beginning of the year, which is hitting sort of a low point in Q2 and then ramping across the back half of the year here. Biggest difference between Q2 and Q3 here, it was actually driven by new go-lives, in particular the Neighborhood Health plan going live up in New England. There was a modest amount, a couple of points -- percentage points of increase, driven by the Medicaid reverification item that I mentioned. But the bulk of the change was driven by new go-lives. -------------------------------------------------------------------------------- Jessica Elizabeth Tassan, Piper Sandler & Co., Research Division - Research Analyst [20] -------------------------------------------------------------------------------- Got it. And then just a quick follow-up on the Centene lives on platform. Did those come out of the lives on platform number versus Q2 or Q1 just in light of the fact that they're now on NCH light product? -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [21] -------------------------------------------------------------------------------- Yes. The -- you are right there. We do not include the lives from the Centene relationship in our reported lives number because of -- they are in this light model. So no change there. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Next question comes from Charles Rhyee with Cowen. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [23] -------------------------------------------------------------------------------- Seth, I just wanted to ask you, I think you guys might have talked a little bit about it at Analyst Day, which is direct contracting. And just curious, I think it's supposed to start sometime next year, was it April? And curious as to sort of the appetite within your current customer base in entering that program. And do you expect that to be something that your clients are going to be participating in next year? -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [24] -------------------------------------------------------------------------------- Sure, Charles. Happy to take that one. So the direct contracting program is not something that currently is in the outlook we have. It's a program we think is interesting. It's early for the program, still in the CMMI phase within CMS. Our experience here over the last 8 years is that the programs mature over the first year or 2. I do think it potentially is quite interesting for us over the next few years. Our focus right now is delivering on what we have with the current Evolent Care Partners Network. But over time, I think it could be quite interesting particularly as we see it mature a little bit. I think it is -- Charles, it's an example. There are other examples like it of what I would call policy accelerators that none of which are in any of these outlooks that we've shared and the medium-term metrics and there are others like it. And I think they're interesting and it indicates kind of where CMS is going. So we'll keep a close eye on that one in other programs. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [25] -------------------------------------------------------------------------------- So is it something that you'd want to see how the first year or so kind of works out in the experience you watched from a distance before maybe developing a program around it for your clients? Is that the right way to think of it? -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [26] -------------------------------------------------------------------------------- Yes. That's the right way to think about it. And just a little more detail on it is that the programs always have a set of rules that are attached to them. And those rules tend to come out in draft form and they get comments and then they harden over the first year or 2, and they become more evergreen. And that's sort of what we're watching right now. But I do think it could be quite interesting as those get firmed up. -------------------------------------------------------------------------------- Charles Rhyee, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27] -------------------------------------------------------------------------------- Great. And just a follow-up. I don't know if you guys mentioned it, but did you guys give the lives on a True Health for the quarter? -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [28] -------------------------------------------------------------------------------- It's about 24,000, Charles. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes from Sandy Draper with Truist. -------------------------------------------------------------------------------- Alexander Yearley Draper, Truist Securities, Inc., Research Division - MD of Equity Research [30] -------------------------------------------------------------------------------- Maybe first, just start on just making sure I've got the dynamics right with the Passport sale. So the deal is closed, but not -- so the balance sheet, everything there is still reflective of Passport. So when I'm thinking about the statutory capital, will that stay on your balance sheet? And I'm just trying to think of the dynamics of how that actually works with it gone, recouping it? Could you keep all of that? I'm just trying to understand that. And then the second part following is maybe just help me think through the step down in terms of revenue. I think you've said before, John, don't expect a cliff where on January 1, all Passport revenue goes away. There's maybe a wind down. So we may have a bigger impact in the second quarter. Could you just help me go through those 2 issues around Passport? -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [31] -------------------------------------------------------------------------------- Yes. Happy to, Sandy. So first, on the balance sheet. Look, the way to think about it is to focus on the statutory capital number that I mentioned, which is a little over $140 million on 9/30. As you think about capital return to Evolent, that's sort of the starting point. And then we have an opportunity, as we've talked about, to earn an additional amount from Molina based on membership retention into next year. The mechanics of that capital return will be subject to regulatory approval and just moving the cash from the regulated entity into the parent entity, at which point we could proceed with our plan to use that cash to pay down the debt. That's the balance sheet there. And I apologize, Sandy, I forgot your second question. Could you ask? -------------------------------------------------------------------------------- Alexander Yearley Draper, Truist Securities, Inc., Research Division - MD of Equity Research [32] -------------------------------------------------------------------------------- About the revenue, just about -- did it -- all Passport doesn't go away on January 1. So how do we think about it winding down through the first half of the year? -------------------------------------------------------------------------------- John Paul Johnson, Evolent Health, Inc. - CFO [33] -------------------------------------------------------------------------------- Yes. Good. So net change in Passport revenue '20 into '21 is probably around $230 million, ballpark. And a little more than half of that will turn off immediately on January 1. There will be, as usual, a bit of a stub in the first quarter that's sort of a fraction of a normal quarter. And then it will be -- it will real trail out after that. So that's the way to think about it and model it. -------------------------------------------------------------------------------- Alexander Yearley Draper, Truist Securities, Inc., Research Division - MD of Equity Research [34] -------------------------------------------------------------------------------- Okay. Great. That's helpful. If I can maybe squeeze one more and for -- probably for Seth, on the Blue Cross Blue Shield deal. When you guys are going after someone new in talking to -- I don't know if you were only talking to the Medicare portion. But is this a situation where their Medicare plan is really having issues with oncology costs and so they want to talk to you specific about that. And so that's why they're not going to sign up for cardiology, you're not going broader. Or I'm just trying to think of the sales dynamics of is it really you find a pain point of the customer, where it's really struggling with cardiology. It's oncology, something else, and then you can grow from there? Or how does it typically work? And maybe if you can give you specific anecdotes with this deal because it's obviously very large. -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [35] -------------------------------------------------------------------------------- Yes. Look, I think in general -- answer it generally first, which is if you go around to the managed care organizations, you think about -- let's take Medicare as an example. Cardiology and oncology are 25% of their total premium. And they're 2 of the specialties that have higher trends, right? And it's not anything specific to any one payer and oncology as an example. It's heavily influenced by what's coming out of the FDA and the fabulous treatments that are becoming available to patients, but it creates an incredibly tough dynamic for any plan to kind of get it right with respect to how do I make sure that every patient gets the very best treatment possible, the right treatment, but we also manage costs because when we spend too much on a therapeutic that is not providing value or is actually hurting the patient, those are dollars that are coming away from the ability to coordinate care, manage care, help other vulnerable patients, right? So I think this is an issue with just about every health plan in the country. So I don't -- Florida Blue but I could go to any other organization. And cardiology is a little bit different, but there's similar dynamics there. And so I think as to whether why cardiology, why oncology, it might just depend on where they're seeing trend in a particular year or where they feel like they have a particular pain point. But I think what interesting about New Century is the degree to which it's 25% of premium. So these are big numbers. And anything that we and they can do together to make care better for the patient while reducing cost, that's helping them live their mission, right? They are trying to take every dollar they can to coordinate care for vulnerable patients. And so I think we just find, in general, Sandy, that there's a lot of opportunity with this area. And again, it might be a particular person has a pain point around oncology one year and cardiology, the next. I think the key for Evolent and new century is that whatever we do, we do an excellent job and we deliver. And that's -- most of the work we've done has come out of what I call word-of-mouth or understanding of, "Gosh, this went really well over here. Let's do more over there." And so that's where the big opportunity comes from, and there's not particular nuances at this market. That market is pretty broad-based in the opportunity here. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Seth Blackley for any closing remarks. -------------------------------------------------------------------------------- Seth Barrie Blackley, Evolent Health, Inc. - Co-Founder, CEO & Director [37] -------------------------------------------------------------------------------- Thanks, everybody, for the time tonight. Stay safe, and we look forward to connecting over the days and weeks ahead. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.