Evolent Health, Inc. (NYSE:EVH) Q2 2023 Earnings Call Transcript

Evolent Health, Inc. (NYSE:EVH) Q2 2023 Earnings Call Transcript August 2, 2023

Evolent Health, Inc. misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.09.

Operator: Welcome to the Evolent Earnings Conference Call for the Quarter Ending June 30, 2023. As a reminder, this conference call is being recorded. Your host for the call today from Evolent are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. 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. I will now hand the call to Seth Frank, Evolent’s Vice President of Investor Relations. Please go ahead.

Seth Frank: Thank you, and good evening. This conference call will contain forward-looking statements under the U.S. federal 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 our current and periodic filings. For additional information on the company’s results and outlook, please refer to our second quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today’s call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company’s press release issued today and posted on the Investor Relations section of the company’s website ir.evolenthealth.com and Form 8-K filed by the company with the SEC earlier today.

During management’s presentation and discussion will reference certain GAAP and non-GAAP figures and metrics that can be found in our earnings release as well as a summary presentation available on the Events section of Evolent’s IR website, ir.evolenthealth.com. And now with that, I’ll turn the call over to Evolent’s CEO, Seth Blackley.

Seth Blackley: Good evening, and thanks for joining us. We’re pleased to be here to discuss another strong quarter of execution against our plan. As context for today’s call, I want to reiterate three key elements of that plan. First, organic growth driven by a conviction that our integrated value-based specialty management approach is a winning strategy for both attracting new clients and expanding with existing clients. Second, our ability to drive earnings expansion given the operating leverage and margin maturation inherent in our business. And third, our commitment to cash generation and thoughtful balance sheet management, including delevering. I think you’ll see our results this quarter affirm all three elements of this plan, and then we’ve taken another step towards our target of $300 million of adjusted EBITDA exiting next year with continued sales momentum thereafter.

Turning to the quarter. Second quarter revenue was at the high end of our outlook for the quarter, while adjusted EBITDA came in right above the midpoint. Specifically, strong revenue growth was driven by substantial organic membership growth both quarter-over-quarter and year-over-year. Our profit growth year-on-year was driven by the high flow-through margins from incremental technology and services, fee-based business, continued maturation of our Performance Suite portfolio, acquired revenue from NIA plus initial benefits from our integration work. Given the results for the quarter and our visibility for the remainder of 2023, we are raising the midpoint of our 2023 adjusted EBITDA outlook. For revenue, we are maintaining our 2023 outlook based on the timing of several significant client go-lives across quarters three and four.

John will provide more detail as well as the third quarter outlook shortly. As part of the guide for the remainder of the year, we anticipate continued growth from the Humana Performance Suite announced this past January. That contract went live in Arizona in July, and we plan to go live in Florida later this year. Our other existing and new contracts are also performing at or above expectations, contributing to high confidence in the remainder of 2023. Looking briefly at the numbers, Evolent’s second quarter 2023 revenue was $469.1 million, growth of 46.6% over the same period of 2022. Sequentially, revenue grew approximately 10% compared to the first quarter of 2023. We focus on Evolent’s specialty revenues representing 83% of this quarter’s total revenue.

Total reported growth was 72% with acquisitions contributing 39.8 points of year-on-year growth. So before the impact of acquisitions, Evolent’s core specialty base grew over 32% year-over-year. Second quarter adjusted EBITDA totaled $47.4 million, more than doubling compared to the second quarter of last year. The growth in adjusted EBITDA year-over-year was driven both by expansion in the base business as well as the addition of the NIA and IPG acquisitions. Now let’s turn to Evolent’s three core operating priorities of strong organic growth, expanding margins and optimal capital allocation. Starting with organic growth, we had a robust quarter of four new agreements, consisting of two new operating partners against our target of six to eight per year as well as two new cross-sell expansions.

Starting with the two new operating partnerships, we are first pleased to announce that we will expand to both Cardiology and Oncology Performance Suite for Molina’s Medicaid and exchange members in Florida. This agreement marks an important milestone for Evolent as our first Medicaid Performance Suite agreement in Florida on the heels of years of success in the MA market. Continue to be pleased with our Molina relationship as we have been able to expand our footprint to multiple Molina states and specialties in rapid succession, including Florida, the relationship will cover seven states and approximately 2.4 million product numbers, representing approximately 8% of the total addressable product members at Molina, leaving the opportunity for further strong expansion ahead.

It’s also important to note that this Molina expansion to Florida allows Evolent to continue to establish critical mass in Florida for the Performance Suite. Molina and their market leadership understand the fact that providers in the market are confident in Evolent and our ability to collaborate both with the health plan and most importantly, with providers in the market. Evolent’s strong performance in Florida makes it increasingly attractive for payers to contract with Evolent because of our existing scale and track record of the market. As more payers work with Evolent, our services providers become more of a standard of care and therefore, easier for providers to use. As provider population in any given market become increasingly familiar with Evolent and more proficient in our clinical pathways, this network effect can help facilitate additional growth and share opportunities over time.

We anticipate the new Molina agreement will go live in the first quarter of 2024, and we anticipate approximately 100,000 unique members at typical Medicaid Performance Suite PMPMs. The second operating agreement in the quarter is a new logo and first-time corporate level relationship with a regional not-for-profit health plan with over a million members. As part of the agreement, Evolent will be replacing several legacy specialty vendors, helping create a more integrated environment for the health plan. This new agreement will be going live in the third quarter. Beyond the two new operating agreements, we’re excited to announce two significant cross sales. The first is with a Blue Cross Blue Shield plan in the Southeast. This agreement renews an NIA contract expands into a new line of business and simultaneously adds an Evolent specialty technology and services solutions.

This agreement is a proof case of one of the strategic elements of the recent acquisitions, whereby health plans using either an acquired product or an Evolent product to adopt some or all of the products to the other. As we believe will often be the case, the broader and more integrated product platform was a key buying criterion for this particular Blue Cross Blue Shield plan. Finally, we’re announcing the second cross-sell arrangement today whereby Centene will deploy Evolent’s surgery management offering, formerly known as IPG for certain of their commercial members. As with the Blue Cross Blue Shield announcement above, we’re seeing good evidence to our integrated product platform and cross-sell approaches are working. This agreement with Centene is over and above the $20 million of incremental adjusted EBITDA we anticipate from Centene’s expansion of NIA solutions which was built into our fully synergized estimate of $85 million of EBITDA from NIA by the end of 2024.

Across all four of the agreements announced today, we see our thesis playing out that large payers are looking for innovative value-based specialty solutions that can better integrate care for patients across multiple specialties. Our strategy of expanding and deepening Evolent’s capabilities into the largest, most complex and challenging medical specialties is resonating and providing a basis for conversations about how we can improve costs and quality for the leading risk-bearing plans and physician groups in the country. These agreements announced today bring our total new operating partnership count to six compared to our annual goal of six to eight new operating agreements. Finally, while new logos like the regional plan we announced today, always remain a target opportunity.

Our primary focus, as we’ve indicated at the time of the NIA acquisition and reiterated at Investor Day are the large opportunities cross-selling into our existing health plan footprint. It’s worth noting that the top 20 plans in the country insure four out of five Americans and Evolent now does business with approximately 13 of those 20 plans, and we have a direct cross-sell TAM of over $50 million right in front of us. Regarding our new business pipeline, we’re seeing some evidence of clients moving faster on accelerating sales processes to manage their MLRs or to consolidate vendors because they see the value of working with us across more domains. Further, our recent acquisitions are absolutely helping elevate our profile nationally and contributing to an accelerating pipeline.

In addition, we’re starting to see a lot more RFP activity from multispecialty solutions consistent with our thesis around our recent acquisitions. Let’s turn to our second quarter operating priority of expanding adjusted EBITDA. Adjusted EBITDA for the second quarter more than doubled year-over-year to $47.4 million. Adjusted EBITDA margin for the quarter totaled 10.1%, growing from 6.8% one year ago. While acquisitions contributed a portion of the year-over-year growth in adjusted EBITDA, we’re also benefiting from a healthy mix of higher pull-through of specialty technology and services as well as maturation of the performance we book. I would note, we spent time at the Investor Day focused on Performance Suite margin ramp, and that margin maturation is continuing to perform as expected.

Looking forward, we’re focused on reaching $300 million of adjusted EBITDA run rate exiting 2024, while continuing to quickly grow market share and revenues thereafter. As you can see from our quarterly results and the mix of agreements I discussed, we feel confident that we’re on plan to achieve the $300 million of adjusted EBITDA. And our pipeline depth gives us confidence in continued strong sales momentum. Obviously, it’s important that we continue to manage costs, utilization and acuity in the populations where we have Performance Suite contracts. We’re aware of conflicting reports of evidence of increased utilization and demand for services, higher health care costs post-COVID and reports of pent-up elective outpatient surgeries, particularly in Medicare.

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For our part, 2023 is running as expected in terms of overall utilization trends on the heels of preventative screenings returning to normal over 18 months ago. You can see that utilization remains consistent with our expectations based on our results and the guide for the remainder of 2023. In addition to the strong Q2 results and the Q3 guide, let me provide you a couple of 2023 year-to-date leading indicator data points to support our confidence in our results across the quarters ahead. First, our own oncology data for the combination of prevalence of disease and authorizations per member is generally flat in the first half of 2023 versus the first half of 2022 on a mix-adjusted per member basis. Within cardiology, while we’ve seen some expected increase in both disease prevalence and authorizations, the absolute growth numbers are relatively small and the overall combination of prevalence per member and authorizations per member also remain below 2019 levels on a mix-adjusted per member basis.

Overall, across both cardiology and oncology, where we hold direct underwriting risk, our utilization trends remain at or better than expectations. We believe that our utilization experience may be more favorable than other plans because of our robust clinical management of the conditions we manage and we likely also benefit from a diversified mix across commercial, Medicare and Medicaid populations. We will of course continue to monitor utilization closely. Our third operating priority is optimal capital allocation. John will walk you through our cash flow dynamics for the quarter. I do want to reiterate our relentless focus on translating profitable growth into cash flow. As adjusted EBITDA grows and we delever, you can expect us to focus on capital allocation on our three capital allocation priorities of one, investing in the business to further accelerate our leadership and value-based specialty care, two, discipline and strategic M&A, which as you can see in the results is starting to pay off and third, maintaining a discipline and efficient capital structure.

As of Q2, we lowered our adjusted net leverage ratio to 3.3x on a trailing 12 month basis compared to 3.9x on March 31, and we reiterated at Investor Day our goal being below 2x net leverage by the end of 2024. Let’s close to the macro view on where Evolent stands at midyear on the integration front and the demand profile for our markets. Regarding integration, innovation and product roadmap, we shared a significant amount of new information during Investor Day. Since then, we officially rolled out our One Evolent approach and our new integrated logo to our clients. The fact is we’re bringing to market what our clients want, which is an integrated platform to help improve outcomes for people with the most complex and costly health conditions.

The initial feedback from our clients is extremely positive and they’re pleased with the pace of our integration efforts, while we continue to provide strong day-to-day operational performance. Our clients also continue to tell us that they’re impressed with our focus on product innovation. As an example, we recently signed a new agreement to pilot an oncology navigation program with the Blue Cross Blue Shield plan. The navigation program will enable us to provide member engagement earlier in the patient journey and to promote shared decision making that will help the patients and their families better navigate the healthcare system. As part of the program, we will enhance our Advanced Care planning capabilities, which we acquired through vital decisions and make them available to plan members in order to empower them as early as possible in their cancer journey.

In this pilot program, we will identify members where there is a suspicion of early cancer or a very recent diagnosis, and an subset of members provide proactive outreach by a licensed therapist to support members with care coordination, navigation to clinical and nonclinical resources, education for patients on their diagnosis and treatment options, as well as aligning treatment with their goals of care and assisting them with meeting their preferences for Advanced Care. All of this will occur in a tightly coordinated and collaborative manner between the payer, primary care providers and oncologists to ensure a seamless experience and coordination with other care programs. In addition to this navigation product, we continue to drive rapid innovation in several other strategic areas like artificial intelligence.

Across our entire product innovation roadmap, we remain focused on market leadership and value-based specialty care with an eye towards a long-term plan of capturing larger and larger share in our $150 billion addressable market. With that, I’ll hand it over to John.

John Johnson: Thanks, Seth. As you see in our release this afternoon, our operating focus and discipline continue to translate into financial results that are at or better than our targets. Let me go through those targets now before turning to the detailed numbers. First, we said we’d drive significant organic growth. As Seth highlighted earlier, specialty revenue for the quarter is up approximately 32% year-on-year, excluding acquisitions. We’re excited about this growth engine. Second, we identified cross-selling new solutions into existing customers as one of our primary objectives to drive growth. We’re excited to announce some early returns on this strategy and the partnership expansions that Seth outlined, and we continue to be enthusiastic about the integrated specialty model we are taking to market.

Third, we expect earnings expansion on our current book of capitation business as we implement our value-based initiatives with new populations. We continue to see steady improvements in Performance Suite populations that went live in 2021 and 2022. Our second quarter revenue number includes more than $200 million in annualized Performance Suite revenue that has been under management for less than a year. These new populations contribute minimally to our second quarter earnings, but represent more than $25 million in annual earnings opportunity at maturity. Fourth, we are focused on turning EBITDA into cash. During the second quarter, we added $5 million to our available cash balance, which was impacted by collection timing. The net of increases in our AR and claims reserve consumed about $34 million of cash during the quarter.

In fact, we received over $40 million in catchup payments from customers during July. Excluding these working capital fluctuations, we would’ve added $39 million of available cash in the quarter. Note that consistent with our plan, we are investing incremental resources this year in integrating and repositioning our business to best capitalize on the value-based specialty opportunity. Without these targeted and non-recurring investments, cash generation in the quarter would’ve been even higher. Now, let’s go through the numbers in more detail. Revenue in the quarter was $469.1 million, an increase of 46.6% versus the same period in the prior year. In total, we had an estimated 41.8 million unique members during the second quarter of 2023 with a total of 78.6 million product members for an average of 1.9 products per unique member an increase compared to the first quarter of this year.

Note that most of the sequential increase in average product members is driven by having NIA in the numbers for a full quarter. Excluding that factor, we added about 1.5 million product members in the quarter. Turning to the breakdown of membership. We averaged 3.8 million product members in the Performance Suite during the second quarter compared to 2.1 million in the second quarter of the prior year, and about 600,000 higher than Q1. Average PMPM fee was $24.20 versus $32.53 a year ago and in line with both our forecast and flat quarter-on-quarter. As a reminder, the year-over-year change in average PMPM is from sales mix, a result of higher growth in Medicaid and commercial lines of business, which run lower than our corporate average. PMPMs will average higher later this year as the Medicare Advantage business from Humana begins to roll through.

Average product membership at our Specialty Technology and Services Suite was 73 million members during the second quarter inclusive of a full quarter of NIA membership compared to 15.1 million in the same period last year. Average PMPM fees were $0.35 in the second quarter versus $0.28 in the second quarter of 2022. Product members and administrative services were 1.8 million compared to 2.1 million in the same period of the prior year with an average PMPM fee of $14.22 versus $14.68 in the second quarter of 2022. Recall, that we will continue to carry the wind down lives from Bright HealthCare totaling roughly 360,000 through the end of this year. Total quarterly cases associated with Advanced Care planning and Surgical Management totaled 15,000 for the second quarter, and average revenue per case totaled approximately $2,500 for the second quarter, both in line with seasonal expectations.

Note that these numbers reflect build cases only and do not include cases for our Performance Suite populations. As a reminder, our strategic priority for these services is deployments as part of our Performance Suite. Our adjusted EBITDA result was $47.4 million versus $21.7 million in the second quarter of 2022, reflecting organic growth, maturation of our Performance Suite contracts and the additions of IPG and NIA. Adjusted EBITDA margin of 10.1%, represented expansion of about 330 basis points over the same quarter last year with the same drivers. Recall that our quarter-to-quarter adjusted EBITDA trends this year reflect the pull forward of about $4 million into the first quarter of 2023 from quarters two and three, which we addressed back on the May call.

Turning now to the balance sheet, we finished the quarter with $142.5 million of cash and cash equivalents, including approximately $12 million in cash held in regulated accounts related to the wind down of Passport. Excluding the cash held for Passport, we had $130.6 million of available cash, an increase of $4.7 million versus the end of the first quarter. Cash deployed for capitalized software development in the quarter was $5.7 million. In addition, we recognized a non-cash lease impairments of $24.1 million from closing our Chicago office as we reduce our overhead footprint and drive efficiencies across the business. Finally, in our 8-K this afternoon, we announced an early redemption of our remaining 2024 convertible notes as we continue to execute our de-levering priority.

Turning now to guidance. As Seth mentioned, we’re raising the bottom end of our adjusted EBITDA outlook for the year. Let’s go through a couple of macro factors we consider as we think about this outlook. First, Medicaid redeterminations continue to be a focus of many who watch the space. Our expectations here have not changed that we will see a gross decline in Medicaid membership in the mid-teens, which translates to about a 6% gross decline, meaning before new adds in our overall revenue, given our particular Medicaid mix. As we have previously noted, our Medicaid book is weighted towards states that are moving slower in the redetermination process. For example, more than 50% of our Q2 Medicaid revenue was in states that started the process in July.

While less than 3% of our Q2 Medicaid revenue within Florida and Texas states that are pursuing redeterminations more aggressively. We will continue to monitor these trends closely throughout the fall and into next year. Second, our revenue guidance implies approximately 17% sequential growth in the second half of 2023 when compared to the first half of 2023, despite the expected redetermination impact. This is largely driven by new go lives in the Performance Suite that Seth reviewed. Recall that these will contribute minimally to adjusted EBITDA this year, but start to flow through as they mature into next year and beyond. Turning now to our positive revision to our outlook for the year. With continued strong core business performance, we are raising the bottom end of our full year adjusted EBITDA range to between $185 million and $200 million, and we are maintaining our revenue guidance for the year of $1.935 billion to $1.965 billion.

We expect Q3 total revenue of $500 million to $520 million. We continue to expect Q3 to be sequentially lower in EBITDA given the pull forward I mentioned earlier into Q1 of this year, and we are forecasting consolidated adjusted EBITDA of $42 million to $47 million before stepping back up in Q4 to finish the year strong. We continue to expect the target net leverage ratio under 3x, including outstanding convertible notes by the end of 2023, and we forecast between $35 million and $40 million in annual capitalized software development expenses. With that, let’s go ahead and open it up for Q&A.

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