Good day and welcome to Evolent Health's earnings conference call for the quarter ending September 30, 2016. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will an opportunity to ask questions. [Operator Instructions]. As a reminder, this conference is being recorded. Your host for today's call is Mr. Frank Williams, Chief Executive Officer of Evolent Health. This call will be archived and available beginning later this evening for the next 90 days 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 reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current periodic filings. For additional information on the company's results and outlook, please refer to its third quarter news release. As a reminder, the financial statements of Evolent Health Inc. for the nine months ended September 30, 2015 do not reflect a complete view of the operational results for that period due to the reorganization completed in connection with our initial public offering in June 2015. Prior to the reorganization, Evolent Health Inc. had no operations. In order to provide consistent and comparable metrics for the periods before and after June 4, 2015, the adjusted results of Evolent Health Inc. presented and discussed in our press release and on this call, reflect the reorganization as if it had occurred on January 1, 2015. The adjusted results include the operation of Evolent Health LLC for the period from January 1, 2015 through June 3, 2015 as well as for the period from June 4, 2015 through September 30, 2015 when the results were consolidated and also include certain other adjustments. Reconciliations of adjusted results to GAAP results are available in the press release and the 8-K we filed earlier today. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.

Thank you and good evening. I am Frank Williams, Chief Executive Officer of Evolent Health and I am joined by Nicky McGrane, our Chief Financial Officer. I will open the call today with a summary of our financial performance for the quarter and our overall perspective on our pipeline and view of the market. I will then hand it over to Nicky to take us through a detailed review of our third quarter results before closing with an update on the overall market environment and our organization. As always, we will be happy to take questions after our prepared remarks. From a financial perspective, our total adjusted revenue for the quarter ended September 30, 2016, increased 39.1% to $60.2 million compared to adjusted revenue of $43.3 million for the quarter ended September 30, 2015. Adjusted EBITDA for the quarter ended September 30, 2016 was negative $3.1 million, compared to adjusted EBITDA of negative $0.67 million for the quarter ended September 30, 2015. We now have approximately 1.5 million total lives on the platform as of September 30, 2016, up 104.3% year-over-year, prior to our close of the Valence transaction. We are pleased with our results for the quarter having exceeded our commitment for revenue and EBITDA as well as our expectations for lives on the platform. Moreover, for several quarters running, we have seen consistent increases in covered lives across our current clients demonstrating the significant organic growth opportunity in front of us as well as driving increased scale towards our objective of moving past breakeven by December 2017. In terms of the overall market environment, we continue to see high levels of interest in value-based care across all market segments including governmental payers in Medicare and Medicaid as well as employers looking for solutions to stem rising premium costs,…

Thanks Frank and good evening everyone. Today, I will cover our financial results for the third quarter and our outlook for the remainder of 2016. We maintained our first half momentum with strong results in the third quarter and continue to leverage the investments we have made to capitalizing the long-term opportunities we see ahead. Overall, our third quarter adjusted results exceeded our expectations. Adjusted revenue increased 39.1% to $60.2 million, up from $43.3 million in the same period of the prior year. Adjusted EBITDA for the quarter was negative $3.1 million, up from negative $6.7 million in the prior year. Adjusted loss available for Class A and Class B common shareholders was negative $6.6 million or negative $0.11 per share for the quarter, compared to negative $9.6 million negative $0.16 per share in the same period of the prior year. The reconciliations of our GAAP results to adjusted results are available in the press release and the 8-K we filed earlier today. As a reminder, we derive our revenue from two sources, transformation and platform and operations services. Adjusted transformation revenue accounted for $7.8 million or 12.9% of our total adjusted revenue for the third quarter, representing an increase of $0.2 million or 2.5% compared to the same quarter last year. As we have noted in the past, transformation revenue can fluctuate from quarter-to-quarter based in the timing of when contracts are executed with new and existing partners, the scope of delivery and the timing of work being performed. Adjusted platform and operations revenue accounted for $52.5 million or 87.1% of our total adjusted revenue for the third quarter, representing an increase of $16.7 million or 46.9% compared to the same quarter last year. The increase was driven primarily by a 104.3% increase in the number of lives on…

Thanks Nicky. I want to close with a few updates on the market and our overall organization and then I will be happy to take questions. Some of you are probably aware that we host a semiannual partner summit to take a real pulse of the market and deepen our relationships. We just held our fall event at the end of October and had more than 150 healthcare executives from across the country in attendance to share insights about their transition to value-based care. At Evolent, one of our core values that we talk about internally is to start by listing and the summit event provides an opportunity to do exactly that. It's a chance for us to hear from not only our existing partners, but also those in early-stage engagements, prospective health system partners and others from across the industry who have lessons learned to share about running value-based businesses on the frontlines. What's also notable is the presence of participants across every major sector of the healthcare landscape from large established health systems to physician organizations, governmental representatives and national payers. The biggest take away from the event was the universal acceptance that providers need to move aggressively to value-based care given the overall cost pressures in the marketplace. Our health policy panel which was composed of Democrats and Republicans alike had similar conclusions given the overall federal budget pressure and the need for immediate relief given the rapidly changing demographics of the population. It was also clear, based on the number CXOs in attendance, that this is the number one strategic priority for organizations considering the threats they are facing from fee-for-service reimbursement cuts as well as competitive activity from other provider groups. We have a number of follow-up conversations occurring as we speak coming out of…

[Operator Instructions]. Our first question comes from Robert Jones from Goldman Sachs. Please go ahead.

Thanks for the questions. I just wanted to start with a big picture question in light of the election results and perceived negative implications on the provider side. Frank, you touched on this a bit in the prepared remarks. But, if we think about the Republican call to repeal the Affordable Care Act, how should we think about the financial health of your clients and more importantly their interests in launching health plans in this environment? And then I guess just specifically around that, how do you think about the repeal or potential repeal of Medicaid expansion and how that might impact demand for providers who are thinking about getting more involved in the Medicaid markets?

Yes. I think those are really good questions, obviously coming off the election results from last night. What I would say is, if you think about the macro picture which is, we have had and this is even pre- Obamacare, we had double-digit premium increases and not an associated increase in either employer growth or federal budget growth to justify the increases. If that were to continue unabated, you would absolutely break the federal budget and many of you have done the analysis and it would also put incredible pressure on the competitiveness of employers. So we of a massive healthcare cost problem. I don't think I have heard any policymaker talk about moving back to fee-for-service as a solution. It simply would not address the cost problem in any way whatsoever. So what we really have then is a desire, I would say, on the side of Republicans and if you look at Paul Ryan's plan and a lot of interest in Medicare Advantage, as an example or you look on the Democrat side, I believe that ultimately we have to have payment reform. We have to have accountability in terms of how we are paying for healthcare. We need more predictability. So the idea of prebudgeted healthcare or whether it's through delegated capitation arrangements, whether it's through full health plan launches, all of those things in our mind will still need to be a big part of any policy prescription going forward and frankly that's been confirmed in our discussion with Republican policymakers. On the provider side, in some ways we have been talking about these pressures on providers for some time that there would be increasing pressure on fee-for-service. If you think of some of the areas that might be reformed from a repeal perspective, it might…

I think that all makes a lot of sense. And just if I could ask one specific follow-up around the Banner Health announcement. Could you maybe just share a little bit more about the scope of that contract? Is that more of a software product relationship versus a health plan risk based contracting relationship? And then just how should we think about the potential, from a pricing of lives perspective, around the contribution from a win like Banner?

Yes. I mean Banner represents a significant revenue opportunity for us on an annual basis. So several million dollars. Banner, as I mentioned, is one of the premium institutions in the United States in terms of the reputation for quality, in terms of how they have pursued population health in value-based arrangements .They have got 4,000 providers in their network. They have expanded more broadly across the state. Initially, we are starting out really focused on clinical quality and risk adjustment. So we will focus on that service provision. We will obviously be leveraging the technology platform. It's also an interesting area where we have been able to collaborate with the advisory board, which is exciting and I think has future potential. But out of the gates, we believe we can add tens of millions of dollars of value to our initial work and the hope is over time that as they take on more value-based lives, that they have needs in other segments that we will continue to expand. But the right out of the gates, it will be a substantial revenue contributor in 2017.

Got it. I appreciate the comments.

Thanks.

Our next question comes from Ryan Daniels from William Blair. Please go ahead.

Yes. Good evening guys. Thanks for taking the questions. Let me start with a follow-up regarding Banner and Hills, both. I think both of them have pretty successful and long-standing value-based operations in their markets. So I am curious, if you can into a little bit more detail on what specifically drove them to Evolent? If they certain gaps in their initiatives or certain products that you are offering that they just did not have or didn't do as well? Any color there would be helpful.

Yes. A great question, I would say, for both organizations, there is a similar theme, which is even though they have been in the value business for a while, they have taken on pretty significant complexity and if you look at their plans in 2017 and beyond, they are taking on additional complexities. So if you think about all the operations they need to manage across the nuances of the Medicare population across compliance, across integrating the physicians, across performing on a variety of value-based contracts, on doing it in a more automated and scalable way, so many times you start out and some things you are able to do a little bit more with pen and paper and then you ultimately need scalability, you need deeper clinical content. So I would say in both, we are focused on specific areas where they felt like partnering with Evolent would help them perform in some areas where they have significant risk and where we could significantly improve financial performance. And we think you that theme is going to repeat across the country as organizations again need to get to scale, are launching fairly complex operations from a standing start and surely can't be experts in Medicare, in serving innovative employers, in engaging with physicians and deploying clinical programs that are consistent with all those populations. And so in both cases, I think they look to what we had and you are right, they kick the tires pretty heavily and concluded that they would be much better and that we could potentially improve performance, again in a very collaborative way because they are their excellent organizations, but improved performance in 2017 and beyond.

Okay. And then it seems like, well let's take Banner for example, you mentioned risk adjustments. I assume a lot of that business might be Medicare Advantage, but they also have a lot of commercial shared savings models and other models that would probably take them and Hills combined well above the 50,000 lives you mentioned. So I am curious if there is a certain trigger point in the future or in the blueprint you develop to take their existing at-risk lives and shift more and more that over time? Or is that something you just can earn with operational excellence in those pieces that you do do upfront?

Yes. We have obviously looked at their value-based business in total. As you suggest, there is a ton of opportunity there, based on what both organizations are doing. I think where you ended is the right place to answer the question, which is we have defined a pretty robust initial relationship. That's our focus. We plan to deliver strong results there. And I think if we do, we will see other opportunities along the way and those could pop up in 2017, just depending on where we are and it could be in 2018 and beyond.

Okay. That's helpful. And then o one final one ad I will hop off. This one's for Nicky. In looking at Valence and Aldera, you mentioned the co-op revenue that will impact Q4, but probably won't continue in 2017. So two questions there. Can you talk about number one, how sizable a contribution that is to the Q4 revenue? And then number two, is that kind of a one in 2017, it disappears or gradual wind down through the year? Thanks.

No problem. It's a relatively small number. You are talking in the plus or minus $1 million, Ryan in the fourth quarter. And with respect to the second part of when it rolls up, I would say the majority of it will roll off year-end, some of it might trickle over into the New Year. But it's just a tail on claims and so it's a little bit hard to predict. But it will not be meaningful in any shape or form next year.

Okay. Thanks and congrats on all the momentum.

Thanks.

Thanks.

The next question comes from Stephanie Davis from JPMorgan. Please go ahead.

Hi guys. Congrats on the quarter.

Thank you.

Just a follow-up on, just on the election results. To the extent that folks become more worried about the health provider spend and wallet share, do you have any products that they would favor or maybe favor less as a good more targeted spend?

I missed what you said, as they favored what? I missed what you said?

Just asking if there are any certain offerings you have that maybe you can see an uptick from some of this versus maybe any offerings you could see as maybe would be a turn away from it?

Sure. What I would -- yes, very helpful, thanks. What I would say is, again if I look at all of our discussions with Republican policymakers as well as looking at Paul Ryan's plan and everything we can read into those discussions and then where we see the overall federal budget, as an example, you might see more of a movement to Medicare Advantage. A feeling that why not, let's us not let 1,000 flowers bloom across 20 different payment models. Let's move towards something that is full premium in its orientation and the great news is, again the platform is very well aligned in terms of its breadth and depth to help providers move towards Medicare Advantage. That could be in delegated capital arrangement with existing payers. It can also be through a launch of their own health plans. It's possible you might see some of the early track programs that were light in shared savings, things like that might not continue. Our belief is the more mature advance payment models where more is at risk would likely continue. And again, we are very well-suited to help providers perform under those arrangements, given the sophistication of our technology, infrastructure and clinical programs. Otherwise, again, if you look at employers which we have talked about where if you talk to anyone on the payer side, they will talk about increasing pressure around premium increases, wanting to move to lower cost alternatives which include high-performance in their own networks, which include potentially different ways of putting dollars in the hands of consumers where they essentially have to vote with their feet and make more value oriented choices. Everything that we are doing is well positioned for that and supporting that in our providers' business plans and where they are headed from a value perspective. So as I said, I think we might see some trades out and some trades in to different areas, but the financial pressure is still there. I think some of the ongoing current hospital specific pressure, if anything, will push those organizations to realize they can't stand pat in fee-for-service and they have really got to explore more aggressive alternatives from a payment perspective, which we are very well suited to help them in that journey.

Thank you. And just one quick follow-up on that one. I know this is probably a who knows kind of answer, but any idea on how this impacts timeline?

In terms of how it impacts timeline?

Yes.

Look, I would say, the budget pressure is what is. Most of the plans for providers and payers have been set for 2017, in some cases into 2018 and beyond. So I would say, it's not going to impact the current environment, surely our revenue environment in the near-term. And then, some of the stuff takes time, as you know. When does the new administration get started? How do they work through some of the changes? When do those actually take effect? And again, what we have heard on both sides is, if you want to have a more balanced budget and you want increased expenses in other areas and you see increasing healthcare expenses that you are going to aggressively and really the only solution is some form of prebudgeted payment models, ones that are putting performance at risk and again all of those impacting the provider organizations that we serve. So possible, an increase in what I would say is an increase potentially given some of the financial pressure. But either way, we are happy if the environment stays at its current level and we are fine as the things phase in. I think will be well-positioned.

All right. Thank you so much.

Thanks.

Our next question comes from Jamie Stockton from Wells Fargo. Please go ahead.

Hi. Good evening. Thanks for taking my questions. I guess maybe just a housekeeping one. I can't remember who it was, you Frank or Nicky, but on Banner and Hills, you drew out a 50,000 lives number. Was that for both of them combined or each?

That's for both of them combined out of the gates. So that's what we would expect. I think that's a reasonable number to use just looking at 2017 based on the visibility that we have.

Okay. That's great. And then on Adera, can you just walk us through what the thought process was there? Is it as simple as, hey, we plan to use this Valence platform materially more than they have in the past and therefore we don't want to pay an escalating cost for the TPA software, so we just decided to bring it in-house?

Yes. I would say, there is two reasons. One, from a financial perspective, we would have had an ongoing license payment that would have gone out across several years. This was an opportunity to essentially take that away and bring the organization in-house. So it had a clear financial benefit. It also, you could argue, was a defensive move in the sense that it was just a pretty core operating system for Valence and so we wanted to make sure that we ultimately had control over the asset. And then lastly, when you think about a vision of really integrating the TPA platform with the Identifi platform, being able to have clinical and financial information seamlessly flow so you can look at and understand benefit design and claims payment, at the same time you are delivering service, a much more consumer-oriented offering long-term, we felt it would really help from a long-term differentiation perspective and is exactly where we went ahead in terms of offering a unique provider oriented product in the market. So I think for all three reasons, the nice thing is financially alone, it made sense. But if you also look at the strategic benefits, it then made it a very easy decision and again it's a relatively small transaction.

Sure. And then just Nicky, on the revenue. It sounds like that it's going to kick in $1 million for the last two months of the fourth quarter, then that's $6 million a year. Maybe there's some purchase accounting adjustments in there. Can you just give us some clarity around what that looks like?

That's pretty accurate representation, Jamie. It's relatively small, the third party revenue obviously that they generate. So yes, I think that's a pretty accurate representation. We are working through the purchase price accounting and the valuation work right now. So we will see where that shakes out. But I think from a dollars and cents point of view, that's about the scope of it.

Okay. Thank you.

Our next question comes from Charles Rhyee from Cowen. Please go ahead.

Yes. Hi. Thanks guys and congrats on the quarter. I had a question going back to Banner real quick. If I recall, they are on a Cerner environment. I think they are pretty much moving all on to Cerner. And if I remember correctly, they were using Healthe Intent. And so, just curious as to see how are they using the Identifi platform? Is that in combination with Healthe Intent? Or would you replacing Healthe Intent there?

It's in combination with Healthe Intent. Again, I think we wanted to make it clear that we are not in the business of trying to replace existing systems if that decision has been made. Usually what we find is organizations that are looking for higher performance in an area like risk adjustment who want more sophisticated integration of clinical content and decision making, who want robust clinical programs that really are specific to patient populations and can be embedded in work flow that there is ways for us to supplement their existing investment. And as you can imagine, if you have already made the investment, you want to see a very clear value proposition as to how we are going to add value. And as Banner went through that process and a fairly long diligence process, in some areas that made a significant difference to them economically in 2017 and beyond, they felt like our solution, which isn't just technology but is also bringing expertise and depth and again increased automation in certain areas that are really important on a day-to-day basis that it made sense to go with them wanted to leverage some of the power of the Identifi platform. So that's where we are today. And as I mentioned, as we rollup our sleeves and begin working with them and hopefully are generating positive results, we may see other opportunities to support what they are doing. But initially our focus is on driving results around the initial engagement.

Great. As a follow-up, Frank, I know a couple of people are just asking about the impact of the elections and what might happen to ACA, but isn't it fair to also think that the pressures to providers in particular now that some of the benefits that they were getting from ACA could go way .They are going to be under even greater pressure and would need to really do more to figure out how to either supplement what they are doing and find ways to be more efficient and generate better outcomes in a higher pressure environment?

Yes. I would agree wholeheartedly. The reality is and we focused from the very beginning, it is financial pressure increased on providers. The realization that continuing to stand pat and solely rely on fee-for-service reimbursement to fuel growth to fund their missions would be untenable. I think any accelerations to those pressures will force organization strategically facing the financial pressure to say we have to do things differently. Would we rather be on the receiving end of declining fee-for-service rates and try to cut cost to be the low-cost leader or what would be better looking for arrangements where we can actually access a much higher proportion of the premium dollar and then manage the episode of care with our integrated assets and physician organizations, which way would you rather go? And almost all the leading providers we have talked to understand the fact that they are going to be much better off in a full premium world than they would be trying to make hay out of profitability with dramatic fee-for-service cuts, which will be what the solution would be. So yes, I would agree that I think it will help us as we head into 2017. We are already seeing, I would say, really strong demand across this year. It you saw the content of the discussions at the summit, it was very different than even a year ago in terms of providers' realization of the impending economics. We had a open discussion about the election possibilities with people realizing that either way that it went, these pressures were continuing and organizations needed to act now if they were going to be in a strong position going forward. So in general, I would agree with your statement.

Great. Thanks a lot and congrats again.

Thanks.

Thanks Charles.

[Operator Instructions]. Next question comes from Richard Close from Canaccord Genuity. Please go ahead.

Great. Thank you. Congratulations on the third quarter. Just to hit this again in terms of maybe the pipeline and I guess the timeline question before and I appreciate the comments on the summit and the conversations there in terms of the election and it didn't necessarily matter which way it went. But as we saw with the stimulus when it was passed in 2008 and electronic health records incentives, there was this big pus, but there was still a lot of uncertainty there. So as you look at your pipeline today, do you think there is any risk to it in terms of people taking a step back here over the next several months to see how the dust settles and maybe the timeline in terms of signing new customers potentially gets delayed a little?

Well, if you think about the sources of growth that I outlined, first of all, our current partner base is quite committed to the strategy. They have used it as a way to potentially grow market share. They are starting to see the business cases work. Many of them have committed to full risk. And so I think you will see a continuation there given the platforms that they have built and the opportunity in front of them. So one, I don't think we will see any change there. I think if you look across our pipeline, remember we are looking with the addition of Valence for somewhere between five and seven organizations to come on across a given year. That's not a huge number. If you look at the pipeline, we have a very large number of organizations and if you dive into a line-by-line and we actually done those, what you will see is yes, there might be some organizations in that pipeline that were committed to a specific governmental program, it could be impacted and you might see some delay around that specific program. But looking at the overall pipeline, the competitive situations in those local markets, pressures they are facing both from payers and computing providers and what they have committed to from a strategic perspective in terms of what they need to do, I don't think you will see any change in those areas at all and there is more than enough of those to fuel the growth that we need running into 2017 and 2018. I don't have visibility beyond 2018 at this point, but I would say we feel really comfortable given where we stand and given the breadth and depth in the pipeline. And again, if you think about adding 400,000 MDwise lives that launch in 2017, you think about expanding the Passport relationship, you think about being five partners, we are very well set up for 2017 and even if you imagine, there was a several month delay in the early part of the year, which again I don't see happening, but if you think it will, we are still well positioned for 2017 and obviously the cost pressures will continue as people are trying to set up 2018. But right now again we feel pretty good about where we are.

Okay. Thanks for that. And then with respect to, you talked about new services and you mentioned, I believe, a couple pharmacy benefit, I think was won earlier. Can you talk a little bit about any additional new services or where you see the most opportunity from new services going forward here?

A couple of areas I highlighted, one was pharmacy benefit management and having a more provider oriented transparent solution. For those of you that are covering healthcare, this is an increasing area of cost. There is a lot of pressure on specialty pharmacy. It's critical in managing risk and health plans to have innovative solutions. So I think that's an area where we are seeing a tremendous amount of interest. The risk adjustment area in general, that's both clinical quality oriented one, are we getting the diagnosis right, are we getting the coding right, are we ultimately reimbursing for that correctly? That's a very important area. And if you look at managing, particularly Medicare risk arrangements or Medicaid, that's an important component. And again, a lot of complexity there, hard to do it in an automated way. Most organizations struggle to pull in clinical data. So they are tending to do more manual processes and there we see very strong growth. And then the last area I would say is for organizations that are trying to manage the needs of unique populations. That could be duals. It could be populations in Medicare. It could be certain aspects of Medicaid. They really need clinical program depth. They need to be able to identify patients really. So you need very sophisticated stratification because you have limited places that you can invest resources. You need to have the right intervention, the right workflow, the right culture built throughout the organization. So I would say, in any area where someone has a pair delegated risk arrangements around a discrete populations, whether it's from a national payer or the government, those are all areas where we believe we will see a lot of demand going into 2017.

And my final question for Nicky would be, in the business outlook you guys talked about, $2 million in expenses associated with new clients. I assume some of that's MDWise as you begin to prepare for that ramp. Is there any additional startup expenses that maybe we should think about at the beginning of the year from new clients?

I mean generally speaking, traditionally their model has been that you get clients ready but we don't begin to recognize any revenue until the actual long-term contract begins. So their business is more 01/01/17 start than ours. Ours is going to happen over the course of business. Theirs tends to be more of a 01/01/17 start. So I think we will have this from time-to-time as we go forward. We called it out because in the specific quarter here, it's meaningful. We will make that determination going forward but it makes sense to call it out. But it's just the nature of their businesses. It's how they have operated historically and it's more typical in that segment.

Okay. Thank you.

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

Great. Well, we appreciate everyone participating in the call and imagine we will see many of you at some of the up-and-coming healthcare conferences and out on the road and we look forward to continuing the discussion. Thanks for participating.

Ladies and gentlemen, thank you for attending today's presentation. The conference is now concluded. You may now disconnect your lines.