Good evening and welcome to Evolent Health's Earnings Conference for the Second quarter ended June 30th, 2022. Your hosts for the call today from Evolent Health are Seth Blackley, Chief Executive Officer, and John Johnson, Chief Financial Officer. All participants will be listen-only mode. [Operator Instructions] Please note this event is being recorded. This call will be archived and available beginning later this evening via the webcast on the company's Investor Relations website, which can be found at ir.evolenthealth.com. I would now like to turn the conference over to Seth Frank, Evolent's Vice President of Investor Relations. Please go ahead.

Thank you and good evening. This conference call will contain forward-looking statements under the US 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 its 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 IR section of the company's website, ir.evolenthealth.com, and the Form 8-K filed by the company with the SEC this afternoon. During management's presentation and discussion, we will reference certain non-GAAP and GAAP figures and metrics that can be found in our earnings release, as well as a summary presentation available on the Events section of IR website, at ir.evolenthealth.com. And now, I'll turn the call over to Evolent's CEO, Seth Blackley.

Good evening. Thank you for joining the call. I'll begin by summarizing our second quarter results and as always, provide my perspective on the status and progress of Evolent's three core operating priorities. John will discuss the numbers in more detail and share our updated guidance. And as always, we'll then take your questions at the end. First, I'm happy to report that Evolent continues to meet or exceed all of our key financial targets and operating priorities and we are well set up for the remainder of 2022 and beyond. With respect to the second quarter, I'm pleased with our results relative to the outlook we provided on the May call. For the quarter ended June 30, 2022, Evolent Health total revenue was $319.9 million, growth of 44% over the second quarter of 2021. Adjusted EBITDA totaled $21.7 million for the quarter, 63% growth and an 800 basis point increase compared to one year ago. Revenue was particularly strong relative to our outlook, and adjusted EBITDA was towards the high end of our expectations for the quarter. As we communicated at the beginning of the year, we expect our quarterly adjusted EBITDA will vary across the year based on timing of performance-based revenue with the second and fourth quarters a bit lower than the first and third quarters, and this quarter is in line with that expectation. We ended the second quarter with 21.9 million lives on all platforms compared to $12.2 million a year ago, a growth of 80%, driven primarily by New Century Health, across both technology and services and our Performance suite solutions. By segment, as of June 30, 2022, we had 2.1 million lives managed in Evolent Health Services and 19.8 million lives in our Clinical Solutions segment, the latter being inclusive of New Century…

Thanks, Seth. We are pleased with another strong quarter of execution across our enterprise. Growth is ramping across all areas of the business and continues to be particularly strong within our Clinical Solutions segment. During the quarter, we saw accelerated new partner go-lives at New Century Health, which combined with membership growth in Evolent Care Partners to drive enterprise revenue above the high-end of our guidance range. Adjusted EBITDA in the quarter was likewise strong near the high-end of our guidance range, driven in part by timing of performance-based revenue in EHS. Let me talk a little about our operating priority of margin expansion and how it is manifesting in our Q2 results. There are three key drivers of our margin expansion opportunity, cost structure improvements, operating leverage and performance suite margin maturation. We continue to make progress on our cost structure priority, which is most focused in our Evolent Health Services segment. For example, we now have over 1,200 employed Evolenteers in our office in Pune, India and later this year, are launching a new office in the Philippines to support our global operations. This initiative will further improve service delivery for our partners as they grow with us and ensure EHS continues to scale in a cost-effective manner. Regarding operating leverage, I'm pleased that our six-month corporate expenses are 5% lower than the same period last year despite revenue growth of over 40%. Finally, margin in our Clinical segment is impacted by the rapid pace of newly added performance suite contracts. As we have previously discussed, profits from these contracts grow over time with limited EBITDA flow-through in the first year, ramping to target profitability over 36 months on average. This curve is a direct outgrowth of our provider-oriented model. Instead of mandating specific clinical pathways or regimens,…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ryan Daniels of William Blair. Please go ahead.

Yes, thank you for taking the questions, and congrats on the continued momentum. John, let me start with one for you. I think I know the answer to this, but core sales look to be up about $100 million, but EBITDA relatively flat. Is that just what you mentioned due to the timing of startups and ramp to margins in the performance suite as much as anything?

You got it right, Ryan. That's exactly it. The real bulk of that growth coming from the performance suite comes with that margin curve that we've talked about and that margin maturing over time. The timing of the performance-based revenue, as I mentioned in the prepared remarks, also impacted in the quarter, everyone recalls that we had -- we expected a Q1 and Q3 high points in our Clinical segment for performance-based revenue. And that's playing out as we expected it to.

Okay. Perfect. And then I know the deal just closed, but it was announced at the end of June. So I'm curious if you've received any feedback from your customers on IPG. I think one of the thoughts on a go-forward basis is MSK is a big category on the commercial front and also there's a desire to have a turnkey solution versus working with multiple vendors. So have you actually started the integration and started to hear anything from your sales teams on interest within the current client base?

Hey, Ryan, it's Seth. I can take that one. Obviously, we just closed yesterday, so we're just getting started. But we did already get several impound outreaches from the client base, and I do feel like there's going to be a significant opportunity in terms of the cross-sell path for IPG. I think the bigger picture here is this $4 billion client expansion opportunity that we've been pointing to just to get to 25% penetration of New Century. That number will now be bigger as we add IPG. And I think what's even more interesting to us is this notion that a lot of our clients have told us they prefer to have fewer partners in the specialty space and the ability to aggregate several different value-based specialty platforms into an integrated platform is core to our strategy going forward, and I think a lot of traction from the payer and risk-bearing provider community to have that kind of platform pulled together for them. So it's been really positive just on an inbound basis. Obviously, now that we're closed, we can begin to work that actively. And it always takes a little bit of time like it has with centric to vital. But as we head into 2023, I think we're going to be in a really good spot to add this in. And again, it's is a bigger strategy here, which we've been talking about, which is leadership around value-based specialty care. And this asset, I think, takes us an important step, Ryan, in that direction. So we're quite excited about it.

Okay. Perfect. And then I'll end with a follow-up there. In regards to that $4 billion by penetrating a quarter of your five largest clients, I know you've laid out, you can move into new markets or states, you can add on new disease states, if you will, like what you did with Molina and then convert lives. Is there any one of those three that you're seeing more momentum on or dedicating more resources or hearing more in the marketplace? And if so, how are you tapping into that? Obviously, great growth already, but how do you ensure that continues from an investment standpoint with the sales teams? Thanks.

Yes. Yes, great questions. I mean, all three are very large in terms of opportunities, Ryan, and they present in different ways or different partners. I think it is mathematically the geographic expansion is probably the biggest right now, biggest opportunity. And what we like about that, Ryan, is that it is, as is the case with these Molina agreements that we announced today, it really does act like a normal sales cycle, where you have to build trust and relationships, improve value to the next constituent, which happens to be in a lot of cases of regional or state-based leader within one of these larger plans. And so it allows us to scale up as we build confidence with that partner. – But it also is sticky and that it builds a whole new set of relationships. I'd say that's probably the first place we started. And again, these Molina relationships today that we're announcing in three new states or have some consistency with that. There's also an element in those Molina relationships of adding a specialty where we were doing one specialty and wanted to add the other. And so that's kind of a secondary component. So that's how I think about it, Ryan.

Great. Thank you so much

Sure.

The next question comes from Sean Dodge of RBC Capital Markets. Please go ahead.

Yeah. Thanks, and good afternoon and congratulations on the great quarter. On the Molina expansion, the oncology Performance Suite launch, Seth, I think you said that, this would double the size of the relationship with Molina. But I think before you guys scoped them is contributing $75 million for this year. Is that the number we should think about doubling, or am I misinterpreting that? And then you also said initially, oncology would roll it out to three states, I think you said by the end of this year. Is that just for this year – or is there the expectation or plan that you'd roll out to additional face in 2023?

Yes. Yeah, good question, Sean. So it's just to kind of hit on a couple of different aspects to that question. I think 75, doubling 75 is the right general metric that we'd be thinking about. It's about 700,000 lives that we're adding with these three agreements. We didn't disclose the specific states just for kind of competitive reasons on behalf of our partner, Molina. But it's significant and then I think that the right way to think about it is that we're getting started here. And as with all these large partners that we have, there should be additional opportunity over time.

Okay. Great. And then maybe just more of a general update around the pipeline. You've announced 10 new operating partnerships so for this year that's well beyond your target of 6% to 8% for the full year. I guess, as we think about the next couple of quarters, did everything just kind of fall into place in the first half of the year? Is that a pace you think you can sustain?

Yeah. I think, as I mentioned in the script, we're at 10%, that's great. We're halfway through the year, and that is a good leading indicator that we're off to a great start. – each of these things are different in kind and increasingly, you got to look at what product is it, how many lives is it, et cetera. And importantly, we're adding a lot of business around the performance suite. And so we're very well set up for 2023 is what you should take away from all this. And as we've talked about a lot, revenue growth rate percentage or margin percentage is less what we're focused on as a company than actual EBITDA dollars to gross EBITDA dollars. And so that's sort of for John's comments, as we had more and more performance suite that has a margin maturation curve. And that's core to how we think about it, and we're very, very laser focused on just gross to EBITDA dollars is our – the way we're managing the company. And expanding that EBITDA dollar mix. And that really is, I think, the most important management indicator. But you're right on the number of clients or even the revenue growth percentages those things are obviously in a very strong spot right now.

Okay. That's very helpful. Thank you again.

Welcome.

The next question comes from Anne Samuel of JPMorgan. Please go ahead.

Hi. Thanks. You've explained earlier that the new performance-based revenue started at a lower margin, and maybe that's why you didn't see as much EBITDA upside as revenue. But I was wondering, how should we think about how that revenue is going to impact margins over time as those partnerships mature?

Hey, Anne. The margin profile that we've laid out for that style of arrangements at maturity is in the mid-teens. And so the real question is how much, what is the mix of new business that's at a much lower initial margin, that's in our numbers now. And as I mentioned in the prepared remarks, we had a lot of that this quarter, we have $60 million of new Performance Suite business in the numbers, which has that lower margin. Over time, as we continue to scale, that should be a less -- smaller and smaller percentage of our overall mix. And you'll see our overall margin expand. But it will be impacted by the pace of that growth. And as Seth mentioned, we're principally focused on driving sustainable EBITDA growth.

Very helpful. Thanks. And then just a housekeeping one. As the model IPG, is there any seasonality to that business, or can we assume a similar cadence for all four quarters of the year?

I would assume similar cadence for now, Anne. And as we get more experience with it under our belt and have a good sense of its growth trajectory over the next few quarters, we'll give some additional guidance on that.

Great. Thank you.

Yes.

The next question comes from Sandy Draper of Guggenheim. Please go ahead.

Thanks so much, and good afternoon. I'll add my congrats on the very strong results. And actually, Anne, just took one of my questions about the margins that I think about the new business coming in. So thanks for that both to you guys. But I guess maybe one question on the Evolent Health Services, the lives were basically flat. Revenue is down. I'm assuming just -- I want to make sure I'm correct. Was that all just performance revenue in the first quarter? Just trying to think about this decline in PMPM and revenue there, but with the live staying the same?

Hey, Sandy, you have it right. Just to speak for a minute on this performance-based revenue topic. We sort of have two flavors, so you can think of it in two flavors. There are some arrangements where we share some of that revenue with other parties. For example, what you saw in EHS in the first quarter where we booked the revenue, we also booked an offsetting expense. We did the same thing in the clinical segment as an example, with Evolent Care Partners, Shared Savings in the Pathways to Success program, some of which we share with our physician partners. The second flavor of performance-based revenue is effectively 100% margin, we get to keep all of it. And that's what we had a little bit of this quarter in Evolent Health Services, which drove the strong EBITDA performance sequentially there.

Got it. That's really helpful. And then -- the second question is on the balance sheet side. Can you remind me, I guess, a couple of things on the debt, what the interest rate we should be thinking about in terms of the debt? And then are there any restrictions on paying that down? And what's the philosophy on using free cash flow? You're not particularly levered, but is it get the debt down to zero as quickly as possible where finally fits, we'll pay it down a little bit. Just any commentary on the interest rate expense, but then also just on how you're thinking about your debt level going forward?

Yes. Good question. So the new senior credit facility is at a blended rate of S+ 500, approximately. We'll file the credit agreement together with our Q perhaps you can pour over help you fall sleep, if that's helpful. In terms of repayment -- as I think we mentioned in the call announcing the IPG transaction, we have the ability to pay down one-third of that facility with no penalties whatsoever. And we would plan to do that as cash is generated. The remainder of the facility has, sort of, typical 103, 102, 101 in call protection on it. Overall, on the philosophy point to your question there, I think, what we will seek to do is focus on our strategic priorities really growing this business and keeping a very disciplined balance sheet approach. So we like this net leverage where we are now after the converts are in the money here. And keeping in this zone of what I think I said on the prepared remarks is getting under two. It feels about right to us. So that's how we'll think about it going forward.

Great. Very helpful, John. Appreciate it.

The next question comes from David Larsen of BTIG. Please go ahead.

Hi. Congratulations on a very good quarter. Can you talk a bit about Evolent Care Partners and the primary care business -- like if you can, like maybe how much revenue is coming from there, or just sort of size it in some way, it seems to me with CMS' proposed rule this could be a very high-growth area. Just anything around like the lives, the potential growth, portion of the overall business that's coming from Evolent Care Partners? Thanks.

Yes. So – hi, David, Seth. We haven't broken out ECP from New Century is part of the clinical segment. We had talked about our various relationships, the number of lives that we have and things like that over time. And I think that's a helpful metric when you think about the life count and in and around 100,000 lives compared to some of these other publicly traded platforms that have a couple of hundred thousand lives or $100,000 in that same zone. So we think it's a pretty significant material platform given the number of lives that we're covering, David. And then I think the next quarter question is, okay, what are those lives. And interestingly, they're all really truly full risk lives, some through the ACO program through pathways, some through the capitation arrangement we have with the Blue Cross plan. And I think you're going to see growth in both of those categories going forward, David. So more ACO lives, of course, as you think about 30 million of those lives out there as a target opportunity in the years ahead. Big opportunity for us to continue to grow that side of it. And then, of course, often in those same states where we have physicians that are participating in ACO, let's go to the Blue Plan? Let's go to the other large national plans to establish really more like capitation style arrangements that are consistent with what you see some of the other risk-based primary care group is doing. So we think -- we've talked about this a lot. We think it's a really nice hidden gem within the broader Evolent platform. It leverages the same technology, the same competencies, et cetera, that help drive the success of New Century Health and it's really just approaching it towards a slightly different population, which is the primary care population, but it's very similar to what we do across the rest of the business. So, excellent platform. I think you're right, a lot of growth potential.

Okay. That's very helpful. Thanks very much. Any sense for what the PMPM rate is for Evolent Care Partners. Is it in line with the rest of the book? And then just one quick one for IPG, it's my understanding that you don't really get involved in like the clinical decisions as to whether or not to actually get like hip or knee surgeries. But could that change over time where you bear risk for IPG and you implement preferred networks kind of similar to the oncology business? Thanks.

Yes. Well, John can take the first question on PMPM and rates and I'll take IPG.

Right. Hey David. The two numbers that we've put out there, just to give a sense of the ECP population rates for shared savings with the Pathways to Success program last year, the total revenue booked for the first performance year translated to about $22 PMPM. In the capitation-like agreements in Blue Cross, I believe we put a number out there of around $600 PNPM. Seth can take the IPG questions.

Yes. On IPG, David, the answer is yes. We do a little bit of that today in terms of selection of devices and therefore, kind of, physician decision-making. Clearly, there's an opportunity to expand what we do, which would head a little further towards what we already do in New Century with oncology and cardiology around the broader, what I would call, pathway design and therefore, what's the full physician decision-making path. And so that's clearly one of the things that is an opportunity in terms of future product for IPG

Great. Thanks very much. Congrats again.

Yes, you're welcome. Thanks David.

The next question comes from Jessica Tassan of Piper Sandler. Please go ahead.

Hi, thanks so much for taking my questions. So, I was maybe just hoping to follow-up on the Evolent Health Services question. I think by our estimate, there was about $8 million of EBITDA upside in the quarter. So, just curious to know is that related to 2021 performance in MSSP, or is that MSSP reconciliation still kind of yet to come in the third quarter? And then maybe just if you could talk about how to think about Evolent Health Services margins in the back half of the year, that would be helpful.

Hey Jess, so the sequential change in EBITDA in EHS was related to the performance-based revenue that we talked about. And I would say that's both 2021 and a little bit of early 2022 data coming through, for instance, from our partners in those arrangements. That was the principal driver there. On overall margins, I think if you look at the trailing 12 months and to average out some of the quarter-to-quarter noise in AHS. That's a pretty good proxy for the run rate of that business right now, of course, growing as we bring right on in full at the beginning of next year.

Got it. That's really helpful. Thanks. And then just you mentioned that medical utilization in the NCH performance suite, both is kind of tracking inline with your expectations. Can you just maybe go into what your current thoughts are in terms of deferred care coming back online potentially in 2022 or 2023? And I think that's it for me.

Yes, great question. So, the -- similar to a number of other commentators on the subject. We've seen screening this for cancer and things like that authorization levels, going to normalize as we've gotten through the pandemic here in to whatever this new normal is, we do anticipate and anticipate in our guidance a bit of deferred care coming back in the back half of this year and it's incorporated into our guidance not a giant number, but we have an expectation for that. And I do think we think that this years’ time.

[Operator Instructions] And our next question comes from Richard Close of Canaccord Genuity. Please go ahead.

Great. Thanks. Seth, I was wondering if you could elaborate on the timing and the number of lives of the Blue partnership for Evolent Health Services. I maybe didn't catch that?

Yes, Richard, it's about 250,000 lives – it's a lot like our tech services suite, so low PMPM technology-oriented relationship, won't have a huge revenue impact as it goes live, kind of going live this quarter to Q3 that is, but it's not going to have a huge revenue impact, given the PMPM. That said, obviously, just like on the New Century side establishing a relationship with the major Blue plan is important. And as we've shown, there's good opportunities to build that relationship and turn into something even bigger and so that's, I think, probably one of the more exciting parts. Obviously, job one is to do a great job with the piece that we have and as we do that, we've been able to expand these kinds of relationships.

Okay. And then with respect to the oncology partnerships with Molina, I just wanted to clarify, none of those are transitions from the tech suite, are they?

No. No, they’re or not. That's a brand-new relationship and we've only had cardiology historically with Molina and this is our first oncology implementation. Obviously, that's big for lots of reasons. I think, Richard, the biggest thing is that we did a good job at the cardiology side and did what we said we're going to do delivered and have that trust with them, and that gives us the opportunity to talk about oncology. And obviously that's gone well. We're going live there now. The next opportunity with Molina, really any of these opportunities were in a handful of states right now. And obviously, there's a lot more opportunities beyond the couple of states we're in. So, if we keep our head down, we do a good job, we deliver. We have some confidence that we'll be able to continue growing and continue delivering for these sorts of organizations.

Okay. That's helpful. And with respect to the Performance suite, obviously, great on the Molina side of things. How are you thinking about the pipeline of potential other managed care organizations looking at the Performance suite?

Yes, it's a good question. I think the first thing that's obvious is that we've got these very significant relationships with organizations like the ones we've been talking about, some of our larger existing customers that are national plans, Richard, and our penetration rate today with those large plans is actually quite low. And that's where we get that $4 billion opportunity, just getting to 25% penetration. So that's kind of an obvious opportunity that we're going to continue to run at. I think that will play out over the years to come, and it will be hopefully consistent and lots of things like we saw this quarter continuing with different partners in different ways and maybe different solutions, but a lot of it, I think, will be Performance suite oriented. The second piece, obviously, is new logos. And there's a bunch of different blue plans out there that cover roughly 100 million lives. We only have a couple of those today. There are other regional plans. And there's a few national plans, actually, IPG has relationships with that traditional New Century doesn't. And so that's going to be our second big priority is also adding some new logos at the same time we do this – this big expansion opportunity that's right in front of us. And we'll want some balance in there over the course of every couple of years. You want a nice mix of expansion to both prove that we're doing a good job, but it's just the right way to serve a client, but also continue to add new names.

Okay. Thanks. Congratulations.

You're welcome. Thanks, Richard.

The next question comes from Charles Rhyee of Cowen. Please go ahead.

Yes. Thanks. Thanks for taking the questions here. Maybe just wanted to maybe follow up and just think bigger picture, Seth. I think to an earlier question, looking at the sales pipeline, I think now it's in the last few years where you've either come in at the top end or exceeded the number of new partnerships signed. How are you thinking about what the right number is that investors should be thinking about as we look forward? Obviously, you're a much bigger company now? And then maybe a little bit more diving into it is, with the resources it takes internally to work on expanding relationships with some of your big existing customers? And how does that differ from the resources that you have invested in sales in bizdev for finding new logos? Thanks.

Yes. Happy to take it, Charles. So obviously, we've gotten that question a lot about mid-teens growth target, where we've been at 40% CAGR for the last 12 quarters. I think we get that question a lot. We like having a target that we can meet or exceed consistently, and we're going to keep it that way that we can continue to feel good about our ability to deliver as we have done. So I think that's just the philosophy we have of being a little bit conservative. I think we're obviously well set up for 2023 as well with the new logos. So that's just a philosophy, but I think we'll continue to see good growth. Obviously, as I've mentioned earlier, I think a lot of it really is about focusing on the EBITDA dollar and that's how we run the company. And sometimes you may grow a lot on a percentage basis and the mix is more performance suite it takes a little time to ramp. You might also have a different margin percentage, but at the end of the day, we're sort of orienting Charles back to kind of that EBITDA dollars piece. So that's how we think about it. And we're really happy with the results we've had on the growth side. It's, I think, validating with respect to the value proposition of the product and the big opportunity that's out there. So not a great answer other than we want to keep beating the numbers, and we feel good about the future. On the expansion point resources required, et cetera, in a good way, I think, a good way, it takes a fair bit of work to expand with any given payer even if you already have a relationship in three or four or five states, you got to go do the work to convince the next stage. Now you have a little bit of a halo and you've got the kind of sister company feeling within the company to support and credibility. So it's probably a little easier than the net new, but it does take work. And I think it takes work going in. It also, I think, insulates us if there's ever a change in leadership at the corporate level, the states really often the regions are actually really where the power resides. And so it really does act in feel and look like separate incremental clients for us which is -- which we think is a feature -- a positive feature of how these national plans work. Hopefully, that answers the question.

Yeah. That's helpful. And I understand where you're coming from. And obviously, a lot of success so far. Maybe just to follow-up on -- similar to Anne's question about the Evolent Health Services EBITDA margins. On the Clinical Solutions side, I think the previous question, right, it's kind of relatively flat as you're kind of ramping up. How should we think about the progression for the rest of the year? Should it be sort of -- is there any kind of step-up that we should see in the third quarter, or should we kind of ramp it up more linearly as we exit the year?

Hey, Charles. The quarterly dynamics for the next two quarters, I would expect, as we've been saying Q3 to have some meaningful performance-based revenue that's recognized in the quarter. So we'll likely see a step up there and then Q4, likely a little less performance-based revenue. I think the dynamics within a time span of a couple of quarters are going to be driven by timing of that data and subsequent revenue recognition. And the maturation of the new business typically is measured over a slightly longer time period. So you're going to start to see that materialize a year from now and into 2024 and so on.

Got it. And I just have one follow-up. And I apologize if someone asked this before. The live on the platform on New Century Tech and Services, I think we are all modeling a shift of lives from Tech and Services performance set for the Molina lives, but obviously, we've seen a step up in both. Can you remind us what the difference here is that, that was additive to both? Was there any specific ramp-up separate from what you might have called out previously?

Yeah. Yeah. So under the headline number in the details, we did have that shift of the Molina lives in the Tech and Services bucket into the performance suite bucket. We also saw some nice growth in the quarter from some existing clients expanding our business with them in the Tech and Services suite.

Okay. Great. Thanks a lot guys. Congrats.

Thank you.

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

All right. Thanks for joining us this evening and I look forward to seeing you all soon on video or out on the road.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.