Welcome to the Evolent Earnings Conference Call for the quarter ended September 30th, 2023. As a reminder, this conference call is being recorded. Your hosts 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.

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 third-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 Form 8-K filed by the company with the SEC earlier today. And with that, I'll turn the call over to Evolent's CEO, Seth Blackley.

Good evening, and thanks for joining us. Tonight, we're announcing another strong quarter of execution against our plan. We exceeded our guidance for profitability, continue to see strong business development and cash flow in the quarter, and are tracking toward our short- and medium-term targets. We believe we have the leading value-based specialty care platform in the market and continue to believe we are set up for continued success. Third-quarter revenue of $511 million represents 44.9% reported growth in the quarter compared to Q3 2022. Our specialty offerings, representing 87% of our total revenue, grew 80% versus the same quarter last year, with the NIA acquisition contributing approximately 24% of that 80% growth. Adjusted EBITDA of $48.7 million exceeded our guidance, driven principally by strength in our maturing performance-based arrangements. Our profitability is also translating to cash flow with cash from operations in the quarter of $60.3 million. We averaged over $78 million product lives during Q3, and we believe that we're still in the early days of capturing the market opportunity ahead of us. This product life count is roughly flat with the second quarter of 2023 as we anticipated due to the offset of new lives added and impact of Medicaid redeterminations. Our shareholder value-creation plan remains the same of, one, strong organic growth; two, expanding profitability; and three, disciplined capital allocation. Let's review progress on each element of the plan before discussing the macro environment. First, our growth algorithm is simple and powerful: find new customers, expand the number of products those customers use, and convert customers from our technology and services product to our performance suite. Today, we announced three new operating partnerships, bringing our total for the year to nine, ahead of our annual target of six to eight. First, we are announcing today that…

Thanks, Seth. Since our last call in August, we've had a calendar full of investor outreach, and it's been great to see many of you on the road and virtually. Before going through the numbers and our outlook, I'll hit on a couple of key themes from those conversations with the benefit of an additional quarter's worth of data. First, the impact of Medicaid redeterminations on our top and bottom lines has been a frequent question from investors. I'll start by reiterating that our exposure here is limited by the fact that 62% of our revenue comes from Medicare and commercial lines of business and only 38% from Medicaid. Our forecasts have called for a decline in our Medicaid membership of between 8% to 10% by the end of this year with an expected mid-teens gross decline when the process is complete sometime next year. So, if our redetermination forecasts were to be for 20% instead of the mid-teens, that would represent a variance of only 2% in our year-over-year growth rate. Second, remember that we have regular dialog with our partners regarding the soundness of our capitation rates and have specific contractual provisions that enable us to update our rates as disease prevalence changes. As of September 30th, we estimate that our Medicaid states were approximately 25% of the way through the redetermination process. Recall that most of our Medicaid revenue comes from states pursuing a linear rather than frontloaded process and are generally deploying resources to assist members in retaining coverage. As an example, according to the latest data from the Kaiser Family Foundation, our states reported an average of 7% disenrollment rate versus a 10% rate nationally. Looking at our own numbers, which, recall, typically exclude the pediatric population, our Medicaid membership declined approximately 4% on a…

[Operator Instructions] We will now begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily to assemble the roster. And our first question will come from Ryan Daniels of William Blair. Please go ahead.

Hey, guys, thanks for taking the questions. Seth, maybe one to start with you. Appreciate all the details on the integrated product offering. And you mentioned you're now able to participate in RFPs that maybe previously you could not respond to because you didn't have the breadth of offering you do today. So, the question is, number one, how much has that expanded the potential growth opportunity? And then number two, is that the case anymore, meaning do you need any other ancillary service offerings, or are you pretty comprehensive based on what you're seeing your client needs demand in these RFPs?

Hey, Ryan. Yes, so on the first question, look, I think it has certainly helped with the growth rate, and in particular, if you look at the total addressable market right now that we have the inclusion of these other capabilities, I think it has been part of why we've had a really strong year this year and part of why we're really well set up going into next year. So, I think the answer to the first one is yes. The second one, no, I don't think we need anything else to participate in RFPs. The things that we've acquired have been pretty strategically chosen, right, that fit really well within a pretty focused set of really high-cost important specialties, Ryan. And I don't think there's anything else we need to do to be able to be incredibly relevant for any RFP that comes out. It doesn't mean that we can cover everything in every RFP. I think we are covering enough that we're going to be well-positioned to win any RFP that comes out. And look, I do think the question in the question of are there more things we can do, of course there are. There are other specialties that are interesting. I think given, the growth rates we're seeing with what we have and also the reasonably low penetration of what we have, we're really focused on expanding what we have for right now versus adding new specialties.

Okay, perfect. And then interesting color commentary about some of the pressures facing your end market customers with risk adjustments, higher interest rates. we're seeing higher utilization in MLRs and some of the Medicare Advantage plans, in particular, and I think that is stimulating demand for your services. I'm curious how much of that has kind of driven an uptick in the pipeline. And then maybe equally important, is it shrinking in all the conversion cycles of RFPs to sales or your approach to customers and implementation given that, maybe there's a more urgent need for cost containment than we've seen over the last two or three years?

Yes, I do think the answer is yes on both. It is helping, for sure, on interest overall, and I think it is - in certain cases, Ryan, it depends on the situation where there is acute pain. I think it is shortening the sales cycle a little bit. And I think the organic growth rate on the specialty side of over 50% is part of that, what we've been seeing this year. And it's been going on for some time. I would say it's not brand-new. The risk adjustment rules have been out for a while, those sorts of things. So, it does feel like we're starting to see it. And I think it's going to be an ongoing issue for a while. It doesn't feel like a 12-month and then done kind of thing. It feels like we'll have pressure in the end market, which is good for us, going into next year and beyond.

The next question comes from Kevin Caliendo of UBS. Please go ahead.

Thanks, and thanks for taking my questions. We heard from two large payers this week about new MA enrollees being older and maybe showing higher utilization from the start. Is that something you're seeing as well? And maybe you can walk us through how those lives, if in fact are happening, start to impact the mix within your existing MA business?

Hey, Kevin, it's a good question. I think as you look at our risk business, right, it is relatively narrow versus a sort of total cost of care model in an MCO. And as we look at acuity or other factors within oncology, for example, we've not seen that dynamic. That's not to say we won't see it in the next year, right? But relative to that commentary from the big MCO, it's not something that we've seen in our risk.

Okay. That's helpful and good to know. This is more of a broad question, more of a strategic question, I guess. When we initiated and picked up coverage, I was kind of surprised at sort of the way the stock is valued and the way it's been trading. And you guys again sort of hit your numbers, you've executed, and the like. I'm wondering if you're contemplating anything strategic above and beyond what you can control, which is the operations, which you've done a fantastic job of hitting your targets. Is there a way to change capital allocation, or is there anything strategic you have contemplated that might be able to create shareholder value or get the investment community to understand sort of what you've built here with this business?

Yes, Kevin, I can take that. The easiest way to answer and say is we're always open to anything that can be a catalyst and can create shareholder value. I think, in particular, for this year and kind of what you're referencing with the stock over the last, say, six months, for instance, there have been, from our perspective, a couple unique things going on with utilization concern and redeterminations that have been concerns for people. And our view has been, hey, let's get that data out there. I think this call is part of that, that we're continuing to feel really confident about our plan. And if for some reason, that doesn't begin to move the needle, then, our board would always consider things that helped us fully recognize the value. We do think we have a really unique asset. We think we're in early innings of a really big opportunity, and so it does need to get recognized one way or the other. And there's obviously a couple of ways to get at that, to your point. Right now, I think we're pretty focused on getting this data out there and continue to execute. And we'll pull up on that question over time if it doesn't work itself out.

The next question comes from Jack Wallace of Guggenheim Partners. Please go ahead.

Hi, this is Mitchell on for Jack. Thanks for taking my question. Would you be able to help us better understand what the go-get portion of the $300 million EBITDA run rate looks like now? And would that largely come from new tech and services deals? Thanks.

Hey, Mitchell. It's John. It's a good question. as we've laid out that path, there are three core items. One was growth, as you noted, mostly in the tech and services suite. The second was the realization of the cost and revenue synergies within the NIA acquisition. And the third was the maturation of our performance suite. On the first one, tech and services growth, announcements like the ones that we made today, expansion with Centene and so on, we feel it places us sort of nicely on track for filling up that bucket by the end of next year. On the second, we'll have a - we've achieved, as we've talked about in previous calls, most of the cost work already within the NIA synergy bucket. The one that we've mentioned before that is still a work in progress is on the technology side and lots of work going on in that now with visibility to completing that in Q1. The final piece, maturation of our performance suite, I mentioned again on the call here that is tracking according to our expectations. So, that feels pretty good. And we still have the opportunity to add more to that. For example, the Florida Blue announcement today, while it will go live, we expect, in the Q1 of next year, by the end of next year, we would expect it to be contributing some EBITDA here. So, feeling good overall.

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

Yes, thanks for the question. I wanted to follow up on the Florida Blue expansion here in the cardiology and think about the ramp up. John, you said it likely starts in Q1. maybe talk about the regional density you might have in cardiology in Florida. Is there already any kind of performance suite with Florida in cardiology that could help maybe ramp it faster? Or is this relatively a new market for cardiology performance suite, so we would think of a more normal ramp-up? Because if I recall, you kind of said with oncology, if you have the regional density of oncologists using performance suite, adding on new lives can ramp quicker to maturation. Thanks.

Hey, Charles, it's Seth. Look, I think in general, regional density is really useful, right? I think it's a good concept. We do strive to grow in ways that, think first about existing markets before we jump to a new state because we want to be very disciplined. On the underwriting, we understand the market. We understand the providers. We have relationships. We have scale, etc. So, that's absolutely a strategic choice that we've been making. We don't have a lot of cardiology risk business in the state. So, I don't think it's like if we added oncology relationship, but look, we understand - we know the multi-specialty groups. We know the health systems, and so we, I think, do have familiarity in the markets. I think of it as sort of somewhere in between, given those two factors. But it is overall the kind of dynamic you want to see, which is growing in markets where we have relationships.

Great. And then if I just follow up, you talked previously about building an at-risk model for MSK, I think, for 2025. Any sort of update or progress on the development of this program and any kind of more details you can share on how an at-risk model for MSK might look?

Yes. I'd say just in general, it's going to look a lot like what we're doing in oncology and what we're doing in cardiology, so things like IDG begin to get folded into that and things like imaging get folded into that and physical medicine, things that we brought from different places, right? So, I think the design of it's pretty clear, and the value proposition will be really clear as well. In terms of timing, Charles, like, we're working on it. It's not super near-term. We're not ready to kind of talk about a specific date yet. I think the big thing for us, right, is growing at 50% organically on the specialty side in the quarter. We have so much opportunity with what we have that we want to make sure we stay disciplined. And when we roll new things out, we don't need to take incremental risk on right now on the MSK specialty front. So, we're going to do it thoughtfully and carefully, and the time line you laid out is probably a reasonable one as a starting point. So, not a super near-term item.

The next question comes from Jeff Garro of Stephens. Please go ahead.

Yes, good afternoon. Thanks for taking the questions. Some more positive comments on the pipeline. So, I want to ask a couple there, rolling them into one here. Just broadly, any more color on the kinds of deals that you're seeing enter the pipeline? And maybe more specifically, you had previously talked about efforts to rebuild the NIA pipeline given the multiple changes in ownership of that asset. So, I was hoping to get a progress update there.

Sure. Let me just give you a couple examples, Jeff, that I think will answer your question, including the last question, right, which is we have several things in the pipeline that are large performance suite opportunities, right, across oncology, cardiology, and even the complex care piece. And those are usually with existing customers. So, let's say we have a relationship with a customer, and we're in some states but not all the states, or we're in one specialty and not the other. There's a number of those that are in the pipeline that feel really good. There are a number of opportunities with new logos that are probably broader, maybe more tech and services oriented that might have multiple specialties involved. And then we're seeing a number of opportunities across a pretty large installed base for NIA Magellan where, maybe we can bring in several additional capabilities or bring their capabilities into our footprint. And I think that last example does a pretty good job of answering the question you're asking about NIA, which is rebuilding the pipeline a lot through cross-sell, frankly. And then related to that, in the second category I mentioned of net new logos, when we respond to an RFP, we're going to be bundling in the imaging and physical medicine and genetics and things like that. And so, I think I would say just as a holistic comment on your last question, I feel like the pipeline is rebuilt at this point, and we're kind of off and running with the strategy that we had set out a year ago.

Great to hear. A follow-up for me on the new business side to ask specifically about the Centene cardiology expansion. Interesting to see the cadence given you have a longer history on the Medicaid and exchange line of businesses, and it was just earlier this year that you expanded into MA with Centene in oncology. So, I was hoping you could discuss what prompted the rapid adoption of your solution in MA for Centene and the potential for adding cardiology across multiple lines of business.

Yes. So, look, I think it's similar to the last question, interestingly, which is most partners that we work with would like to work with fewer vendors and fewer strategic partners on the specialty side, right? So, they might have five or six they work with today. They'd love to consolidate that down, and I think what you're seeing with a really good key partner in Centene is them starting to do that. And it's good for them. It's really good for the patient, right, in the sense that, hey, we can start to integrate across these different specialties. Nobody wants to have one of their images and the request for an image reviewed in isolation. They want to be understood as, hey, I'm a human with a diagnosis of cancer. What's the right course of treatment for me and how does the image play into that, right, in that example. And so, I think what you're seeing is the same thing go with cardiology, right? We're tying together imaging, and imaging is a huge part of cardiology, for instance. So, I think this is the natural course of things. I think it's better for the partner or clients. It's also better for the patient. MA, YMA versus others, I think they're all opportunities. I think a lot of plans right now are focused on Medicare, managing utilization in that line of business for the obvious reasons. But I think, to your point, these should be relevant for all lines of business over time.

The next question comes from Richard Close of Canaccord Genuity. Please go ahead.

Yes. Thanks for the question and appreciate all the details here today. With respect to performance suite, John, I was wondering maybe if you could talk a little bit - on the ramp, you said you moved from estimated to actual three to five quarters. And I'm just curious, how that's trended for different cohorts in terms of maybe the bottom end of the three or the top end at the five. And can you like shorten that time frame at all in terms of have a better ramp? Any thoughts there?

That's a good question, Richard. I'd say two things. The principal sort of determinant of whether it's three quarters or five quarters is the cadence of data that we're receiving from our partner. And so, what that can mean, right, is as we are growing with existing partners who are already accustomed to this sort of data transfer with us, accustomed to this sort of scope that we do, it can happen faster. With a brand-new partner, it will typically happen maybe on the longer end. So, that's the principal arbiter that'll take us whether it's three quarters or five quarters. Overall, what we've seen with these go-lives regardless of the specific timing is a pretty consistent way that it's playing out in terms of our general reserving methodology, starting off on the conservative end, which we feel is appropriate, and then releasing some of that conservatism when we have the actual claims data.

Okay, that's helpful. And maybe a follow-up on that. I'm just curious, you're talking about a strong pipeline, and obviously, you have existing customers that you have a long-standing relationship with. I'm curious if you ever look at pieces of business and just say, hey, we don't want to necessarily do that in terms of - just gauging in terms of what kind of line of sight do you have before you, sign another performance suite contract.

Yes, we absolutely have said that before is the answer. When we're underwriting a deal like this, we'll review two to three years' worth of claims, and you're looking at that data for sort of what's the size of the risk pool, what's the volatility of the risk pool. Is there a of - are there manageable levers that we know we can pull here, or are there not? And sometimes, there are not, and that's a great customer for tech and services.

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

Hi. Congratulations on the good quarter. Some of the health plans, we're talking about a few different things, obviously, higher MA utilization. Everybody's been talking about GLP-1s, diabetes, obesity management. And then also, importantly for 2024, the plans are talking about pricing. Have they fully accounted for the higher utilization levels in their pricing? Sometimes, they have. Sometimes, they haven't. Any thoughts or color on how that possible margin pressure that some health plans might see in 1/1/24 may either benefit you because they need your services more or how you basically get your fair share of the premium? Thanks very much.

Yes, David, look, I think what you're highlighting, whether it's GLP-1 or pricing or the aging question that we talked about before, the general press toward slightly higher MLRs and I think the pressure that our customers are feeling, it is generally a positive thing for us, right? And I think risk adjustment, I'd put into that category, too, David. There's a set of factors that have created a little bit of pressure, and the need to actually manage the thing that is driving a lot of the costs, which is utilization in general, and all these other factors is helpful to us. We have, as John mentioned earlier, ways to manage our reasonably narrow risk, and we have some contractual protections on that. Also, I think just the way we manage our risk is a little bit different and clinically manage it. So, I think part of the results we're seeing this year through this commentary by the plans but also the business development pipeline that I talked about earlier, it is partially related to the question you're asking, and it is a net positive for us. And we can talk about the puts and takes on that if we want to, but in general, it's a net positive, and I think it's going to continue for a while, which should be a positive for a while.

Now, I'd just add one piece of detail to that, which is the way that we price our performance suite is with dollars per member per month, not as a percentage of premium. And so, as plans are contemplating their benefit design, their pricing, that does not directly flow down to us.

Okay. And then I just wanted to confirm that what I heard was there's no unusual increase in oncology or cardiology or GLP-1-related costs. Your costs are coming in sort of in line with your own expectations. Is that correct?

That is correct.

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

Yes. Thanks. John, I think you just kind of hit on it, but I wanted to ask kind of the inverse of what I think Dave was asking, which is - so on the redetermination, some of the NCOs are talking about upcoming Medicaid rate updates and those, in some cases, building in prospective consideration for acuity changes in those populations. And so, if you've got a performance suite counterpart that gets a higher rate from the state when or where they're actually seeing acuity changes, do some of that flow through to Evolent?

It does not, Sean.

Okay. All right. That's clear. And then I guess apologies if I missed it, but on the performance suite expansion with Florida Blue, are there any details that you can share in terms of number of lives involved and maybe expected revenue from that when it's fully ramped?

Yes. On the revenue side, we're expecting north of $75 million on an annual basis going live probably in Q1 of next year, and that represents a little north of 150,000 MA lives.

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

Hi. Thanks for taking my questions. I wanted to start with just on the $25 million of prior-year claims development year to date that you mentioned. Is that related to MSSP or NCH, or is it kind of diversified across the businesses?

Yes, it's a good question. That is all the specialty performance suite. So, that does not include anything with MSSP.

Okay, awesome. And so, is that against all of the risk contracts in the specialty business launched in 2022, or is it some subset?

That's the majority of it, that's right, that launches from 2022.

Okay, got it. And then just one quick one and then one sort of philosophical one. Should we think about the cardiology NCH tech and services contract with Centene as similarly sized versus the $5 million to $10 million run rate you gave us for the oncology launch?

Generally speaking, cardiology is a bit cheaper than oncology in MA, and so it would be a little lower but same general ballpark.

Got it. And then finally, hoping you guys can just describe the seasonality of the performance suite sales and kind of launches around the Medicaid procurement cycles. Can NCH contracts be launched at any time during a Medicaid contract? And just what would you or the management team's philosophy be around announcing those types of new partnerships in terms of timing? Thank you.

Yes. Just on the last question, there's not really seasonality, I wouldn't say. I think it really depends upon where the plan is in their own cycle of managing the cost structure of the plan clinically. sometimes, they may be interested in doing it, early in a new state launch, which we've had a couple of those, right, over time. And sometimes, it might just be with a plan that's already up and running in a year or two into the contract. So, I don't think there's much of a cycle or philosophy got announced, and it's generally going to be, the quarter after we sign it, we generally let everybody know.

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

Thanks for everybody's time. We look forward to connecting soon. Have a good night.