Welcome to the Evolent Earnings Conference Call for the Second Quarter Ended June 30, 2024. 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 titled Investor Relations. I will now hand the call to Seth Frank, Evolent's Vice President of Investor Relations.

Thank you, and good evening. This conference call will contain forward-looking statements under the U. S. Federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the Company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the Company's results and outlook, please refer to our second quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the Company's press release issued today and posted on the IR section of the Company's website, ir.evolent.com and the Form 8-K filed by the Company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and the supplemental investor presentation. And now, I'd like to hand the call over to Evolent's CEO, Seth Blackley.

Good evening. Thanks for joining the call. Tonight, I'll go through the headline results for the quarter and update you on our three pillars of shareholder value creation before handing it to John to speak more about financials and outlook. Evolent delivered revenue just above our anticipated range, while profitability came in within our expected range for the second quarter. Today, we're updating our full year 2024 adjusted EBITDA guidance. We're also reiterating our confidence in our $300 million 2024 year-end exit run rate target. To put the results and our outlook for the year in perspective, we have a number of important updates to share today. First, recall in the quarter of this year, we noted a few performance suite markets with higher than expected medical costs due primarily to higher prevalence of disease. We also noted that our contracting model allows us to update our capitation rates to reflect these changes. Today, we're pleased to update you on our progress regarding rate increases from these Performance Suite customers. Specifically, we have aligned with our partners on new rates, which we expect will contribute approximately $60 million in additional revenue on an annualized basis. We expect to capture approximately $35 million of this rate benefit in 2024. Based on the partnership dynamics with our payers in an environment where they are under pressure, we have prioritized setting the correct rates for the balance of 2024 and for 2025 over retrospective rate increases. Given that, we anticipate the majority of the economic benefit of these rate increases to begin in the third quarter of 2024 and not retrospectively. 2024 came in slightly lower than the midpoint, but we now have high confidence in reaching our target year end exit run-rate of $300 million in adjusted EBITDA as well as a…

Thanks Seth. Let's unpack some of the key financial metrics for the quarter. Revenue of $647 million outperformed our internal expectations. This included the recognition of approximately $5 million in higher revenue in the quarter related to the rate increases driven by elevated prevalence and acuity we experienced in our performance suite. This $5 million per quarter improvement will persist, contributing $15 million for the year. We anticipate new increases totaling $10 million per quarter starting in July for a total of $35 million for the year $60 million annualized. Specific line of business trends were consistent with our expectations, including specialty tech and services revenue of $81.5 million was down $7.5 million sequentially driven by a combination of Medicaid redetermination and lower onetime quarterly revenue compared to Q1 2024. As expected, we did not receive any new data for the Medicare shared savings program and so did not book any incremental revenue in the second quarter impacting comparison to Q1 '24. In cost of revenue, we recognized approximately $10 million in favorable claims development from 2023 that was not offset by revenue refunds. This claims development represents about 1% of specialty performance suite revenue in 2023 and was consistent with our expectations. As a comparison, in Q2 of 2023, we recognized $6 million in favorable claims development from 2022, which was also about 1% of specialty performance suite revenue in 2022 for a $4 million net positive prior period developments relative to Q2 a year ago and $5 million more compared to Q1 of ‘24. This favorability was offset by continued elevated medical expenses during Q2 in certain of our performance suite markets, which I will discuss more [Technical Difficulty]. Overall, adjusted gross margin in the quarter was 16.7%, an increase of about 30 basis points from the first…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ryan Daniels with William Blair. You may now go ahead.

Congrats on the progress towards the re-contracting. Given I can only have one, I'll ask a multipart one, which you'll probably get a lot tonight. Can you speak to a few things there? Number one, it mentions in the release that guidance is predicated on the anticipated rate increases to go live. So, I'm curious how visible those are at this point that you'll actually get them, number one? And then number two, when you talk about updating the mechanisms to get these rate increases in the future, can you double click on that? I'm curious if it's something that makes it a little bit more formulaic, so that it'll just happen without having to go back to negotiations or what that really means. So just a little bit more color on all that. Thanks.

Yes, thanks Ryan. It's Seth. I'm happy to take those. So, look on the first question, we've aligned with our partners. This is across several different health plans first of all and I've seen about the $35 million we noted for this year, about 30% of that is paper contractually, about 60% of that we've reached I'd say what I call alignment on what the business terms are and we expect to paper it over the next couple of weeks. So, it's in the final stages. We feel good about it. I think the thing that underlines the broader point and this is the most important point for Evolent more broadly is that we do feel Ryan like we create really unique clinical value and so when you get to this sort of moments in a relationship being able to know that clinically you feel like you're creating more value than the next best alternative is really important from our perspective. So that's kind of where we are in that process in terms of the formulas. A lot of that is in most of our contracts. There are a few places where we're adding some additional detail as we noted on the call. And I don't think it's ever going to be fully formulaic, just how the world is. These customer relationships have lots of different facets to them and we at the end of the day are really dedicated to our customers succeeding Ryan. So, it's never going to be formulaic and we're all about partnering with them, but I do think it helps to have a framework set up.

Our next question will come from Anne Samuel with JPMorgan. You may now go.

Congrats on the quarter. I was hoping maybe you could talk a little bit about the decision to exit certain markets, what went into that decision making process? And then, how to think about the revenue impact for next year realizing that there is no EBITDA impact?

So, this is a couple of markets with one payer that we're working on updating our risk profile given the elevated prevalence and acuity that we saw in some of these areas. And one of the tools that we have in addition to raising rates is to narrow our scope and we and payer decided collaboratively to do that here. For this year, retro 1/1. I think in terms of scope, you sort of saw our raised revenue guide for the year. It feels quite swallowable to us and we don't think it impacts next year's growth either on the top or bottom-line opportunity in any particular meaningful way.

Our next question will come from Jeff Garro with Stephens. You may now go ahead.

I was hoping you could provide a little more context on the margin maturation for the Performance Suite. So, first of the $7 million remaining, maybe you could comment on visibility into contracts that have launched over roughly the last 12 months, hitting that kind of initial inflection point to in some cases I know from contributing zero EBITDA to contributing some once you hit that first initial milestone? And then, if you could also give some similar comments on the $5.5 million that you've already captured from the first time you provided that bridge. How much is from initial contracts hitting that initial milestone versus the more dated contracts performing better than expected or I guess better than in past years?

Yes, good question, Jeff. It's a little of both and let me break it down a little bit. As you know, we sort of think about this margin maturation curve in two ways. One is the initial release of actuarial conservatism that we have right as we go live for the first few quarters of a partnership. And the second is driving the underlying clinical value through the network, which we've noted usually takes some time. As you think about the progress that we've made this year that underlines that $5.5 billion that I noted, it is a combination of both of those factors. As we think about then what's in the $7 million, we still have a little bit of that initial actuarial conservatism from some of the most recent go lives that we would anticipate releasing in the coming quarters and the normal sort of everyday business of the Performance Suite in the market driving quality up and cost down continues and represents the rest of that $7 million.

Our next question will come from Charles Rhyee with TD Cowen. You may now go ahead.

Yes. Thanks for taking the question. John, I wanted to ask about sort of the timing impact of Medicare shared savings that didn't occur, that was last year but not this quarter. Should we anticipate, we could see that in the third quarter then? And is that in the guidance? Or would that be on top of guidance? And then secondly, when you talk about the higher rates, sort of $60 million on an annualized basis, is that right then we should see that benefit on a year-over-year basis as we go into the first half of next year?

Yes, you got it. So, on MSSP you're exactly right. We would anticipate when we see the final settlement from CMS for PY 2023. We will expect to have a revenue true up there to the final settlement number. We also as we talked about before typically start accruing for the current performance year revenue, so that would be performance year ‘24 in Q3, but all of that is incorporated into our guide. On your second question, yes, on a sort of like-for-like basis as we move into next year. The rate increases that we start to recognize here in the second half based on our expectations will be a bit of a tailwind for us going into next year.

Our next question will come from Kevin Caliendo with UBS. You may now go ahead.

You said that the rate increases are expected to offset anything that you see in terms of the elevated incidence and prevalence or in acuity. I guess what I want to understand is, what you’ve been seeing since 2Q, in terms of acuity and incidence. I know you have slightly more exposure to Medicare versus Medicaid, and recognizing that not all utilization is the same. Can you maybe frame the relative exposure there versus the other? And if what you're saying implies that what you've seen since you've gotten these rate increases or negotiated these rate increases hasn't increased further, if that makes sense?

It sure does Kevin. And the headline is exactly that, which is from a prevalence and acuity standpoint, we have seen consistent stats really since March. To dig a little bit deeper on the utilization question though, let me give a little bit more color. If you think about our core leading indicator is an authorization and that authorization might be, let's take a cancer case, it might be for a checkpoint inhibitor where the authorization covers 12 weeks of treatments with infusion once every three to six weeks. And so said another way that authorization is translating into costs, i.e., utilization both in the current month and then often in the subsequent month or two. And so, what we saw first quarter was a ramp in those leading indicators to a peak in March, but then as we have now seen translated into sustained elevated claims into the second quarter. The good news as Seth mentioned in his prepared remarks is that we've seen those leading indicators trend down since the peak in March. We're not assuming that that trend continues in our guide, that could be potential upside, but we have seen that trend down over the course of in particular the last couple of months.

Our next question will come from Jailendra Singh with Truist Securities. You may now go ahead.

Actually a follow up on Kevin's question. So it looks like the cost trends in Q2 are essentially the leading indicators are trending better than what you flagged for March -- better than what you flat from March last quarter. So maybe in March, you called out higher cardiology costs in Medicaid, higher oncology costs in Medicaid maybe clear in some of the markets. Maybe give some color on a particular category or payer type you're seeing that all those indicators are improving across the board. Like how do I reconcile this with the fact that for the March you called out $5 million headwind from higher cost, you're getting around a $5 million monthly rate adjustment which would imply the cost in $7 million range in the role of to of 70% cost really just I hope those numbers make sense? Just trying to reconcile that trends improving, but your rate update is actually reflecting higher cost trend.

Yes. So, here's what I'd say on that, Jailendra. I'd go back to my point here that a leading indicator is just that right. It's a leading indicator of costs that we expect to incur in the coming weeks months. And so, while we have seen a decline in the leading indicators, in particular at the back part of the second quarter, the costs remained elevated and were only partially covered by the increase in rate $5 million in the quarter that we noted. Hopefully that makes sense.

Anything you can call out on the type of payer, type of category you're seeing the improvement on those leading indicators? Sorry, that part was not answered.

Nothing in particular to call out there. It's pretty diverse, Jailendra.

Our next question will come from Jessica Tassan with Piper Sandler. You may now go ahead.

I was just curious if you could maybe comment on any like any automatic triggers in your risk-based contracts that allow your rates to keep up with cost trend, just because we've heard about high single digit trend in Medicare Advantage. And I'm curious to know if your contracts just automatically recalibrate to accommodate that trend irrespective of kind of the acuity mix or how that works on an annual basis?

Yes, Jess. So, as I was mentioning earlier, it's not uniform across all clients. In certain cases, we do have negotiated provisions that do automatically adjust the rates. In certain other situations, it's more of a broad change event conversation and he didn't sit down with the client. So, it's yes in some cases, no in others. Again, I think the fundamental issue as we do sit down whether those exist or not it's always a broader conversation with these clients because there's usually opportunities to grow right into new markets to add different lines of business and the like. And so, these things do end up being broader conversations and some of them are more automatic and some of them are broader more integrated conversations.

Our next question will come from Richard Close with Canaccord Genuity. You may now go ahead.

Seth, I think in your comments you talked a little bit about the rate increases and I think you said something with respect to 2025. Can you go over that again for us please?

Yes, so the way we characterized it, Richard, was around the portion of the rate increase $35 million it affects this year. When you annualize that and go into a full run rate for $25 million it's about $60 million. And so, that's sort of the way we think about it. Some of those rate increases kick in kind of right at the end of the year going into January and some of them are across this fall.

Our next question will come from Stephanie Davis with SVB Leerink. You may now go ahead.

I see we have a throwback on the call, very excited. Guys, thank you for taking my question. Congrats on threading the needle this quarter. I have a bit of a multiparter, but in your prepared remarks, you talked with continuation of the environment. So, to the extent that utilization is higher for longer, how are you thinking about how this factor into your pipeline in conversations with payer clients around specialty care management? Is it more attractive on a relative basis or is there more distraction so there's just less conversations to be had? And in terms of how it could impact the forward model, is there anything left to do in a higher for longer environment beyond the re-contracting that's behind you?

Yes. So, first of all on the pipeline, this has been a theme for a while multiple quarters I would say that the pressure on the payer side is a positive for us on the pipeline side. And I think when you think about the ways that payers manage costs, the specialty trend I'd say is very, very high number one. Number two on the list for many payers that we talk to Stephanie. So, we're seeing a lot of inbound demand for our products. Oncology has been an evergreen issue, the cardiology of late has been a pain point for a lot of payers in managing that one, but even MSK and down the line. So, I think that's certainly going to be part of the model going forward. I think to the extent that utilization ramp back up in some way. We obviously have the ability to go back to and have those conversations that we talked about. And I think we also have additional clinical levers that we continue to pull. In this current environment, we can continue to pull in that environment too Stephanie. So, I think again our job from our perspective is to be able to help drive clinical value that's in excess of what our payer partners can do on their own. And I think our view is if we're able to do that which we think we can, the kind of balance between rate and fairly sharing that increased value creation sort of takes care of itself over time. And I think that kind of goes to both of your questions both on the pipe side but also how we'd address it if it ramped back up again.

Our next question will come from Daniel Grosslight with Citi. You may now go ahead. Pardon me, Daniel, your line may be muted.

Sorry about that. Hey, guys, thanks for taking the question. You mentioned that around 60% of the $35 billion of cap rate increase this year, you have alignment with the payer, but it hasn't yet been papered. I'm curious what's preventing, I guess that contractual obligation? And is there any risk that some of that either slips a little later or there is some disagreement or is it pretty much over the finish line at this point? And then secondarily, are you all done with cap rate increases at this point in time? Or are there still some stragglers out there where you're still hoping to get a little more of a rate increase and that could potentially be some upside either this year or early next year?

Yes, Daniel, on your first question the kind of 60% that's not yet papered. We feel good about the alignment that we've reached with our partners, and these things just take a little bit of time right to get formally contracted. And usually when you do an adjustment like this you might make a few other changes that need to be made at the same time, and these things just take a little while to paper, but we feel fundamentally good about the alignment that we have. On your second question, no, there really aren't any stragglers. We've got our hands around the things that we need to have our hands around to drive towards the rest of the year guidance that we've provided.

[Operator Instructions] Our next question will come from Jack Wallace with Guggenheim. You may now go ahead.

Just a quick question on the third quarter revenue guide. It looks like it's down slightly over $20 million at the midpoint. Should be able to call it an 80-ish run rate, but you're getting a fee run rate back from the rate increases. At least in the press release you talked about the being mostly going to the onetime true down of risk scope. But is there also an element there of just kind of a lower jumping off point from the Medicare redeterminations, how should we just think about the bridge to the 3Q guide?

Yes, Jack the principal driver there down from 6.47 in Q2 to the guide for Q3 is three quarters of that retro true down for that risk scope narrowing.

Our next question will come from Sean Dodge with RBC Capital Markets. You may now go ahead.

This is Thomas going on for Sean. Congrats on the positive update here and thanks for taking the question. Just going back to the performance fee margin ramp, you said 12% to 18% is possible there as those mature. How does some of those other capabilities acquired like palliative care and genetic testing play into that? As you build those into those engagements, does that help you get to the higher end of that range? And I guess maybe ask in more straightforward ways, is it possible to achieve and kind of stay at the 18% margin level there or do you kind of have to maintain a strict alignment around 15%?

Yes, look I mean I think the mid-teens number that we've had on Performance Suite does require continued work. All these things require continued work to continue managing. That's our clinical innovation. That's the things that we're doing every year to improve our product. I think that also makes us better on the pipeline side. And with respect to the in the life piece that sort of built into that range that we think about as we continue to manage towards those targets. And I don't think -- I would characterize that as a source of upside necessarily for the $7 million of this year, but it is part of our multiyear plan to continue to drive really strong clinical value back to our partners.

Our next question will be a follow-up from Richard Close with Canaccord Genuity. You may now go ahead.

Yes, thanks for letting me get back in. Seth, on the Machinify, you talked about, I guess, allowing customers to use the tool to do analyze like inpatient and some other items there. When is that like actually live? And I think with all the managed care talking about in higher inpatient trends that that would be significant demand there?

Yes, I agree Richard. That part of the tool is live today with Machinify customer that we are working across there that they have when we acquired the asset and it's available for us to bring out to the market. I just say in general a lot of demand around that platform, right now, Richard. There's a lot of payers that I think are looking for creative ways like this to manage the long tail specialties on a more innovative basis that are easier for the doctors to deal with and better for patients. And so, I think that combined with our ability to kind of outsource and drive the really complicated specialties we think is going to be a pretty unique combination and we're out in the market pretty aggressively right now with that platform, that demo and having conversations right now.

It appears we have no further questions. 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. Thank you for joining us tonight. We'll look forward to connecting over the coming days. Thanks for the time.

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