Welcome to the Evolent Earnings Conference Call for the Fourth Quarter and Year End December 31, 2024. [Operator Instructions] 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 rest of the week via the webcast on the company's website in the section titled Investor Relations. I will now hand the call over 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 fourth 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 measure are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations 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 supplemental investor presentation. And now I'd like to turn the call over to Evolent's CEO, Seth Blackley.

Thank you for joining us this evening. Earlier today, we released our earnings for the fourth quarter and full year 2024. We have also provided our financial outlook for 2025. Both our 2024 results and our 2025 outlook are consistent with our expectation and we are happy with the progress we have made over the last three months. To review, we ended 2024 revenue of $2.55 billion with growth of 30% versus 2023. Adjusted EBITDA of $160.5 million was within but the low end of our guidance range provided in November, impacted by continued elevation in oncology expenses in our Performance Suite. Tonight, I will comment on our progress within our three pillars of stakeholder value creation of: one, growing the business organically, two, expanding our profitability and three, allocating capital to increase shareholder value. Then I'll update you on operational initiatives, which we believe will enhance our visibility into earnings, including evolving our Performance Suite products. John will then go through the numbers for 2024 and our 2025 outlook, and we'll open it up for questions after that. Beginning with the first pillar of strong organic growth, the 2025 outlook we established today guides to a growth rate of approximately 15% to 18% after adjusting for onetime contract conversions and revenue recognition impacts, which John will go through in detail. Including the announcements today, we have high visibility in achieving this range based on both contracted business and the strength of our pipeline. Now let's turn to the details of the revenue agreements and significant expansions we're announcing today. This quarter, we have two new revenue announcements to share. The first is a technology and services contract with a large health plan in New England, serving approximately 2 million members across multiple states. This plan, which is a legacy…

Thanks, Seth. Revenue in Q4 was $646.5 million across an average of $83.5 million product members. Our product membership was up by 4% year-over-year despite a 6% estimated headwind from Medicaid redeterminations. Q4 adjusted gross margin of 11.9% represented steady state margins in our tech and services business, offset by a lower Performance Suite margin of 3%, dominated by losses of negative 7% in our oncology book. Adjusted SG&A of $54.4 million was seasonally higher than Q3 and approximately $3 million lower than typical due to lower incentive accruals. On the balance sheet, we ended the quarter with cash and equivalents of $104 million. Cash used in operations was $26.2 million driven by working capital needs as we initiated reconciliations for certain loss-making performance fee contracts that have since been restructured. Net leverage on 12/31 was 3.6x. Note that our 2025 convertible notes due this October are now reflected as current in the accrued liabilities line. As planned, we borrowed our available credit facility at the January. And adjusting for that transaction, cash on 12/31 would have been $300 million leaving significant available cash for liability management across 2025. Our claims reserve ended the quarter at $318 million modestly up from the Q3 balance despite lower Performance Suite revenue, reflecting our conservative reserving approach. Prior year development in the quarter was minimal. Let's go to our 2025 outlook. We are projecting organic growth of 15% to 18% off the 2024 reported revenue results, adjusted for onetime contractual updates, which we refer to as adjusted revenue in the accompanying presentation. These adjustments result from changes to three performance suite contracts. First, the conversion of one large oncology Performance Suite contract to technology and services as discussed in January. Second, we are making changes to the contractual terms of two additional specialty…

Thank you, John. In closing, I want to summarize our long-term value creation plan. Please take a look at Slide 4 of the presentation for a summary. First, we plan to continue to grow our business organically at 15% per year or better off of the adjusted 2024 revenue baseline. Second, we plan to expand our margins through automation and efficiency, enabling us to grow our adjusted EBITDA earnings stream at least 20% per year off of our 2025 results. And third, we will continue to allocate capital with discipline to support our growth strategy and drive strong cash flow over time. Based on the industry wide challenges of the previous year, we have made strong progress on a fourth pillar of value creation, which is to enhance the visibility and consistency of our earnings by evolving our Performance Suite, as discussed earlier in the call. We reset our profitability baseline and have quickly migrated certain performance suite partnerships to a narrower, more predictable economic model, one where we are providing more upside for our clients and placing a cap on Evolent's downside risk. To be clear, this is a trade off as our long-term Performance Suite margins in this evolved risk structure are lower than our traditional Performance Suite. Needless to say, 2024 was a difficult year. As such, we understand the importance of reestablishing trust and credibility with our stakeholders. This begins with establishing an outlook that we can meet or exceed even in the face of historic cost trend headwinds. We believe we have done that, and we believe that the benefits of this approach to both our customers and our investors will become evident as we report results over the ensuing quarters. The team and I are proud of the rapid progress we've made entering this year, and we remain committed to delivering strong results across 2025 and beyond. With that, we'll open it up for your questions.

[Operator Instructions]. The first question comes from Matthew Gillmor with KeyBanc. Please go ahead.

Seth, it seems like you're trying to signal degree of confidence in the 2025 guidance. Is it fair to say that it's coming from the oncology trends in the higher weighting of EBITDA and weighting of the higher services and then the changes you have made on Performance Suite. Is that kind of how to think about it? Or are there other areas of sort of areas you call out for.

Yes, I think that's the right way to think about it. Yes. And that is our intent. You're right to come into the year with a lot of confidence for the reasons I said at the end of the call of being very committed to being able to hit and hopefully exceed our expectations throughout the year. And I'll let John talk a little bit about I think it's an important data point, Matt, around what would happen if trend was higher or lower. And I'll let John talk a little bit about that, which I think is part and parcel to your point.

Yes. Hey, Matt. Just maybe to put some sizing around that 12% oncology trend. If you look at the size of that book this year, it's smaller than it was last year, and the corridors that we've put into place, we see some asymmetry here to the upside, where, for example, a 14% trend applied across the book, 2% higher than our forecast, would be a $9 million estimated hit to adjusted EBITDA and a 10% trend, 2% better than our 12% forecast, it would be $12 million to the good. So that hopefully bounds the level of volatility there a little bit for you.

Yes, that's great. And then one clarification. You had mentioned 300 bps sort of margin maturation on Performance Suite. And separately, you had mentioned $50 million of efficiency sort of longer term from the [Speech Overlap] Are those discrete items that the 300 basis points encompassing [Speech Overlap].

Yes, good question, Matt. Those are discrete items.

Great, thank you.

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

Maybe just a little digging into sort of the [Speech Overlap] trend again. And John, I appreciate you [Speech Overlap] -- sort of the ranges of the volatility here. If we think about that now you have about 75% of your Performance Suite revenue covered by sort of these enhanced features, including sort of rate adjustments for prevalence. Is it still right to think that the comparison between the 11% in 4Q of '24 and a 12% to '25 trend? Are these still really apples to apples comparison when we think about sort of the potential impact for you guys? And then I have one quick follow-up.

Yes. It's a good question, Charles, because I think that they are different, right? If you look at the incremental protections that we've negotiated for this business beginning this year, that as you know, cover the majority of our performance fee revenue. And so while there's certainly still motion within that book in terms of where does Med X land unmanaged and how do we manage it down, the corridors on both the cap and the other side bound that range a little more than we experienced last year.

Got it. And then as a follow-up, just wanted to hear a little bit more of an update on cardiology, just sort of the trends that you're seeing here given that, I think it was Cigna that called out cardiac trend pressure on their call just the other week. So just trying to get a little bit of better sense of what you're seeing here in this area. And then just as an aside, Seth, I just want to wish you a happy birthday as well.

That's how I've always wanted to spend my birthday, Charles. Thank you.

Yes, cardiology, I'll take that one to start. It's a smaller trend, clearly, than in oncology. And where we saw a bit of elevation across 2024, most of that was explainable by our sort of prevalence metrics and so on. I will say that consistent with the oncology approach and our overall sort of outlook here, we are taking, we think, a conservative approach for cardiology trend as well And our forecast for '25, sort of modestly above what we experienced in '24. And it's certainly not nearly as large of a move here, Charles, as we're seeing in oncology.

But it's right to think that the way the contracts are always structured, it includes both oncology and cardiology in terms of sort of the narrower kind of risk corridor that you're facing?

That is correct.

Got it. Alright. Perfect, thanks a lot.

The next question comes from Andrea Alfonso with UBS. Please go ahead.

Hi. Thanks, everybody. And thank you, Charles, for flagging Seth's birthday. So happy birthday to you. I guess I just wanted to follow-up and sort of just thinking about the puts and takes to EBITDA guidance for '25. Just curious which inputs could screen most conservative to you such that would represent the greatest swing factor to the downside? Because I'm sort just looking at the bridge inputs and stress testing, I'm curious what really gets you to that lowest end of the $135 million ballpark, particularly after signing the new contracts? Is it just sort of a lack of organic growth? Is it oncology spend being just far worse than expectations? Thank you so much.

Yes. It really is around feeling a desire to have a buffer for surprise medical cost inflation that is meaningfully beyond our current expectation. We feel and Seth can comment on this really good about what's in the bag and what's the pipeline in terms of organic growth this year. And a lot of the other items that you see on the page are knowable. So that's really the source of potential variability in the year.

The next question comes from Jailendra Singh with Truist Securities. Please go ahead.

Yes. Thank you and thanks for taking my questions. So I want to go back to the 12% growth in oncology trends expected in 2025. So on Slide nine, when you talk about $25 million impact from that, that's just reflecting the annual impact of the trends you saw in late Q4, right? I'm assuming that late Q4 was higher than 11% you're talking about in Q4. So essentially, your guidance does not assume trends get any worse than where you exited 2024. And to that point, can you talk about oncology trends you have seen in 2025 thus far?

Yes. So let me be really explicit here that the Q4 is our jumping off point, right? So if you look at the actual projected year-on-year trend for Q1, it is significantly higher than 12%, in large part because of Medicaid redeterminations. So just to be really precise there, the Q4 number is the jump off point here. I guess that's the main answer.

And so the trend and anything so far to share for 2025 thus far?

So as you can imagine, we don't have a lot of claims completion at this point for the first six weeks of the year. But what we have seen so far in our leading indicator data, the authorization information is consistent with what we would expect given this forecast.

Okay. And then I missed the first few questions because there was some feedback. But on the 1/3rd of your Performance Suite book, which have not been part of your recent negotiations, it seems because they're running at matured margins. You provide any update on that book? And why do you not see a risk of higher cost rents impacting that book? Just trying to understand why not get proactive in terms of having some downside protections for those contracts as well?

Yes, Jailendra. So the way we approached the renegotiations is really focused on where we felt like we had the most urgent need to make changes. And in other cases, either because the original contract structure or protections or the way those given markets were running, we didn't feel like the risk reward on opening up the contract made sense. We always have that option in the future. And we would certainly look for opportunities to add those protections in when we feel like the risk reward tradeoff is the right one.

Got it. Thanks guys.

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

Yes, Seth, I'll add to the happy birthday, Chris. And thanks for taking the questions. Maybe a big picture one. I'm curious why you decided to narrow the scope for some of the solutions outside of the core oncology and cardiology and simplifying reporting there. Was that getting ahead of any potential issues from lessons learned with what occurred last year with oncology? Or was it a client request to simplify reporting? Just curious what drove that given that there's kind of not a bottom-line impact?

Yes, it's a good question, Ryan. Look, I'll say two things. One is driven by us. And it is principally around focus, right, as we are deploying our operating resources. And the way that you're doing that ends up impacting on your accounting treatment in some of these capitation contracts. So that is the rationale.

Say Ryan, I'd just add to that, right? It's part of the whole theme, I hope everybody is feeling from this call and everything you put out, which is around consistency of results and narrowing any volatility in those results and say those changes were consistent with that same thing, Ryan.

Yeah. And maybe I could ask a follow-up to that exact point to put a finer point on that. You mentioned earlier in the call that a 200 basis point uptick under the new contract terms would hit EBITDA by about $9 million. If we go back to the start of last year and I told you, you were going to see a 200 basis point uptick off oncology trends, how would it have then impacted EBITDA? So it's $9 million now, how big of an impact would that have been before you did all this to kind of show us how much more visibility you have?

Yeah, it would have been $20 million to $25 million, Ryan.

That does tie to that. Okay. And then maybe last question, just the $10 million in kind of operational investments in platform. Is all of that isolated to 2025, so that we should think of $10 million hit this year, but then a $20 million yield in automation and AI next year leading to a $30 million increase on a net-net basis for 2026. Is that fair or too aggressive?

That is approximately correct, Ryan. We're not guiding for '26 and that is how we're thinking about it.

Okay, perfect. Thanks for the color. Again, happy birthday, Seth.

Thanks, Ryan.

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

Yeah, good afternoon. Thanks for taking the question. I want to ask about the $25 million in core organic growth in the FY 2025 bridge detail. I want to ask more detail on both timing and mix. So first on timing, we would assume that would be front half loaded, but want to check-in there. And then on mix, would normally assume zero profitability contribution from year one Performance Suite, but want to see if that assumption should change given some of the enhanced contractual features you guys have been implementing.

Yes, good question. So on timing first, you're right that the bulk of this, right, will be driven by both annualizing some of last year and the go lives that have principally already happened or are in process of happening during the first half of the year. So the bulk of the EBITDA will be driven by deals that are going live earlier in the year. On the top line, the bulk of the growth there, on the prior page is of course, driven by Performance Suites to go live a little later in the year. And there, while we haven't changed our expectations for initial profitability of performance fee contracts, that is to say, we don't expect much EBITDA from those go live this year. We do anticipate a faster ramp to the new mature margins, where prior we had talked about a three-year ramp to mature margins. We now see that in, call it, 18 months.

I'll just answer a question that hasn't exactly been asked that's related, which is the new Performance Suite relationships that we plan to go live with this year. And going forward, we'll have, John, to your point, all the protections that we've been talking about.

Great. And then one specific follow-up there, I guess, be the top five national plan Performance Suite win that was announced last quarter. Just any incremental update on the timing of that, I think, would be helpful given the size of it.

Yes. I mean, we would expect midyear -- towards the middle of the year when that starts to go live and we're everything feels like we're moving in the right direction.

The next question comes from Anne Samuel with J.P. Morgan. Please go ahead.

Hi, thanks so much for taking the question. I was hoping maybe you could just speak to your kind of pipeline for 2025 new partnerships. And perhaps just given some of the pressure that you experienced this year, what is your aptitude for adding more Performance Suite contracts?

Hi Anne. So pipeline feels very good. As I mentioned in the script. I think any time you have the sort of dislocation that's existed in the market over the last year or two on cost and each plan tries to manage this tension around affordability and their pricing and membership and all of these dynamics, it's made for a really, really good sales environment. And that continues to be the case. I'd say our new Performance Suite model, right, that is narrower, shares more of the ups with the clients and has more protection for us, feels like it's working. And it feels like that is sellable in the market and meets the issues and demands of the marketplace. In terms of the specifics of this year and into next year, we continue to have a good mix, Anne, of like Performance Suite with the protection and tech and services. And I think that will continue. In terms of this year specifically, in the guidance for this year, we have I think really good line of sight, as I mentioned in the script, doing the things we need to do to achieve the growth rates that we guided to.

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

Yes. Thanks for the questions. I understand the '25 guidance contemplates the MA market exits. But I'm curious how you're thinking about potential policy changes on the Medicaid side, maybe a cut in FMAP, what that maybe does to your business from enrollment declines there. So that's 33% of revenue in 2024. So just thoughts there, it's probably more a '25 impact if anything happens, but how are you thinking about it?

Yeah. So look, I think you hit on one of the points, which is it's a diversified business. So the other one, we've got a lot of Medicare and a lot of commercial as well. I mean, I think with respect to Medicaid and really any line of business where you have pressure and compressed funding in some different way, it compresses the P&L or profitability of any given plan, that does have a negative on us. We close through the membership in the short term. The flip side of it will be, I think, sales momentum around initiatives to help drive profitability back into the business. So I think it will be one of those yin and yang type issues. And obviously, we can't forecast where that is going to go specifically, when and how and the like. But that's how I'd answer it. And then the last thing I'd say is, again, whether it's Medicaid or any other line of business, this far societal thing that's going on right now around health care, the debate of affordability and quality, I do think solutions like ours where we can help drive affordability and improve quality at the same time. Setting aside, given changes in one year or the next, I think they're going to have a tailwind to them over time because of the ability to achieve those objectives.

Okay. And maybe a follow-up Seth, you mentioned the Centene contract extension and some adjustments there. You go over those adjustments? What is the benefit to you guys?

Yeah. Look, I mean, with all of our major key partnerships, Centene included, we're always seeking to balance what's the right thing for the partner, what's the right thing for us. I think we identified always with our partners are there opportunities to do something together that creates more value for both of us. I think the changes that we made collectively to this partnership are an example of that. We're going to be investing more in '25 as a for instance. But the things that we're doing with that, I think, create fundamental value for both of us. And we can share that value over time and having an extra year on the relationship as part of making that equation work for them and us and making it the best possible partnership it can be in terms of efficiency and good for patients, good for physicians. So think of it as us investing more this year, particularly around some of these automation things and things that are better for patients and for physicians. And that then yields positive results for our P&L over time and then there's additional year added to the end of the contract. That's really the summary of it.

Okay. Thank you.

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

Hi, guys. Thanks very much for taking the question and happy birthday, Seth. So I guess I'm curious to know what percent of the Performance Suite book ultimately ended up being profitable in 2024? And just the question is really given the fourth quarter acceleration, was there an increase from that 50% of Performance Suite that was profitable as of 3Q to something less than that for the year? And then I have one quick follow-up.

That's a good question, Jess. The mix is about the same. So the overall profitability curve shifted down, but those contracts that were underwater remained underwater, and those that were profitable remained profitable just slightly less so.

Okay. That's really helpful. And then just for the portion of the business that was profitable in 2024 and essentially wasn't subject to rate revisions or enhanced corridors, does that EBITDA level contract in '25 because you're seeing trends accelerate, and you're not protected by rate revisions or enhanced corridors? Or have is there some other protection that we should be aware of there?

Yes. There is modest contraction there, Jess. And that's a part of what I mentioned in my prepared remarks around seeing an 800 basis point decline, but then recapturing 400 basis points of that decline in 'twenty five.

Got it. All right. Thank you.

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

Hi. Happy birthday, Seth. Can you maybe talk a bit about what your expected pricing increases are going to be in 2025 and going forward? Because it seems to me like a 12% trend in oncology is not your new normal. And it also seems like a lot of the plans are raising premiums by anywhere from 10% to 15%. So I would think your starting point for any year going forward would be at least 10% growth in the PMPM rates you're collecting from plans. And then also in the 3Q transcript on Page 17, it says that you were going to get $50 million of price increases in addition to the $100 million of renegotiations, I would have thought that, that $50 million would have offset the estimated impact of $25 million from the 12% oncology trend. So just any color on expectations for your price increases that you're going to see going forward, especially if 12% is your new normal? Thank you.

Let me say a couple of things, and Seth may fill in as well. The first thing, whether it's in our business, narrow to oncology and cardiology, or in the broader managed care market, there's no world in which 10% to 12% annual health care inflation is sustainable. And so that is part of what we're seeking to do, right? It's part of the mission of the company. I do not believe sitting here today that a 12% annual oncology trend is the new norm. I don't think there is another forecast out there that would suggest that. It certainly, though, is what we are projecting for 2025 based on a variety of factors. How do we handle that perspective? As we've talked before, you can think of this in two buckets. We have a standard annual inflator that is based on a typical discount to a typical trend. So that might be 6% or 7% or 8% annually. And then we have a mechanical and formulaic update each year based on changes to the population that happened in the prior year. And so that might translate in a year like we're having this year to 12%, 14%, 15% increase if there was a significant change in that population in the prior year. But I wouldn't expect that, that is a new normal going forward.

Yes. David, look, the only thing I'd add to it, right, is the way our business works, whether it's in a season like it if we have now with higher inflation, with lower inflation, we have to be able to be better than the next best alternative for our partners. And I think that's where we have a lot of confidence. We can then price to whatever that delta is. And again, the key to that is our ability to have the best clinical teams with the best evidence, technology, the right interventions and the like. And I think we remain really confident that we're to fix the pricing in this case, but the fundamental value creation is going to always be a delta between what we can create and what a normal plan can create for our other competitors. And that's the key to our value proposition.

Great. And just one more quick one, if I can. Let's say there's an adjustment during budget reconciliation where Republicans ease up the pressure on the V-28 and there's a benefit to the plans. Is there anything in your contracts that will enable you to capture some of that benefit?

There is no direct linkage, David, between plans, premium and our fees. So no, although it's always easier and nice to have happy partners.

The next question comes from Daniel Grosslight with Citi. Please go ahead.

Just had one about how to think about profitability in 2026. You've given us a few factors here, the $30 million swing from investment in client efficiencies from $25 million to $26 million potentially 300 basis points of Performance Suite improvement if trend remains stable. I'm just trying to square that with the longer-term growth target of 20%. For 2026, should we think about growth being a bit higher because 2025 is so depressed? Or are you saying for twenty six percent, we should really view $150 million or so as the right baseline and grow that 20%? Thank you.

Yes. Let me start and Seth can fill in. What you're hearing us say today, Dan, is a core mission, we believe, right now is rebuilding trust with our stakeholder community. And part of doing that, we believe, is putting out an outlook that is highly achievable. And so we're not going comment on 26% right now other than to say we feel really good about what we're pulling out today and our ability to grow at 20% plus per year on top of that.

Got it. Okay. And then as we think about the MA headwind to revenue and profitability as well. Can you help us think through the impact on -- or the split between Performance Suite and Ticket Services?

Yes. It's certainly across both, right? And you can sort of see that by the implied math of losing $20 million in EBITDA and $125 million of revenue. So it's both some long standing Performance Suite clients that were operating at mature margins and a slew of tech and services clients as well.

Got it. Thank you.

The next question comes from Matthew Shea with Needham. Please go ahead.

Yeah. Happy birthday, Seth, and thank you for taking the questions. You guys are moving more aggressively to scale implementation of Machinify or Op Intelligence. Curious, does this change or accelerate your expectations around gross margin benefits from AI? I know you're still orienting us towards 2026 to begin seeing improvement. But given this was sort of the prior expectation and now you're stepping on the gas, wondering if we can maybe see some benefits come through earlier than expected.

Yes. So we're live in a few markets, as we mentioned in the prepared remarks. And the early returns are pretty positive, both in terms of overall efficiency, but more importantly here for physician usability and partner satisfaction, etc. So we're excited about this, and that's one of the reasons why we are, as you know, putting our foot on the gas on implementing this across the book this year and pulling forward some of that overall gross margin improvements that we've been projecting.

Okay. And then maybe just quickly on the selling environment. It sounds like demand remains high headed into 2025. I guess, from demand generally being up, is the demand is this demand creating faster deal cycles or deal velocity? Wondering if given the rising needs for a solution to control costs, you're seeing deals get approved quicker, just anything to call out in terms of time to close a deal?

Yeah, I don't think it's changed dramatically on the sales cycle duration, maybe slightly better, slightly faster. But the overall scope of the pipeline, I think is what has really expanded and feels quite good right now.

Understood. Thanks guys.

That there are no further questions. [Operator Closing Remarks]