Evolent Health, Inc.
Q3 2021 Earnings Call Transcript

Published: 3 Nov 2021

[Operator:]

Welcome to Evolent Health Earnings Conference Call for the Quarter Ended September 30, 2021. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, Chief Executive Officer of Evolent Health. 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. Here is some important introductory information. This call contains forward-looking statements under the U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of 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 the current and periodic filings. For additional information on the company’s results and outlook, please refer to its second quarter news press release issued earlier today. As a reminder, reconciliations of non-GAAP measures discussed during today’s call to the most direct comparable GAAP measures are available in the company’s press release issued today and posted on the Investor Relations section of the company’s website, IR.EvolentHealth.com, and the 8-K filed by the company with the SEC earlier today. At this time, I will turn the call over to the company’s Chief Executive Officer, Mr. Seth Blackley. Please go ahead.

[Seth Blackley:]

Thank you and good evening. I’m Seth Blackley, Chief Executive Officer of Evolent Health, and I’m joined by John Johnson, our Chief Financial Officer. I’ll open the call this evening with a summary of our recent results, including an update on our key investment themes, which are

[John Johnson:]

Thanks, Seth, and good evening, everyone. Our financial results for the quarter delivered on all 3 of our strategic goals with strong organic growth, profitability, and attractive cash flow. Let me say a bit about each before walking through results by segment and ending with guidance. Our revenue year-to-date is now 35.6% higher than it was for the same period last year, excluding divested assets, demonstrating a consistent track record of growth since 2019 with a CAGR of about 34%. At the end of the quarter, we had 14.7 million members on our platforms and with the addition of Vital Decisions on 10/1, that number now exceeds $17 million. Our profitability in the quarter was strong, particularly in our clinical segment, and driven by shared savings for our Evolent Care Partners solution. Let me comment briefly on how these shared savings translates to profits to Evolent, and I’ll reference Page 7 in the presentation. In 2020, we created $21 million of savings or about $32 per member per month across 55,000 lives. As Seth mentioned earlier, those 55,000 lives have grown substantially, and we would expect the $32 per member per month savings to also grow over time, creating the opportunity for revenue and earnings expansion each year. Of those savings, Medicare keeps the first 25% and we recognize the other 75% as revenue for Evolent Care Partners. We then share a portion of the savings after operating expenses with the physicians in the network, and the rest becomes Evolent profit. The revenue in the shared savings models is recognized on a delay as we receive an analyze data on our performance. The bulk of the revenue recognized for that solution in Q3 was the Performance Year 2020. We expect this seasonality to persist into next year, leading to elevated Clinical Solutions revenue in Q3 versus other quarters. Cash flow in the quarter was strong, driven by our EBITDA results and cash from timing of working capital. And we ended the period with $191 million in available cash, excluding cash held for Passport. Cash deployed for software development and purchases of PP&E was $7 million. Net debt, which we define as the face value of our convertible notes less available cash was $125.4 million at quarter end, resulting in a net debt leverage of 2x versus LTM adjusted EBITDA. As we look at our balance sheet over the next 2 quarters, I would note 3 main items outside of normal operations

[Seth Blackley:]

Thank you, John. I want to close with a few words on our organization. First, across the organization, we’re excited to kick off our 5th annual Season of Giving program. Over the next 2 months, Evolent carves out space for employees to reflect, celebrate and give back. Through this tradition, community engagement, philanthropy and social impact have become a part of our collective DNA and culture. Giving back to our communities is a natural extension of Evolent’s commitment to improving health equity and social equity in the communities where we live and serve. Second, I’m proud to report that our employee engagement scores remain at an all-time high of approximately 90%. And we have had employee retention rates that are consistent with our last few years or approximately 87%, even amidst a strong labor market. And finally, I’m thrilled to welcome Dr. Tunde Sotunde, the CEO of Blue Cross and Blue Shield of North Carolina to our Board of Directors. Tunde adds a wealth of experience and important diversity to our Board. In summary, we’re very proud of the value we’re creating for our partners and our communities. And we remain confident in the execution of our investment themes of, one, driving strong organic growth and achieving our mid-teens growth target; two, scaling the business to drive enhanced margins; and three, efficiently allocating capital. Thanks, everyone. for participating in tonight’s call. Also, before we open the line for questions, I want to directly address the recent speculation regarding the company. I’m not going to comment on market rumors. What I will say is that we’re open to all paths of maximizing shareholder value. Our Board and management team have been committed to maximizing shareholder value since day-one, and this will continue to be our top priority. With that, we’ll open it up for Q&A.

[Operator:]

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

[Ryan Daniels:]

Yeah, good evening. Thanks for taking the question and congrats on the continued momentum in the business. I wanted to talk a little bit more about Vital Decisions. Now that that has closed and kind of started the integration process, I’m curious what kind of conversations you’re having with your existing customers, especially on the New Century Health platform. Obviously, a lot of synergies there with that patient base and several of those disease categories and advanced planning. So I’m curious, what early feedback has been or what the pipeline is looking like since the deal closed.

[Seth Blackley:]

Sure, Ryan. Thanks a lot. This is Seth. I’d just say in general the feedback has been very good. We’ve talked to most of our existing partners, and obviously, lots and lots of other potential partners out in the market about the opportunity for integration. And I think the biggest thing, Ryan, that stands out is just this fact that over 50% of the end-of-life opportunities are around oncology and cardiology. And so, there’s such a high overlap with the work that we’re already doing. It’s just a very natural conversation. So that’s kind of point one. Point two, just validation that there’s incredible challenge here for families, for patients, for oncologists, cardiologists and other treating physicians, which is a pain-point, right, that is not being very well solved today by the solutions in the market. So there’s been a feeling of, “Oh, thank goodness, you brought this up.” We’re interested in talking about it and we’d like to talk about it. And if you can integrate it with what you’re doing, because of the overlap that I just mentioned, that is fabulous. And so, those two themes have been the main two that we hear a lot. I’d say, probably pleasantly surprised by how those conversations have gone that have further validated the thesis we had coming in, and it all just feels very good right now. Obviously, we just closed a few weeks ago, and lots of work ahead. But right now, it feels like it’s off to a very good start, Ryan.

[Ryan Daniels:]

Okay. That’s helpful. And then, as we think about the 10 new partners, obviously, nicely ahead of your guidance of 6 to 8 for the year, I’m curious if that’s just better conversion or quicker conversion in the pipeline, maybe just more opportunity or shots on goal, given the broader product offering or if you’ve pulled forward some partnerships that you would have anticipated might have closed in 2020 into 2021. So how do we think about that, and then the current status of the pipeline as we look at the potential for 2022 sales?

[Seth Blackley:]

Yeah, another good question. Look, I think it’s the combination of a number of different factors in terms of the products that are creating differentiated value, Ryan. I think the teams are doing an excellent job. We’re fully staffed. We’re focused and are executing in a very high standard. And the macro-environment is really good. So those are the main factors. There’s a little bit on mix too, right, when we think about how many of them are from Evolent Care Partners versus how many of them for New Century EHS. And that matters a little bit too, in terms of how many you might see in a given year. And obviously, we’ve had a few more this year and a handful more from Evolent Care Partners than maybe in the past. But generally speaking, I think it’s just things that are firing on all cylinders, and things are going well. And, what I wouldn’t say is that we pulled something forward from next year. That’s really not part of what’s happened in the remaining pipeline that we have to run after for the rest of this year and the next year is in a really good place.

[Ryan Daniels:]

Okay. That’s great. And then, just on the margin front, obviously, a good performance, especially given the revenue decline year-over-year, given the divested assets. I’m curious, if you could remind us kind of what the plan is or blueprint going forward. I know you’ve had some restructuring and synergies that you’ve achieved there. Also, you’re getting pretty good leverage on same-store growth. So what’s going to be the driver in 2022, as we think about the EBITDA performance? Are there more kind of corporate-level synergies to be had? Or is it mostly going to be the strong organic growth shining through, driving margin performance? Thanks.

[John Johnson:]

Hey, Ryan. It’s John. Good question. So you may recall, we have 3 main margin improvement levers, cost improvements, the second is the maturation of our new clinical partnerships that mature over time and improving their flow through, and third is SG&A leverage. And what I’d say this year, and then as we look forward, obviously, we’re ahead of plan this year. Our midpoint of our guidance now is 120 basis points higher from a margin perspective than when we started the year. So we feel really good about that. Largely that is a result of early capture of the cost savings work. So, as we look at moving into next year, the opportunity in front of us is principally driven by the maturation of the new clinical clients, and by continued SG&A leverage. Over time, we continue to target that mid-teens adjusted EBITDA margin by 2024, and feel good about getting there. With the pull forward of the cost reductions into this year, probably, the year-over-year expansion into next year is a little lower, since we’ve captured that already in this year’s result.

[Ryan Daniels:]

Okay, that’s very helpful color. Thank you so much.

[Operator:]

The next question comes from Sean Wieland of Piper Sandler. Please go ahead.

[Sean Wieland:]

Hi, thanks very much. So, we noticed that is expanding into some new states for next year. Is that something that naturally you go along with? Or is that a new endeavor in every new market?

[Seth Blackley:]

Hey, Sean, it’s an opportunity for us. As we have maybe talked about a couple of different times with that partner and several others, we have a handful of states that were already live in and then we have conversations more at the state-by-state level to expand. And so those will be new opportunities that just make that that opportunity expand their relationship with them bigger.

[Sean Wieland:]

Okay, so those are – so that’s not included, right? And then…

[Seth Blackley:]

Correct.

[Sean Wieland:]

Okay. And then just follow-up on what Ryan was talking about, you’re at the upper end of your guidance range on new partnerships. Is there – I suspect that you’re not done yet for the year? And is there a reason to maybe revisit that guidance of where you’ll be by the end of the year?

[Seth Blackley:]

I mean, I would just say in general, I’ll make a couple macro comment, Sean, and answer your question specifically. We have had a good year, the pipeline remains very strong and it feels good both on the new partners as well as same-store growth. We’re not changing any of the targets or metrics right now for a host of reasons. But we can we feel good about where we are, as we head into next year in February will obviously give guidance for the full year of next year, but we’re not changing the specific number right now.

[Sean Wieland:]

Okay, thanks very much.

[Seth Blackley:]

Sure. No problem.

[Operator:]

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

[Charles Rhyee:]

Yeah, thanks for taking the questions guys. Just want to make a follow up of it, obviously, strong new partnership wins and when we look at the revenue growth performance particularly on the clinical side, extra deficit assets. Is this one of the right range of growth we should be thinking about, as we think about next year, because it looks like if we’re looking at Evolent Health Services kind of growing in the mid-high-single digits, but obviously much faster in Clinical Solutions, maybe help us think about given the partnerships you signed? And then maybe similar to along on the EBITDA performance by segment. I understand, John, about the savings that are captured, but is when we’re talking about just absolute EBITDA dollars, will it be driven more by revenue growth, any kind of color there for now would be great?

[Seth Blackley:]

Yeah, Charles, it’s Seth. I’ll take the first one, and John can take the second one. Obviously, not guiding today’s specifically, we’ve had this very, very high growth rates in clinical and then to your point high-single-digits on the administrative side, if you look at the last handful of signings, including the one we talked about a little bit today on the Evolent Health Services side, which we haven’t yet named, but we will in February name. I would expect in to next year, and the years after, there wouldn’t be such a huge difference in between the 2 segments, I still think clinical will grow really rapidly. But those numbers have come a little bit closer together over time, and obviously will provide more detail headed into next year. But that’s a qualitative answer for now. And I’ll pass it to John, for your other question.

[John Johnson:]

Yeah. And, Charles, on EBITDA expansion for next year, I think, really looking at that in 2 ways. The first will certainly be flow through from the growth that we see in next year. In particular, is that also contributes to our SG&A leverage expansion. And then, second, we will anticipate some margin expansion from those clinical clients that went live this year. So it will be a combination of both of those.

[Charles Rhyee:]

Okay. And maybe just to follow-up on, John, your comment about this accrual for the past performance that you recently estimated at $30 million? Are there any other expected payments related to Passport either in the fourth quarter or that might trail into next year at all?

[John Johnson:]

Yeah, good question. The principal one – the other one that I referenced, which is on the purchase price side, the $23 million payment for the second half of the earn-out, those are the 2 primary items that we anticipate from Passport at this time in terms of payments. And then, finally, as you know, as we continue to earn-out the balance sheets, we will be able to return the remaining capital that’s in the plan. Today, I believe that around $35 million back to Evolent over the next several quarters.

[Charles Rhyee:]

Thanks. And can you just remind me again, what are the timing for that $23 million earn-out, is that tied to a certain performance? Or is that a timing issue?

[John Johnson:]

Just timing and we expect it in Q1 of 2022.

[Charles Rhyee:]

Okay, great. Thanks.

[John Johnson:]

Yeah.

[Seth Blackley:]

Thanks, Charles.

[Operator:]

And our next question will come from David Larsen of BTIG. Please go ahead.

[David Larsen:]

Hi, congratulations on the good quarter. Can you talk a little bit about the Vital Decisions win, I think, you mentioned in the press report of 180,000 members. Can you give any color around like what the PMPM rate might be there? And is there an in-sell opportunity for the performance services? We look at PMPM rate increase to, and of what period of time will that account roll onto the platform?

[Seth Blackley:]

Yeah, sure, David, I can take that one. I think the first point just generally is that we’re excited about the signing into this confirmation for what we knew about Vital, which is growing business in and of itself. I think, as we talked about, we announced the transaction that the really important part of this transaction is about the integration with New Century. And, it’s tying back to all those same stats, I was mentioning earlier about, how much of this is cardio and oncology and the like, and that’s the big opportunity with Vital, right? And so that opportunities ahead of us with Health New England, not putting any timing on it, but that’ll be an opportunity. The PMPM for the initial piece on just Vital is reasonably modest, if you remember when we talked about the PMPMs for Vital by itself, so the big opportunity is really around the conversion that you’re referencing. And, more broadly, if you think about what we’re doing with Vital, it’s very rarely going to be sort of taken in the market on a standalone basis and much more is going to be around linking it together with New Century. So that’s where our focus on your point that’s the big opportunity.

[David Larsen:]

So, if I do the math on that 180,000 lives, at let’s call at $13 per member per month, that’s almost $30 million, is that the potential?

[John Johnson:]

The comparable, Dave, is the New Century Health Tech and Services suite, so this Vital PMPM is around $0.70 PMPM.

[David Larsen:]

Okay. The longer-term if you were to convert them to performance service customer?

[John Johnson:]

Yeah, and I think, yeah, if you were thinking about it on a performance basis, David, the potential PMPM could be significantly higher than the $13 that you referenced on a full – for full performance basis. When you think about the New Century full PMPM, they’re sometimes 3, 4 times as high as the $13 that you referenced. So that’s really the longer-term opportunity. And it’s similar to, I think last quarter, we talked about the conversion in Ohio, with Molina and what that looks like. And that’s the kind of opportunity that we’re really focused on to your point.

[David Larsen:]

Okay. And then just one more quick one, the revenue on a sequential basis, it was a little bit behind what I had been modeling. But the guide for the year was increased at the midpoint. John, did you mention there was a revenue headwind of like $8 million on the quarter related to some accounting adjustment?

[John Johnson:]

You are correct. Yes, the updated accrual for this path toward shared savings in payments was a revenue item. So that hit revenue in the quarter.

[David Larsen:]

And that was for how much? $8 million?

[John Johnson:]

Correct.

[David Larsen:]

So revenue would have been $230 million. Okay.

[John Johnson:]

Correct.

[David Larsen:]

Okay, very helpful. Okay, helpful. And then, just but my last one, when I look at the year-over-year growth rate in revenue for 2Q of 2021, like last quarter, for example, I think it was up 42% organically. The reported was 2%. Is the delta there Passport and Lighthouse that are still included in the 2Q 2020 restated numbers, but True Health is excluded? Is that why we’re not seeing that 42% revenue growth rate?

[John Johnson:]

So if you look at the numbers in the press release, all of those are excluding True Health, which is now in discontinued operations. But we do provide the revenue excluding divested assets, which to your point are Passport, Lighthouse and Miami Children’s, to give what we think is the best representation of the year-over-year growth of the organic business. Did that answer your question?

[David Larsen:]

Okay, so – it does. So when we look at 2021 to 2022, when it comes time to basically build our models, you’ve been talking about a mid-teens top-line growth rate, is sort of what the bogey is. But if you were to, say, deliver 30% organic revenue growth, we would see 30% revenue growth from 2021 to 2022, is that correct?

[John Johnson:]

That is correct.

[David Larsen:]

Okay, thank you very much. Good quarter.

[John Johnson:]

Thank you.

[Seth Blackley:]

Thanks, David.

[Operator:]

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

[Seth Blackley:]

All right. Thanks for everybody’s time. We look forward to connecting soon. Have a good evening.

[Operator:]

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