Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare's second quarter 2021 earnings conference call and webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the question and answer session, you will need to press star 1 on your telephone's keypad. Please note, this event is being recorded. Leading today's call are John Kao, founder and CEO, and Thomas Freeman, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC. including the risk factors section of the prospectus for our initial public offering filed with the SEC on March 29, 2021, and our Form 10Q for the quarter ended June 30, 2021. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and in our 10Q for the quarter ended June 30, 2021. Hello.

and welcome everyone to our second quarter earnings conference call. We are pleased to report a solid quarter in which we exceeded the high end of our guidance across each of our four key KPIs. Our health plan membership ended at 84,700, an increase of 32% compared to last year. Total revenue of 309 million grew 26% from last year, which was led by our health plan premium revenue growth of 32% year-over-year. Adjusted gross profit came in at $37 million, and adjusted EBITDA was a small loss of $5 million as we continue to invest in growth and scaling of the business. Thomas will share more regarding our financial performance for the quarter, but from an operational perspective, we are executing on the growth strategy via our virtuous cycle that we laid out during our IPO roadshow. As a reminder, this growth strategy consists of three components. These are, first, entering new states by establishing anchored beachheads and partnerships. Second, delivering contiguous market expansions in our existing states. And third, adding new innovative products and provider partnerships to further grow market share in each of our existing geographies. Across each of these three prongs of our growth strategy, our business is exceeding my expectations. Our ability to deliver upon our growth agenda is due to the consistency of our operating model. I'm thrilled with how we're performing and how our team is skillfully executing on the plan. Though our 2022 AEP market expansions and products are still subject to regulatory approval, we are excited about our strong positioning. In terms of overall geographic expansion, we are making steady progress to expand our addressable market to allow a greater number of seniors to experience what makes alignment unique. We anticipate growing the number of markets we operate in from 22 counties in 2021 to 38 counties in 2022. As a result, we will have access to approximately 7 million Medicare eligible members in 2022, an increase of about 27% from today. Since our IPO, we've been very clear about our growth strategy of first establishing beachheads in new states and then expanding into contiguous markets, which means counties, and those states over time. With that in mind, on the first strategy, we recently announced that we're entering our fourth state, Arizona, by offering plans in Pima and Maricopa counties beginning in 2022. These two new markets provide access to nearly 1 million eligible seniors and represent a natural extension of our existing operations in California and Nevada. On the second prong of adding contiguous markets, we are planning to add 12 new counties in North Carolina in 2022, which will bring the total number of markets alignment serves to 15 in the state. We also intend to add two new markets in Nevada next year, as we expand to Washoe and Nye counties. Shifting to our third problem, which is to drive market share gains in our existing markets, our plans and supplemental benefits are designed to meet community needs by ethnicity, income, and health status. Our innovative product offerings, which are considerate of culture and social determinants of health, continue to be well received in the market. we are pleased to recently announce several new products and product line expansions effective January 2022, subject to regulatory approval. After the success of our Harmony product focused on the Asian community in 2021, we are eager to launch our El Unico product designed to serve the Hispanic population in 2022. This product has been developed to better customize the experience of our Spanish-speaking population which today represent over 25% of our total membership. In addition to our ethically focused plans, we're also expanding our offering to include PPO plans and plans for dual eligible special needs members, or DSNPs, as well as chronic conditions special needs plans, or CSNPs. Beginning in 2022, the PPO plan will be offered in 28 of our markets and provide our members with greater flexibility in their care and coverage decisions. The DSNF plans will be available in 24 markets and are designed to provide the same level of care and service associated with our regular MA products in conjunction with members' Medicaid benefits. Meanwhile, the CSNF plans will be offered in 11 markets and targeted to members who believe can benefit from our chronic disease management programs, such as those with cardiovascular disorders, chronic heart failure, or diabetes. Adding these differential plans in 2022 allows us to further penetrate our existing markets and to offer broader value proposition across different senior consumer segments. These product strategies designed to meet the individual needs of a diverse set of consumers demonstrate our product leadership in the market and are consistent with our goal to provide a more personalized experience for our consumers. We look forward to sharing more about these products during this upcoming AEP. On the provider partnership front, we have recently closed several relationships that we plan to announce in the coming weeks as we gear up our 2022 AEP. We believe the growing list of provider and delivery system organizations that want to work with alignment reflects the value proposition we deliver to the provider stakeholders in our ecosystem. More specifically, These providers are partnering with us because of our differentiated products, our proprietary AVA technology, and our Medicare Advantage expertise, all of which result in consistent outcomes of high quality and low cost, which enable us to offer market-leading benefits for seniors. This in turn drives our ability to help our providers grow and gain market share. As we continue to demonstrate the efficacy of our platform, We believe we'll establish more and more partnership arrangements like these in the future, helping us drive in our existing and new expansion markets. Looking to the remainder of the year ahead with the annual enrollment period right around the corner, we are working diligently to educate our channel partners about alignment's differentiated approach. It is this powerful combination of market entry strategies, product positioning, provider relationships, and broker engagement and partnerships that allow us to continue to grow our market share across our geographic footprint. As a result of all this work we've done over the past several months, we believe we are well positioned for a successful enrollment season. Finally, before I conclude, I want to touch on our AVA technology platform. AVA represents a core differentiated advantage to our company as it embeds the intelligence from our experience into repeatable and scalable technology and associative processes. This allows us to manage risk consistently and successfully with our provider partners as we implement our high-quality, low-cost growth model. AVA is central to our ability to provide our senior consumers with differentiated products that meet their personal needs. Many of you have begun to see demos of portions of our AVA platform, and we look forward to sharing new and improved features with you in the future. Wrapping up, the first half of 2021 is off to a great start operationally. We are positioning ourselves well for a successful 2022 enrollment period And we're very focused right now on putting the building blocks in place to set up meaningful and sustainable long-term growth for 2023 and beyond. Our prudent and disciplined approach to continuously investing towards growth and AVA remain priorities for us heading into the back half of the year. I look forward to keeping you updated on our progress across these initiatives. With that, I'll turn the call over to Thomas to review our financial performance. Thomas?

Thank you, John, and thank you, everyone, for joining us on the call today. Turning to the second quarter results, as John mentioned, we had another strong quarter in which we exceeded the high end of our guidance ranges across each of our four KPIs. Our health plan membership of 84,700 increased 32% over last year as we wrapped up the final month of CMS's open enrollment period in April. Our strong membership growth further translated to revenue outperformance in the quarter. Total revenue of $309 million increased 26% year-over-year, representing $39 million over the high end of our guidance range. Notably, our health plan premium revenue of $293 million increased 32% over last year. The strength of our second quarter revenue outcome was supported by a couple of drivers worth highlighting. The $39 million of outperformance versus the high end of our guidance range can generally be thought about in two buckets. Our Medicare Advantage, or MA Health Plan Business Performance, and the introduction of our initial DCE venture into our financials, which was launched at the beginning of the second quarter and was previously excluded from guidance. First, our continuing MA business delivered strong results ahead of guidance shared last quarter. Excluding incremental sweep revenue from 2020 and excluding incremental DCE revenue, I would highlight that we exceeded the high end of our 2Q revenue guidance by $21 million. This was due to a combination of better-than-anticipated membership performance, as well as increasing our revenue PMPM for the first half of 2021 dates of service based on our latest data. Note that 8 million of the 21 million related to the first quarter of 2021 dates of service. The upward momentum of our revenue PMPM is reflective of the operational efforts we took in the back half of 2020 to engage our provider partners and our seniors directly in documenting our members' underlying conditions, as well as visibility from the mid-year sweep for the 24% of our members who were new to alignment in the first half of 2021. This quarter's revenue also incorporated our 2020 final suite payment, representing another $5 million of revenue related to 2020 days of service. These suite payments for prior periods are standard course of business in our industry and happen every year. In total, our continuing MA business contributed $26 million of the $39 million of revenue outperformance in the quarter versus the high end of our previous guidance. Additionally, our second quarter revenue included another $13 million from our direct contracting launch in North Carolina. Through our joint venture with a number of leading independent clinicians, we are leveraging our experience, platform, and capabilities for our Medicare Advantage book of business to take risk on 5,900 seniors in traditional Medicare. Our revenue for the program is reflected on a gross basis, which means that we are accruing for our revenue based on the benchmark expenditures established by CFS. While our participation in Medicare's direct contracting program remains early, we remain cautiously optimistic as to the long-term economic opportunity as we increasingly apply our AVA technology and related critical processes to this population. Thus far, our revenue per member per month is meaningfully below our Medicare Advantage population. However, we believe our ability to generate a profit remains positive given the significantly less direct and indirect operating expenditures associated with DCE members as compared to our MA population. That said, we reserved a small gross profit loss in the quarter on our DCE partnership, given the early stage nature of the program, as well as due to the limited claims data we received from CMS thus far. Just to reiterate, the 5,900 DCE members are in addition to our 84,700 health plan members we reported for the second quarter. Turning to adjusted gross profit, We delivered 37 million in the second quarter as we saw a continued decline of COVID-19 impacting our overall utilization consistent with our expectations we shared on our previous earnings call. Relative to our pre-COVID experience, total inpatient utilization in the quarter was slightly better than what we would consider to be a normal 2Q baseline. Further in the quarter, we continued to see some of the temporary favorability we discussed on our last earnings call with our internal clinical model spend. That said, We still anticipate this to reverse in the second half of the year. All things considered, our second quarter medical benefit ratio, or MBR, of 88% was a market improvement versus our first quarter MBR of 91.5%. Further, excluding DCE, our MBR for the quarter was 87%, which is comparable to our previous communications, which excluded the DCE venture. It's worth noting that we do not anticipate sharing our separate MDR performance in future quarters unless we feel it is necessary to explain the underlying trends of the business. However, we felt that it was appropriate to share this quarter given that our previous guidance excluded DCE. Our SG&A in the second quarter was $71 million. Excluding equity-based compensation expense of $28 million, our SG&A in the second quarter was $43 million, which increased 28% year-over-year. We continued to experience some temporary favorability in SG&A in the quarter, which we intend to reinvest in the second half of the year towards growth in our existing geographies, as well as 22 expansion geographies and potential 2023 target markets. All of these factors resulted in an adjusted EBITDA loss of just $5 million. Turning to the balance sheet, we ended the second quarter with a net cash balance of $343 million. The strength of our balance sheet is allowing us to remain offensively oriented while evaluating new markets and partnerships for 2023 and as well as various M&A opportunities in both existing as well as targeted expansion markets. Finally, I'll conclude my remarks by providing our initial outlook for the third quarter and some color on the increased full-year guidance being announced today. For the third quarter of 2021, we expect health plan membership to be between 84,800 and 85,200 members, revenue to be in the range of 270 to 275 million, adjusted gross profit to be between 30 and 32 million, and adjusted EBITDA to be in the range of a loss of $19 to $17 million. For the full year 2021 outlook, we now expect health plan membership to be between 85,000 and 85,800 members, an increase from our previous range of 83,500 to 84,500, revenue to be in the range of $1,105,000 to $1,120,000, an increase from our previous range of $1,040,000 to $1,055,000, adjusted gross profit to be between $117 and $123 million, an increase from our previous range of $116 to $122 million, adjusted EBITDA to be in the range of a loss of $55 million to $50 million, and improvement from our previous range of a loss of $56 to $51 million. As we think about the second half of the year, we expect continued sales and membership growth, as well as this enrollment, to be consistent with our prior experience. As previously discussed, there is an element of seasonality to our business where a majority of our net membership growth occurs by April 1st of a given calendar year due to the timing of the annual enrollment period and open enrollment period. We therefore expect more modest membership growth from July to December, and we then expect a step-up in membership effective January 2022 after this upcoming AEP. Given our receipt of the midyear sweep, as well as having experienced another three months of data run out for our returning members who were with us in 2020, we now have improved visibility to our revenue PMPM for the second half of the year and feel confident about our second half revenue outlook. As we think about our gross profit and NBR assumption in the back half of the year, we remain mindful of the potential for utilization to increase, in particular in Q4. We anticipate a return of the flu season, which was largely absent this past winter due to the various COVID-19 protocols that were in place. And further, we are keeping an eye on infection rates in our markets related to the more highly contagious COVID-19 Delta variant. And accordingly, we remain somewhat cautious with respect to our second half claimed expense outlook. With that in mind, we continue to further engage and outreach our members to support their vaccination needs and are pleased to report that we estimate that over 80% of our seniors have been vaccinated. We also have incorporated our new member sales outperformance year to date, where newer members that join alignment typically begin with higher MBRs that then improve over time as we engage our population. As a reminder, this mix of new versus returning members is a key driver to our consolidated MBR performance. Finally, we remain highly focused on executing against our strategic growth plan for this upcoming AEP, as well as developing our 2023 target market opportunities given the 18-month sales cycle associated with our business model. With those two items in mind, we anticipate continuing to make intentional growth and scaling investments to redeploy EBITDA performance and therefore expect to see several million dollars of reversal in early-in-the-year SG&A favorability during the second half of 2021. As John noted, the building blocks we've put in place today are foundational to driving sustainable growth in the out years. Our EBITDA guidance for the remainder of the year also reflects the seasonality of our SG&A spend, whereby we typically have greater growth-oriented investments in the second half of the year, such as the timing of our sales and marketing spend around AEP. To wrap up, I'm very pleased with how our business has performed in the first half of the year given our recent public market debut, and I believe we're in a strong position to continue that progress in the second half of the year. With that, let's open the call to questions. Operator? Operator?