Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare's fourth quarter 2022 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. In order to do a question during the session, you need to press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, press star 1-1 again. Please note that this event is being recorded. Leading today's call are John Cahill, 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. 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 our annual report on Form 10-K for the fiscal year ended December 31, 2022. Although we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. 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 are reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and on our form 10-K for the fiscal year ended December 31, 2022. With that, I would now like to hand the conference over to your speaker today, John Kao, founder and CEO. Please go ahead.

Hello, and welcome to our fourth quarter earnings conference call. We appreciate you joining us. I'd like to start us off by congratulating our employees for a year of outstanding progress and continued dedication to serving our members. As we approach the 10-year anniversary of our founding, I'd like to take a moment to reflect our accomplishments together. We've grown our membership from less than 13,000 in 2014 to over 108,000 a day and have grown revenue from just 130 million to an expected 1.7 billion in 2023. During our time together, we have focused on quality in all we do. We have helped improve our members' lives by conducting more than 300,000 face-to-face meetings between our members and our Care Anywhere teams and completing more than 1.5 million grocery and OTC transactions. Through our Care Anywhere model and partnership with providers, our inpatient utilization outcomes represent a combined total of nearly 24,000 fewer hospital stays relative to traditional Medicare, giving our members precious time with their family, families and loved ones. And this is just the beginning. Turning to today's results, we are pleased to have concluded the year with strong performance, having met or exceeded our outlook range across each of our four key performance indicators for the eighth straight quarter. For the fourth quarter 2022, our total revenue of $362 million represented 21% growth year over year. We ended the quarter with health plan membership of 98,400 members, growing 14% year over year. Adjusted gross profit was $38.3 million, resulting in an NBR of 89.4%. Meanwhile, our adjusted EBITDA was negative $23.7 million. Concluding the full year, total revenue of $1.434 billion grew 23%. Adjusted gross profit of 193.6 million resulted in an NBR of 86.5%, and adjusted EBITDA was a loss of 26.7 million, all well ahead of our initial and updated expectations. Last year, we conveyed expectations for our California market to be slightly adjusted EBITDA positive in 2022. We are proud to share that we exceeded those expectations and produced an MBR of 86.3%, even as we rapidly brought on new members. This result was driven by ongoing clinical engagement with our provider partners and members through our Care Anywhere clinical teams and greater operating scale. Additionally, each one of our new states ran less than 155 inpatient admissions per thousand, powerful testament to the replicability of our care model. This is similar to our California performance, which has ranged between 155 to 165 admissions per thousand over the past six years, and nearly 40% better than the traditional Medicare, which averages over 250 inpatient admissions per thousand. I'd like to share a few statistics that demonstrate how we are consistently improving outcomes across markets by deploying our Care Anywhere clinical engagement model powered by Ava Insights. Number one, members in our Care Anywhere program show a 32% net reduction in institutional claims expense 12 months after engagement versus Care Anywhere eligible members who did not enroll in the program. Number two, at-risk members across all chronic condition cohorts saw 47% lower ER visits per thousand versus traditional Medicare, including 58% reduction in ER utilization for members with six or more chronic conditions. And number three, lastly, at-risk members from our year one cohort to our year six plus cohorts see a 10% improvement in MBR going from 88% to 78%. The improvement in MBR acts as the funding mechanism for our rich product benefits and we see even greater opportunity ahead of us as we replicate these results across an increasingly large membership base. These examples and more are described in greater detail on our latest corporate presentation available on our investor relations page. Importantly, they showcase how our Ava-powered Care Anywhere clinical model is making a difference in members' lives while driving our outstanding MBR results in 2022. Furthermore, we are seeing these clinical outcomes materialize not just under our Medicare Advantage members, but also in our fee-for-service members. CMS recently released data for direct contracting performance year 2021 results, and despite having the second lowest weighted average benchmark PMPM in the country, we produced top quartile net savings results. These results underscore the adaptability of our clinical engagement model and our ability to effectively manage costs across Medicare populations. When we first began our DCE efforts in 2021, we balanced the strategic merits of working more collaboratively with our provider partners across a broader portion of their senior panel with a cautious attitude toward the long-term economics of the program. With our 21 and 22 performance in mind, we have grown increasingly comfortable and we can generate a positive long-term margin on the ACO REACH book of business, and most importantly, continue to leverage the program as a way to drive more strategic and integrated relationships with providers that complement our MA business. Accordingly, we have continued to invest resources in the ACO REACH program for 2023 and began the year with 7,900 aligned beneficiaries, an increase of 52% year over year. Turning to the results of this annual enrollment period as of January 1, 2023, we had 108,300 Medicare Advantage members, representing approximately 17% growth year over year. We previously shared a few highlights from the selling season, including a successful market launch in Fresno, California, with 1,800 new members. Improved performance in Southern California versus 2022, netting 16% growth year over year. A 50 basis point improvement in our California AEP voluntary disenrollment rate. And lastly, positive momentum in our states outside of California with membership growth of more than 60% year over year. These achievements were a direct result of our ability to replicate our AVA insights and Care Anywhere outcomes, giving us the confidence to create market-leading products. As we continue to target 20% top-line growth in 2024, we are focused on four areas this year that we believe are key to driving repeatable market success in future years. First, we are doubling down on our quality and cost initiatives, which has been the foundational element of our playbook for sustained growth both inside and outside of California. Maximizing STARS outcomes as part of these efforts remains a strategic priority for us heading into 2023, as evidenced by the successful AEP in North Carolina, where we achieved our first five-star plan. Second, we're deepening relationships with our provider partners and expanding our network to create greater access for members. We have established a significant geographic footprint and remain focused on going deep in each one of our markets. Third, we are laser focused on creating opportunities to increase the richness of our products heading into 2024 without sacrificing MBR, including looking at how we optimize the allocation of our rebate dollars across benefits. And fourth, we are employing a broader, more balanced distribution strategy we will continue to invest in our durable relationships with third-party brokers that have consistently delivered, while we will add internal sales agents and a greater online sales presence in areas where we need better performance. While we are pleased with the establishment of our Florida and Texas beachheads and our early traction of provider engagement, we have identified numerous targeted actions to reconfigure our growth strategies, starting with our four-pillar playbook, with a noted emphasis on distribution. In summary, we have identified key pillars that we believe will elevate us to the next phase of organizational growth and look forward to sharing our progress as we move through the year. Looking ahead to 2023, I feel confident that we are positioned for continued success as we continue to make strides across each of our key value drivers. Now, I'll turn the call over to Thomas to cover the fourth quarter financial results, as well as our outlook for 2023. Thomas?

Thanks, John. I'd like to echo how proud we are of the milestones we've achieved not only in 22, but throughout our journey over the past 10 years. Now, turning to our year-end results. For the year ending December 2022, our health plan membership of 98,400 increased 14% year over year. Over the course of the year, we added approximately 5,700 net members from January 22 to December 2022, which is similar to our past experience. Our total revenue in 2022 grew 23% to $1.434 billion. Further, our adjusted gross profit of $193.6 million reflected an MBR of 86.5% for the full year, driven by a continuation of strong medical outcomes in California, while Care Anywhere and our core medical management capabilities began to produce outcomes in our new states as well. SG&A for the year was $295.6 million. Excluding equity-based compensation expense, our SG&A was $223.1 million. Lastly, our full-year adjusted EBITDA was negative $26.7 million. This reflects a margin of negative 1.9% and represents approximately 90 basis points of improvement year over year, even as we grew revenue by over 20%. As we reflect on the year, we're proud to note that we ultimately delivered a $97 million revenue beat and a $16 million adjusted EBITDA beat, both relative to the respective midpoints of our initial 2022 guidance. We aim to strike a continued balance between both our growth and profitability objectives going forward. Turning to the balance sheet, we ended the quarter with $245 million in net cash. This sequential step down in cash compared to the third quarter included the previously discussed timing impact of an early payment from CMS of approximately $117 million, which temporarily inflated the prior quarter ending balance. This had no impact on a full year basis. Moving to our 2023 guidance. For the first quarter, we expect health plan membership to be between 109,300 and 109,500 members. revenue to be in the range of $429 million and $434 million, adjusted gross profit to be between $38 million and $41 million, and adjusted EBITDA to be in the range of a loss of $17 million to a loss of $14 million. For the full year 2023, we expect health plan membership to be between 113,000 and 115,000 members, revenue to be in the range of $1.705 billion and $1.730 billion, adjusted gross profit to be between $205 million and $217 million, and adjusted EBITDA to be in the range of a loss of $34 million to a loss of $20 million. Consistent with our long-term outlook, the midpoint of our 2023 revenue guidance represents approximately 20% growth year over year. As part of our forecast, we are assuming continued growth of our health plan membership throughout 2023 comparable to our experience from January to December in prior years. Our health plan revenue per member per month forecast contemplates a few moving parts. First, our returning member revenue PMPM is increasing year over year, partially offset by new member growth, which on average comes in at lower PMPMs. Second, we will realize the full adverse impact of the return of sequestration, which began phasing in during the second quarter last year, and represents a roughly 75 basis point headwind to revenue PMPMs in 2023 versus full year results in 2022. Additionally, our ACO REACH membership is increasing year over year, and we expect total program revenue of approximately $130 million, which represents over 150% growth compared to 2022 DCE revenue. While we don't include ACO REACH beneficiaries in our health plan membership count guidance, The associated benchmark revenue is recognized on our income statement and is included in our guidance. Moving to MBR and utilization, we'd like to note a few factors that impact the year-over-year comparison. First, our previously mentioned growth in ACO REACH membership is expected to weigh on our consolidated MBR in 2023. At this time, we are forecasting the program to run close to 100% in 2023 presenting a drag on consolidated MBR of roughly 60 basis points year over year, but also creating meaningful operating leverage across our SG&A spend. We remain confident in medical improvement over time as we deploy our AVA and Care Anywhere resources and continue to view the ACO REACH program as a strategic extension of our relationships with our participating provider partners. It's also worth noting that the MBR implied in our guidance excluding both ACO-reached medical expense and revenue is approximately 86.8% at the midpoint. Second, we expect new member growth to increase consolidated MBR by approximately 55 basis points this year and trend down in future years as we engage these new members with our Care Anywhere teams. Consistent with our past cohort experience, we are seeing strong year-over-year improvement in MBR results with our returning members, including continuing to expect non-California inpatient emissions per thousand of less than 165 in 2023. third we will realize the full year impact of sequestration this year which we expect to weigh on our consolidated mbr by approximately 15 basis points normalizing for these three factors our core mbr of 86.4 at the midpoint of our guidance reflects a continuation of strong underlying trends and we now also expect an incremental two to four million of additional embedded earnings power in our ACO REACH members over time as they mature toward our target margins in the future. Lastly, our first quarter guidance contemplates an increase in emissions per thousand, similar to our past seasonal experience. This results in a higher MBR in the first quarter and implies MBR over the remainder of the year will be lower than the full year MBR on average. Overall, we feel confident that we are well positioned to deliver on our full year adjusted gross profit objectives. We expect to add significant operating leverage in 2023 with $240 million of operating expense implying an SG&A ratio of 13.9% and improvement of 140 basis points year-over-year. This is a result of our disciplined focus on deriving economies of scale as we continue to grow, along with the additional benefit from growth in our ACO REACH book of business. While we believe the long-term MBR profile of the MA business is more attractive than ACO REACH, the incremental SG&A required to grow our ACO REACH business is significantly less than MA. Lastly, our adjusted EBITDA outlook range takes each of these factors into account and reflects a margin of negative 1.5%, a 40 basis point improvement year-over-year, and on pace with our adjusted EBITDA break-even objective in 2024. As John mentioned earlier, our California franchise was adjusted EBITDA positive in 2022, and we expect this to continue in 2023. Our consolidated adjusted EBITDA loss guidance in 2023, therefore, continues to reflect the investments we're making to support growth in markets outside of California and future expansion initiatives. As we continue to scale, we foresee a high degree of visibility into the leverage we will achieve over our corporate resources, clinical model costs, and public company expenses. Importantly, our strong balance sheet position and operating projections give us confidence that we will not require additional financing to fund our organic growth objectives in the future. I am proud of how we are positioned today, and we look forward to updating you all on our progress throughout the year. With that, let's open the call to questions. Operator?