Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare third quarter 2024 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please note that this event is being recorded. Leading today's call are John Kell, 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 for our annual report on Form 10-K for the fiscal year ended December 31, 2023. 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 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 form 10-Q for the fiscal quarter ended September 30th, 2024. And with that, I would like to turn the call now to John Kell.

John Kell Oh, and thank you for joining us on our third quarter earnings conference call. For the third quarter 2024, our health plan membership of 182,300 members represented approximately 58% growth year-over-year, and once again surpassed our year-end membership guidance of 178,000 to 180,000 members. Total revenue of $692 million grew approximately 52% year-over-year and 62%, excluding ACO REACH. Adjusted gross profit of $81 million produced a consolidated MBR of 88.4%, which led to adjusted EBITDA of positive 6 million in the quarter. This marks the second quarter in a row where both adjusted gross profit and adjusted EBITDA achieved the high end of our guidance ranges, placing us on solid footing as we enter the final quarter of the year and prepare for 2025. Over the past year, CMS has implemented changes that are aligned with its original vision to reward health plans that deliver better care and value to seniors. Many organizations are struggling to adapt to CMS's higher star standards and tighter reimbursement, creating an opportunity for companies like Alignment who have unique population health management capabilities to take share at an accelerated pace. Alignment's MA platform, which provides visibility and control across the enterprise, was built to succeed in this new MA paradigm. Our fully integrated data, health plan, and clinical ecosystem capabilities have resulted in consistent star performance, lower utilization metrics, better retention, and superior growth outcomes. Our ability to seize the opportunity ahead of us is further evidenced by the strength of our third quarter results. During the quarter, our Care Anywhere clinical model and real-time visibility in the utilization enable us to manage care and control costs while growing membership close to 60% year over year. We believe our year-to-date outcomes are unparalleled in today's MA environment and a preview of what we can achieve over the coming years as we continue to take share from incumbents. Turning to stars, we are pleased to announce that 98% of our health plan members are in plans rated four stars or above for 2025. This marks the eighth consecutive year that our California HMO contract, which represents roughly 86% of our MA membership, has earned a four-star or above rating. Across our other plans, our HMO contract in Nevada and North Carolina retained its five-star rating for this third straight year. As CMS raises the bar on stars cut points, we are only one of seven plans in the country with a five-star rating. Meanwhile, our California PPO plan obtained a solid 4.5 star rating outcome. Our success in STARS stems from an enterprise-wide cultural commitment to ensuring our members get the best quality care and experience possible. This is driven by daily cross-functional reviews of each specific STARS measure across our markets. Our visibility and control has enabled us to deliver consistently strong results while many of our competitors have seen STARS declines. While we're proud of our results, we see room for further improvement by more deeply partnering with our network on access to care. Beyond our rating year 2025 STARS scores, which impact our 2026 payment, we see multiple years of meaningful STARS tailwinds ahead of us. For rating year 2026 impacting payment year 2027, CMS is increasing emphasis on HEDIS clinical quality metrics that we historically scored 4.5 to 5 stars on in our California HMO contract. Conversely, CMS is reducing caps and admin weightings from 4 to 2. We estimate that the reduction in caps and admin weightings would have resulted in an increase to our raw star score by approximately 0.23 during the past rating cycle for our California HMO contract. This gives us even more confidence in our ability to maintain at least four stars or greater. For rating year 2027 impacting payment year 2028, CMS is replacing the current reward factor with a health equity index, which rewards plans who enroll a greater than average portion of low income and disabled members and demonstrate high clinical quality. Importantly, our California HMO contract has a high percentage of low-income and disabled membership, which places it in a solid position to benefit from the new Health Equity Index bonus. Furthermore, our California HMO contract doesn't currently receive any benefit from the reward factor, making the Health Equity Index change a pure tailwind to our STAR rating. In summary, we believe STAR's policy changes over the next two years give us confidence to maintain our current ratings and create upside to our already strong STARS scores. With our STARS competitive advantage locked in for payment years 25 and 26 and significant tailwinds looking ahead to 27 and 28, we believe we are well positioned to thrive in a STARS environment that will likely continue to pressure our competitors over the next several years. Before I turn the call over to Thomas, I'd like to share some early thoughts on 2025. For the 2025 selling season, we continue to take a portfolio approach to our products and markets. Given our focus on profitability, we are directing capital towards markets where we have the greatest competitive advantage and the highest return on investment. We are pleased with the early activity from our sales channels, And based on the first two weeks of results, we believe we are solidly on pace with our 2025 growth target of at least 20%. Beyond growth, we're equally excited for our margin expansion opportunity ahead of us in 2025. First, we expect cohort improvement from our significant growth this year. Second, we believe our relative advantages on STARS and the second phase in of the V28 risk model changes are widening our funding advantages versus competitors, allowing us to maintain competitive benefit offerings even while bidding for margin improvement. Third, our weighted average benchmark increase of 5% will exceed expected unit cost increases in 2025 And lastly, while the results of this year are proving that our clinical and operating model is already best in class, we expect to see continued improvements as we further scale AVA, our clinical operations, and IPA performance management. With each of these factors in mind, along with continued anticipated SG&A operating leverage improvements next year, we are confident that we can achieve 2025 consensus adjusted EBITDA of approximately 40 million. We look forward to sharing more on our growth and profitability outlook in 2025 as we gain more visibility into our AEP results. In conclusion, we believe the Medicare Advantage industry is at an inflection point where future success will require population health management capabilities, consumer-centric technology, and a care delivery culture. Simply put, we built a better MA mousetrap for seniors who are seeking a member-first experience that simplifies the healthcare system, improves care coordination, and provides greater value. When combined with the scalability of our platform and stars tailwinds on the horizon, we see a multi-year pathway ahead of us to grow profitably, increase margins, and establish new geographies using internally generated cash flows. Our mission begins with improving the life of one senior at a time, and I would like to thank each one of our employees for being part of this journey. Your commitment to treating each member like you would your own family member has been and will continue to be the cornerstone of our success. Now, I'll turn the call over to Thomas to further discuss our financial results and outlook. Thanks, John.

For the quarter ending September 2024, our health plan membership of 182,300 increased 58% year over year. Our growth achievements this year have continued to surpass expectations and demonstrate how alignment's products, member experience, and brand reputation are resonating in the market heading into AEP. Our third quarter revenue of $692 million represented 52% growth year over year and 62% growth excluding ACO REACH. marking our highest revenue growth quarter as a publicly traded company. While we are exceptionally pleased with our growth outcomes year to date, our ability to onboard and manage our growth this year is what differentiates alignment versus competitors. Adjusted growth profit in the quarter of 81 million was in line with the high end of our guidance range, representing an MBR of 88.4%. To put our growth and margin performance into perspective, we have added more seniors in the last 12 months than in the prior three years combined. meanwhile due to our strong clinical programs and ability to scale we have consistently met our adjusted gross profit expectations each quarter throughout 2024. during the third quarter our new member engagement rate continued to track with expectations even as we onboarded more new members than previously anticipated strong engagement supported our third quarter utilization results performing in line with expectations year to date inpatient admissions per thousand of 153 continued to run modestly lower year-over-year, establishing a strong jumping-off point for 2025. Turning to OpEx, SG&A in the quarter was $91 million. Our adjusted SG&A was $75 million, an increase of 8% year-over-year. Adjusted SG&A as a percentage of revenue excluding ACO reach declined from 16.2% to 10.8% year-over-year, improving by approximately 540 basis points. The significant year-over-year decline reflects the scalability of our operating model and the elimination of one-time costs associated with the insourcing of our member experience functions that we incurred beginning in the third quarter of last year. From a year-to-date perspective, our adjusted SG&A as a percentage of revenue excluding HDO reach has now improved by 310 basis points, putting us in a solid position to achieve our full-year operating leverage goals. Taken together, adjusted EBITDA of positive $6 million in Q3 achieved a high end of our outlook range and marked the second quarter in a row where the enterprise has been adjusted EBITDA profitable. Our strong year-to-date performance underscores our ability to manage costs while growing quickly and further reinforces our confidence in our 2025 outlook. Turning to the balance sheet, we remain solidly positioned and ended the quarter with $381 million in cash and investments with $105 million to parent companies. We expect year-end parent cash to be approximately the same or higher than Q3 parent cash due to the timing of intercompany transfers, which have no impact on total cash. Moving to our guidance. For the fourth quarter, we expect health plan membership to be between 184,000 and 186,000 members, revenue to be in the range of $663 million and $678 million, adjusted gross profit to be between $67 million and $82 million, and adjusted EBITDA to be in the range of a loss of $10 million to positive $5 million. For the full year 2024, we expect revenue to be in the range of $2.67 billion and $2.68 billion, adjusted gross profit to be between $282 million and $297 million, and adjusted EBITDA to be in the range of a loss of $10 million to positive $5 million. Following another strong quarter of sales activity, we are raising our year-end membership expectation by 6,000 members at the midpoint of our guidance range. Year-to-date, we have raised our year-end membership guidance by 22,000 members at the midpoint and now expect ending membership growth of 55% year-over-year. Higher membership expectations also continue to drive improvement in our full-year revenue outlook, which now implies revenue growth of 47% year-over-year and 57% excluding ACO reach. Moving on to profitability, we are narrowing our adjusted gross profit and adjusted EBITDA guidance ranges. We are raising the low end to reflect strong year-to-date management of medical utilization and continued SG&A operating leverage. We are also reducing the high end to reflect the timing of certain clinical initiatives and investments to support our growth, which impact gross profit, and incremental variable SG&A expenses such as commissions associated with our membership outperformance. From an MBR standpoint, we continue to see our increasing mix of new members as a percentage of total membership modestly increase MBR relative to prior expectations. However, this has continued to be offset by outperformance in our adjusted SG&A as a percentage of revenue outlook. It's worth noting that we now expect our adjusted SG&A as a percentage of revenue to be 10.9% at the midpoint of our guidance. Finally, in terms of year-over-year seasonality comparisons, I would remind investors to use the second half as a more comparable baseline than the third and fourth quarters individually due to dynamics affecting the quarterly comparisons. The third quarter of 2023 benefited from atypically favorable prior period releases. Meanwhile, the fourth quarter of 2023 was impacted by unfavorable ACR reach results and the start of higher inpatient unit costs. As a result of these quarter-to-quarter dynamics, the second half MBR comparison year-over-year is more indicative of regular seasonality. In closing, the strength of our third quarter results places us on solid footing towards our full-year profitability guidance as we successfully manage our year of outstanding growth. Although still early in AEP, we are optimistic about the year ahead. As John mentioned earlier, we continue to anticipate at least 20% growth and are confident that we can achieve consensus of $40 million of adjusted EBITDA for 2025. Taken together, our results this year and our outlook for the next few years demonstrate our ability to scale, balance growth and profitability, and improve health care for seniors. With that, let's open the call to questions. Operator?