Alignment Healthcare, Inc.

Good afternoon and welcome to Alignment Healthcare's second quarter 2025 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. Please note that this event is being recorded. Leading today's call are John Kao, founder and CEO, and Jim Head, 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 factor sections of our annual report on Form 10-K for the fiscal year ended December the 31st, 2024. 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 10Q for the fiscal quarter ended June 30th, 2025. I would now like to turn the call over to John Kao. Sir, you may begin.

Hello and thank you for joining us on our second quarter earnings conference call. We are pleased to report another quarter of strong, disciplined execution with the results that exceeded the high end of each of our guidance metrics for the second quarter in a row this year. Much like 2024 was a breakout year for membership growth, 2025 is well on its way to becoming a breakout year for adjusted EBITDA profitability. For the second quarter, Our health plan membership of 223,700 members represented growth of approximately 28% year-over-year. Strong health plan membership growth supported total revenue of $1 billion, increasing approximately 49% year-over-year. Adjusted gross profit of 135 million increased by 76% year-over-year. This produced a consolidated MBR of 86.7% and improvement of 200 basis points over the prior year. Finally, our adjusted SG&A ratio of 8.8% improved by 160 basis points year over year. Taken together, we delivered adjusted EBITDA of 46 million. This handily surpassed the high end of our guidance range of 10 to 18 million, and produced an adjusted EBITDA margin of 4.5%, generating 360 basis points of margin expansion year over year. Turning to our first half results, our NBR of 87.5% improved by 230 basis points compared to last year, and our adjusted EBITDA margin of 3.4% improved by 390 basis points. In total, our first half adjusted EBITDA of 66 million exceeded the high end of our initial full year guidance range of 35 million to 60 million. We are proud of our execution towards adjusted EBITDA profitability, especially in light of rapid membership growth that was seven times higher than the industry and a highly dynamic Medicare Advantage environment that includes the second phase in of V28 risk model changes. Our first half outcomes continue to validate our business model and further increase our confidence in the 2026 bids we submitted earlier this year. The strength of our financial results reflects our operating principles of transparency, visibility, and control over the medical outcomes and consumer experience for our seniors. This begins with AVA and our unified data architecture, which provides us with real-time operating and financial visibility, combined with our approach to comprehensive care management as a core competency, instead of relying on global capitation. Demonstrating our ability to successfully manage rapid membership growth, our second quarter inpatient admissions per thousand ran in the low 140s. and outperformed our expectations. This was supported by both new member performance and ongoing clinical engagement with our loyal members, resulting in solid progress toward the embedded earnings potential in each of our member cohorts. Most importantly, our steady execution is highlighting our model's durability as the Medicare landscape continues to evolve. Following our continued momentum across the business in the second quarter and first half, we are raising our guidance ranges across each of our four key metrics. The guidance raised reflects strong fundamental performance across the business, an unchanged Part D outlook, and upside from sweep payments. Jim will expand on this in his remarks. Building upon our success, we are deepening the durability of our provider relationships by more fully integrating our clinical expertise and medical management capabilities. Our increased support aims to improve chronic condition management, create greater coordination of care, and increase adoption of our AVA technology insights. Through closer alignment with our providers, we are driving increased shared savings and profitability for our partnerships. Each provider's success story contributes to our growing track record of referenceable outcomes, and as a result, we are increasingly becoming the preferred solution for providers aiming to grow profitably in Medicare Advantage. Looking ahead, we believe CMS's continued focus on improving quality is raising the standard to be successful in Medicare Advantage. The agency's mission to provide seniors with the highest quality of care at the lowest cost rewards senior health companies like ours that stand at the intersection of excellent customer experience, exceptional clinical outcomes, and affordable products and coverage. This is consistent with our core competencies and the strategic framework we have shared with you over the past few years. We believe we are establishing a new paradigm and leading by example with industry-leading star ratings, exceptional member satisfaction, high member retention, world-class medical outcomes, and consistency in our financial performance. The introduction of V28 is further accelerating the importance of our unique capabilities. Since its initial phase in 2024, And along with star rating declines across the industry, large incumbent MCOs have lost share in Medicare Advantage for the first time since 2014. Meanwhile, we have continued to maintain our high star ratings and take share from incumbents through this period of dislocation, demonstrating our ability to leverage our competitive advantages into profitable growth. Turning To our preparation for 2026, we are well positioned to deliver another year of at least 20% growth and continued year-over-year growth in adjusted EBITDA. Even following our strong growth over the past few years, we believe we have substantial capacity to take share in existing markets, expand into new counties, and enter new states. With counties we currently serve, our current membership represents just 5% of 4.6 million total MA enrollees. Further expansion into each county within the existing five states would nearly double our reach to an additional four million MA enrollees, while additional states in 2027 and beyond could establish our model as the preferred Medicare Advantage platform in the industry. To support our long-term growth objectives, we are making investments across the organization. Much like the investments we made in member experience in 2023, and clinical capabilities in 2024, we are continuing to invest a portion of our strong year-to-date outperformance in administrative automation and care navigation to drive success in 2026 and beyond. We are continuing to invest in our infrastructure to allow us to scale repeatedly. We believe these investments will continue to widen our relative advantages over competitors in the years to come. Lastly, we recently announced that our Arizona HMO contract was revised from 3.5 to four stars for payment year 2026, and are pleased that our commitment to quality for our Arizona members is being recognized. With this latest update, our stars advantages are poised to widen with 100% of our members in a plan receiving four star or above payment in 2026. Combined with our confidence in our ability to navigate the third and final phase in a V28 risk model changes, we believe we are well positioned to achieve our growth and profitability objectives next year. In conclusion, our momentum during the first half is demonstrating that our approach to Medicare Advantage as a care management business is a winning long-term strategy. By fully integrating our data visibility, technology insights, clinical expertise, and financial competency, we are sharing the power of a dedicated senior consumer platform as we create the blueprint for the future of MA. Now, I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?

Thanks, John, for welcoming me to my first earnings call with Alignment. I'm excited to join an organization that is charting the future of Medicare Advantage, and I look forward to engaging with many of you over the coming weeks. Now turning to our results. For the quarter ended June 2025, our health plan membership of 223,700 increased 28% year over year. Meanwhile, our second quarter revenue of 1.0 billion represented 49% growth year over year. Strong revenue growth was driven by continued momentum in new member additions, a year over year increase in Part D revenue PMPM, and revenue pickup from the 2024 final sweep, which I'll expand on shortly. Total adjusted growth profit in the quarter of $135 million grew 76% compared to the prior year. This represented an NBR of 86.7% and improved by 200 basis points year over year. The strength of our second quarter NBR and gross profits results were underpinned by strong execution in our provider engagement and clinical initiatives leading to inpatient admissions per thousand in the low 140s and outperformance in our core medical expenses. Additionally, our Part D MBR was slightly favorable in the first half. With six months of experience, we now have further confidence in our full-year expectations for Part D. Lastly, favorability from the 2024 final sweep contributed approximately $14 million to adjusted gross profit. Gross profit from the final sweep is primarily attributed to a large cohort of new members who joined us in 2024. While the size of the final sweep varies from year to year, this is very much a normal part of our business which reflects a catch-up in payment from CMS for members who were previously under-reimbursed in 2024 relative to the severity of their chronic conditions. Excluding the final sweep payment, we still would have outperformed the high end of our guidance range across each of our key metrics in the quarter and would have produced an adjusted MBR of 87.7% compared to the MBR implied by the high end of our second quarter guidance of 88.3%. Turning to OpEx, adjusted SG&A in the second quarter was 89 million and declined as a percentage of revenue by 160 basis points year over year to 8.8%. This marks a continuation of the outcomes achieved in the first quarter and, once again, demonstrates our ability to scale our capital light operating model. Our SG&A results also included approximately $6 million of timing benefit, which we expect to reverse in the second half, keeping our full year expectations for SG&A roughly unchanged. Finally, adjusted EBITDA was $46 million in the quarter. This reflects an adjusted EBITDA margin of 4.5%, which improved by 360 basis points compared to the second quarter of 2024. Moving to the balance sheet, we ended the second quarter with $504 million in cash, cash equivalents, and investments. Turning to our guidance. For the third quarter, we expect the following. Health plan membership to be between 225,000 and 227,000 members. Revenue to be in the range of 970 million to 985 million. Adjusted gross profit to be between 106 million and 114 million. And adjusted EBITDA to be in the range of 5 to 13 million. For the full year 2025, we expect the following. Health plan membership to be between 229,000 and 234,000 members. Revenue to be in the range of 3.885 billion to 3.910 billion. Adjusted gross profit to be between 452 million and 469 million. And adjusted EBITDA to be in the range of 69 million to 83 million. Following the strength of our second quarter and first half results, we are increasing our membership guidance in each of our key P&L metrics. Our 2025 sales continue to exceed expectations through the second quarter, supporting our full-year membership raise. Continued momentum of new sales is also reflected in our revised outlook of $3.9 billion at the midpoint, which now implies approximately 44% growth year over year. Turning to our 2025 profitability expectations, the midpoint of our updated adjusted gross profit guidance of 461 million was raised by 28 million, which is greater than the magnitude of our second quarter beat. This latest update now implies an MBR of 88.2% for the year, a 40 basis point improvement from our prior annual guidance. Meanwhile, the 27 million increase in our adjusted EBITDA guidance to $76 million at the midpoint captures strong performance through the first half of the year and implies a 1.9% adjusted EBITDA margin for the full year. Our profitability outlook includes the following components in the second half. First, we expect continued stability in our inpatient admission per thousand results, with the second half running modestly higher year over year due to changes in our mix of memberships. This is consistent with our previous comments. Second, while our first half Part D gross margin ran a few million dollars favorable to expectations, we are keeping our full year assumptions approximately unchanged. Based on the first six months of our Part D experience, we feel confident that our outlook assumptions accurately reflect underlying cost trends in Part D and continue to expect our Part D MBR will be modestly lower in the second half compared to the first half. And third, we expect the 6 million of FG&A timing favorability we experienced in the first half to reverse in the second half, leaving our full year FG&A expectations roughly unchanged. For full year 2025, our latest guidance implies an adjusted FG&A ratio of 9.9%, reflecting an improvement of 130 basis points year over year. Spending a moment on seasonality, We expect the fourth quarter MBR to be higher than the third quarter due to normal seasonality from the combination of lower revenue PM between Q3 and Q4 and regular utilization patterns in Medicare Advantage, including the impact of the flu season. Additionally, we continue to expect changes in Part D seasonality due to the Inflation Reduction Act, including a higher MBR in the fourth quarter relative to prior years. On operating expenses, consistent with normal seasonality, we expect the ramp-up of AEP-related sales and marketing expenses and staffing in preparation for 2026 growth to increase our second half SG&A, particularly in the fourth quarter. With these factors in mind, we expect adjusted EBITDA to be higher in the third quarter than in the fourth quarter. Taken together, we are pleased with our first half results. and we're well positioned to deliver on our increased full-year expectations. With our latest update and our full-year outlook, we now expect to be free cash flow positive on a company-wide basis in 2025. This is a milestone in our organizational maturity and adds to our position of strength as we plan for 2026. Lastly, I'd like to take a moment to express how energized I am to be part of this mission-driven organization. In my first few months, I've been deeply impressed by the expertise of the team, the sophistication of our integrated clinical and technology platform, and the strength of our financial visibility and processes. As I settle into my role as CFO, investors can expect continued consistency in our reserving methodology and financial communication with investors. With that, let's open the call to questions. Operator?