Evolent Health, Inc.

Welcome to Evalent Health's earnings conference call for the fourth quarter and year-ended December 31st, 2022. As a reminder, this conference call is being recorded. Your hosts for the call today from Evalent Health are Seth Blackley, Chief Executive Officer, and John Johnson, Chief Financial Officer. 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. I will now hand the call to Seth Frank, Evelyn's Vice President of Investor Relations. Seth, please go ahead.

Thank you, and good evening. This conference call will contain forward-looking statements under the U.S. federal 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 the 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 our current and periodic filings. For additional information on the company's results and outlook, please refer to its fourth quarter press release that we issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the investor relations section of our website or in the company's press release issued today and posted on the investor relations section of the company's website, ir.ebelinhealth.com, and in form 8K filed by the company with the SEC earlier today. During management's presentation and discussion, we will reference certain GAAP and non-GAAP figures and metrics that can be found in our earnings release as well as a summary presentation available on the events section of Evelyn's IR website. Now, I'd like to turn the call over to Evelyn's CEO, Seth Blackley.

Good evening, and thanks for joining our fourth quarter and year-end earnings call. I'll begin with a summary of Evelyn's fourth quarter results, as well as the highlights for the full year 2022. I will then provide you with an update on our three core operating priorities. John will discuss the numbers in more detail and share our guidance for 2023. We'll then look forward to taking your questions. We have a number of exciting developments to discuss, so let's jump in. First, I'm pleased to report Evelyn ended 2022 on a strong note with fourth quarter financial results better than anticipated. For the quarter ended December 31st, 2022, Evalent Health's total revenue was $382.4 million, growth of 54% over the same period of 2021. Excluding approximately $37 million of acquired revenue in the fourth quarter of 2022, base business growth was 39%. Fourth quarter adjusted EBITDA totaled $32.3 million, above the high end of our guidance range, and an increase of $8 million, or 33% growth compared to one year ago. Evelyn finished 2022 with revenue of $1.352 billion, growth of 49%. Adjusted EBITDA totaled $106.3 million for the year, annual growth of 60%. More broadly, we feel 2022 is an incredibly successful year. We achieved our financial objectives while also making strong progress against our longer term financial, operational, and strategic goals. Underpinning our success is an exceptionally talented team of approximately 4,000 employees and a deep executive leadership bench of more than 115 senior leaders. I'd like to thank the entire team for their contributions to our mission, and our 2022 results. Also want to note that our employee engagement score in 2022 is approximately 90%, which we believe places Evelyn among the top public companies on this metric. Employee engagement is a critical measure of the cultural health and productivity of our workforce, and I believe indicates our readiness to continue to scale our mission and financial performance. With that, let's now turn to an update on Evelyn's three core operating priorities, which guide our operating strategy. Those priorities are strong organic growth, expanding margins, and optimal capital allocation. Let's start with an update on organic growth, which includes both adding new partners and expanding with existing clients. We're obviously focused on delivering on both dimensions, and we finished 2022 having signed 13 new operating partnerships, well exceeding our annual target of six to eight. Our total operating partners, as defined by the number of distinct corporate entities with whom we do business, totaled 47 as of December 31, 2022, and our total lives stood at 20.6 million lives, organic growth of approximately 3 million lives from the prior year. As a reminder, we report our advanced care planning and surgical management businesses on a case basis, which John will report in his section. We also believe we are executing well on our cross-sell opportunity. During 2022, we added over 1.8 million lives to the performance suite, the majority of which were conversions from our technology and services platform. Financially, this conversion dramatically increases our pricing on a per-life basis from an average fee of $0.29 PMPM on technology and services to an average fee of approximately $26 PMPM on the performance suite. Last year, we sized the total performance suite opportunity at our top five customers as over $16 billion of new annual revenue. With the closing of the NIA transaction, we now estimate that our cross-sell opportunity exceeds $50 billion. I'm pleased to report today that our growth momentum continues into 2023 with two new agreements to talk about today. The first is a significant cross-sell to the performance suite, which we first announced at an investor conference in January. And the second, a new performance suite risk-based agreement with benevolent care partners. To recap what we shared in January, the first agreement is a significant expansion of our partnership with Humana through the addition of the performance suite for oncology in Florida and Arizona. Humana is a valued, long-standing partner of Evelyn's. We have collaborated for years to deliver significant value to support the high-quality oncology care for their membership through our technology and services platform, historically in 36 states across the country. This new agreement converts the majority of Humana's Medicare Advantage members impacted by a cancer diagnosis in these two states to the performance suite. Our expanded relationship can also lay the groundwork for additional state expansions in the future. We estimate the total revenue from the new contract to exceed $250 million of revenue in 2024. With a go-live date in the second half of 2023, we also expect significant revenue from this agreement this year, contributing to our revenue growth outlook of over 25%. In addition to Humana, today we're announcing a second new performance sweep partnership for 2023, which is a new agreement with a large regional health plan within Evaluant Care Partners. The agreement includes up and downside risk for an initial population of Medicare Advantage lives. The economic opportunity for Evelyn is, importantly, tied heavily to quality of care metrics, an important hallmark of success for MA plans. This new contract also reflects the success of our initial partnership in the commercial line of business. We look forward to continued success in Evelyn Care Partners as we expand beyond Medicare shared savings and into full risk arrangements with private health plans like this one. Finally, I want to note the similarities in managing a performance suite contract in our specialty business and managing a performance suite contract in Evaluant Care Partners. We view our work in Evaluant Care Partners as akin to managing additional specialty. In this case, we think of the focus area as complex care. This type of population requires care management and coordination for patients who often have multiple chronic conditions simultaneously. Further, The technology, clinical IP, and human talent required for success in specialty care are very similar to those required in managing complex patients through their primary care provider, allowing us to scale our work and spread our investments across more clients. With that update on growth, let's now turn next to an update on our second core operating priority of expanded adjusted EBITDA margins, where we continue to make progress towards our goals. As a reminder, approximately 75% of our go-forward adjusted EBITDA, including NIA, will be driven by our technology and services platform, a SaaS-like business model, and 25% from our performance suite business model. We believe this balanced approach, where we realize earnings across different business models, is the best way to drive sustained earnings growth and shareholder value. This approach contributed to our ability to expand our adjusted EBITDA margins in 2022 versus 2021, while at the same time adding over $250 million of new performance suite revenue, with margins that increase annually after year one and ramp to target margins across a three-year period. The acquisition of NIA further reinforces this balanced approach. NIA, which closed about four weeks ago, brings roughly $250 million in annual fee-based technology and services revenues and $50 million of additional adjusted EBITDA before any synergies. With additional contractual commitments from Centene and cost synergies, we believe NIA should contribute adjusted EBITDA of approximately $85 million in Q4 2022. As we discussed in our January investor presentation, we're now running the business with a focus on reaching a $300 million annual run rate adjusted EBITDA target by the end of 2024. John will share additional details on the path to $300 million in a moment. Finally, I want to comment on our third operating priority, which is optimal capital allocation. Overall, we have focused our capital investments on value-based specialty care, where we believe we are a market leader. With NIA now closed, our capital priority is focused on deleveraging the balance sheet through both adjusted EBITDA growth and debt reduction via cash generation. John will share additional details here, but I'm pleased to note that our net leverage at the end of the year, inclusive of our financing for the NIA acquisition, was lower than our target. Therefore, we feel good about the balance sheet today and looking ahead. While we're discussing NIA, I want to provide a brief update on our integration and operational execution efforts, which are an important goal for this year. We successfully welcomed all NIA staff and systems to Evalent in late January, and the first few weeks proceeded smoothly thanks to the efforts of the Evalent, Centene, and NIA teams. As we look out across the year, we organized the remaining integration efforts into a couple areas. First, organizationally, we have moved the management of Evolent Health Services, NIA, and all of our specialty businesses under one leader, Dan McCarthy, our president. As a reminder, Dan has been with Evolent for approximately 10 years and has been a key architect of our specialty healthcare strategy. Dan's broader team is incredibly talented and experienced, having successfully led our specialty business for the last several years through a period of strong growth and customer retention. Going forward, I'm highly confident in this team as they take on this larger opportunity ahead. The organizational alignment we implemented has allowed us to both begin immediately reducing our cost structure while providing exceptional service to our clients. The organizational structure also allows us to share capabilities and resources across multiple products, and we believe it will unlock important innovation in areas like artificial intelligence and single platform integration. Second, we're off to a strong start generating cross-sell opportunities, kicking off with an in-person customer event this quarter that will bring together partners from across Evelyn and NIA, as well as many other sales initiatives underway. And finally, we are late stages integrating our solutions fully under one Evelyn brand. As we transition from legacy brands, we'll increase the power of our cross-sell messaging, concentrate our investment behind one brand, and facilitate the talent and operational integration that's already underway. All of this work is a part of accelerating Evelyn's position as a leading multi-specialty independent partner for managing vulnerable patients who are experiencing complex health issues. With those updates, I'll now turn the call over to John to review additional details from the quarter and review our 2023 guidance.

Good evening. We are pleased with where we landed the year and the momentum we bring into 2023. Tonight, I will start with an overview of the key financial components of our path to $300 million in adjusted EBITDA, which we are targeting as an exit run rate at the end of 2024. I'll then come back to discuss 2022 results and our 2023 outlook. Using our 22 adjusted EBITDA of $106 million as a jumping off point, there are three components that bridge to our target of $300 million. First is the full impact of the NIA and IPG acquisitions, which, after the capture of identified synergies, should add approximately $100 million in annual run rate adjusted EBITDA by the end of 2024. The second component is the maturation of our existing performance suite book of business to target margins. Between Q2 of 2022 and the end of 23, we expect to have added several hundred million in incremental organically generated performance suite revenue from contracts already announced, which exiting 2024 should be well on its way to target profitability. Finally, Rounding out this pathway is continued profitable growth in our technology and services suite, supported by strong cost structure discipline. So that's how we are managing the business across the next several years. Now let's review 2022 through that lens. During the year, we went live with over $200 million in new performance suite revenue at New Century Health, including several launches in Q4. We also had a full quarter from our surgical management offering, IPG, with total 22 revenue contribution from that product at 58 million, right on target. These factors drove sequential revenue growth in Q4 of 22 of almost 15% versus Q3 of 22 in the clinical segment, with 75% revenue growth year over year. Our performance suite continues to mature according to our expectations. with like-for-like margins ticking up in Q4 of 22 versus Q3 of 22. I want to give a little more insight on how this works for the first few quarters of a new population. We target a first-year margin between 4 and 6 percent. This typically shows up as an even lower margin for the first couple of quarters, as our accruals are by nature more conservative while we're building a history of claims experience for that new partner. This is typically followed by a step-up three to five quarters after launch as that track record is established and margins on those initial periods are recognized, after which margins continue to grow linearly to maturity. This dynamic naturally leads to margins accelerating slightly more quickly around the year into a new relationship. You may recall in the fourth quarter of 2021, we reported a benefit of $6 million in the clinical performance suite roughly four quarters after a new population went live. This is a great example of this dynamic in action. In 2022, we launched several new performance suite populations later in the year, so our Q4 22 results reflect those early, more conservative margins. This sets us up nicely for margin expansion in 2023. Finally, we also benefited in Q4 from strong cost discipline, We took early and aggressive action within Evelyn Health Services to right-size the cost structure entering 2023 as we focus our growth on the clinical segment and the integration activities Seth described earlier. This improved Q4 EHS segment results by about $4 million. Now let's go through the segment details before turning to guidance. Starting with clinical solutions, Q4 revenue grew 75% to $281.5 million. up from $161.1 million in the same period of the prior year. Q4 clinical solutions segment adjusted EBITDA totaled $26.7 million, a modest decline compared to the prior year as we lapped the one-time revenue and adjusted EBITDA impact in Q4 of 21 I mentioned earlier. We ended the quarter with 3.3 million lives on the performance suite compared to 1.5 million as of December 31st, 21. with an average PMPM fee of $25.78 versus $32.33 a year ago. The change in average PMPM is a result of higher growth in Medicaid and commercial lines of business, which run lower than our corporate average, and is not the result of any pricing pressure. Lives on platform in our technology and services suite were 15.2 million compared to 14.6 million as of December 31, 2021, with an average PMPM fee of 29 cents versus 31 cents in the fourth quarter of 21. Note that this membership figure is net of transfers to the performance suite during the year. Similar to the performance suite, the PMPM changes year over year and sequentially are driven by mixed changes. Total quarterly cases associated with advanced care planning and surgical management totaled 15,700 for the fourth quarter. and average revenue per case totaled approximately $2,800 for the fourth quarter, both in line with expectations. In Evalent Health Services, fourth quarter revenue net of intercompany eliminations increased 16% to $101 million, up from $87.2 million in the fourth quarter of 2021. EHS adjusted EBITDA was $16.1 million for Q4 of 22, compared to $7.9 million in the prior year. the increase driven in part by the cost actions I described earlier. Membership for Evelyn Health Services was $2.2 million compared to $1.6 million as of December 31, 2021, with a PMPM fee of $15.29 versus $17.25. Finally, we continue to remain disciplined on corporate costs, with full year 22 costs of $30.2 million compared to $33.7 million in 2021. While we have continued to invest in the clinical segment as we grow, this corporate overhead improvement highlights the operating leverage in the business as we continue to scale. Turning next to the balance sheet, we finished the quarter with $188.2 million in cash, cash equivalents and investments, including $36.7 million in cash held in regulated accounts related to the wind-down of Passport. excluding cash held for passport, we ended the quarter with $151.5 million of available cash, a sequential increase of $25.4 million versus September 30, 2022. While we ended the year with a higher DSO driven specifically by two of our larger clients, we received approximately $47 million in gross receipts from those clients during the month of January 23, bringing them current and aligning with our historical trends within these specific clients. Cash deployed for capitalized software development in the quarter was $8 million. Net of available cash, we ended the year with $270.3 million in net debt for a net leverage ratio of 2.5 times, including all debt and convertible notes. We closed the NIA transaction and associated financings on January 20, 2023. Assuming the inclusion of NIA and the financing impact on our financials, our year-ending available cash balance would have been approximately 182.6 million, and our net leverage ratio would have been 2.8 times, well ahead of our target at the time of the transaction announcement, in part due to timing, as our working capital needs tend to consume cash during the first quarter of each year. As we look towards 2023, As Seth mentioned, we are consolidating the operations of our business units to drive enhanced performance for our customers. With that consolidation, we will no longer track adjusted EBITDA at the reportable segment level and expect to collapse our reporting into a single segment beginning with the first quarter of 2023. To enable continued visibility into the components of our business, we will continue to provide detailed revenue metrics in our filings. For the full year 2023, we expect revenues in the range of $1.92 to $1.96 billion and adjusted EBITDA in the range of $180 to $200 million, implying adjusted EBITDA margins of approximately 10% at the midpoint. Our top-line guidance anticipates base business growth of 25% to 28% versus the 2022 actual EBITDA. plus approximately 240 million from NIA, given the timing of the acquisition's close. Our expectations for adjusted EBITDA represent margin expansion in the base business, plus approximately 48 million from NIA, again, given the close of the acquisition in late January. We expect to deploy between $35 and $40 million in cash across the year for capitalized software development. We continue to expect a target net leverage ratio of under three times including outstanding convertible notes, by the end of 2023. For the first quarter specifically, we expect revenues between $420 and $440 million and adjusted EBITDA between $45 and $50 million. With that, I will hand it back to Seth.

Thanks, John. I'll close by reiterating our excitement headed into 2023 and our confidence in our multi-year product plan and financial path outlined today. I'm confident that our value-based specialty focus will create value for shareholders, customers, employees, and patients. To share more detail on our multi-year plan and integrated platform, we're planning to hold an Evelyn Investor Conference in the second quarter here in Arlington, Virginia, and we'll announce a specific date soon. In the meantime, let's go ahead and open it up for Q&A tonight.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. Please limit yourself to one question and one follow up. At this time, we will pause momentarily to assemble our roster. The first question this evening comes from Sean Dodge with RBC Capital Markets. Please go ahead.

Yep, thanks. Good afternoon, and congratulations on the strong finish to the year. Maybe just starting with the new performance suite agreement within Evalink Care Partners. Seth, is there any more detail you can share on that? Maybe how many lives does that involve? Can you give us any help sizing the expected revenue contribution from that? Is that already live now, or maybe when is that expected to launch?

Yeah, happy to, Sean. So, first, just comment on where this fits in within the broader strategy. If you think back to the work we've been talking about with Evelyn Care Partners for a couple years now, we do a lot already on the Medicare Shared Savings Program. And a core part of the plan is to do more with private payers. And this is a good example of that expansion. And I think it's an important part of the strategic direction of that business. So that's kind of what it is. It's with a large regional plan they actually already did some work with. It's initially not a huge agreement. Sean, it's a couple thousand lives. Think of it as in the $15 million a year of revenue. So I don't want everybody to get over their skis on how big it is initially, but I would say that could easily be a $50 million opportunity in that same MSA with other Medicare Advantage partners. And so it has a nice opportunity to expand. And I think, again, the most important part of the message is we're doing well already in that geography with the product, creating value for patients and for payers. And I think this is a good recognition of that in terms of expansion.

And, Sean, that agreement went live in January 1.

Okay. Great. And then Just in the guidance, there's a lot of moving pieces over the course of the year. There's the Molina expansion that started last year. There's NIA, which closed recently. Humana started mid this year. And then you've got Bright Health kind of winding down. If I look at Q1, you're guiding to EBITDA of $45 to $50 million, which basically looks like what you're expecting to end the year at. So maybe just if you could kind of help us understand all of the moving pieces, the cadence of EBITDA over the course of the year and where you expect to be maybe exiting the year at. Yep, great question.

You are right that one of the nice things about coming into this year is we have very good visibility on the arc of the top line. You've heard us in prior years sort of reference here in February, looking out at the rest of the year, very high confidence in the bottom end of the range. I think as we sit here today, the bottom end of our revenue range is fully contracted, subject to timing and go-living. On the EBITDA side, as has been the case in prior years, the shape of that over the quarters is going to be driven largely by the timing of performance revenue and payments. I think sitting here today, we would expect it to be relatively consistent across the year. It might be up a little bit and one quarter down a little bit another based on timing factors, but we'd expect it to be relatively consistent.

Okay, that's very helpful. Thanks again.

The next question comes from Ann Samuel with JP Morgan. Please go ahead.

Hi. Congrats on the quarter, and thanks for taking the question. I was hoping maybe you could speak to your go-to-market strategy now that you've got NIA closed. Do you plan to bundle that offering, or are you going to try and get your foot in the door with maybe one specialty and then try to expand thereafter?

Hey, Annie. So I think the way I'd frame it is we're going to have some of both. it's going to depend on the situation and as to whether we go with a full bundle or whether it's one specialty. And I think the considerations there include what are the main buying dynamics for that given payer. I think typically when the payers are smaller, more regional, they tend to buy in bundles a little bit more. The bigger they are, the more national they are, and the more they are interested in potentially considering one specialty at a time. And so I think it's important that we have the ability to do either depending on the situation. I do think that over time, this sort of more integrated approach where you're going with multiple specialties will be quite differentiated. And I'd say the early readout from customer conversations on the integrated opportunity has been better than our expectations, meaning a lot of attachment, Annie, to The fact that we can do more than what we historically could and our ambition to do it in a more integrated fashion has really resonated. And I think that speaks to the part of my comment, which is, you know, over time, I think it will be more and more bundled.

That's really helpful, Culler. And then maybe just one, John, on the integration. You know, how do we think about the cadence of synergies as the year progresses, just any seasonality to think about?

Great question. You know, I think the two things to highlight there, right, there's revenue synergies, cross-sell, and there's cost synergies. On the revenue side, you know, we typically talked about a selling cycle of between six to 12 months. We could see some of that in the back part of this year, but I think you're going to see most of that start to come to fruition in 2024. On the cost side, that will phase in over the course of this year. And at the same time, while we're doing the integration, we're anticipating investing some money to ensure that it is very smooth. And so you heard us in my guide, it's effectively a $50 million annualized contribution from NIA, just adjusted for the closed timing. And that incorporates both of those things, the capture of the synergies, as well as the one-time investment that will fall off as we go into 24.

Very helpful. Thank you.

The next question comes from Ryan Daniels with William Blair. Please go ahead.

Yeah, thanks for taking the questions this evening, and I'll add my congrats on the strong outlook. Seth, maybe one for you, just hoping you could speak a little bit more to the overall pipeline. In the past, you've kind of highlighted what segments are really resonating. I know clinical solutions clearly is, but any specific peer categories and just maybe any update on the size of the pipeline or what you're seeing in regards to conversion cycles?

Yeah, Ryan, happy to take that. I think the top line that I would give you is that the pipeline is in a really good place and a lot of health fitness in the pipeline in terms of the total size of it, but also the weighting of it. I think you'll see, if you looked into the pipeline, you'd see a lot in terms of opportunities with additional cross-sell, right, because we have this large opportunity on the specialty side in particular with our existing payers. So, I'd kind of highlight that as one category. Second category, I think the, you know, the blues segment, Ryan, where we don't have a huge footprint today, but, you know, solid and growing. I think a lot of acceleration and conversations there and different relationships that we're building. So I would just highlight that as another one. Again, probably weighted a little bit more towards the specialty side because that's been a theme for a while. But there's, I think, a nice opportunity there as well. And then, you know, the last thing I'd note is, you know, outside of specialty, both Evelyn Care Partners and Evelyn Health Services, for that matter, have some nice opportunities in the pipeline. And so I like the balance. across all those components and it feels very good kind of in total as john said the bottom end of our our range for this year uh really already contracted just subject to go live and so we'll really focus our efforts right now and setting up 24 24 and beyond again i just closed with sort of that earlier comment on annie's question that the integrated message around what we're doing, uh, has, has resonated better than I think we would have expected. And it feels, I mean, it was going to be a good opportunity, Ryan, but it's felt quite good.

Okay. Super helpful color. And then I know it's still early on and you've discussed this a little bit and probably we'll do more so in the analyst day in Q2, but any early thoughts on NIA in regards to kind of key integration milestones for the business, whether it's from a sales, a product standpoint, go-to-market, and then any other client anecdotes or feedback you're hearing as you continue to put this under the Evelyn brand and look to broadening your coverage of spend among your clients to add value for them. Thanks.

Sure. I'll start, and maybe John will add a couple things. I would say I put it in a couple categories. Ryan, first, just sort of organizationally, we've made a lot of progress. I'd say that's a place where You know, we've done a fair bit of the work already in terms of obviously bringing the team on, but also integrating it fully into the specialty business under Dan's organization and getting the people in the right seats, right? That's a big important moment and get handling that correctly. I feel quite good about. I think the second component is thinking about cross-sell. And that's a very near-term activity that we can begin working on now. I mentioned in the setup that we actually already have a session put together for this quarter. to begin doing that on top of a lot of other things. And so I think that is what I'd say is off and running. Related to that is brand, right, where I mentioned in the script that we're pretty far down a process to integrate the brand of the organization all together. And then, you know, the third piece is really around the technology and the platform, which that is the longer pole in the tent, right? And it will take some time. Parts of it, it's not monolithic. We don't get it all done in one day in a big bang fashion. Parts of it, we're already moving on, and parts of it will take over a year to get fully done. And so I feel really good about the progress we've made in a couple short weeks, actually, on the first two in particular, and I think we have a very good plan for the technology side as well. And out of all that comes the financial synergy that we've talked about, and I think everything we've seen so far, we feel very confident about achieving the numbers that we put forth

The next question comes from David Larson with BTIG. Please go ahead.

Hi. Congratulations on a fantastic quarter. Can you maybe talk a little bit more about the Humana expansion? And in particular, it's obviously a great expansion. What led to it? And also, how much more opportunity is there with Humana? Did I hear... that this is a two-state expansion and there's potentially another 30 states? Just any thoughts there would be very helpful. Thank you.

Yeah, David, so I would say first off, just in terms of the context to your question, you know, we've been working with Humana for a long time. You know, job one for us is always to hit our commitments to our customers and deliver on what we promised. I think we've been doing that with Humana in the trenches, doing our job well with the tech and services platform. We also had a very small performance suite relationship in South Florida. And so it was an obvious conversation to say, okay, how do we continue to create more value? We were in 36 states on the tech and services side. And Adding these two states to the performance suite was very logical and kind of went through that process with their team in a very rigorous fashion. So that was, I think, a great outcome reflecting the trust that we have between the two entities. You're right that we had 36 states on tech and services, so there's more than 30 additional opportunities for this. Now, obviously, Arizona and Florida, the two states we added, are big states from a Medicare Advantage perspective. So not all states will be created equally, but certainly there's a lot of opportunity left at Humana. And it's just oncology, just to kind of reiterate it. Obviously, there are other specialty opportunities that we could address there as well. But for the moment, look, our job is to deliver on what we signed up and hit a home run with them on that. And we'll have the right to do more. It continues to be our philosophy. And if there's one theme for 2023, it's certainly been the last few years, but it's around execution. And that is where we'll be focused in the short term.

Okay, fantastic. So it sounds like there's more states. You could also potentially in-sell cardiology. And then there's obviously also IPG and other solutions that you could in-sell. And then can you maybe just talk a little bit about the overall market? I think we've seen Cigna invest some dollars into like Evercore, and then CVS has been on a spring of acquisitions. Just any color or thoughts on how these sort of deal activity could impact you, if at all? Thanks.

I think in general, David, what I would say is that, you know, our core strategy that we've articulated is to be leading independent specialty projects. partner, and I think the market values a platform independent specialty partner, and that's what we've heard over and over again from our customers. We're listening to them. That's what they want, and I think our job is to go deliver that to them, and I don't think any of the things going on around us really affect that too much right now, and Again, the opportunity for us is around executing on the opportunity we have in front of us. And so I would turn it back inwards a little bit and to our customers, frankly, and sort of shine the light there, David. I think that's going to be where we're focused.

Okay, great. Thanks very much. So by being independent, that might actually help you win more business. You're not owned by any major plans. You can serve others. Okay, thanks very much. Congrats on a good quarter.

Thanks, David.

The next question is from Sandy Draper with Guggenheim. Please go ahead.

Thanks very much. First, just sort of a housekeeping one for you, John. So you mentioned a pro forma cash number for the close of NIA, but should we still take, I think it looked like between the revolver and the convertibles, about $687 million of debt on a pro forma basis, at least that's what you had in those original slides, is that still a good number? And how will the preferred equity, will you actually put that on the balance sheet as debt or where exactly will that show up?

Hey, Sandy. That is the right number on the debt side. That has not changed. The preferred equity is temporary equity. So it'll show up as equity.

Okay, great. And then a broader question probably for Seth. Obviously, you've got another expansion with Humana, a smaller, as you talked about, deal with the regional payer. I'm just curious, clearly that your additional cross-sells has really been gaining momentum. You've talked a lot about this integrated platform. Just any sense for how much, I mean, clearly within an organization, Humana, state managers or geographic managers are going to talk to each other. But how much momentum is there of payer A going, wow, look at what these other people are doing or Evelyn's doing a lot with these other payers. Maybe we should talk to them. Is that flywheel spinning at all or is it really right now you've still got to go out and do the groundwork there? The flywheel is really once you've landed, you're getting that flywheel expanding. So just would love any thoughts on that. Thanks.

Yep. Sandy, I think the flywheel is starting to turn. And again, I mentioned earlier, there's a lot of resonance with this idea of a more integrated platform. And it's partly about defragmenting healthcare. Healthcare is already pretty fragmented. So if we can do things with fewer partners, great. So we are starting to get either inbounds or just sort of folks asking the question about how that could work for their organization. I think the other one I'd point out is Centene. They've been a great partner to us in terms of the NIH transaction, but I think part of the logic is around integration and the proof point that we'll have there. We'll have a lot of products across the spectrum in place. We'll also be a nice proof case beyond the ones you mentioned. I feel like that wheel is starting to turn. Great, really helpful.

Thanks, and congrats. Thanks.

The next question comes from Richard Close with Canaccord Genuity. Please go ahead.

Yes, thanks for the questions. Congratulations on the outlook. Seth, I'm curious, you know, I believe you threw out in January – 300 million adjusted EBITDA run rate exiting 2023. Obviously significant growth from the outlook that you just provided for this year. So I'm just curious how you think about capacity and the ability to onboard you know, new expansions and new clients and just any thoughts there would be helpful.

Yep. Yes. And so that metric, Richard, that we've been talking about is exiting 2024, $300 million run rate EBITDA, which, you know, John walked a little bit of the building blocks of that. And it, you know, we feel like we have a very good path to get there. But to your point, it does entail a fair bit of growth and on top of growth we've already had. So, you know, how are we Preparing for that and managing that, I think, is a good question. One of the biggest things that we've done that we mentioned today and is reflected in our segment numbers, frankly, for Q4, is moving talent inside of the organization, whether it's from corporate or from some of our other work that we're doing in the other two business units, into our specialty side, where most of the growth is coming from. And that, I think, has been a really helpful and important lever in being able to staff up and be ready to handle both the integration work but also the growth work, because it's not just one of those two things, it's both. So, you know, a lot of credit to the entire team, not just the specialty team, but also some of the folks who have moved over and moved internally. And I think our culture has been part of that, being able to hang on to some of those high performers and get them to take on a new role, right, to help manage the growth that we're describing, I think has been part of what we have really focused on over the last few months. I'm really, really happy with where we are on that. And the teams are just doing a fabulous job prepping for that. So that's kind of the biggest thing I would say. And I think we're big believers in getting the right people on the bus and the right teams in the right places. And when you have that, you can handle the growth and scale. So that's been our primary focus. If you look out into the year as well, other investments we're making, to make sure that we can also achieve that metric, but it really starts with the people.

Okay, that's helpful. And then, you know, as I think about specialty management, obviously somewhat different than utilization management, but how do you think about in terms of how you guys either help health plans or reduce churn in membership or, you know, what role do you guys play on that side? Obviously, you're saving money and improving quality, but I'm just curious how you think about the role you play on membership for the health plans.

Yeah, I would put it into a couple categories, sort of the first being the here and now, and I do think we help with membership in two ways. One, by managing costs, we're able, I think, to help a plan price, right, to win business, price to members, to win business, be it Medicare Advantage or commercial or et cetera, and the lower cost that they are, the better their ability is to grow or retain memberships. That's kind of part of the near here and now. The other part of here and now is doing that kind of work I just described, Richard, in a, you know, as least abrasive way as possible for the patient. And we tend to be more clinical, more about influencing the physician through, you know, providing our guidance and our expertise. And I do think that is better for the member and is likely also contributes to lower churn. That's sort of the here and now answer. I think in the medium term, certainly part of where we're headed is to do more and more directly with the patient and do it in ways that are more and more efficient for the provider and the patient. So automation and artificial intelligence and some of these things that we've been talking about, I think can make the friction to the patient and the physician lower. which will also help on that, and related as you do more things with one specialty, it's going to be easier for any given physician. So, you know, I think there's a here and now answer, which is very real, and then the medium-term sort of product path that we're on, I think will kind of accelerate that work.

It's just one follow-up. Do you think the MA enrollment declines on the regional and not-for-profit side in this most recent AEP period? you know, help drive further pipeline growth for you or accelerate adoption?

I do think that anytime a plan is focused on growth and feeling pressure there, one of the ways they have to solve that is figure out how to price more effectively. And whether it's pricing or additional benefits to members, right? So I do think it will be a stimulant for us in that segment. You know, we also benefit on the national level side when they take share, we can benefit on that side of the house too. So there's two ways to look at that. Okay, thank you. You're welcome.

The next question comes from Jalendra Singh with Truist. Please go ahead.

Yeah, thank you. This is Jalendra Singh from Truist. I want to go back to Sean's question around EBITDA expectations beyond Q1. I understand there's some lumpiness to performance revenues, but overall it sounds like you expect it to be very consistent. Should the NIA contribution and cost synergies you expect should provide more support in the last three quarters versus Q1? Just curious if it is a function of you building some cushion around any pickup in utilization or maybe impact of Medicaid determination, just trying to understand any other assumption moving parts there. It would be good if you can let us know what is in your assumption for MSSP results in Q3, which might be impacting the EBITDA shape here.

Hey, Jalinda. So a couple things to unpack there. I'd say at the outset, we do expect it to be relatively consistent across the year. The second thing I would say is relative to NIA, our perception and plan there is is to quite mindfully invest in that integration over the course of this year at the same time as we're driving those cost synergies. And so we anticipate the net of that gets us to the $50 million. But, of course, the investments drop off as we go into next year, right? And we just have the benefit of the cost synergies. On redeterminations, just to hit that, be comprehensive in my answer, consistent with what we've talked about in the past, now we have some clarity in terms of when that will start. To start April 1st, different states will take different approaches. Most seem to be indicating that it will happen over a year, maybe 14 months in certain states that might delay it. Our guidance contemplates ending the year with Medicaid membership 8-10% lower than where we started on a like-for-like basis. That feels reasonably in line with where our partners have also recently guided. We obviously look to them to help us on this one as well. That is mostly a top-line impact, not a big bottom-line impact. And on Both the MSSP piece and the broader performance piece, this is one of the key reasons, right, why we have a $20 million EBITDA range for our guidance for the year. And the likely drivers of where we are in that range are where we land in those performance-based arrangements.

Okay, that's helpful. Just my quick follow-up, you know, this comment Seth made around earlier, like, you know, with the company's business mix now, 75% SaaS-based EBITDA versus 25% performance suite business, how do you think about the business mix longer term? Is your long-term goal still to move these lives under tech and service business to your clinical performance business? And does your 2024 outlook, any of these transitions, like, happening over the next couple of years, or that's more like in out years?

So I'll take that one, Jalindra. I think it absolutely continues to be part of the strategy to, in targeted regions with the right partners, move from tech and services style arrangements into the performance suite, where we can drive the most value for the patients that we care for and for the health plan partner. I think from a dollar margin contribution perspective, one of the reasons that you didn't hear me talk about that as much in my walk to the 300 is if we go live with a new performance suite business in Q2 of 24, that's not going to contribute a lot as we exit 24, given the margin ramp. So where we're particularly focused in getting to that 300 is driving profitability in the performance suite that we have now, both that we're live with currently and that we will be going live with this year.

Thanks, and congrats on the good quarter. Thanks.

The next question comes from Jessica Tassin with Piper Sandler. Please go ahead. Jessica, your line is open.

Hey, Jessica.

Sorry about that. Thanks for taking the question. So I think you guys mentioned that your new disclosures will omit the segment level adjusted EBITDA. And I assume it will also, you guys will no longer be disclosing segment level gross margin. So I'm just, without that data, how should we get comfortable with pricing in the clinical solutions risk-based business?

Yeah. Two things there, Jess. It's the right question. The first is just the rationale behind our expected move to one reportable segment. That's now the way that we're operating the business. As I think we talked about when we made the NIA announcement, this vision of presenting a unified platform to our customers who today even have multiple products. Some of our largest customers are live on both Evelyn Health Services and in the specialty business. And so as we move towards that operating model, we just won't be able to track adjusted EBITDA in the same way. What we are committed to is continuing to provide the investment community with enough insight to be able to model the business. And so I mentioned that we'll continue to do the same revenue disclosures for the most part that we do today. And we'll discuss more when we have our analyst day in Q2 what that will look like going forward.

Got it. Thank you. And then on the Evelyn Care Partners side of the business, when you guys announce a new partnership there, how should we think about just kind of assigning lives to that new partnership, ramping revenue, and adjusted EBITDA related to those Evelyn Care Partners deals? Thanks.

Yeah. In this case, with the one that we announced today, it is a capitation-style contract. And so it went live in January. About $15 million for the year is our expectation and a couple thousand lives. The MSSP additions are a little more complicated, as you know, but this one is simpler.

Got it. And then on the MSSP side, if you could just give us kind of a general view as to how to think about revenue or just incremental margins for those contracts in years one, two, three. Thanks.

Yeah. So there, the majority of revenue associated with a new partner in MSSP will start to recognize the year after we go live with them, and it will grow usually rapidly over the first three years.

Got it. Thank you.

The last question today comes from Charles Rhee with Cohen. Please go ahead.

Yeah, thanks for squeezing me in here. You know, obviously a lot of great commentary here, and maybe just to maybe follow up a little bit, John, on the $300 million EBITDA target, just to clarify a little bit. You're saying $100 million from IPG and NIA with synergies, and just to be clear, that's only cost synergies, or does that kind of incorporate some assumptions for revenue synergies? And then secondly... As we think about that $300 million as well, what kind of assumptions have you built in for further expansion with Humana? And then likewise, I know with the NIA transaction, you're going to be working towards a more strategic relationship with Centene and their move towards performance as well. What have you built in for either of those into that $300 million sort of exit run rate?

Yeah. Let me take those in turn. So on the 100 million, you probably recall we've talked about for the NIA business, after additional contractual commitments from Centene are fully live and the capture of $15 million of cost synergies, we expect that business to contribute approximately $85 million of annualized EBITDA in Q4 of 24. And the rounding out to the 100, of course, is the other seven months of IPG that we didn't have in 2022. On the further cross-sell question, to broaden your second question a little bit, clearly this is a very important component of achieving that $300 million exit run rate number. That plus the maturation of the performance suites margins are the two key steps on the path to 300. And we believe that there's a very wide market for us to attack to drive that growth, whether it is continued expansion with Humana or Centene or cross-sell into an NIA customer, for example, or adding new customers, there's a big world out there for us to attack in moving towards that $300 million number.

Okay. And maybe just to follow up on the Humana side, I know you talked about another 30-something states opportunity, and I know it was asked before. Just to understand a little bit better, How is Humana operationally organized? Is it very similar in the way Molina is on a state-by-state basis? Because my understanding, I thought Humana also operated in kind of larger groups, kind of larger operating groups that covered multiple states. Just trying to understand structurally where the touchpoints are for you within Humana and how that kind of progresses. Thanks.

Yeah, I'm happy to take that one. I think generally speaking, a lot of these national payers are similar, which is they have corporate leadership and local or regional leadership. Humana is similar. They group some things by regions, which is a little different than some that do it just by states. When you're more Medicaid, you may tend to do it by states. When you're more MA-focused, you may do it by region. So it all varies a little bit, but I think generally speaking, it's a similar methodology. And the goal is to do a great job for each state or region that you're performing in, make sure that the corporate team also is supportive of your work. And when you hit both those things at the same time, that's where you're able to go to a new region or new state. And so that's been the methodology really everywhere we've gone. It's no exception for the question you asked. And look, I think over the next few years, you'll see more of that from whether it's you know, the payer you asked about or Centene or others. I think there's lots of different opportunities to continue to deliver, execute, be a good partner to our customers. And I think we'll have a chance to continue to expand and grow in the ways that we have.

Okay, great. Yeah, that's all I had. Hey, congrats on a great finish and great results.

Great. Thanks, Charles.

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