Evolent Health, Inc.

Welcome to the Evelyn Earnings Conference Call for the first quarter ended March 31st, 2024. As a reminder, this conference call is being recorded. Your hosts for the call today from Evelyn 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 titled Investor Relations. I will now hand the call to Seth Frank, Evelyn's Vice President of Investor Relations. 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. 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 our first quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measure 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 IR section of the company's website, ir.evelynhealth.com, and form 8K filed with the company, with the SEC earlier today. Finally, in addition to the reconciliations, we've provided details on the numbers and operating metrics for the quarter in both our press release and our supplemental investor report. investor presentation on the IR website. With that done, I'm going to hand the call over to Evelyn's CEO, Seth Blackley.

Good evening and thanks for joining the call. Evelyn had a strong first quarter with above expectations revenue growth and adjusted EBITDA in line with the first quarter guidance. Tonight, we'll cover updates on various fronts, including new customer arrangements, new client go-lives, an announcement of the completion of our M&A integration workstream, and our technology innovation agenda. Let me first provide a few highlights from our first quarter results. Revenue totaled $639.7 million, growth of 49.6% year-over-year. This result exceeded the top end of our Q1 revenue guide of $610 million by almost $30 million. This high revenue growth is driven by strong membership in our performance suite arrangements and new specialty technology and services agreements. Evaluant specialty care offerings now account for 91% of total revenue, up from 60% just three years ago, enabling our organization to focus on our specialty strategy. Year over year, specialty care revenue grew approximately 69%, as reported, and 62% after normalizing for the NIA acquisition in January 2023. On the membership front, we averaged 39.9 million unique members, net of Medicaid redeterminations, and new implementations during the quarter. Total product members eclipsed 80.6 million in the first quarter, or just over two products per unique member on average. On the profitability front, adjusted EBITDA was in line with the midpoint of our guidance at $54.1 million. Our cash position remains strong with $165.1 million in cash and equivalents after what is always a historically high cash outflow quarter associated with higher working capital requirements that moderate as the year progresses. Let me now update you on each of our three principles for shareholder value creation of one, strong organic growth, two, expanding profitability, and three, disciplined capital allocation. On the first principle of organic growth, we are announcing today that we signed three new revenue agreements during the first quarter. Two of our new revenue agreements are with Molina, building on that highly successful long-term partnership. We will be implementing both cardiology and oncology performance suite across both Medicaid and exchange lives in South Carolina and Mississippi. We anticipate implementing these solutions by the fourth quarter of this year. Financially, we anticipate the impact of South Carolina and Mississippi to contribute together at least $50 million of new annual revenue contribution once live. The addition of these states increases our presence with Molina to nine states after these two states go live. Our revenue will be below 50% of the total opportunity at Molina within the current scope of services we provide today, excluding new solutions like MSK Performance Suite, leaving what we believe to be a significant opportunity to continue expanding our partnership and impact for our partner. Our third new revenue agreement is a specialty technology and services contract we signed with a long-standing, evident Medicaid health plan on the East Coast. This health plan will be adding our MSK specialty offering to help manage orthopedic surgery costs, utilization, and outcomes. We anticipate implementing this solution in the third quarter across several hundred thousand Medicaid members. This contract will contribute towards the $4 million of quarterly adjusted EBITDA earnings go-get we provided in our bridge illustration for achieving the 2024 year-end exit adjusted EBITDA target. Today's announcements bring us to seven new revenue agreements year-to-date. In addition to new revenue agreements, Q1 was productive for successful go-lives. In total, we launched 25 specialty go-lives across multiple health plan customers for the performance suite and the technology and services suite. These included major go-lives and new geographies for performance suite, including oncology and cardiology for Molina in Florida and cardiology for Florida Blue. During the quarter, we also began a national implementation with Centene for our MSK technology and services suite covering several million members. Recall we announced this agreement back in February, fulfilling a significant portion of the promised initial revenue synergies from the NIA acquisition. From a macro perspective, industry demand remains very strong. Beyond our normal product value proposition, healthcare utilization pressure and health plan margin pressure are accelerating our core inbound sales opportunities. Our belief is that typical savings levers outside of specialty care are more limited in the current environment, making high-cost specialty management a critical and growing focus for health plans. As a result of these factors, our sales pipeline remains very strong, driven by interest in both regional and large national health plans. As a result of all of these dynamics, we are raising the midpoint of our revenue guidance for 2024 by $115 million, as John will detail shortly. Moving to our second operating priority, expanding profitability, I'm excited to announce that in March we successfully wound down the NIA transition services agreement we had in place since January of 2023 with NIA's former owner. The transition was the largest and most complex IT project in the company's history, involving hundreds of professionals globally. Most importantly, we were able to continue serving all of our customers with limited disruption. I want to thank the Evelyn teams who worked tirelessly through weekends to achieve this important transition. This transition in the quarter marks another important step towards our year-end run rate EBITDA target and the achievement of our $15 million of NIA cost synergies. Next, I'm pleased to share that we continue investing in the artificial intelligence opportunity at Evelyn through our initial product testing. Based on our work thus far, we believe that there's a significant opportunity to reduce the cost for specialty case review while maintaining or even enhancing service quality and providing a superior user experience. As an additional benefit of our AI investments, we expect we'd be able to redeploy our human capital pool to higher value word streams that improve our product and our value proposition. We expect these benefits to begin making a more significant impact in 2025. Third, Our results in Q1 demonstrate the benefit of our balanced approach to value-based specialty care, with earnings growth from both our non-risk and risk products, and our non-risk products continue to account for approximately 70% of our annual adjusted EBITDA. As John will share in detail, we saw increased utilization in our performance suite risk business in Q1, and we have lower data visibility than is typical for this point in the year. Those factors do impact our Q2 guide. But because our data visibility will increase across the year, because the increases in utilization have moderated across early Q2, and because of the contractual protections available to us around prevalence and other population changes that John will detail, we remain confident in our 2024 exit run rate adjusted EBITDA commitment of $300 million and our annual guidance. Finally, I'm proud of the team for continuing to drive efficiency as we grow with our SG&A expense down sequentially versus Q4 despite substantial revenue growth. And I feel we've been able to drive these efficiencies while maintaining a strong culture and talent orientation. Regarding our third investment theme of disciplined capital allocation, our principles remain consistent with our communications over the last few years. which are ensuring strong organic innovation, carefully managing to our leverage targets, and pursuing accretive M&A to accelerate our leadership position in value-based specialty care. With respect to organic innovation, we have consistently talked about building more services to help members and their families navigate their conditions in their moments of need. Our strong belief is that shared decision making with an engaged member helps drive the highest quality, most efficient care. We've addressed this opportunity thus far through our end-of-life solution, which we primarily bundle into our performance suite. Our data shows that when our end-of-life solution is integrated with our oncology and cardiology solutions, we have materially higher member engagement rates, generating greater referrals into palliative care, reducing the overall total cost of care, versus the status quo, while most importantly, aligning clinical care with patient-identified goals and values in order to improve their quality of life. Last August, we also announced a pilot program with a large Blue Cross Blue Shield plan partner to offer shared decision-making and better navigation of the healthcare system for patients diagnosed with cancer. Today, we're accelerating this initial navigation work by announcing a strategic partnership with Careology, a privately held UK-based company with what we believe to be the most robust digital cancer care platform available. The Careology platform is being used extensively across the UK National Health Service to connect patients to caregivers, to monitor and report symptoms associated with chemotherapy, and to monitor vital signs and overall well-being. In addition, the platform manages schedules, appointments, and the overall care process. We believe this solution will help manage the cost and quality of our performance suite members as a bundled offering and potentially become an Evalent technology and services offering in the future. From a business perspective, Evalent has secured the exclusive long-term right to distribute and integrate the product in the United States for the payer market. We believe this patient navigation arrangement is another good example of both innovating our solution and doing so in a capital efficient way. Before I hand it to John to talk through our financials and guidance, I want to take a step back and comment on where I believe Evelyn is headed in the future. First, we are proud to have built an incredible and what we believe is a differentiated specialty platform. currently growing organically at over 50% annually, driving strong profitability and cash flow. The strong growth and profitability we believe are indicators of customer confidence in our ability to innovate and execute over the long term. Second, a rising utilization environment creates significant financial and operational pressures on health plans. requiring more innovative solutions given the need to aggressively manage utilization pressures in specialty care. This will create, I believe, an important opportunity for our company for years to come. And third, our innovation across areas like patient navigation, artificial intelligence, and specialty expansion all provide meaningful opportunities to accelerate our platform. We understand the investing environment for small and mid-cap publicly traded healthcare organizations has been challenged as of late, and Evelyn is no exception. However, we remain very optimistic about our future and fully committed to using all the tools available to ensure shareholder value creation. With that, let me hand it to John.

Thanks, Seth. We are pleased with our first quarter results and anticipate the continued solid outlook for 2024. We are raising the midpoint of our revenue guidance by $115 million and reiterating both our in-year adjusted EBITDA outlook of $235 to $265 million and our 2024 year-end exit run rate of $300 million in adjusted EBITDA. Revenue growth was nearly 50% year-over-year versus the same quarter last year, outperforming internal and external expectations from two factors, First, about 25 million from membership growth across our performance suite. We expect this level to be the new quarterly baseline for the rest of the year. Second, based on CMS data we received in the quarter and our consistent revenue recognition policies, we recognized an additional 18 million in shared savings for MSSP performance year 2023, along with an offsetting expense accrual of 14 million and gain share for our physician partners for $4 million of adjusted EBITDA. Those items were ahead of our expectations for this time in the year. Note that consistent with our past practice, our cumulative accrual for PY2023 shared savings remains at the conservative end based on data received to date, and we anticipate an incremental step up once final settlement data is received in Q3. Demand for our technology and services product also continues to be strong. We generated Q1 revenue of $89 million, despite losing an estimated $6 million in quarterly tech and services revenue to Medicaid redeterminations and conversions to our performance suite, representing underlying year-over-year growth of nearly 25%. Regarding Medicaid redeterminations, We estimate that the process for our Medicaid population was over 80% complete as of 3-31, and we estimate a same-store weighted membership decline of 10% as of the same date. Recall that our biggest Medicaid states started the process later, so our commentary here differs slightly from national MCOs. Our outlook continues to anticipate a gross decline in the mid-teens when the process is complete in the summer, consistent with our expectations and our initial forecasts in 2023. Turning to profitability, we continue to drive efficiencies in our cost structure as we grow, with adjusted SG&A costs of 8% of revenue, down by 166 basis points sequentially versus Q4. Adjusted gross margin in the quarter was 16.4%, down 185 basis points sequentially versus Q4. The change in gross margin is principally driven by growth in our performance suite products combined with higher unit medical expenses. The drivers of medical expenses in the quarter are as follows. First, net favorable prior year claims development in the quarter was approximately $15 million, consistent with our expectations and demonstrating our continued prudent actuarial processes and conservative approach to reserving in our risk business. This $15 million was associated with revenue refunds to our clients from corridors of approximately $10 million for an approximate net $5 million benefit to gross profits, again consistent with our expectations. This favorability was offset by higher estimated medical expenses for Q1, driven both by lower data visibility and our continuous review of leading indicators. On the first, Because of dynamics impacting our partners, including the change healthcare outage, we closed the quarter with lower claims visibility than is typical, even for longstanding clients. This is exacerbated by the volume of recently launched performance suite revenue, approximately two and a half times more than the same quarter last year, which typically has lower visibility overall. The mechanics of this lower visibility in our reserving approach combined with macro commentary across the industry regarding elevated utilization, creates incremental conservatism for the first quarter and our guide for Q2. Second, we incorporate leading indicators like volume and disease prevalence from authorization requests into our reserving models, and our reliance on these leading indicators is higher if our claims visibility is lower, like it was for this quarter. During the latter part of the first quarter, we saw increasing activity on these indicators, rising to a peak in March. This observed activity from our authorization data was in both oncology and cardiology specialties for particular markets in both MA and Medicaid. Note that these indicators declined in April from their March peak. Now, as a reminder, we've previously highlighted two distinctive features of our model. The first is that we have intentionally built a diversified business that balances both risk and non-risk products, and we continue to generate close to 70% of our expected adjusted EBITDA across the year from our technology and services business. And so any potential impact of higher utilization in our performance suite is buffered by the other two-thirds of our EBITDA guide. The second is that our performance suite products typically contain certain contractual protections that may adjust our capitation rates based on population changes outside of our control. So, as Q1 claims complete and our visibility improves, if these elevated leading indicators translate into elevated paid claims, we estimate that over 70% of the reported cost increases in Q1 can be addressed by contractual adjustments resulting in rate changes over the next 3 to 12 months. It is important to note that this is a normal course part of our business. Over the last few years, we have regularly used these mechanisms to work with our partners to update rates for changes at the market and line of business levels. You will also recall that we included in our original adjusted EBITDA guidance for 2024 a $10 million buffer for changes in medical utilization based on dynamics in the market If the leading indicators from Q1 persist beyond March and translate into claims, we will be quickly implementing the contractual changes available to us. However, there may be a timing lag between that elevated cost and increased fees to Avalyn, which could cause our results for Q2 to be adversely impacted. As a result, we are taking a conservative approach to our adjusted EBITDA guidance for Q2 with a range of 48 to 62 million, Let me be specific about what could take us to the high or the low end of this range for the second quarter. In scenarios where the leading indicator data in late Q1 is transitory and or we obtain increases in our capitation rates for the quarter, we could see the top end of our range for the quarter or beyond. In scenarios where that leading indicator data translates into persistently elevated claims expense, and the process for obtaining corresponding rate increases extends beyond the quarter, we could see the lower end of the range. Because trends mitigated in April, and because we have several levers to drive profitability across the year, including but not limited to these contractual protections I mentioned, we remain confident in our full-year adjusted EBITDA guidance and our 300 million exit run rate targets. Let's go through the path to that exit run rate target, further updating the bridge we provided on the February call. On Medicaid redeterminations, currently we are running in line relative to our forecast for a $3.5 million quarterly headwind versus Q4 23, with one quarter to go. We estimate a Q1 in-quarter impact of about $2.5 million. On NIA synergies, As Jeff discussed, we are on track to realize the total $8.75 million quarterly benefits by the end of this year across both cost and revenue items, with about half of this value included in Q1 results. On the performance suite, we are still early in our journey to capture the first leg of maturation that drives the $12.5 million quarterly expectation here. but we are pleased with the leading indicators of value creation in populations launched in 23 and 24. Authorization data suggests that new plan members under our management are on average experiencing higher quality, more cost-effective treatment regimens in oncology and cardiology, and we look forward to seeing these shifts reflected in the claims data. Finally, on the organic growth side, we estimate that the combination of strong membership performance and recently announced tech and services deals closes approximately 25% of our quarterly adjusted EBITDA go-get, leaving just under $3 million as a go-get. Shifting to cash generation, first, we remain on track to meet or exceed our target of $150 million in cash flow from operations for calendar 24. Recall that the first quarter of the year is seasonally our biggest use of cash, given the timing of working capital changes. seconds after the quarter closed, we closed out the NIA earnout for $88.75 million, slightly ahead of our initial expectations based on what has been a very successful acquisition that was additive to our corporate performance during 2023. We elected to fund 100% of this earnout in cash, avoiding dilution to our common shareholders. Turning to guidance, for the full year, we are raising our revenue outlook to between $2.53 and $2.6 billion. and reiterating our adjusted EBITDA outlook of between $235 and $265 million, as mentioned above. We continue to expect capitalized software development of approximately $30 million and total cash flow from operations in excess of $150 million, including the technology initiative steps discussed. For the second quarter, we are anticipating revenues between $625 and $645 million, and adjusted EBITDA between 48 and 62 million. In closing, we remain confident in the value of our unique and diversified platform, and we are excited to continue driving value for shareholders, employees, and the partners and patients we serve. With that, we will now open it up for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question. If you have additional questions, you may rejoin the queue. Our first question today comes from Ann Samuel with JP Morgan. Please go ahead.

Hi, this is Kyle Aikman on for Annie. Congrats on the quarter and thanks for taking my question. I was wondering if you could touch more on the macro payer landscape, things that you could point to that are pressuring these health plans. Has this gotten incrementally worse in the quarter? And does this mean that deals are closing quicker? How is it benefiting Evelyn in the long term? Thank you.

Yeah, sure. Happy to take that one. So, look, I think it's a bit of a perfect storm on the payers over the last handful of quarters. One piece is reimbursement. One piece is around B28 risk adjustment. One piece is around pricing and benefits. And one piece is around utilization. And, you know, I think the fact that those are all hitting kind of over the last six, nine months has created a lot of pressure that we all know about. And I think one of the remaining levers that's available to the payer community is obviously around specialty management. So that's become I'd say one of the top one or two issues when we talk to most of these payers is how do I better manage specialty costs if I can't do as much on risk adjustment or as much with primary care or much go down the list. And so it has definitely increased interest in what we're doing. I think it's increased the imbalance to the top of the funnel. I wouldn't say it necessarily has accelerated the sales cycle, but I think there's just generally a lot more in the funnel. And it may, we'll see, it may increase sales cycle in certain situations, but it definitely added a lot more to the funnel. And I think it, you know, what I really like about this dynamic is even setting aside the more immediate pressures, I think it's very clear this management of these high-cost specialties is a very long-term issue. A lot of it's driven by, you know, pharmacy innovation and the like that's not going away.

Amazing. Thank you.

The next question is from Jeff Garrow with Stevens. Please go ahead.

Yeah, good afternoon. Thanks for taking the questions. Maybe we can dig in a little bit on the topic of the contractual protections. And you mentioned the three to 12 month lag on capturing any potential rate changes. You know, that's a bit of a wide range of time and some of it could fall out of FY25 at the high end of that range. So maybe you could help us further understand how that timing would most likely play out and how a rate change would also play out in terms of either retrospective or prospective adjustments to your rates and in turn revenue. Thanks.

Good questions, Jeff. I'll hit three things. First, on the retrospective question, many of these changes do occur retroactively. That's an important piece here. The second thing I'd note is that in each of these contracts, the way it's treated is different, and that has to do with the particular payer's needs and how that particular contract is structured. The last piece that I'd say is that 12 months is from 331, right, from the end of Q1, so in place by Q1 of next year as we're exiting this year.

The next question is from Kevin Caliendo with UBS. Please go ahead.

Hi. Good afternoon, everyone. It's Andrea Alfonso in for Kevin. John, thank you so much for providing all that color on, you know, why sort of the inputs for that wider range in 2Q. I wanted to just dig into that a little bit. I think the key question being, you know, how much is that directly related to sort of that lower claims visibility on change versus that leading indicator volume? You know, you had talked about guidance building and the $10 million buffer for EBITDA. How does that tie in, you know, versus sort of these renewed expectations for 2Q? And then just as a follow-up for that, apologies for the loaded question, but are you embedding, you know, onboarding costs for some of these customers versus prior expectations that could be depressing that number as well? Thank you so much.

Yeah, good questions, Anjaya. On the mixed question, how much of this sort of outlook and conservatism is from leading indicators that we're seeing, in particular, we saw in March, versus lower claims visibility. I think the truth of the matter there is they're inextricably linked. And in situations where we have lower claims visibility, we have to rely more on leading indicators. And the leading indicator reserving is naturally more conservative. And so they sort of reinforce each other. And what I would say also is in a quarter where we have what we'll call a normal level of visibility where that's less of an issue, we would place less reliance on a change, one month's worth of change in leading indicators. That's how we think about that. On your second question around startup costs and otherwise, those are incorporated in the outlook typically not that significant sort of operational lift to get these contracts live.

The next question is from Charles Reed with TD Cowan.

Please go ahead.

Yeah, thanks for taking the question, guys. I wanted to talk a little bit more about these leading indicators and just sort of, because I know in the last couple of quarters when you've been asked about how utilization is trending. You've kind of commented that it's been in line with your expectations. Here you're kind of talking that you're seeing some change, but that you've also seen it start to moderate. I guess in the context of when you're signing new partnership deals, particularly let's say the new ones here with Molina, how do you factor in then the trend that you're seeing at the moment as it gets factored into the agreement? Is that Is that a moving target then for each new partner as it gets signed at that moment in time?

That's a good question, Charles. I'll reiterate what I said earlier, that it does depend on the specific contract with the specific partner. It varies. But in most cases, for these sorts of moments, we will have what we call a true-up embedded in the contract that resets the capitation rate upon go-live based on trends to that point. So, for example, if we go live on September 1st or October 1st, we would reset the capitation rate for that contract based on claims through that point.

The next question is from Jessica Toussaint with Piper Sandler.

Please go ahead.

Hi, guys. Thanks so much for taking the question. I just want to verify you guys saw positive prior year development related to MSSP in the first quarter of 24. And then can you just, I guess our understanding was that these MSSP reconciliations hit in the third quarter. So just can you verify that you had not, that you have not, recognized any prior year development related to MSSP in 3Q23 and that I guess this first quarter recon was the first that you've seen. Thanks.

Yeah, let me go through just how we do revenue recognition for MSSP. Typically, we will start recognizing revenue in the third quarter of the performance year. And so the first dollar of revenue we recognized for the 23 performance year, which is Q3 of last year. And each quarter we received from CMS an updated claims file, other external factors, regional benchmarks and risk adjustment information and so on. That allows us to narrow our actuarial range. And each quarter we're then doing a true-up based on that narrowed range. You know our orientation is to be conservative here. And so as we're doing that true-up each quarter, we're remaining on the conservative end. We're still book 12 below where the percent shared savings came out for QI 22, for example. And we'd expect to true-up to the final number in this Q3 when we get the final settlement information.

Awesome. That's so helpful. And then my quick last question is – On the Medicaid redeterminations, did you see an incremental sequential headwind related to Medicaid redeterminations, or was the number you cited in aggregate? Thanks.

Yeah, good question. That was incremental. And to set another way, cumulatively, since the whole process began, we have seen a headwind of $5.5 million per quarter, a headwind to adjusted EBITDA. That's consistent with our expectations. It's about where we thought the quarter would end.

Perfect, thanks. The next question is from Ryan Daniels with William Blair.

Please go ahead.

Yeah, guys, thanks for taking the questions. Congrats on the strong start to the year. I hate to ask another one on this, but you probably anticipated it. In regards to the leading indicators kind of peaking in March and then declining in April, If we take a broader purview and look at the data through the first four months of the year, acknowledging it's somewhat limited due to change, but if we look at the four-month period, how does that period reflect upon your guidance for the full year and assumptions for the performance week?

Yep. It's a good question, Ryan. I think what you're seeing here in our second quarter guide is is that $10 million buffer that we talked about for the full year. And so if March is a new normal, then we would initiate some of these contractual protections, and we may be in the lower end of that guide. If March was an aberration and April is more normal, more like the rest of the year, then we could be close to the higher end of the guide. So it's always a little tricky in a risk business to draw a line between just two points, so we've sought not to do that. But given the lower visibility, it feels appropriate at this time.

And then a quick follow-up, if I could. Regarding the contract provisions you have, are those kind of automatic where you just go back with the data and there's an agreement for things like, you know, if there's increased cancer prevalence, you know, that's not your fault. You're paid to manage the cases, not to avoid cases. So is it automatic or do you have to go back and actually kind of negotiate things with these payers? Thanks.

Yep. Depends on the specific contract. Generally speaking, the contracts will outline the specific So, the calculations and corridors and there is a real mathematical element to it.

Ryan, I'll add one other comment to your question, but also Jeff's question earlier. You know, as we said in the prepared remarks, this is not sort of a new territory for us. This is something we regularly participate in each year. It's a little bit different this year given the data, but it's not really a different process. So, we understand how it works. We've done it, you know, multiple times in the past. are able to, I think, pretty accurately bake all that into our forecast. So when we, you know, reiterate this or adjust Q2, it's with a lot of experience having done this many times before and have a pretty good sense of how it'll play out.

Yeah, that's a good call. And I think there's just heightened sensitivity to it, but that makes a ton of sense. So thank you.

Yep. The next question is from Jalendra Singh with Truist Securities. Please go ahead.

Thank you, and thanks for taking my question. I actually want to go back to the gross margin discussion. Can you speak to your 180 basis point decline in the quarter? So MSSP revenue, which came through, likely helps the gross margin, but offsetting, you called out more performance revenue, higher reserves on claims visibility and authorization. Can you provide a little bit more granularity on the individual buckets on those gross margin impacts? And related to that, how do you think about gross margin trends for the rest of the year?

Let me take that last question first, Jalinder, and then I can add a little bit more color. As we've gone through before, the biggest driver of our enterprise percent gross margin is the mix between performance suite and tech and services. And so what you saw in Q1, what you saw in Q4 also was the impact of continued rapid growth in the performance suite, which has a lower gross margin. It's also true that the Q1 gross margin is depressed because of a lot of new go-lives. For example, we had over $125 million of performance revenue in the quarter that was still relatively new and contributing minimally to the gross profit line. If you were to pro forma that closer to target margins, that would increase enterprise gross margins by 230 basis points plus. So as we think about gross margin trends across the year, absent new go-lives in the performance suite, we would anticipate them ticking up. As we think longer term, It's going to continue to be driven by the mix of our growth between the performance suite and the tech and services suite, which as we sort of highlighted in the prepared remarks, we seek to have a balance.

My quick follow-up, actually I want to go back to 2025 MA final notice. Clearly a lot of focus there. I want to ask a question in two ways. First, how are your conversations with payers progressing in terms of carving out some lists for new customers are taking more risks with existing customers because of the cost pressure they're seeing. And we'd be curious on your thoughts regarding potential membership changes that might occur in 2025 as some plans focus on pricing for margin.

Just maybe provide some color there. Yeah, Seth, do you want to talk about the conversation?

Yeah, look, I think, John, what I would say is that... As I mentioned in the prepared remarks, just a lot of pressure on the payer community right now, which is driving good demand in the product. And I continue to think that our ability to more effectively manage these categories, whether it's under performance suite or tech services, that is a platform opportunity that I think we accrue over time. And we continue to take market share and grow for that reason. In terms of the negotiations to your very specific question, You know, I don't think a lot has changed there. We have always had a number of different protections. It's always part of the conversation. It's always part of a negotiation to get those aligned, you know, in terms of how it's set up. One of the things that's also true is that, you know, we can do it different ways. We have relationships where baked in, the trend is much higher, our trend on our fee, meaning our annual inflator on the fee is It's pretty significant because we're taking fewer protections, and the opposite can also be true. And there's not been a huge change there. You know, to the earlier question, obviously, we have to take in the most recent data and pick the right market-based trend to use in that negotiation. But that's a fact. It's not that hard to get our hands around and get aligned on. So that's sort of the dynamic in the marketplace. And again, you know, there's some puts and takes on these kinds of moments. I think, as we've been saying for a while, we think it's a net positive, the pressure that exists in the market. in terms of the demand side.

Thanks a lot.

The next question is from Sean Dodge with RBC Capital Markets. Please go ahead.

Yeah, thanks. Just on the performance suite indicators, I guess, can you give us any more detail on why you think it stepped up in March? Was it concentrated in any particular geography or payer or population? And was it You said volume, so it sounds like it was more tied to prevalence than it was cost, but correct me if I'm wrong there.

Yeah, you're not wrong, Sean. We see in that authorization data the majority of the increases driven by what we see as changes in the population, so things like disease prevalence. I'd say they're not localized to a particular geography or line of business. There's pockets here, pockets there. and something obviously that we're watching closely as we go through this quarter.

Okay, thanks. The next question is from Daniel Grosslight with Citi. Please go ahead.

Hi, thanks for taking the question. Last quarter you mentioned that you would expect to see around 10 percentage points of margin improvement of 2023 performance suite launches in 24, similar to what you saw from 22 to 23, given some of these utilization pressures, are you still comfortable with the assumption around margin improvement of 2023 performance suite launches? And as you look at utilization and some of these pressures, is there any difference between newer launches versus more mature launches or more mature performance suite arrangements?

Yeah, both good questions. Let me take the second one first. There is not. This isn't specific to a new population or more recent growth. It really is in pockets of both older clients and newer populations. To your first question, are we still confident in that 10% execution in the margin maturation for the performance suite as we're exiting this year? The answer is definitively yes. We feel very good based on what we're seeing in terms of the interventions that we're doing, the value that we're creating, the incremental quality that we're delivering to those members. It is true that we may need to adjust the capitation rate or two, as we sometimes do, but on the our ability to create value by lowering the cost of care. I feel very good about that.

Got it. Thank you.

The next question is from Jack Wallace with Guggenheim. Please go ahead.

Hey, thanks for taking my questions. I just wanted to get an idea for the, it sounds like the end market is building quite a bit of demand and you're Thinking about the performance suite, if you're able to pull in more new customers for the performance suite and transfer or transition some of your tech and services customers to performance suite, is there a potential that enough of that demand would put an impact on your EBITDA target and said differently when any of the upfront costs and actual assumptions for the incremental performance suite lives potentially be a drag in a good scenario for the medium and long term? Thank you.

Yeah, Jack, so good question. I don't think so for this year. You know, we continue to, first of all, have a nice pipeline across performance week and the tech and services side, it's pretty balanced if I looked at what's in there. And so I don't see a skew, you know, point one. And then I'd say the second point would be just that You know, I don't think at this stage in the year there's, from a timing perspective, likelihood that that would happen. And even as we look into next year, if you ask the question differently, I think it's the same response, which is we continue to have a pretty balanced pipeline. We like it that way. We sort of, you know, always like the balance between the two segments for the reasons that we've been talking about, and that continues to be what it looks like.

Excellent. Thank you. And then, yeah, how should we be thinking about the economics from the It sounds like it's a pretty interesting partnership. Should we think about that as some potential upside for this year? Is that really more of a 25 story?

Yeah, Jack, so we're very excited about Careology, too. Our team has done a great job, their team. It's an exciting partnership. I think that it's not going to have an effect on this year. We'll probably go live with our first health plan partner late this year, if I had to guess, so it's down the road a little bit. And, you know, we're going to really be targeting our performance suite relationships first. And at some point it may become a tech and services product as well, but it's really about embedding it into our performance suite relationships, similar to what we do with our end-of-life product.

Got it. Thank you. Sure.

The next question is from Stephanie Davis with SVB Lyric. Please go ahead.

Hey, guys. I'm actually with Barclays. I'm glad to be in my new home. But thank you for taking my question. You provided a really helpful bridge on profitability. I was hoping to split hairs a little bit more and ask which of these, like the new wind mix, would be more of an impact to gross margins and which of these we should think of as a headwind to gross profit dollars.

I'm not sure I understand the question, Stephanie.

Sorry.

So is there a reason you would see a year-over-year decline in gross profit dollars as opposed to just a headwind to gross margin mix?

Ah, good question. Yes. So from Q4 to Q1, gross profit's relatively flat, largely driven by the sort of elevated indicators in March, as I mentioned. As we go through this year, continue to drive performance in the performance suite and those cost improvements that I mentioned, get the benefit of some of the new launches that we've seen, which are mostly in the tech and services suite in the first half of this year, that should drive it forward. And then when the newly announced Molina deals go live later this year, you'd see another dip on the percentage side, but I wouldn't necessarily anticipate a dip there on the dollar side. Expect that to continue to grow as we laid out the EBITDA ramp continuing to grow.

All right, helpful. Thank you. And just a quick one on the Molina contracts. How should we think about what would happen if Molina loses Florida? Does that have any impact to your business?

Yeah. Too early to say what happens. We're not close to it. I think we previously specced out that sort of Molina, Florida, revenue in Medicaid at less than $15 million. So that would be the top line impact if something were to change there.

All right. Thank you so much.

Again, if you have a question, please press star then 1. The next question is from David Larson with BTIG. Please go ahead. Hi.

Congratulations on the good quarter. For the $300 million of annualized EBITDA, should we be thinking about $75 million of EBITDA for the fourth quarter of 2024, or does the $300 million of annualized EBITDA mean in December of 2024 you'll be trending at like one-twelfth of $300 million of annual EBITDA? Thanks very much.

Yeah, Dave, the way that we think about it is it's an exit number. And so Q4 is probably a little under that and Q1 is probably a little over that.

Okay. And then in terms of the different components to getting to the $300 million, there's performance suite maturation, there's new growth, and then there's earnings from NIA and IPG. Just any update on those numbers would be great. In particular, like the new growth figure, I think that was $50 million just Are those all tracking in line with or ahead of expectations?

Yeah, in line. So we mentioned from the NIA synergies anticipating $8.75 million in quarterly benefit there. About half of that is already in Q1 and well on track to achieve the rest of that. We commented on the performance suite already and on the new growth mentioned that we're with the seven new relationships that we've already announced, seven new agreements we've already announced this year, strong membership, taking that go-get to just under $3 million a quarter.

Great. Thanks a lot. And then just quickly on cash, just expectations for cash flow for the year or free cash for the year, and then how should we be thinking about that for 2Q, 3Q, 4Q, and how does that compare to EBITDA, please? Thank you.

We affirmed our expectation of $150 million or more in operating cash flow for the year. Q1 is right in line with our expectations on that metric, and we'll build cash across the year.

Thanks very much. Appreciate it.

This concludes our question and answer session. I would like to turn the conference back over to Seth Blackley for any closing remarks.

All right. Thank you for the questions tonight, and we'll look forward to catching up offline. Have a good evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.