Evolent Health, Inc.

Welcome to the Evelyn Earnings Conference Call for the second quarter ended June 30th, 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.

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 second 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 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 IR section of the company's website, ir.evalent.com, and the form 8K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and the supplemental investor presentation. And now I'd like to hand the call over to Evelyn's CEO, Seth Blackley.

Good evening. Thanks for joining the call. Tonight, I'll go through the headline results for the quarter and update you on our three pillars of shareholder value creation before handing it to John to speak more about our financials and outlook. Evaluant delivered revenue just above our anticipated range, while profitability came in within our expected range for the second quarter. Today, we're updating our full-year 2024 adjusted EBITDA guidance. We're also reiterating our confidence in our $300 million 2024 year-end exit run rate target. To put the results and our outlook for the year in perspective, we have a number of important updates to share today. First, recall in the first quarter of this year, we noted a few performance suite markets with higher than expected medical costs due primarily to higher prevalence of disease. We also noted that our contracting model allows us to update our capitation rates to reflect these changes. Today, we're pleased to update you on our progress regarding rate increases from these performance suite customers. Specifically, we have aligned with our partners on new rates which we expect will contribute approximately $60 million in additional revenue on an annualized basis. We expect to capture approximately $35 million of this rate benefit in 2024. Based on the partnership dynamics with our payers in an environment where they are under pressure, we have prioritized setting the correct rates for the balance of 2024 and for 2025 over retrospective rate increases. Given that, we anticipate the majority of the economic benefit of these rate increases to begin in the third quarter of 2024 and not retrospectively. 2024 came in slightly lower than the midpoint, but we now have high confidence in reaching our target year-end exit run rate of $300 million in adjusted EBITDA, as well as a strong setup for 2025. More importantly, we believe this outcome clearly underscores the fundamental value creation our solutions deliver to our customers. With respect to overall utilization trends in our performance suite, expenses were in line with our expectations for Q2 and were consistent with elevated levels suggested by the leading indicators previously noted in March. We saw these same leading indicators decline in Q2, suggesting potential utilization improvement into Q3. However, our full year guide assumes baseline third and fourth quarter utilization trend levels will remain consistent with Q2 levels. That is, we are assuming trend to be stable, neither improving nor deteriorating. And to achieve our $300 million adjusted EBITDA exit run rate, we are assuming normal margin maturation improvements consistent with our historical experience. As John will detail in a moment, As normal course margin maturation, we expect to drive approximately $7 million in increased quarterly adjusted EBITDA by the end of the year. To achieve the top end of our range or higher, we need to slightly outperform our historical margin maturation pace or see utilization trends return to 2023 levels. However, because the rate increases are fully in effect by December 31st, 2024, we have high confidence in reaching the $300 million run rate exit EBITDA, even if utilization trends remain at the 2024 average levels and don't return to 2023 levels. Regarding Medicaid redeterminations, we believe we have substantially captured the impact of this process in our revenue and earnings through the second quarter, and this issue is now in the rearview mirror. Finally, I'm pleased to announce today four new revenue agreements from the second quarter, adding over $70 million in new annualized revenue bookings across performance suite and technology and services, with the latter closing out our tech and services new business EBITDA go-get towards our $300 million run rate target. Taken together, as a result of these factors, we have confidence in our path to significantly improve the performance suite and enterprise margins and adjusted EBITDA for each of the remaining quarters of 2024 within the range provided today. Evaluating where the business stands today, I continue to feel excited about Evelyn's future. We continue to see a strong pipeline, which we believe is reflective of high demand for our solutions from the leading payers around the country. We have a $150 billion addressable market and over $50 billion in cross-sell opportunity. We believe our portfolio consists of an attractive balance across different customer types and sizes and revenue models across fees and risk. With that, let me turn to the results. Second quarter 2024 revenue was $647.1 million. totaling year-over-year growth of 37.9%, all organically driven. We averaged 39.9 million unique members in the quarter, with an average of two products deployed per unique member, for a total of 79.9 million product members, a modest sequential decrease due to anticipated Medicaid redeterminations. Given that we'll start to recognize the majority of our anticipated rate increase in Q3 and not Q2, Adjusted EBITDA for the quarter was towards the lower part of the range, totaling $52 million. We ended the quarter with a strong cash position of $101 million in cash and equivalents after the outflow of $89 million in cash for the earn-out to the former owner of NIA. Turning now to our three pillars of shareholder value creation, I want to update you first on our organic growth. We're announcing today over $70 million across four new revenue agreements that we anticipate will go live in the coming months. Of the four new revenue agreements, two are performance suite and two are for specialty technology and services. The two performance suite expansions are for Medicaid and commercial in Ohio and Wisconsin for an existing performance suite customer, and they're expected to add approximately $60 million in new annual revenue. In specialty technology and services, we are seeing exciting growth and growing traction among Blue's plans around the country. In the quarter, we want an RFP to provide our comprehensive oncology technology and services solution for one of the five largest Blue Cross Blue Shield plans in the country. This plan was an existing NIA customer and has selected Evelyn to provide medical and radiation oncology services. as well as care navigation services across over 2 million of their members. We also expect this will be our first deployment under the Evalyn umbrella of the Careology care navigation product announced in May. Secondly, we secured a significant line of business expansion with the Midwest Blue Cross Blue Shield plan for MSK solutions within technology and services, expanding existing services to this client's Medicare membership. beyond existing lines including Medicaid and commercial. We expect these new agreements to contribute approximately $10 million in annual revenue when they go live, and these agreements close out the remaining new revenue bookings go-get towards our $300 million exit run rate. The four new revenue agreements announced today brings us to a total of 11 for 2024 sales cycle with one more quarter to go. Turning to operations, we completed a number of successful large-scale go-lives during the quarter. One example worth highlighting was implementation and deployment of our national radiation and surgical oncology solution to a large national health plan. This implementation marked the first time we rolled out our surgical oncology solution and the first time we implemented on a full 50-state basis in one go-live. Recall, we announced this agreement back in February where we already provide national medical oncology technology and services across several dozen states. In addition, we also had a successful rollout early in the quarter with our first cross-sell of an existing Evalent client with imaging solutions. One other successful large-scale implementation to highlight was with one of our national partners for the specialty technology and services in the Midwest, New products included medical and radiation oncology, as well as interventional cardiology for over a half a million numbers across all three major lines of business. We continue to be pleased with the progress of our services and solutions team has made in supporting higher scale and increasingly complex implementations. Looking at the sales pipeline, we see significant demand that we can anticipate to continue to drive meaningful top-line growth for Evelyn. In speaking with payers across the country, it seems clear to us that health plans increasingly need effective strategies to manage high-cost, complex, and rapidly evolving medical specialties. We understand and align with where healthcare is headed, moving beyond the limitations of traditional utilization management to providing advanced condition management solutions. We believe these solutions lower abrasion with providers, improve satisfaction for patients, and provide higher quality care. Taken together, our positioning and competitive advantage remain highly differentiated, and we're optimistic regarding the setup for a strong growth year in 2025. Let's turn now to our second operating priority of expanding profitability. Our profitability and our value proposition are built on our ability to drive more clinical value than anyone else in the market. I'd like to share a few examples of what our clinical value creation looks like in real life for our customers. First, in our work with one of the largest community-based cancer specialists in the country, located in the southeast, we drove a 77% decline in designated low-value regimens, which directly leads to higher quality and lower cost. We achieved this result using the full breadth of our performance suite model, alternative payment models, scorecarding, and direct peer-to-peer engagement. Another example of clinical value creation can be found in our cardiology performance suite in another state in which we were able to drive a 20% decrease in the interventional cardiology costs in year one of an implementation using optimal medical management and guideline-directed medical therapy. Importantly, these financial results also improve quality of care for patients. These examples demonstrate the way our scalable approach can drive value far beyond what is achievable through traditional models. In fact, we believe our approach of implementing clinician engagement strategies, such as peer-to-peer discussions and alternative payment models, help reduce denials. For example, in one Midwestern state, we recently demonstrated a denial avoidance rate of over 90% based on high-quality peer-to-peer consultations. We believe this is how healthcare should work for complex care. are world-class experts having thoughtful, data-driven conversations with the treating physicians about the right care for the patient. This model, we believe, improves the experience but also avoids delays, frustration, and red tape associated with the traditional payer utilization management model. Let's turn to our third principle of discipline to capital allocation. It's a good time to talk about our operating efficiencies. We're pleased to announce the closing of the Machinify transaction we announced back in June and are rapidly ramping integration and implementation activities across our product portfolio. We acquired the Machinify technology and team after a comprehensive search of competing AI technologies that were relevant to our products. We found the technology and platform deployed by Machinify to be the most advanced and the most consistent with our vision for AI and specialty condition management. As a reminder, we've described two immediate benefits of this technology to Evelyn. First, in scale deployments with a large payer, Machinify has demonstrated up to a 55% reduction in clinician review time. Evelyn will spend about $150 million this year on clinical staff with continued rapid growth forecasted in years ahead. Using this technology to streamline the workflow of our expert clinical teams, we believe will enable them to work at the top of their license, deliver incremental value to our members, and absorb our growth, which in turn should drive meaningful operating leverage for Evelyn. The second benefit is an expansion of our product offering for clients and prospects. The Machinify product provides a holistic solution for payers for specialties and general authorizations where we do not focus, including inpatient admission reviews, long-tail specialties, and other areas that require conformity to health plan medical policy. Machinify can be sold to our health plan partners as a SaaS solution, enabling our partners to cover the long-tail specialties with their in-house staff while Evelyn continues to manage the more complex specialties on an outsource basis. This combination model we believe allows Evelyn to serve our payer customers as a one-stop partner for the first time. At the moment, we're taking a measured approach to the implementation of this technology within our current development budget, though we do anticipate a lower capitalization rate of engineering resources as we start the integration. We continue to be excited about the potential of this technology and the impact we believe it will have as we target up to $50 million in annualized EBITDA improvement from the solution in the years to come. Looking ahead, our capital priorities remain the same. We continue to reinvest in the business, seek out accretive assets that accelerate our platform and maintain a strong balance sheet and prudent leverage ratio to maximize financial flexibility and strategic growth. Before I hand the call to John, I want to address a few issues on the policy front since we're in an election year and this topic will take on more oxygen as we get closer to November. In short, we're keeping our focus on the enduring theme of higher quality and lower cost, which is obviously has always enjoyed support by those on both sides of the aisle. Further, we believe our condition management model drives more of our value from patient navigation and provider engagement and further reduces any burdens on providers from the utilization management model. In fact, based on the examples we gave earlier and other data, we estimate that in oncology, over 80% of our value creation comes from actions outside of traditional utilization management, and we believe that percentage will go up in the time ahead. With that, I'll turn the call over to John.