Evolent Health, Inc.

Welcome to the Evelyn Earnings Conference Call for the first quarter ended March 31st, 2025. 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. This conference call will contain four 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 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 measures are available in the summary presentation available in the investor relations section of the website. or in the company's press release issued today and posted on the investor relations website, ir.evalence.com, and the form 8K filed by the company with the SEC earlier today. In addition to these reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. And now I will turn the call over to Evelyn's CEO, Seth Blackley.

Good evening, everybody, and thanks for joining the call. I'm happy to be here tonight to discuss Evelyn's strong start to 2025 with Q1 financial results at the high end of our expectations and a favorable outlook for the rest of the year. As is typical, our prepared comments are structured around our three shareholder value creation focus areas of one, organic growth, two, expanding profitability, and three, optimal capital allocation. Starting with organic growth, we believe we're positioned as one of the largest and most effective providers of specialty condition management in the country, with 84.8 million product lives on the platform. We believe health plans, providers, and members all demand and deserve a clinically oriented approach that encourages a holistic view of a person's journey through cancer, cardiovascular disease, or musculoskeletal conditions, and we think Evelyn is uniquely positioned to offer those solutions. The strength of our offering led to five new revenue agreements this quarter, covering each of our three major condition areas as follows. First, we have two new health plans that are rolling out our surgical management solutions for commercial lines of business. One is a Blues plan located in the south, and one is a large national plan rolling out the solutions initially to two of its large southern states. We are particularly excited to add these contracts as they are both first-time logos, and we look forward to the opportunity to expand with these partners over time. Third, we expanded the geographic reach of our existing medical oncology technology and services solution with one of our national payer clients to cover an additional 800,000 Medicare Advantage lives. Fourth, An existing partner in the southern state will be adding technology and services solution for advanced imaging and cardiac imaging for approximately 100,000 lives in their Medicaid line of business. And fifth and finally, we expanded our Moscow skeletal services to the Medicare Advantage line of business for an existing partner in the northeast expected to add over 100,000 lives. Altogether, we expect these expansions to represent annualized specialty technology and services revenue of approximately $10 million and new lives on the platform of approximately $1 million. Renewals with our existing customer base also continue to be very strong, with one of our top 10 customers recently renewing through the year 2030. More broadly, the selling environment continues to feel very good across both technology and services and the performance suite. The performance suite pipeline in particular is the largest it's been in the firm's history, and our updated performance suite model with the additional protections and a narrow corridor is getting great traction in the market, and we are confident we'll be able to continue to have sales success with that new contract structure and with the performance suite more broadly. Finally, as a reminder, even with today's new announcements, Evolent remains less than 5% penetrated in its broader revenue opportunity across all products, including oncology. Given the current traction of our solutions and the challenges that payers face in managing these specialty costs, I continue to feel confident in meeting or exceeding our long-term growth targets. Turning now to our second pillar of expanding profitability, We're on track with both core initiatives, which are one, performance suite margin maturation, and two, AI-led automation within our technology and services suite. First, regarding the performance suite margin maturation, our leading indicators for the first quarter track slightly favorable to our expectations. As John will discuss in this section, we are not yet fully recognizing this favorability in our medical expense accruals, but the initial data is a promising sign for a potential faster return to higher performance suite margins. Second, regarding our automation efforts in the technology and services suite, we deployed our off Intel AI solution on over 200,000 reviews during the quarter, leading to higher clinician satisfaction, faster patient response times, and enhanced productivity. While these initiatives are still early, covering a small fraction of our reviews completed during the quarter, I am encouraged by the results to date and our outlook for the ultimate value of these efforts remains unchanged. Moving to our third pillar of capital allocation, as we communicated at the beginning of the year, our primary use of capital during 2025 is balance sheet management. Both debt pay down and the cash reconciliation of certain loss making performance suite contracts in 2024 that have since been restructured. In addition, as I'll discuss in a moment, we are purchasing the oncology navigation assets of one of our joint ventures pursuant to a previously negotiated put-call structure to accelerate our oncology strategy. As John will discuss, we anticipate positive operating cash flow for the rest of the year, and we're well-positioned to continue investing in driving organic growth into the future. While we continue to see M&A as an attractive way to accelerate our strategy in the long term, We do not currently anticipate any new transactions in the near term. In addition to updating you on our three pillars of strategic value creation, I'd like to also highlight the early success of our work deploying a unique, integrated condition management model in oncology. Let's first review how our existing operating model functions across our specialties, using oncology as an example. We work with treating oncologists with a shared goal of approving adherence to evidence-based pathways where we have a track record of consistently increasing adherence by 20 percentage points or more. While these interventions leverage the utilization management process to drive physician engagement, about 85% of our savings opportunity today in oncology is created through non-UM efforts like peer-to-peer consults, provider quality incentives, other practice transformation initiatives, and unique Evalon technologies, with a balance of 15% through utilization management. We grouped these techniques into two broad toolkits of, one, clinical decision support, which includes but is not limited to UM, and two, provider alignment and engagement. Given the work we are already doing with AI and automation on the first leg of the stool around clinical decision support, We expect that UM will continue to quickly shrink as a share of the value we create for our customers from 15 percent today to a much smaller number in the near term, while the total value we create across our platform for our customers will continue to go up. As we have previously discussed, we have also been making important investments to add a third leg to this stool, which is bringing innovative patient-facing navigation services combined with our clinical decision support and provider alignment solutions. We believe this combination will be the most comprehensive solution for oncology management in the market. To build this model, we have worked over the last 18 months with representatives from across the care continuum to find what works, and I'm pleased to announce the official launch of our oncology navigation solution that combines three important components. First, Navigation protocols that we developed internally in close collaboration with one of our largest payers over the last 18 months. Two, we announced today that we are purchasing the assets of oncology care partners through a previously negotiated put-call structure, bringing the best of what oncology care partners developed with practicing community oncologists into Evalyn's model. And three, as we have discussed on previous calls, We have the exclusive U.S. partnership license with Careology, whereby their digital cancer navigation app is integrated into our solutions. We've been piloting this approach for some time, and by the end of May, we expect to be live with our integrated solution across 300,000 members. We are already seeing inspiring results. Let me give you a couple examples of the power of this fully integrated approach. Through an approach refined by Oncology Care Partners, we've been able to integrate our pathways directly into practice EMRs and support those pathways with innovative value-based compensation models. A study we published in the Journal of Clinical Pathways demonstrated significantly higher adherence to our value-based initiatives when these integrations are in place relative to a control group. We're excited to build on this foundation in the time ahead. As a second example, many cancer treatments leave members with a weakened immune system. They and their caregivers live with a high level of uncertainty in which simple common cold symptoms might be fine or might be a severe or even life-threatening condition. A member and their caregivers need to decide in real time whether their symptoms are manageable at home or if they need to go immediately to the emergency department. Our solution is powered by the Careology platform and Evaluant Care Navigators, can use real-time member symptom information to trigger interventions and take the guesswork out of these decisions for the member. In this example, we're able to provide peace of mind to the member and the family, help ensure immediate action were clinically indicated, while also helping avoid unnecessary hospital visits. Going forward, we expect to deploy this platform to customers in both technology services and the performance suite models. Under both models, we believe our oncology navigation solution will drive meaningful ROI to Evelyn and our plans, in part by increasing the dollar pool of medical costs we can influence, while also improving member quality and experience. This innovation is also an example of the differentiation we seek to drive across our platform, prioritizing care quality and focusing on creating clinical value for our members and health fund partners. Before handing it over to John to go through the numbers, I want to recognize the efforts of the 4,500 professionals at Evelyn who focus day in and day out on driving outcomes for our members and customers and ensuring that each of our members receives the care that we would want for our family members. Our recent 2025 employee survey showed an engagement rate of 89%. which is a very strong score relative to benchmarks and one of the highest scores in our history. I also believe that engagement is a leading indicator of our ability to deliver for our customers, our patients and members, and our shareholders. We also continue our normal course board refreshment activities, and I'm excited by our recent board of directors nomination of Sean Gurtin to stand for election at our annual shareholder meeting in June. Sean is an experienced healthcare executive with a career spanning some of the top brands in the industry, including most recently as the Chief Financial Officer of CVS, and we believe upon his election will be a significant value add to Evaluant. With that, let me pass it to John.

Thanks, Seth. I will comment on four areas this evening before turning to guidance. One, revenue dynamics affecting actual results in the quarter, as well as associated PMPM trends. Two, medical cost trend in our performance suite. Three, our outlook for cash generation in 2025. And four, sizing potential policy impacts on our near and medium-term outlook. First on revenue, Q1 revenue of $483.6 million in the quarter was impacted by two partially offsetting items, Without these items, revenue would have been approximately $450 million in the middle of our guidance range. First, recall that we anticipated that contractual changes would shift the accounting for two performance week contracts from gross to net. Those contractual changes are now complete, with one effective on January 1st and the second effective April 1st. Therefore, the extra quarter of gross revenue recorded in Q1 for the contract that converted on April 1st contributed approximately $55 million in revenue with no impact on adjusted EBITDA. The second revenue item in the quarter was related to true-ups for performance suite launches during 2024. In all new performance suite launches, we true-up our capitation rate to reflect actual experience immediately prior to our go-live date. We finalized these true-ups for 2024 performance suite launches during the first quarter and experienced final capitation rates that were on average lower than our initial estimates. In total, we recognized a retroactive revenue impact of minus 12.9 million and released associated claims reserves of 13.4 million for a favorable net adjusted EBITDA impact of 0.4 million in the quarter from prior year development. Finally, the updated capitation rates for 2024 launches lowers our estimated revenue for 25 by approximately $33 million, including $8.4 million in Q1, again on an EBITDA neutral basis. Note that as previewed on our last call, the contractual changes coming into this year, including the conversion of one performance suite contract to Tech and Services, affect our reported PMPM stats. In particular, our Q1 performance suite has a lower mix of Medicare Advantage revenue than last year and has a correspondingly lower average PMPM fee. To be clear, though, our same-store PMPMs demonstrate continued pricing strength. For example, on a same-store basis, our largest oncology contracts saw year-over-year increases of over 20% versus the first quarter of last year. Turning to medical cost trends, Those leading indicators and claims completion for Q1 suggest an oncology trend that is modestly lower than our overall expectation of 12%. While we are pleased to see signs of trend moderation, we have not fully reflected this favorability in our results for the quarter. We also are not yet updating our assumption in our guidance and continue to guide based on a 12% oncology trend for April through December. Favorability on these oncology trends is driven both by modestly lower disease prevalence and strong performance on our clinical management initiatives. Cardiology expense trends are tracking according to our expectations so far this year. Turning to the balance sheet, we ended the quarter with cash of $247 million and revolver capacity of $62.5 million for total liquidity of over $300 million. resulting in a net leverage ratio of 4.1 times our last 12-month adjusted EBITDA. We generated $4.6 million in cash flow operations in the quarter, a result driven by strong customer collections and the timing of performance suite claims reconciliations. Looking out across the rest of the year, we anticipate a modest increase in net debt across the April through December period, generating approximately $40 million in cash flow from operations, after funding reconciliation payments for 2024 performance suite contracts that have since been restructured or converted to tech and services arrangements, and using $51 million to purchase the rest of oncology care partners in Q2. Following the retirement of our 2025 convertible notes in Q4 of this year, we anticipate ending the year with cash in excess of $85 million and a net leverage ratio approximating our current level After these liability management activities this year, we have no outstanding maturities until 2029. Regarding oncology care partners, this joint venture had two components, a portfolio of oncology clinics and a member navigation and practice alignment arm. As Seth mentioned, we are excited to integrate the member navigation and practice alignment capabilities from OCP into our condition management model and believe they will meaningfully enhance our differentiated approach to the market. Prior to bringing the JV fully in-house, we made the decision to close the oncology practices themselves to avoid both channel conflicts with our network providers as well as future capital investment requirements associated with brick-and-mortar models. Closing the clinics contributed to a one-time loss on our income statement during the quarter, despite the strategic value of the navigation and practice alignment work. As Seth mentioned earlier, the navigation and practice alignment capabilities we acquired will be very important to our oncology condition management model. Before turning to guidance, a few words on the impact of potential policy initiatives to get ahead of frequently asked questions. First, our business is generally unimpacted by tariffs. In the vast majority of our contracts, to the extent that there is a significant change in pharma unit costs driven by international trade dynamics, our performance suite contracts contain clauses allowing us to update our rates accordingly. Second, regarding potential changes in value-based programs from CMS, the only program that we participate in today is the Medicare Shared Savings Program through our ACO Evelyn Care Partners. We see the commentary from CMS to date as largely encouraging for MSST, which is a permanent program legislated by Congress as a part of the Affordable Care Act. Commentary from the administration around prioritizing affordability and clinical quality to us reinforces the importance of value-based contracting. Third, regarding potential changes to Medicaid, the policy briefings released in April by CMS leadership suggests that some form of work requirements may be implemented over time. We have estimated the potential impact of work requirements on our book if rolled out across the nation at less than 5% of Medicaid membership, which would translate to 8 to 10 million in adjusted EBITDA for us today. We believe that Medicaid is a critical program for tens of millions of Americans and remain steadfast in our support of these programs. Further, our diversification across Medicaid, Medicare Advantage, and commercial lines of business helps to insulate us from potential policy swings. Finally, we do not currently expect any prospective changes to Medicaid policy would impact our fiscal 2025 results. Now let me go through guidance before we open it up for questions. While we are encouraged by the strength we saw in Q1, we believe it is important to see another quarter of claims completion data before altering our 2025 assumptions on cost trend or our full-year guidance. As a result, we are reiterating our adjusted EVA dot outlook for 2025, that's between $135 and $165 million. To be clear, this guidance continues to assume a 12% oncology trend for Q2 through Q4, despite Q1 coming in lower. Our revenue range for the year is also unchanged between 2.06 and 2.11 billion, supported by planned go-lives in the performance suite in the back half of the year. For Q2 specifically, the EBITDA-neutral performance suite true-ups I mentioned earlier result in a top-line guide of between $440 and $470 million in revenue, with corresponding adjusted EBITDA of between $33 and $40 million.