Evolent Health, Inc.

Welcome to the Evelyn Earnings Conference Call for the second quarter ended June 30th, 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 forward-looking statements on the D.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 have followed 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 investor relations 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 supplemental investor presentation. And now, I will turn the call over to Avalanche CEO, Seth Blackley.

Good evening, and thanks for joining the call. We're pleased to announce another quarter of adjusted EBITDA performance ahead of expectations, as well as four new partner announcements and an accelerated new business pipeline. We achieve these results through strong execution, but also because of the fit between our products and the top need in the industry, which we believe is balancing quality and cost for the most complex and expensive specialty conditions. We have a number of positive developments to share today across all three pillars of shareholder value creation of organic growth, margin expansion, and capital allocations. So let me walk through the updates now on each of those three themes. Starting with organic growth, we have four new revenue agreements across both technology and services and the performance suite, bringing us to 11 new agreements here to date. On the technology and services side, we're announcing three new agreements, which are one, a current partner in the Northeast will add our cardiology radiation oncology, and MSK services across multiple lines of business for more than 400,000 members. Two, a regional partner in New England will add MSK and cardiology services across multiple lines of business. And three, a national partner will add additional MSK services to its plans in the Northeast. In the performance suite, we're pleased to expand our oncology and cardiology solution to a new Midwestern state for an existing national partner expected to go live later this year. Also in the performance suite, you'll recall that we previously announced a partnership with a national health plan for oncology services. We're pleased to announce today that that partner is Aetna across 250,000 Medicare Advantage members in the state of Florida. Since that announcement, we've been working closely with Aetna to ensure we are well set up to scale to additional Aetna states over time by ensuring that key partnership components like data exchange processes are well hummed. We've also been impressed with Aetna's leadership position on innovation in this area, including leading the market on the new AHIP and CMS prior authorization commitments. Evelyn's roadmap is highly aligned with Aetna's vision for ramping interoperability, and clinical data exchange, improving member experience, and reducing provider administrative burden. We plan to launch together in Q1, 2026. We're excited to partner with this national pair and look forward to earning the opportunity to expand to additional states and specialties over time. Across all these partnerships, we expect total new revenue in excess of $250 million by the time they're fully live in Q1, Furthermore, as our customers search for more ways to control cost, we are seeing our addressable market expand. Historically, our oncology performance suite offering has generally been limited to specialty pharmacy and professional spending. We are now seeing some potential for performance suite customers to come to us seeking help managing select inpatient or Part A oncology costs. With our expanded capabilities provided by our partnership with Careology and the acquisition of Oncology Care Partners, we believe we can now meet this market opportunity while simultaneously limiting our risk through our enhanced performance suite contract structure. Finally, we continue to have a very strong late-stage pipeline and expect to make additional growth announcements across the fall. As we mentioned earlier in this year, we are seeing the pipeline accelerated health plan struggle with new pressures on their P&Ls, including in risk adjustment shortfalls and medical utilization trends. Combining those issues with the membership pressure created by recent legislative developments, we expect the selling environment to be very strong across the next couple of years. Next, I want to turn to margin expansion, where we're focusing our efforts in two areas, which are one, performance suite margin maturation, and two, AI and automation in our technology and services suite. On the first, we continue to see oncology expenses below our forecast for the year, contributing to potential tailwinds as we move into the second half of 2025. As John will outline in more depth, we are maintaining a conservative approach to reserving and forecasting for the guide for Q3 and Q4, but are currently encouraged by our performance so far this year. Our AI and automation work is on track to our plan for this year as well. Our principal goal with this effort is to get the yes faster for members and providers, leaving our expert clinicians more time to intervene with treating physicians on complex cases. Many of you will recall the investment we made last year in the AI-driven future of our business by acquiring the Auth Intelligence solution from Machinify, a company that reviews over $200 billion in claims annually using AI. We believe the transaction allows us to more aggressively roll out AI capabilities, given that we today process over 8 million clinical reviews each year and provide the opportunity to bring the right talent and mindset into the organizations. We believe the AI opportunity at Avalyn represents the rare win-win investment where we can both reduce costs while improving member experience and outcomes through efficiency, speed to answer, and accuracy based on the latest clinical evidence. We've now integrated this technology into a number of our workflows, improving review efficiency by roughly 11% in the last quarter since starting to roll it out. More importantly, We're striving to become a leading AI-first company across the next 24 months, targeting 80% of our current authorization volume to be auto-approved, allowing our clinical talent to focus on cases where intervention is required. We believe we'll be able to do this while meaningfully improving the experience and health outcomes for our clients and members. We'll have more details on this in the coming quarters as we roll out these solutions more broadly, but we believe this puts us in a leadership position in leveraging AI to improve quality of care to the 40 million members we touch each year. As a reminder, we expect to exit the year with a net $20 million annualized run rate even to improvement across a number of AI and operational efficiency initiatives. But we believe the total addressable market expansion and EBITDA improvement opportunities from AI will be much larger over time. Finally, on capital allocation, our priorities remain the same. First, investing in organic product development and deploying free cash to de-lever. We do not expect to pursue an AM&A in the near or medium term and continue to believe we have the key assets and capabilities necessary to execute on our strategies. John will comment in his remarks on our cash flow expectations for the rest of the year. Before we go to the numbers, let me say a few words about the evolving macro environment. Our primary customers are navigating a very challenging confluence of events, of an elevated utilization, lagging premiums, and a backlash against traditional methods of medical cost control. Earlier in the summer, CMS and several health plan industry groups announced a series of commitments for streamlining prior authorization, all of which are highly aligned with our approach and future roadmap. We believe these new commitments will likely accelerate adoption of our solutions as health plans move away from in-house solutions or legacy partners, both of which we believe will struggle to meet the new requirements. Later that same week, CMS introduced a new pilot called the WISER model to pilot new prior authorization requirements for certain specialty areas in traditional Medicare in an attempt to balance affordability and quality. These twin announcements, one streamlining clinical oversight and the other expanding it, encapsulate the moment that faces the industry. Against this backdrop, we believe Evelyn is a durable and critical part of the healthcare ecosystem. We see customers choosing us at an increasing rate as their clinical decision support partner because of our ability to improve clinical quality, reduce physician burden, and improve member experience, all while also lowering costs. With multiple ways to grow the earnings of the business, including strong organic growth and margin expansion opportunities in both services and the performance suite, we remain confident in our ability to grow adjusted EBITDA at 20% per year despite industry volatility. I'll now hand it over to John to go through our results in more detail.

Thanks, Seth. Q2 adjusted EBITDA of $37.5 million was in the top half of our range, driven by strong results across both our tech and services and performance suite models. In the performance suite, normalized oncology trend of approximately 10.5% continues to be modestly below our initial forecasts for the year of 12%. As is typical, we have visibility into claims for about half the claims expense in Q2, with the rest comprising an actuarial reserve based in part on leading indicators. For oncology in Q2, our key leading indicator, which is authorizations per thousand, was flat to down on a per capita basis versus Q1 for each line of business. Recall that we closed Q1 with an elevated level of conservatism in our reserves compared to what we saw in the authorization data. With claims for Q1 now about 90% complete and reflecting expenses in line with what our leading indicators suggested, we have released the majority of that conservatism. That favorability from Q1 claims development was offset by a similarly conservative approach to Q2 for a net neutral impact on our year-to-date results. Prior year claims development was a favorable $11.7 million in the quarter, partially offset by $4.6 million in revenue updates for a net benefit of approximately $7.1 million. This was in line with our expectations. Given the level of focus on medical trend across the managed care industry, I want to go deeper on what we are seeing. Make no mistake, The last nine months represents the highest per-member, per-month trend that we have seen in oncology in the history of our company, driven both by elevated prevalence and cost per active case. Despite this, we are currently favorable to our forecast year-to-date for two reasons. First, we were intentionally conservative in our outlook for this year, including a provision in our guidance for continued deterioration in the environments, beyond the elevated levels seen exiting Q4 last year. And while medical trend has remained elevated in 2025 to date, we have not seen this further deterioration in trend that was contemplated in our guidance. Second, we continue to deliver on the core goal of our platform, lower cost by increasing adherence to best evidence medicine. This enables us to consistently deliver below market trends. On the top line, Q2 revenue is $444 million, $11 million below the midpoint of our guide. $4.6 million of this deviation was driven by the lower revenue for 2024 that I just referenced, with the rest attributable to go-live timing for one performance suite market where our plan partner was working through a local regulatory matter. This issue is now cleared, and that market is scheduled to go live in September. As a reminder, Our Q1 results included $55 million in gross revenue from one contract that switched to net revenue in Q2. Adjusting for that item, we saw a $16 million sequential step-up from Q1, driven principally by new launches and recognition of revenue from the Medicare Shared Savings Program. Looking out across the year, our revised revenue outlook incorporates our latest estimates go-live timing with Performance Week partners, including the national partnership Seth referenced. As you know, the first few months of a performance suite contract are typically neutral to adjusted EBITDA, so there is no flow-through of that change to our bottom line this year. Importantly, since this is a timing-related adjustment, our view of our 2026 opportunity has not changed. While it is too early to provide formal top-line guidance for next year, based on our weighted pipeline and current market dynamics, We see a clear path to delivering 2026 revenues in excess of $2.5 billion, with continued strong growth thereafter. This pipeline is across both technology and services and performance suite opportunities. And importantly, all prospective performance suite deals are under our new risk model, which includes enhanced protections against unfavorable changes in our risk pools, standardized data flows, and hard limits to our liability for gaps in historical data. Turning to the balance sheet, we ended the quarter with unrestricted cash of $151 million. Cash used in operations of $26 million was driven by two factors. First, performance reconciliations for 2024 contracts that have since been restructured, consistent with our expectations. And second, a collection slowdown during the second quarter, similar to what we saw during the fourth quarter of last year. Since the quarter closed, we received $24 million in catch-up payments from these customers, bringing us back in line with overall expectations. In response to this variability, we have recently experienced in our working capital. We have taken important steps that we believe will improve the timeliness of payments, including working with our partners to amend the payment terms in our contract, to ensure more predictable cash flows for Evelyn. With those improvements and the cash-up collections in July, we expect DSO to remain normalized for the rest of the year, allowing us to generate approximately $40 million in cash from operations in the April through December period, consistent with prior expectations. Note that included within our operating cash flow this year are several non-recurring cash items, including reconciliations for performance suite losses from 2024 that have since been restructured, and lease termination fees, together totaling approximately $84 million for the first half of 2025. After this year, we would expect to return to our normal range of EBITDA to cash flow conversion, which would result in significant year-over-year growth in cash flow. There are a number of updates on the policy and macro front that inform our outlook for the rest of the year and into 2026. So let's go through these and our current view on impacts organized by line of business. First, about a quarter of our Q2 revenue and more than 80% of the new business thus far announced for 2026 is in Medicare. Our view of this line of business is the trend has largely stabilized With a favorable rate notice for 2026, we anticipate a return to normal macro membership growth within MA, which averaged about 8% between 2020 and 2024. We expect this to be a tailwind for our membership. Second, roughly 10% of our Q2 revenue is in the commercial fully insured line of business in technology and services, which we expect to be stable over time. Third, about 45% of our Q2 revenue and about 10% of the new business we've announced for 2026 is in Medicaid. Absent policy changes, the Medicaid population typically grows between 2% to 3% annually. While there remains uncertainty on how states will implement the provisions of the One Big Beautiful Bill, we do not currently anticipate meaningful impacts until 2027. We continue to estimate that a 5% membership reduction would result in an EBITDA headwind of approximately $8 to $10 million. Finally, about 20% of our Q2 revenue and less than 10% of the new business we've announced for 26 is in the Affordable Care Act exchanges. While this has been a fast-growing line of business across the country over the last two years, driven in part by Medicaid disenrollment and enhanced subsidies, Membership in 2026 is likely to face headwinds from the potential expiration of those subsidies and other impacts. Our updated guidance for 2025 incorporates a modest pull forward of medical utilization within the approximately $180 million of annualized performance suite revenue in the exchanges during the second half of 2025. So to sum up from a line of business perspective, we currently have the least exposure to exchanges and the majority of our book's revenue growth for next year is in Medicare Advantage. We feel the macro trends on the horizon are reflected in our guidance for 2025 and our targets for 2026 and beyond. Now let me go through guidance before we open it up for questions. With continued successful execution, we are updating our outlook for adjusted EBITDA to be between $140 million and $165 million and initiating Q3 adjusted EBITDA between $34 and $42 million. This outlook incorporates our strong performance year-to-date while remaining prudently conservative for the second half given the volatility experienced by managed care. On the revenue line, we are updating our full-year outlook to be between $1.85 to $1.88 billion with a corresponding Q2 outlook of between $460 and $480 million. This update principally reflects the Edna Go Live timing Seth referenced earlier.