Evolent Health, Inc.

Welcome to the Evelyn Earnings conference call for the fourth quarter ended December 31st,

As a reminder, this conference call is being recorded. Your hosts for today's call are Evelyn, Seth Blackley, Chief Executive Officer, and Mario Ramos, 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 under the U.S. federal laws and 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 these risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commissions, including cautionary statements including in our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most directly 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 in the Investors Relations website, ir.evident.com, and the Form 8-K 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 Evelyn's CEO, Seth Blackley.

Good evening and thank you for joining us. Earlier today, we released strong Q4 results with revenue and adjusted EBITDA both landing in the upper half of our guidance range. Our performance reflects disciplined execution and continued momentum across our three key value creation pillars of strong organic growth, expanding profitability, and disciplined capital allocation. Before I get into detailed updates on each pillar, I want to comment on our outlook for 2026 and the overall State of the Union at Evelyn. First, Evelyn is retaining and growing its customers. In addition, we're adding market share through new partners, and we're forecasting the business will grow by approximately 30% in 2026. These factors point to a large market opportunity and validate that we believe Evelyn is the leading solution to support payers as they balance quality and affordability in specialty care. Oncology in particular remains a challenge for health plans seeking to balance affordability and quality with very high trends expected for many years to come. For 2026, we expect that approximately 65% of our company revenue will come from oncology, up from 36% in 2025, and we expect our oncology product to continue to be the core of our growth in years to come. If you think about why our oncology product is growing so rapidly, we believe it's the combination of very high annual trend that our health plans are experiencing and the incredible opportunity to reduce clinical variability. As an example of clinical variability in oncology, our analysis suggests that for one tumor type, which is second-line treatment for non-small-cell lung cancer, oncologists today follow more than 200 different prescribing patterns. Variation, as we believe, is not supported by the evidence, and it can result in substandard outcomes for patients and a warranted cost for the system. Evelyn's value to our customers is our proven ability to engage with treating oncologists and guarantee the quality and cost benefits from reducing this variability. This market dynamic as well as our large new business pipeline makes Evelyn well-positioned to see outsized growth in the years ahead. Further, we've been able to successfully renegotiate contracts and convert them into the new enhanced performance suite model, which includes revenue rate adjustments for certain medical expense factors outside of our control, as well as MER corridors to protect the downside. When we embarked on the effort to move our contracts to the enhanced performance suite model, there were a lot of questions from investors about our ability to successfully achieve this change while retaining customers and continuing to grow. The fact that we now have approximately 90% of the performance suite revenue under this new model, have retained all of our key customers, and have signed two major new customers this past year under the enhanced model answers that question in an emphatic way. As we mentioned at the outset of this renegotiation process, our expectation for margins for the enhanced performance suite model will be approximately 10%, as opposed to 15% under the old model. As we've rolled out this model, we're seeing opportunities to target margins higher than 10% in some cases if we feel comfortable with the additional downside exposure. And in other contracts, there are opportunities to eliminate almost all the downside exposure if we will accept a lower maximum margin. While we make these trade-off determinations as part of a disciplined underwriting process around each contract, our existing mature contracts will tend to run above 10%. But as we expand, We'll target future performance suite opportunity for the entire book around a range of 7% to 10% as we continue to prioritize adjusted EBITDA and cash flow predictability over maximum margin. Still, as Mario will discuss, getting to a target margin of 7% to 10% would create a very significant tailwind for the business in the years to come. Turning to the outlook for 2026 specifically, we're forecasting $2.5 billion of revenue at the midpoint, representing revenue growth of approximately 30%, and our adjusted EBITDA guide is $125 million at the midpoint. The adjusted EBITDA outlook has two significant impacts embedded for 2026 ahead of the potential tailwind I described earlier. Both of these impacts hit primarily in the first half of 2026, And we believe that our run rate adjusted EBITDA in the fourth quarter of 2026 will be over $150 million. Those two factors impacting 2026 adjusted EBITDA are as follows. First, our 2026 performance suite launches are expected to generate approximately $900 million of 2026 revenue with go live dates in Q1 and Q2 representing 37% of total 2026 revenue. The 2026 performance suite cohort revenue estimate has increased from our previous estimate a few months ago of $550 million, driven by large shifts in our customer membership and by scope expansion of one of the new contracts. At the same time, we saw several of our legacy cohort performance suite partners lose significant membership in open enrollment, so our total revenue forecast continues to center around $2.5 billion, despite outsized growth from the 2026 cohort. In addition to the increase of new revenue, we decided to take a more conservative guidance approach given the size of these new contracts in 2026. Mario will provide further color on the impact and the timing of those contracts in his comments. The second major factor impacting adjusted EBITDA for 2026 is that the One Big Beautiful bill has eliminated approximately $40 million of contribution from expected exchange membership disenrollment and customer plan closures. That impact is at the very highest end of the range we estimated at the end of last year, and with one of our largest customers seeing reduced exchange membership up to 60%, and our next largest exchange membership broke down approximately 40%. Some of this reduction is as a result of the lost subsidies. but we're seeing more of it from decisions, the specific plans that our customer base made to shrink exposure to the exchange risk pool. You can see the combined effect of these two items on page eight of the pack. Finally, we've been aggressive on efficiency by getting the benefits of AI and other automation across 2025. As we previously communicated, we did slightly exceed the $20 million Q4 2025 annualized savings number we had talked about on previous earnings calls. And we're continuing our cost efforts in 2026, now targeting SG&A, AI, and other automation savings. These efforts included a large RIF already announced just a few weeks ago. Our 2026 cost structure efforts modestly improve H1 2026 EBITDA, but ramp fully by the second half of the year. Mario will share more details on the 2026 cost plan in his section. Despite these aggressive cost actions, we decided to budget the year and guide around a multi-year opportunity. Accordingly, We have protected a number of product, technology, and sales investments in the P&L that weigh on 2026, but we believe will have a positive impact over time. While we're pleased with our revenue growth, we understand our first half, 2026, even dies disappointing on the surface due to the one big beautiful bill impact as well as the addition of our new contracts. But as I mentioned, we're confident in the ramp across 2026. And we believe we'll have a very large multi-year tailwind for the business as our 2026 contracts mature and the exchanges likely return to growth over time. Now let me turn back to give you a few more detailed updates on each pillar, starting with our first pillar of organic growth. Today, we're sharing the expansion of a previously announced partnership, and we're disclosing another new contract signing. First, we're excited to share that the large oncology partnership we announced in November is with Highmark. We're obviously thrilled to have been selected by such a marquee plan. Since November, we have also expanded the partnership to additional geographies and capabilities. This contract is expected to go live on May 1st, and we expect it will contribute over $550 million of revenue in 2026 and over $800 million in 2027. As we will discuss in more detail later in the call, the structure for this contract is, like Aetna, under our enhanced performance suite model. Finally, we feel there are several exciting expansion opportunities at Highmark across new lines of business for oncology and across all lines of business for new specialties. And we look forward to earning that opportunity through strong performance with this initial launch. And second, we're announcing today that we have launched our performance suite in oncology in an additional state with an existing national partner. Beyond these signings and the robust pipeline I mentioned earlier, we're seeing very high renewal rates as well. Across 2025, we retained specialty TNS logos covering over 98% of 2025 revenue. And through a turbulent industry cycle, we have successfully moved our key performance suite relationships to the enhanced performance suite model. Said simply, our current customers are opting to stay and expand with us, even as we require more protective terms. And we're adding market share through new logo signings. We feel all of this data points to the value we can create and to the durability of our company. Turning to our second pillar of profitability, We continue to focus on both medical and operating expenses as described earlier. I did want to add several additional pieces of data here. In 2025, our medical expense ratio, or MER, came in slightly better than expectations at 89%, excluding our Evelyn Care Partners business, representing an improvement of just under 700 basis points versus 2024, even amid another year of high trend. We believe this performance reflects strong execution and pathway management, business engagement, and alignment with our partners. Mario will walk you through how we're thinking about our 2026 MERs for both new business and the legacy cohort. But I think you'll see that we're making two basic assumptions for the year. First, we estimate the 2026 cohort will run at 103% inclusive of new reserves, and the total cohort will run at approximately 93%. We're assuming that 2026 oncology trend will remain high in line with the 2025 trend. In total, we believe these assumptions are conservative and set us up to meet or beat our numbers across the year. In our final pillar of capital structure, I'm pleased that we ended the year with strong cash generation. That, combined with the strategic divestiture of our Evelyn Care Partners asset, enabled us to end the year with net debt of $782 million, below our expected range of $805 to $840 million. With no maturities until late 2029, we believe our balance sheet strength supports near-term leverage and a clear path to long-term new leverage. Before I hand it to Mario, let me say a few words about the macro environment. We've been saying for several quarters now that demand for Evelyn services has never been greater. We believe this is born out in our new business wins as we take share and grow our customer footprint. And this reality continues to be true. The managed care industry, our core customer base is in the middle of a multi-year margin recovery cycle. To manage their own profitability targets, we see health plans are turning to companies like Evelyn that have proven solutions to lower costs while improving quality for their members. At the same time, as we're expanding our business with new partners, the industry is navigating through a period of contracting membership, which presents near-term headwinds for our business as well. We believe we have a clear strategy for navigating through this dynamic moment. First, we will use this moment to seek to capture share, expanding our customer footprint under strong terms. Demand for our product is such that we can be selective in our partnerships and highly disciplined in our underwriting. Second, we will use our scale and customer volume to drive operating efficiency within our products, enabling us, we believe, to deliver margin expansion over time. We've committed to using technology and AI from our Machinify asset acquisition to get to our long-term goal to automatically approve 80% of baseline authorization volume across our products, an outcome that we believe will improve patient and provider experience while driving down our cost structure. We made great progress on this front in 2025, seeing our imaging auto-authorization rates and key test areas go up dramatically in areas where we deployed this technology. For example, through this optimization, our real-time auto-authorization rate for chest CT scans rose by over 11 points and cervical spine MRI rose by 16 points. In 2026, we'll be deploying additional AI capabilities that will provide additional auto-authorization and Third, we'll continue to innovate our product and its value for our customers to ensure that we are the leading specialty platform in the market. As an example of our product investments, one of our Blue Cross partners recently published data showing an approximately 40% reduction in hospitalizations and ER visits from patients who use our new cancer navigation solution. And fourth and finally, we will achieve these goals within the context of our current balance sheet, continue to prioritize debt pay down as our primary capital allocation focus. I do believe we have the right plan, an incredible board and team, and the right product to meet this moment, and I remain highly confident in Evelyn's future. As I handed to Mario to go over the numbers, I will just note that Mario has been added at Evelyn across the last 90 days. He's already had a huge positive impact on the company. and I'm highly confident in his leadership and approach going forward. Mario?