Evolent Health, Inc.

Welcome to the Evalent Earnings Conference Call for the second quarter ended June 30, 2026. As a reminder, this conference call is being recorded. Your hosts for the call today from Evalent are 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 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 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 Thank you for joining us. and now I will turn the call over to Evelyn's CEO, Seth Blackley.

Good morning and thank you for joining us. Today we reported a strong second quarter with results that reflect our continued ability to execute on our commitments. In a dynamic healthcare environment, our performance underscores the mission critical nature of our business, the dedication of our team and what we believe is the continued value of our solutions to our customers. For the quarter, Avalent reported total revenue of $653 million, up 31% versus Q1, and adjusted EBITDA of $28 million, a 27% increase versus Q1. Our Q2 2026 medical expense ratio, or MER, was 95% compared to 93% in Q1, reflecting the expected impact of the launch of Highmark on May 1, 2026. Given our performance in the first half of the year and our current visibility into the remainder of 2026, we're increasing our full year revenue guidance range to $2.6 to $2.7 billion and increasing the midpoint of our adjusted EBITDA guidance by narrowing the range to $120 to $135 million. We continue to expect a full year MER of approximately 93% and believe we are well positioned to build on our progress in the quarters ahead. Mario will walk you through our financial results in more detail in a few moments, but I first want to provide you with updates in three key areas of one, growth and renewals, two, our new performance suite oncology arrangements, and three, are AI platform and related cost improvement opportunities. First, regarding revenue growth, we continue to see a very positive sales environment. To that end, we have two partnership announcements today. First, we're preparing for the go live of an oncology performance suite partnership with an existing advanced imaging client. The partnership will cover approximately 1.5 million lives across Medicaid and Medicare populations spread through 11 states. We currently expect this business to launch by December 2026, subject to certain regulatory approvals, and to generate approximately $300 million in annualized revenue. As with other recent performance suite arrangements, this relationship includes the full enhanced contractual protections we've discussed on previous calls. And second, a current regional Blue Cross plan and former NIA customer has signed an agreement to broaden its use of our Evaluant specialty technology and services platform by adding new products and extending existing products to additional populations. We expect these implementations to occur during the third and fourth quarters of this year. While the total annualized revenue from this contract extension is less than $5 million, we expect to generate strong adjusted EBITDA from the contract. Contracts like these continue to prove out the cross-sell opportunity available to us across our entire customer base. Taken together, these announcements demonstrate that our customers are increasingly choosing to expand their relationships with us by adopting additional products and expanding current products across existing populations. As important as our new customer growth is the strength of retention of our existing customers. 2026 has been an outstanding year for renewals, as we have successfully renewed three of our largest customers. These renewals, combined with our Aetna and Highmark contracts, which launched this year, not only give us confidence about the strong foundation of our business, but they also provide us with significant visibility into our 2027 outlook. Next, I want to update you on our 2026 performance suite launches with Aetna and Highmark. We had a successful launch with Highmark on May 1, supported by strong collaboration between our teams. While we're only a few months into the launch, we are encouraged by the positive early indicators. Currently, clinical engagement rates are trending above our targets, and provider engagement has exceeded our initial go-live expectations. We expect to have greater visibility into claims performance over the next few months, but we're incredibly happy with our progress so far. With respect to Aetna, which launched earlier this year, we continue to see strong clinical engagement results, also above our targets, and initial claims-based performance that is in line with our expectations. Given the scale of these two partnerships and their importance to our 2026 and 2027 P&Ls, The strong execution is an important additional data point supporting the overall strength of our business. Finally, I want to update you on our continued efforts around AI and automation through our off intelligence platform. We remain focused on our long-term objective of automatically approving 80% of authorization volume, simplifying the prior authorization experience for providers and patients. We believe Q2 is a tipping point in our AI journey. as we saw these efforts take root and accelerate past the pilot phases and to a point of meaningful scale with a clear line of sight to more. The results and impact of these AI-enabled capabilities, which are built on our 2024 Machinify acquisition, are at the high end of our expectations, giving us increased confidence in our 2027 outlook. We also believe we have been improving our performance as we scale. Among customers where these models have been deployed, we are seeing auto approval rate improvements of up to 20 percentage points. For example, auto approval rates that were 55% are now 75% with no degradation to clinical quality or value to our partners. And as a reminder, Evalyn has a hard and fast rule that a clinician is always making any recommendation to change treatment and as AI is only used to speed up the process or to approve a case. Importantly, we're seeing the cases approved through our AI models are completed within minutes instead of days, improving timeliness and we believe reducing administrative burden for providers and for patients. We're also seeing a large benefit for our employees who are able to spend more of their time practicing at the top of their license and getting patients faster answers both of which are important to the job satisfaction of our team. Today, more than one-third of our authorization volume that was previously requiring manual clinical review is now being evaluated through our off-intelligence platform. We continue to believe this platform will be a key element of our ability to meet our long-term margin targets and our customer needs. Finally, Auth Intelligence will be aggressively deployed in Q1 2027 as part of one of the major renewals I mentioned earlier in the call. In closing, let me touch on how we're currently thinking about 2027. First, we expect strong revenue growth supported by the strength of our renewing business and the continued growth of our new business. At the same time, we're committed to delivering strong adjusted EBITDA growth in 2027 against the backdrop of year one investments that come with new performance suite growth, AI investments, and expected membership declines in Medicaid and the exchange. We feel confident in committing to strong adjusted EBITDA growth in the year ahead despite those headwinds based on the proven performance of our auth intelligence platform, A highly disciplined approach to managing our operating expenses and what we expect to be the stability and performance of our performance suite book of business. With that, let me turn it over to Mario.

Thank you, Seth. And good morning, everyone. We delivered solid second quarter financial results that were above our expectations and the outlook we discussed on the Q1 2026 call in May. Total revenue was 653 million, up 31% versus Q1 2026. And adjusted EBITDA was 28 million, up 27% quarter over quarter. The outperformance in adjusted EBITDA versus expectations was driven by the recognition of prior year development in Q2 that we had previously anticipated or recognized in Q3. Given this Q2 timing favorability, we now expect the previously discussed Q2 to Q3 adjusted EBITDA increase of $10 million to $15 million to be more modest. I will address this in more detail later in the call. Turning to revenue by product type, performance rate revenue was $485 million, up 50% quarter over quarter. driven primarily by higher membership from the launch of Highmark on May 1st. Specialty tech and services revenue totaled $78 million, a decrease of 3% compared with the first quarter. The revenue decline was driven by code review scope changes as part of AHIP commitments and not by client attrition or pricing pressure. on administrative services, revenue declined by 3% sequentially to $48 million, largely due to a prior year reserve true-up recorded in the first quarter. Our medical expense ratio, or MER, for Q2 was 95%, approximately 200 basis points higher than Q1 2026, but in line with our expectations, primarily due to the impact of the Highmark launch and its associated higher reserves. Please note that we did see higher acuity in our exchange populations consistent with Q1. However, as we discussed during the Q1 call, our contracts are structured to protect against changes in prevalence. Adjusted cost of revenue, excluding medical claims but including medical device costs and adjusted SG&A, totaled 163 million for the quarter, improving 5% sequentially. The improvement versus the prior quarter was driven primarily by previously discussed expense management. We ended Q2 with 115.7 million in unrestricted cash and 808.3 million of net debt. We took the opportunity to pay down the ABL revolver by 10 million to bring the balance to its minimum draw of 62.5 million. As expected, cash decreased from our Q1 2026 balance, reflecting approximately 10 million of cash used in operating activities and approximately 7 million of capital expenditures during the quarter. As a reminder, operating cash flow this quarter was unusually low due to the repayment of pass-through PBM proceeds which had positively impacted Q1 2026 by approximately 20 million. Without this pass-through payment, we would have generated approximately 10 million in operating cash flow for the quarter. Turning to full-year 2026 guidance, as Seth noted, we are increasingly confident in our ability to deliver on our goals for 2026 and therefore are raising our 2026 revenue guidance from the previous range of 2.4 to 2.6 billion to 2.6 to 2.7 billion. We're also tightening our adjusted EBITDA guidance range from the 110 to 140 million to 120 to 135 million. We continue to expect MER for the full year to be approximately 93%. On revenue, we expect Q3 and Q4 to be meaningfully higher than Q2, driven primarily by performance suite revenue. In Q3, we will benefit from another quarter of high market revenue, along with the launch of several markets associated with the performance suite expansion we highlighted last quarter. On medical claims cost, we continue to expect our MER to be higher in Q3, as we see a full quarters impact of the Highmark launch. From there, we continue to expect MER to improve meaningfully into Q4 as we see the impact of our clinical programs begin to take effect and favorable contractual true-ups flow through. Finally, on the quarterly adjusted EBITDA cadence, we are refining our sequential improvement for the second half given the timing of favorable PYD moving from Q3 to Q2. We now expect a more modest Q2 to Q3 increase in the range of approximately 4 to 7 million and an increase from Q3 to Q4 in the range of 7 to 15 million. A few additional items related to our full year outlook. We continue to expect adjusted cost of revenue, excluding medical claims but including medical device costs, plus adjusted SG&A of approximately $675 million for the year. As we enter the second half of the year, we remain encouraged by the momentum we are seeing in operational efficiency across the business. We continue to expect cash flow from operations for the year of $10 million to $20 million, after approximately 60 million of annual cash interest expense. We continue to expect 25 million to 30 million in software development and capital expenditures for 2026. Let me close with some early perspectives on 2027 and how we will address our leverage and refinancing of our debt. Based on the revenue currently under agreement and customer renewals already completed, We expect revenue growth of more than 25% in 2027. Any new contract signings over the next few quarters would further increase this number, and we expect to achieve this 25% growth while absorbing ongoing membership headwinds for Medicaid work requirements and client-specific market exits and attrition. On earnings, We remain committed to delivering meaningful adjusted EBITDA growth in 2027 and beyond. Improved performance suite care margins coupled with significant cost reduction and productivity initiatives underpin our expectation that the midpoint of our 2027 adjusted EBITDA outlook is expected to be at or above $150 million. That's 150. This outlook incorporates the significant headwinds for Medicaid, further exchange membership attrition, and some expected client-specific membership attrition. For example, our midpoint reflects both the revenue and acuity impacts that large Medicaid and exchange-focused managed care companies have noted over the last several weeks. Our midpoint also assumes the earnings drag from signing additional performance suite contracts over the coming months, which would likely drive 2027 revenue growth even higher than the 25%. One driver of adjusted EBITDA growth in 2027 will be additional OpEx reductions. We have launched a comprehensive review of our cost structure across the enterprise to ensure spending is aligned with our strategic priorities. focus on the highest return opportunities and driving greater efficiency at scale. This may include modest additional investments in additional operating expenses in Q3 and Q4, all of which are contemplated in our 2026 guidance to drive additional cost savings in 2027 and beyond. We also believe this return to earnings growth will drive meaningful improvement in operating cash flow conversion in 2027. As I have discussed previously, our 2026 operating cash flow has been impacted by approximately 20 million of one-time items. As we move beyond the majority of those items, we expect cash flow performance to improve. We expect to deliver this earnings growth while also accelerating AI and technology investments which will have a significant ROI across the enterprise in 2027 and beyond. As Seth mentioned earlier, the testing of the next phase in AI and technology investments is already producing encouraging results. Now let me address the issue that I'm personally most focused on, which is our capital structure. We have identified several different ways to improve our capital structure and address our 2029 maturities. This will be through a combination of adjusted EBITDA growth, improved cash flow conversion, disciplined capital allocation, and via the pursuit of capital markets and strategic options available to us. Taken together, we see a clear path to significantly improving our leverage ratios and our maturity profile within the next 12 to 24 months. While it is too early to determine what the ultimate path will be, We are actively advancing this work. This will enhance financial flexibility and free capital to pursue several opportunities that we believe can create significant long-term shareholder value. To wrap up, we're pleased with our second quarter execution and the momentum we're seeing across the business. Our results year to date, combined with increased visibility into the second half and a clear roadmap for 2027, give us confidence in our outlook. We remain focused on discipline execution, delivering on our commitments, and creating long-term value for our clients and shareholders. With that, operator, please open the call for questions.