Evolent Health, Inc. (EVH) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you again for participating in the BofA Securities Virtual Health Care Conference this year. I'm Michael Cherny, the health care tech and distribution analyst. It's my pleasure to introduce the team from Evolent Health. We have Frank Williams, Chairman, CEO and Co-Founder; Seth Blackley, who is President and Co-Founder; as well as John Johnson, who is the Chief Financial Officer. With that, I will turn it over to Frank, who I believe will kick things off.

Great. Thanks. We appreciate everyone joining today. We thought we would give an update given our recent quarterly announcement and then sort of go through the basics of the business and provide a broader update. Starting with our recent announcement, we reported results last Thursday evening. A few things to emphasize. First, our financial results for the quarter were slightly above expectations, and we reiterated our full guidance for the year as well as providing guidance for Q2. As we mentioned on the call, we still feel comfortable with 20% plus revenue growth for the year in our service business with expanding margins and plan to be cash flow positive by the third quarter of this year. So we feel on track from a financial perspective and have very strong visibility, given that our revenue is fully contracted for the year. We've been able to fortunately take our population health infrastructure. So if you think about our technology platform, our data infrastructure, our virtual care management capabilities, an integrated approach to care, working with providers, all of that has been deployed to have a significant impact on our membership base during COVID. We believe we have kept a significant number of people out of the hospital during this time. And our goal has been, obviously, to help flatten the curve but also to reduce mortality. And for those that suffer from other chronic conditions or have other support needs, that we're there and actively helping to provide that either directly or through our partnership relationships. We believe the pandemic has illustrated the importance of a population health infrastructure if you think about having significant data on a population on being able to regularly understand what's going on with a large group of people and intervene proactively and well in advance. Ultimately, when you think about the fee-for-service business model and impact from COVID versus one that is value oriented, we do believe this will be a catalyst for continued move to value. For a number of our partners, the value business is the highest performing business they have, given that it's prepaid, that it's dependable obviously. And we believe we'll continue to see growth from our existing partner base as we go further into the year. From a pipeline perspective, we welcome 2 new partners, EmblemHealth plan and a regional plan in the Northeast for New Century. These are good wins for us, bringing our total partnerships for this year to 3. We're hoping to bring on 6 to 8 new partners. So that deal's well within our range, and we still feel confident in that number for the year. If you step back and look at the overall impact on COVID. There's a lot of factors. If you think about Medicaid membership growth, if you think about utilization in different areas, you think about all of the factors that we can account for, based on what we know today, we see the impact of COVID as being neutral to slightly positive for the business for the year. So no change to our current outlook, there are some scenarios where, again, we could see increase in membership and growth as we get into the summer and second half of the year. We have not included any of that in our current outlook. And we obviously need to see more data across the coming weeks before we would be able to update that. But that's where we are right now. So a good start to the year, continued focus on supporting our partners, continued focus on advancing our pipeline which is really about setting up 2021, and obviously trying to have the biggest impact we can on a very significant public health emergency and ultimately support our partners during this time. So that's really the most recent update. And with that, I'll turn it over to Seth to walk through the presentation.

Great. Thank you, Frank. And I hope everybody is doing well. I'm going to move reasonably quickly to the presentation. There's not a lot of new content here. Many of you have probably seen some of this. I'll move quickly. But let's pick up on Page 6. Market context. I think everybody knows this, but this is the issue that Evolent's been focused on since we started the company, which is a fee-for-service world, payers and providers largely misaligned and the patient stuck in the middle. And we've, from the start of Evolent, really sought to be the bridge in between the payer community and the provider community to help address the issue on Page 7. A lot of issues that come out of that, which are well-known issues but around outcomes, cost, and just in general satisfaction with administrative hassles that come with this fragmented fee-for-service system. We talked -- oncology is one example we use around the middle column as just one place to click in, which is huge growth, high cost and a real pain point for payers and yet very challenging to manage, and we'll talk more about that later. Out of those 3 issues, Evolent has been very focused on 3 specific business areas, 3 solutions. One is total cost of care management, which is around our primary care model, and we'll talk more about that later in the presentation. In the middle, the specialty spending, we have a specialty care management platform, which is New Century Health. And then our third business is our Evolent Health Services platform, which has really taken on this administrative simplification issue that affects many payers and consumers around the country. Just a second on COVID on Slide 9. As Frank said, I think it's probably a slight positive for Evolent. If you back up from that and just look at the macro environment, I'd say COVID is generally putting a very bright spotlight on the fact that there are a bunch of issues with fee-for-service. When you're in a pandemic, you highlight the problem with lack of coordination inability to coordinate care, triage care, put the right care to the right people, stratify the population, all those sorts of things. And if you're a provider, you also highlight the problem when you have radical changes in utilization. On the right-hand side of the page under value, the -- anybody who's in a value arrangement are doing reasonably well. Payers are doing well because they have the actual economics, and then there's an ability with the full picture, as you have with the value to coordinate in a pandemic. And as Frank said, that's been, I think, has been a positive for us this year. I think more importantly, we'll continue to highlight why coordinated care, value-based care, whatever you want to call it, is going to be a major macro trend for many years to come as we continue to head in that direction as a country. Page 10, as I mentioned earlier, Evolent's primary role in life is sitting in between the payers and the providers as a bridge between the 2. At times, our customers are the providers. At times, our customers are the managed care organizations. In either case, the capabilities we're providing are similar. We're coordinating care. We're helping make smart decisions using pathways, clinical interventions, et cetera. Probably worth noting on this page, I'd say more of our contracts and revenue over the last 3 years have been coming from the left side of the page versus the right, so more from payers versus providers. Again, it's the same underlying capability. We're still doing work with both end markets. I think during COVID, having a large managed care organization, customer base has been very nice because they're in a steady and strong financial position, and they're already scaled. And so I think that's one of the reasons you see our first quarter being steady and feeling good about guidance for the year. Moving on to Page 11, just a quick overview of the business. You can see where we are in revenue, headed into this year approaching $1 billion on the top line, several million lives. I think close to 40 partners now and over 3,000 employees. And as I mentioned, the very diversified set of customers. At the end of the day, we have health plans, which are national or regional. We have health systems, which is sort of where we started the business years ago, and then we also increasingly have a bunch of independent physician organizations as customers, particularly for our total cost of care platform. So broad organization, diversified across the country. In terms of the investment themes, again, I won't hit on these for long because we've talked about them, but we feel very good about the 3 solutions that we have being highly differentiated, each in their own way and creating a strong organic growth path going forward. Two, the addressable market is of both payers and providers, probably skewing a little bit towards the payer community at this point for the reasons I said but across both and it's diversified. Because of those reasons, 1 and 2, we've talked about 20% growth rate locked in for this year and feeling very good about mid-teens for the foreseeable future. And then finally, the piece that I think we've all been excited to see start playing out this year, which it did in the first quarter, is getting to the strong profitability and cash flow. We'll talk more about that towards the end. Real fast on Page 13. Each of these solutions has their own differentiation. The total cost of care space, this is primary care model. We're primarily working with independent physicians. And if you're an independent physician today, you're in a tough spot in some ways. You could sell your practice to Optum or you can sell it to a health system or you could sell it to other buyers. For those that want to remain independent, we feel like we're a very good partner. And we've had great results over time. In the middle, specialty care management. This is our New Century platform. We feel like our differentiation here for cardiology and oncology, is a deep clinical perspective, which we bring to this, and our ability to engage effectively with providers. We guarantee savings, which we think, in any economy, a good economy or a recession economy being able to guarantee hard savings is going to be a winner, and we think that's continued to be a good product for us. And then on the far right, on the administrative side, this is our Evolent Health Services back office platform that we -- clinical and financial, that we largely sell to regional payers. And lots of outcomes to talk about there. A double-click into each of those. The total cost of care space, again, here, we're focused on working mostly with independent primary care. Largely, these are capitation-like arrangements that are going between the payer and the provider, the payer and the independent physician group, and we've had great success dating back to Next Gen and then the new Pathways to Success model from CMS but also beginning to work with private payers. We haven't done as much of that in the past, but we're now facilitating those arrangements. So this solution will be a strong one for us in terms of growth in the years to come. Second one, moving to the next page, which is Page 15, specialty care management. We've talked about this a lot, but the way we do it, imagine a patient is diagnosed with a difficult cancer diagnosis, what happens from there. What we do is we spend a lot of time studying the science. It's available. We have our own scientific advisory board. We develop pathways that we think are best care. When that patient's diagnosed, we look at the possible treatment patterns, as you can see in the middle, and we narrow those down to those that we think are best for the patient first, best for toxicity and then ultimately best for cost. And if the oncologist or the cardiologist, if we're using that example, weren't following that pathway, we'll pick up the phone. We intervene peer to peer and help change the actual pathway, which, as you can see on the far right, results in quality improvement, better pathways but also very significant cost savings in many cases. And this is the value proposition that's taken on a lot of traction in the market. Page 16, the third and final business on the administrative side. We've been able to take our Identifi platform and all the things we do from claims to UM, to care management, fully integrate that. And with the Maryland Physicians Care win and other health plans regionally around the country, we're having good success being differentiated as a provider-oriented solution but one that is getting sold into the payer community. So when you step back and look at those things, the way that we create differentiated value normally but then also in a COVID environment, you get this integration effect of being able to look at the data holistically, coordinate care triage for patients, outreach in a very tactical way to the right patients. And we have 1 case study where a 300,000 life plan, we helped them narrow down to the 9,000 most at risk patients. We then, our care management staff, drove a lot of the interventions to reach out to those patients in a COVID world. That flattens the curve and reduces mortality. In a non-COVID world, that results in higher quality, lower cost, which has been consistent with all these things that we've been talking about thus far. If you then look on to Page 18, which is around the second differentiation theme, investment thesis, so just a large market. We talked about this a lot. We view it as over $100 billion market. The total cost of care space has always been big for us from when we launched the company. The specialty care management space is -- I think we talked about it as a $10 billion market. When we acquired New Century, we feel like we've expanded that significantly by expanding the lines of business and also the scope of the work we do. And then our third business on the administrative simplification side, also a pretty large market in its own right. I think one thing just to comment on here very briefly as I get ready to hand it to John is that a huge theme for us for this year and last year, frankly, have been focused because we have a huge market right in front of us with these 3 areas. We don't need to do anything else. What we need to do is just execute and continue doing what we're doing in these 3 markets, and the market size is part of that. Page 19 and then I'll hand it to John -- just 19 and 20. Real fast on the pipeline. I don't think a lot to add beyond what Frank said in terms of the new additions we've had. We continue to have good balance and diversification across the pipeline, across our 3 businesses, some from cross sell, some from new, new net new logos. And in general, we feel very good about sort of the outlook for this year and next year. And then lastly, on Page 20, not really anything new on Passport to share. As we talked about on our earnings call, we have not heard from the state as to their time line with respect to the announcement of the RFP. It originally was going to be in the April or May time frame, and we don't have updates. Obviously, given COVID, things can change on decisions like that, but no new news there. I think the only thing that is new is we continue to have strong performance financially for the plan, and we've done a lot, I think, to help the Commonwealth of Kentucky respond to COVID, and we've tried to be excellent partners to them during this public health situation. So with that, I'll pass it to John for Slide 21.

Thanks, Seth. We report our financials in 2 segments. Our services segment, which includes the solutions that Seth was just commenting on; and our True Health segment, which is a commercial health plan in New Mexico. Our services segment is largely per member per month recurring revenues with long-term customers and long-term relationships and we have a number of different ways to grow this business. We can add new partners. We can add new lives to an existing partner, and we can cross-sell new services to an existing partner. And you've seen examples of all 3 of those, even in the last few quarters, as Frank and Seth were talking about. And overall, the strength of the differentiated model here and the diversified approach have been able to drive significant sustained growth across the period that the company has been public since 2015 with services CAGRs of over 40% since that time frame. And growth this year of north of 20% as we come into 2020 versus 2019. Revenue in our True Health segment is largely health plan premiums. During 2019, that revenue also included some transitional reinsurance revenue that we did not bring into 2020 with us. But the core business there continues to grow largely due to an expansion into the individual and federal lines of business. The strength of the growth here in the services segment, in particular, combined with the scalability of the model that we have has driven our longer-term margin outlook. On Page 22, you see the recent margin profile and where we expect to end this year, implied in our guidance. And really, this is driven by a couple of things. One is continuing to grow the top line. The second is driving leverage thereby. And the second -- or the third is continuing to identify and capture cost improvement opportunities as we've done over the last 18 months, taking a significant amount of operating expense out of the business. We guided to $4 million to $8 million of adjusted EBITDA in this quarter and have a high level of confidence in our overall outlook of $24 million to $32 million of adjusted EBITDA for the year and also expect to be positive cash flow by this fall and for full year 2020, assuming a Passport win in Kentucky. Finally, before I hand it back over to Frank and Seth. On Page 23, we've been able to accelerate our path to market leadership here through selective deployment of our balance sheet on both capability acquisitions and also select market entry points. On the capability side, this includes the acquisitions of both New Century Health and Valence Health, which have been highly strategic and mission-aligned and have delivered high ROI across our business and continue, as Seth mentioned earlier, to have significant growth prospects. We have also deployed a small portion of our capital towards health plan investments, including Passport Health. We have no plans to make further health plan acquisitions. With that, I will turn it back to Frank and Seth.

Great. Thanks, John. So I think in summary, good start to the year. We feel on track to meet our objectives for the year and feel like we're in a good position to continue to drive strong growth in the medium term. We do feel that the current pandemic has highlighted the importance of population health and value-based business models and, we do think, will serve as a catalyst as we get into the second half of the year and into 2021. Overall, feel in a good position and obviously, very focused on supporting our partners on making sure we're having an impact on the pandemic where we can and leveraging our infrastructure. Good early results. And every week, we're finding new best practices that we can export across our network, and the team has done an unbelievable job responding in a short period of time. And we feel very honored to support the partners that we have the opportunity to work with. So with that, we'll stop the formal remarks and be happy to take questions.

Great. Thanks to all of you for those comments. I want to start, Frank. This will probably be a question for all 3 of you. We pay attention to a lot of companies. There are very few that we've come across that are maintaining guidance. And you also referenced some of the moving pieces you have on opportunities around COVID. Can you maybe dive a little deeper into some of the early actions that you took both externally to ensure more rapid technology analytics deployment to your customers, but also internally, highlight a little bit about the ability to continue to manage an organization in a fairly remote setting when needed?

Sure. Obviously, our priority has been on keeping our employees safe and being able to support our partners, which are on the front lines in responding to the crisis. Fortunately, we have a very robust technology infrastructure. A lot of our interactions, particularly with patients, are remote in nature. So a combination of telehealth and care management, integrating other support services and if you think about people that have food needs, transportation needs, people with behavioral health or substance abuse disorder being able to still get therapy access and support and so the good news is, you look at that infrastructure, it's in place and we were able to move employees very quickly to remote and really did not miss a beat operationally. So we've continued to perform very well in terms of our key operating metrics. We also stepped back and said, okay, given that we have this infrastructure, how can we have an immediate impact. So our data and analytics teams, which are highly sophisticated, looked at our risk models, locked themselves in a room for several days and really thought through what factors can we pull out to identify high risk and medium risk patients and then can we turn our attention to reaching out to those patients, both with education about good public health practice, but also understanding what risk factors they had on being able to have an impact on those. And I would just say the team did a phenomenal job of responding when we had some efforts where we were reaching out to 10,000 patients a day in a variety of different formats to really try to engage people quickly because losing time, obviously, could cause a negative event to happen. And so I would say we responded very quickly. And then if you take that into our year and our outlook, one, it is clear that we're mission-critical for a lot of our partners. They're doing on-the-ground work. We're supporting them. And I think it's been a very important partnership in addressing the crisis. So I think that's important context. Second, we have a recurring revenue model. We have a lot of visibility in our revenue stream. We came into the year fully contracted at the time that we set our guidance. So we really had full confidence in our guidance at the beginning of the year. As I mentioned, there could be some factors here in terms of growth in membership and other areas that could have a positive impact on that, but we're not dependent on that to meet our goals for this year. And so that's sort of where we stand from a financial outlook perspective and why we come into May fairly confident. There are obviously factors that could change, but if you look at most of what we've been able to experience and see at this point, we feel very good about where we stand on the year.

And along those lines, thinking ahead to 2021, which I know a number of investors are already doing across the entire health care space, you highlighted your confidence in achieving 6 to 8 new partners by the end of the year. Can you give a little flavor for how the conversations changed in this purely remote world? And also, along the lines of some of the new tools you've been able to deploy, does that now create other opportunities in the selling process to either bolster, broaden, whatever term you want to use, the conversation about how you can deliver and partner with these new targets?

Sure. As we talked about, we came into the year with a pretty strong pipeline, particularly relative to historical standards. I think the fact we were able to close 2 deals in the last quarter and extend an existing arrangement, I think, demonstrates that what we do is important enough that people see it as a priority in terms of moving along pursuits. We've moved a lot of our discussions to remote. I would say pacing is not as rapid as it was pre-COVID, but we continue to get follow-up meetings. We continue to advance. There continues to be data exchange and things like that. So we feel pretty good about pacing in the pipeline. Of course, we'll have some delay with COVID. But again, we've got a good runway to set up 2021. I would say if you think about what emerges from this, which is budget pressure on all payers of health care, whether it's federal, state, employers, payers that are managing risk also will be under pressure. So if you look across what we do, first, New Century is immediate savings and quality improvements, better management in both oncology and cardiovascular services, we feel there'll be very high demand there given that it can have an immediate impact. If you look at value-based businesses in general, they're obviously more resilient in a time where if you're just in fee for service, you've been impacted by declines in utilization and cash flow. So we do think organizations will step back and want to expand and grow those businesses. So that I think will help from a same-store perspective. And I also think we'll see increased interest in organizations sort of stepping in more boldly into value who understand the strategic importance given what may occur across the next several quarters and into next year. So I would just say, with that backdrop, I think we see a positive selling environment that's been reflected in our new wins and the status of the pipeline today. And we think it will continue as we go into the quarter and into the summer.

Excellent. Well, with that, Frank, team, we're out of time. So I just want to thank Frank, Seth and John for joining us today, for giving us an overview and also for all the hard work you're doing with your clients as they manage through this unprecedented time. So thanks for joining us, and look forward to doing this again, hopefully, next year in Las Vegas.

Thanks again. We appreciate it.

Thanks, Mike.

Have a good day, everyone.