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

Good afternoon, everyone. Welcome to the JPMorgan Healthcare Conference. My name is Annie Samuel, and I'm the health care technology and distribution analyst here at JPMorgan. We're thrilled to hear from Evolent this afternoon. They've got a lot of great news for us. Presenting will be Founder and CEO, Seth Blackley. We'll hear his presentation and then afterwards, we'll open up the room to Q&A. So with that, let me turn it over to Seth.

All right. Thank you, Annie. I'm also joined by Seth Frank, our Head of Investor Relations. Unfortunately, John Johnson, our CFO; and Dan McCarthy, our President are home sick. Otherwise, they'd be here with us as well. Glad you were not in the Evolent offices last week, certainly something going around. Thrilled to be with you. Thank you for joining. I'm going to present this on behalf of our 4,000 mission-oriented employees and our incredible management team. Quite an interesting presentation. I'm going to jump right in. We also have a new exciting announcement that I'll share, so I want to get right into the content. In terms of the agenda, I'm going to give you a quick overview of Evolent Health. We'll talk a little bit about the investment considerations and with a look back at '22, and a look ahead at 2023. For those of you who don't know us well, we help improve the quality and reduce the cost of health care, and we have a particular focus on complex medical specialties. Our motivation in life is to help patients, better treatment, better health. Our customers, our health plans largely, you can see some examples of those on the right, higher quality and lower cost. And our users ultimately are the providers, the physicians who are really looking for less friction, more time to provide care. In terms of a little bit more detail on who we are, we serve and contracted with about 20 million patients across the United States to deliver this higher quality, lower cost care. We work with a network of over 50 health plans and risk-bearing providers. You can see a little bit of the financial information on the right-hand side of the page. Over $1.2 billion of revenue on a trailing basis. We've had revenue CAGR for the last 3 years of 37%. So it's been a high-growth company. Our adjusted EBITDA is around $100 million. Strong EBITDA margin, cash flow generating. And we'll talk about this in a minute, but a very significant total addressable market. As I mentioned a second ago, our primary focus in life is around complex specialties in serving those vulnerable patients. We do report our financials in 2 segments. One is the clinical segment, which is everything at the top of the page here; and our administrative segment, which is the bottom piece of the page. The top part of the page, our clinical segment, is about 70% of our revenue. That portion of our business is growing very rapidly, and it's becoming a larger and larger percentage of our business today. Increasingly, we're also thinking about the specialties that we support, oncology, cardiology, musculoskeletal and the like, as including complex care. So patients with multiple comorbid conditions. Some of you may know of that as Evolent Care Partners. I'd say the last thing, I just want to note, we've obviously done a number of acquisitions over the last couple of years to broaden out the number of specialties that we cover. One of the biggest points of feedback we hear from our customers, our health plan customers is, hey, if Evolent could cover more specialties, then it makes it easier for us to buy from you. It's better from an integration perspective from patients. So we've been broadening out the number of specialties that we address. And this idea of more consolidation and providing more specialties in one place is a huge part of the strategic thesis of Evolent. Another question that we talk a lot about is what are the business models within Evolent. Unlike a lot of companies, we have 2 distinct business models that we support our customers with. The first, we call the performance suite, I think of that as recurring capitation fees, another moniker for that might be risk-based business. Our applicable solutions there include all of our specialty work, but also the work we do with Evolent Care Partners, the complex care piece. And there, you'll see sort of mid-teens mature EBITDA margins. Second part of our business, second business model is the technology and services suite. The moniker here that you might attach to this is SaaS-based or SaaS and services based, a more traditional software model. That is, again, a business model that we apply with our specialty solutions, but also in Evolent Health Services. And that business line has mature margins in the mid-50% range. The other point that we've been talking a lot to investors about is, hey, how does the business break down in terms of contribution to the profits. You can see that on the right-hand side of the page, where 75% of our profitability is coming from the technology and services part of our business. Think of that as, again, a technology business. Growth of the company, growing very rapidly in both parts of this business model, but even more quickly in the performance suite. Let me turn into the investment considerations. Maybe a little bit of a broken record here and starting off '23 with the exact same investment considerations that we've had for the last few years. They're consistent and that's part of how we run the company. One is we're going to have compelling long-term organic growth in the core of what we do. We're going to stay very focused on that as an investment consideration. Second, we're very committed to strong and expanding margins. 2, 3 years ago, we set out to be a strong EBITDA-generating company. At that time, it was a little less in vogue to be a strong EBITDA contributor, but we've been very consistent about being what I would call a little bit old school about delivering EBITDA. And so the second consideration will maintain and remain, which is strong and expanding margins. The third investment consideration is efficient capital allocation. We'll talk about that in a minute, but it really means that we're going to be very disciplined about how we deploy capital. So let me go into each of these briefly, and I want to save lots of time for Q&A. First, in terms of compelling long-term organic growth. I mentioned earlier, we've been growing in the 30s for several years now. A lot of that is that our revenue renewal rate for our existing customers is well over 100%. So not only do we renew customers, but we've been expanding those relationships. And then I'll talk about it in a second. We have a very significant cross-sell opportunity with our existing customers. So that's been a big part of the opportunity. To go a little bit deeper on that cross-sell opportunity, I think those of you who've known Evolent over the last year, we've talked a lot about, hey, our largest customers, there's a $16 billion direct cross-sell opportunity; 25% penetration of that, $4 billion. So very big numbers just from a few customers. I think most of you know, we're a pending acquisition of NIA Magellan from Centene. Those numbers didn't step up from $4 billion to $12.5 billion from [ 16 ] to [ 50 ]. So very significant cross-sell opportunity. 1/3 of our TAM really is available to us in direct cross-sell, which we like. I'd say our approach in life is to try to do a great job for our customers, earn the right to win more business with them and then win that business through, again, delivering our commitments. On the right-hand side of the page, I get a lot of questions about, hey, what is the level of penetration that you do have within your large customers. So we decided to profile 4 of those customers here. You can see that on average, the penetration of the opportunity is well less than 10%. The fourth payer here on the list, we've talked a lot about is Molina over the last few years. And we've gone from less than $5 million of revenue to less than $10 million to $75 million, to $180 million of revenue next year with Molina. We're big fans of that team, hopefully doing a very, very good job for them and again, earning the right to grow with that partner as we've done. One of the other questions that we get a lot is that a great case study with Molina. We'd love to see it again. Where there's another opportunity like that. And so with that, I'm thrilled today to be announcing the expansion of our Humana partnership. Humana is a long-standing partner of Evolent. We have a very close relationship with them, have worked very hard to deliver high value to them. And I think this is a culmination of a lot of that hard work. On the left-hand side of the page, you can see our footprint with Humana, which is that in 36 states, we have a technology and services relationship in oncology with Humana, supporting much of their work in cancer care across the country. And that's been a great relationship, I think in both directions. We've historically done very little on the performance suite side with Humana. As of today, we're announcing that we're adding Arizona and Florida for the performance suite with Humana. It's obviously a very significant expansion given the size of those states at run rate. It will be over $250 million a year of revenue for us. That will be for 2024. It goes live in the second half of 2023. So you can get a sense that it will be a contributor to 2023, but well over $250 million of annual revenue for this new contract. And again, I think one of the exciting components of this is that that's for 2 states. There's 36 others in the Humana footprint that we'll be able to support. I think it's interesting also, when you look at Florida, we're doing the similar work with Florida Blue with [indiscernible] and one other national payer. What happens, I think, in a state like Florida, where the snowball starts going downhill in terms of the ability to support cancer patients in a better way. It's easier for the oncologist to standardize on one model. So today, we're providing much of the cancer care in the state of Florida through our model. And again, the standardization, I think, builds on itself. There's a nice network effect and that's certainly happening in Florida. On the right-hand side of the page, you get some sense of if you're the customer, the types of things that you're getting, it really is about higher quality for the patient, better adherence to evidence-based medicine and ultimately lower costs at the same time. So thrilled to have the chance to announce the new relationship with Humana. Turning to the second investment consideration around margins. I think I've touched on a lot of this already, but we had a really good end to 2022. We're not updating guidance today, we are reiterating. We will report, obviously, on Q4 here in a few weeks as well as give our guidance for next year, but very heartened by the progress we've been making on the margin front and everything is playing out the way that we've been communicating over the last couple of years with respect to margin maturation. With that last comment in mind, I did want to just spend a second on the performance suite, which, as a reminder, is 25% of our profits today. But as is the example with that Humana contract that we just announced, it's a big part of revenue growth going forward. If you remember, the curve on the performance suite margins, low single digits in the first year, getting to double digits in the second year, and then that mid-teens EBITDA margin in the third year. This is what that looks like when you think about what -- how a customer experience is that, which is they have a certain trend in year 1. We guarantee a reduction in that cost of cancer care in this example or cardiology or whatever the example may be. And then over time, the level of savings that we're generating for the health plan grows each year. You can see 4% value in the first year, 10% in the second, 15% in the third. And you stick at the bottom, you can look at our margin profile, also growing year-to-year. This is the financial value equation that's been driving our margins for the last couple, and we'll continue to do so next year. I did want to kind of close this section with just a quick example of how that works. How do we create value in oncology? What do we do for patients that makes their lives better. This is an oncology example. It's the same thing we would do in other specialties, but we really start on the left with evidence. What is the best evidence for the patient, what is the right kind of care. We call that Level 1 pathway. Think of that as best practice. That's the care that I would want a family member to receive or you would want a family member to receive. It's the best care. We then compare that evidence of Level 1 pathways to what is actually happening on a case-by-case basis. So in a state where you have 100,000 Medicare patients, 2,000 or 3,000 of those patients are going to have cancer in any given year. What kind of care are we providing to those 2,000 or 3,000 patients? We compare that to our pathway. If the pathway being delivered to the patient is different from best practice, we intervene with the treating oncologists. We do that on behalf of the health plan. We're empowered by the health plan to do that. We make a number of different interventions to help change the adherence to pathways and improve them. When we enter a market, adherence to pathways, might be in the mid-60s. Within 2 to 3 years, it will be in the 80s, 80% range, meaning much better adherence to evidence-based medicine. You can see some examples on the far right of the page, what that might look like. It's using genetics and genetic medicine to understand targeting. It's understanding efficacy of drugs, it's understanding advanced decision-making for patients that have terminal illness. Many more examples, of course, but this is the value equation, how we help patients and payers at the same time. Keep an eye on the clock here, just moving to Page 17, around efficient capital allocation, which is again our third priority. I'll just highlight that our priorities around capital allocation are: number one, to invest in the core part of our business, make sure our product is innovative, make sure it's market leading. That's the core of how we spend capital. Second thing that we do is M&A. We've done a bit of M&A in the last few years, NIA and IPG just in the last year. NIA acquisition, 12x EBITDA. So very accretive from a capital allocation perspective. IPG, 15x, also very accretive. We've done these acquisitions. I think we're very well set up. We don't plan any additional M&A in the short, medium term. So our capital and our cash flow will be going to paying down debt and delevering. To that end, just briefly, I won't dwell on this slide, but you can see where our leverage ratio is at closing of NIA when that happens over the months to come and then also what the plan is to delever based on our cash flow estimate that we've provided here and obviously, a pretty rapid delevering process. Let me end just kind of year-end review, looking back at '22, looking ahead at '23. If I look back at 2022, incredibly proud of the team, our leadership team. It's a very mission-oriented place. Everybody is interested in doing more for patients. We announced 13 new partnerships last year. And I think each one of those partnerships relative to our target of 6 to 8 gives us a chance to run at our mission a little bit more, and you see the revenue growth as a result of that. The margins expanded in the ways that I've already described. That's important for investors. It's important to fund the innovation that we're doing. And then finally, just accretive capital allocation I just talked about. Not listed on the slide. I'm also really proud that our employee engagement score, which is our measure of our culture. How much our employees care about being at the firm, doing what we do is at an all-time high. It's the highest it's ever been over the last 12 years, and I'm thrilled about that. It's a diverse workforce and couldn't be happier with the team we have. Just rounding out here looking ahead. In terms of outlook for '23, I think we mentioned this to many of you in one-on-ones, we're not providing new guidance today. We'll do that in February. Things have -- we ended the year in a really strong way, and we're set up well for next year. We do have a few things that we have shared that I'll just reiterate right now, one of which is a floor on revenue growth of 25% before the impact of NIA. So we're going to grow very rapidly again next year. Obviously, that 25%, just to say it again, is a floor, and we'll be at least at 25%. And we'll obviously be continuing to expand EBITDA margins. We'll give that guidance as part of our February call as well. Last thing, just because we talk about leverage a little bit today, we will generate operating cash flow in excess of $120 million in 2023 before any interest expense. So we're generating a lot of cash. That number will go up, obviously, over time, but it's an important metric. Just wanted to close with what I would refer to as sort of a North Star on the business and how we're managing the business, at least the financial part of it. I mentioned earlier, we're around $100 million of EBITDA today. A couple of years ago, when I stepped into the CEO role, we talked about the core business by the end of '24 being $150 million to $200 million. The blue box in the bottom right. If you add what we've communicated around IPG and NIA, those 2 acquisitions that I mentioned earlier that round out our specialties. We believe we'll be at $300 million of run rate EBITDA by the fourth quarter of '24. So $75 million in that quarter of 2024. I think what gives me a lot of confidence is that if you look at the components of that, NIA as a for instance, whether it's contracted or some of the modest cost synergies there, we have a lot of line of sight to those. And then the blue bar at the bottom, getting to that level of profitability really is around growth and expanding margins, all the things we talked about today, including the new customer relationship I mentioned. So -- the future is bright for Evolent. Really happy to be here today. With that, I know we're about on time. We'll go to Q&A.

Seth, thanks so much for that great presentation and congratulations on the Humana expansion. That's really exciting news. I think maybe we should start there, right? That's really incremental. You kind of quantified the overall dollar amount, but I was hoping maybe we could talk a little bit about what the lives look like, maybe the PMPM that you're kind of assuming within that. And then also what specialties are going to be using? Are you kind of thinking maybe that your recent acquisitions may be kind of an incremental specialty opportunity? Or you're going to be including those in that?

Yes. So great question. So with Humana, think of it as around 500,000 incremental lives on the Performance Suite. It's oncology only, is the expansion. That's the focus. In terms of PMPM, you can kind of do the math on the over $250 million number that I provided of revenue and those number of lives, but it comes out to a place where it's significantly north of our average PMPM. And that's partly due to oncology is complicated and high cost, and it's Medicare. So that's what it is initially. Obviously, I think our approach in life is to try to do a great job on that and earn the right to go to more states, but also could be adding more specialties in those same states, should be a very significant opportunity ahead.

So you've got your foot in the door and you keep expanding?

Keep expanding. Right.

Kind of along that same theme, Molina has been one where you've kind of already followed that road map and you had some really nice expansion there. Can you touch on that relationship? What's working so well? And why do they keep expanding with you?

Yes. I mean, I'm probably going to bore everybody a little bit with a broken record. But I think the biggest part of it is when we tell somebody we're going to do something, we do it. We follow it through on our commitment. That's part of our DNA and our culture. And I just believe that the way to win business is to prove it out when people trust the old-fashioned way and deliver. And I think we've been doing that on their behalf. I think part of it also, though, is that if you're in the payer space, you're hungry for solutions to manage MLR because there is a pressure on MLR right now that's new, I think, after COVID. And there are a lot of sort of niche companies that are doing a little bit here and there on specialties. And I also find that payers are looking for fewer vendors that can do more. So I think the combo of all those things has been in the formula.

And how do we think about how big that relationship could be over time?

Yes. So we've talked about that in the past before NIA and before IPG, we talked about $800 million a year of sort of revenue opportunity. Obviously, adding NIA and adding IPG, it's probably significantly bigger than that, but it's over $1 billion, I think is a good way to think about it.

Great. You talked about how you're differentiated and the -- your customers want to have one vendor. Can you talk about -- how do you look different than a lot of the other models out there because you -- a little bit more kind of [ tacked ] on the investment, particularly on the Evolent Care Partners business. There's a lot of other models out there. So how do you differ from them?

Yes. I think -- I'll sort of answer it in 2 ways, Annie, if it's all right. One is on the specialty side where the core of the company is today. I think it really comes out of our DNA, which is very clinical -- lot of work with providers over time. So we understand provider perspective, we're not historically a payer company as much as we are a clinical company. So that, I think, is the biggest thing. And because of that, we've been willing to take and manage risk. And I think that gives us a level of credibility. If you're selling a product to somebody, but you won't guarantee the result, that's one thing. If you're saying, I'll actually stand behind it, it's another. So I think the combo of all those things is the secret sauce on the specialty side. Evolent Care Partners, which for those who don't know it, managing complex patients through primary care, it's similar to some of the other models. We don't employ physicians. It's a small part of our company. And I think a lot of the differentiation there is the ability to partner with physician groups that want to get into value but may not be ready to sell their practice and want to do it on a network basis.

Great. Another big announcement that you made recently, you've had a lot of announcements yesterday. But -- with the NIA acquisition, and that was a really big one. So I was hoping you could talk a little bit about why you decided to do that acquisition, what they're going to add for you and maybe the opportunity to sell that incremental specialty into your existing base?

Yes. So I think with NIA Magellan, that business for us is really important because it gives us breadth. So we had cardiology, oncology, end of life. Now we have -- we're adding multiple -- 4 new specialties. And what I -- again, I find a lot with health plans is they'd rather have 1 or 2 partners, not 5. So it gives us the ability to cover more of the waterfront. So that, I think, is going to be the main reason we did the NIA transaction and the main benefit. I do think the products themselves, Annie, are really complementary, right? So they have radiology and genetics and some things that -- when you have cancer you need to -- you got to scan your body to understand tumor progression. You need to understand genetics to understand targeting of the therapeutic. Those kinds of things, that NIA brings to the table, I think are going to make us a lot better at the specialties that we already have. So it's -- those 2 things were the main drivers. I think the third one, though, is the relationship with Centene is a really important one for us. I think the reason we came together around that partnership is that, again, they see -- we already were doing work with them with our oncology work. The ability to do more with them under one vendor partnership where they have trust that we'll do what we say what we're going to do, I think, is a big part of that, a big part of why they were willing to give some additional commitments on the contract. And they're obviously a big -- I think about big payer relationships. We've talked about Molina, talked about Humana. I think Centene is going to be yet another leg to the stool in terms of just a great partner, see the world in a similar way. And I think we'll have a lot of runway there.

And this was the first time -- you've done a lot of acquisitions in the past, but this is the first time you've ever talked about synergies from an acquisition -- so what made you decide to do that this time? And where are those synergies going to come from?

Yes. Yes. So there's -- for those who haven't studied it, there are kind of 3 synergies with the transaction. One is that Centene committed to a lot of incremental contract for NIA and expanding it there. That's great. Second one is also a revenue synergy, but outside of Centene. For all the other plans, a lot of blue plans that they have relationships with that we don't and vice versa, the -- I think, be significant revenue synergies. Then on the cost side, I'll give you a couple of examples. We see a big opportunity for automation in this space. Today, what happens at NIA and New Century, for that matter, are -- when you work with the physician on changing a practice pattern, there is some manual work for the office. And we've already been working on automation. They're working on automation. I think together, there's going to be a bigger automation opportunity, which really just means less manual labor for the physician's office, more quickly jump into the right answer for the patient. And it's less labor-intensive, and therefore, less costly for us. I don't think that likely means fewer jobs at Evolent. And what it really means is we can support growth with fewer people, but we're growing so fast that we can kind of deploy those people over more lives.

And that's something you've already done in your core business, and that's been a nice driver of launch already. So hopefully similar road map.

Yes. Totally.

You have talked a lot about new partnerships today, but something that is also a really good driver of your growth is same-store growth. I'm sure we'll kind of get a little bit of a better sense of how that turned out when you provide your guidance in February, but how should we be thinking about same-store growth as the driver of that kind of long-term mid-teens growth target?

Yes. I mean, look, it's interesting. The last year or 2, it's been very, very significant. Obviously, Humana and Molina I would characterize as same-store growth. We have very small footprints and big opportunities and a lot of other plans, too, that we're currently working with. I'll use Florida Blue as an example, where we have an important relationship, but it's quite small relative to their full footprint. In most of these situations, Annie, we've got 1 specialty, sometimes 2, out of what will soon be 7, depending on how you count them. So I think it's going to be very significant. I mentioned that $50 billion cross-sell opportunity. It's 1/3 of our entire TAM now, is cross-sell. So I think same-store growth is going to be a big driver. That said, we're going to -- we're also going to put some focus almost like strategically, even though we don't have to, I don't think, on new logos just because the diversification, I think, is good. And so you're going to see, I think, some of both over the next year.