Welcome to Evolent Health’s earnings conference call for the quarter ended December 31, 2015. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Frank Williams, Chief Executive Officer of Evolent Health. This call will be archived and available beginning later this evening for the next 90 days via the webcast on the company's website in the section entitled Investor Relations. [Operator Instructions] Here is some important introductory information. This call contains forward-looking statements under the US Federal Securities 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 reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to its fourth quarter and full year news release. As a reminder, the financial statements of Evolent Health Incorporated for the 12 months ended December 31, 2015 and for the three and 12 months ended December 31, 2014 do not reflect a complete view of the operational results for those periods due to the reorganization completed in connection with our initial public offering in June. Prior to the reorganization, Evolent Health Incorporated had no operations. In order to provide consistent and comparable metrics for the periods before and after June 4, 2015, the adjusted results for Evolent Health Incorporated presented and discussed in our press reflect the reorganization as if it had occurred on the first day of the relevant period. The adjusted results include the operations of Evolent Health LLC for the period from January 1, 2014 through June 3, 2015 as well as certain other adjustments. Reconciliations of adjusted results to GAAP results are available in the press release we issued today, as well as the 8-K we filed today with the SEC. You can find further information in the financial statement presentation and non-GAAP financial measures sections of our press release. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams. Please go ahead.

Thank you and good evening. I am Frank Williams, Chief Executive Officer of Evolent Health, and I am joined this evening by Nicky McGrane, our Chief Financial Officer. We have a three-part agenda for today’s call. First, I will open with a summary of our performance for the quarter and the calendar year covering our financial results and an overview of what we are seeing in the market. I will then turn it over to Nicky to take us through a more detailed review of the financials. Finally, I will close with some additional highlights on the quarter and an update on our key priorities for 2016. As always, we will be happy to take questions at the end of the call. In terms of our results for the quarter, from a financial perspective, total adjusted revenue for the quarter ended December 31, 2015 increased 74.9% to $46.7 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended December 31, 2015 was negative $5.9 million compared to adjusted EBITDA of negative $13.1 million for the quarter ended December 31, 2014. For the calendar year ending December 31, 2015, adjusted revenue increased 62.1% to $163.5 million compared to $100.9 million for the full year ended December 31, 2014. Adjusted EBITDA for the full year ended December 31, 2015 was negative $31.7 million compared to negative $37.1 million for the full year ended December 31, 2014. We have over 717,000 total lives on the platform as of December 31, 2015, up 66% year-over-year. All in all, we are very pleased with our financial results for the year as we exceeded our guidance for the fourth quarter and for the calendar year and also made significant strides strategically and operationally, solidifying our leadership position in supporting providers in…

Thanks, Frank. In terms of the focus of today’s financial review, I will start by covering the income statement results for the quarter and fiscal year ended December 31, 2015, our December 31, 2015 balance sheet and cash flow statement for the quarter ended December 31, 2015. This is also the time of the year in which we have the highest visibility into our growth for the coming 12 months and I look forward to sharing our outlook for 2016. During this discussion, I will be comparing fourth quarter and fiscal year 2015 results with comparable 2014 results on an adjusted basis. The reconciliations of our adjusted results to the most comparable GAAP results are available in the press release we issued today and also the 8-K we filed with the SEC. Overall, I am pleased with our results for the fourth quarter and fiscal year. In terms of the fiscal year, we had adjusted revenues of $153.5 million or 62.1% growth from $100.9 million in 2014. In 2015, we grew the lives in our platform by 66% and as a result, we saw a significant expansion in our adjusted gross margins from 28.3% to 39%. This reflects the scalability of our service model as we are able to leverage local market infrastructure over growing membership at our existing clients. We continue to invest in our capabilities with a particular focus on our Identifi platform as well our go-to market resources. Adjusted EBITDA for the year was negative $31.7 million compared to negative $37.1 million in 2014. Turning to our adjusted results for the quarter, our adjusted revenue increased 74.9% to $46.7 million, up from $26.7 million in the same period of the prior year. Adjusted EBITDA for the quarter was negative $5.9 million, up from negative $13.9 million last…

Thanks Nicky. I wanted to close with a few updates on our pipeline moving into 2016, our product development focus and our overall organization. Looking forward in 2016, we’re excited about both the quantity and quality of health systems in our active pipeline. Given the lead time for execution and readiness, many health systems executive teams are working to finalize their strategic and operational plans in the first half of this year in anticipation of value-based care launches in late ‘16 and early ‘17. For example, we continue to see health systems developing substance of risk arrangements with regional or national payers as a tactic to quickly scale their value-based business. Currently, we’re supporting our partners in 15 payer risk contracts as well as several systems in our pipeline were in the early stages of negotiations around shared savings and delegated capitation agreements. At the same time, we're finding that a number of systems we work with are determining that they want increased option value in their go-to market strategy and are pursuing their own health plans. Within our pipeline, there are half a dozen organizations that are engaged in market and financial feasibility analysis around the viability of launching their own health plans to serve discrete populations in the region. In terms of platform development, we’re consistently seeking to support our clients in innovative ways to effectively power their value-based business strategies. Many of our health system clients are in active discussions to offer high-performance neural network offerings to local employers and we’ve made a consorted effort to develop a highly effective scalable offering in this area. To our employer value advantage product, we assist health systems in developing compelling provider networks, tailored clinical programs, and wellness and benefit plan designs to lower total cost and improve employee productivity.…

We will now begin the question-and-answer session. [Operator Instructions] First question comes today from Robert Jones with Goldman Sachs. Please go ahead.

Thanks for the question. This is Adam Noble in for Bob. Just wanted to ask around the platform lives in the quarter and just curious, was the number in line with your expectations heading into the fourth quarter, with potentially, flat sequentially with 3Q and I understand a lot of the enrolment that goes on 4Q will really show up in 1Q, but is there anything to call out, given the strong existing client growth you guys talked about why there wasn't a little bit more of a step up in 4Q?

Yes. Bob, I would start by saying it was in line, sorry, Adam, it was in line with expectations. The way we -- earlier in the year, we had one or two contracts or populations we thought might hit in the fourth quarter, those are now slated to begin in 2016. In general, I think what you will see is in the fourth quarter, not a lot will happen, not a lot of new lives generally coming on just based on the way that the year pans out. So nothing surprising to us. I think as Frank talked about, as of February, we are up to 1.1 million lives. So you do see a nice step-up in Q1 and so things in line with expectations and we're making the progress we expect to make in life growth.

Got you. That makes a lot of sense. I guess also the gross margin, again, it was a lot above our expectations for the second straight quarter, you mentioned last quarter having some gain share utilization, was that the case again here in 4Q, and thinking about the -- talking about gross margin for 2016, you said it should be flat year-over-year, how should we think about I guess the appropriate baseline for the year and maybe the fluctuations that we might see.

I will take it in two parts, Adam. Specifically on Q4, so the two pieces to that puzzle, one is that we saw a very strong transformation revenue in the fourth quarter, so relative to the third quarter, we had $7 million uptick in transformation, which is very good flow through, and we also did mention that in Q4, we actually had some rebate. It’s not revenue, it comes through the – it’s a deduct to expenses and rebate income and some other year-end adjustments that were kind of one time in nature and favorable. So that explains the delta from Q3 to Q4. For the full year, we are just under 40% and I think we see that as a sustainable basis going into 2016. So I think 40% is a good number to work with for full year 16 on the gross margin line.

Next question is from Ryan Daniels with William Blair. Please go ahead.

Yeah. Thanks for taking the questions guys. Frank, I wanted to ask one of you in regards to the Passport relationship and really your broader Medicaid population health strategy, how do you use an organization effectively institutionalize their decades of learnings and then kind of take that and move that into other markets to assist with Medicaid population?

Yes. What I would say is that’s something that I think we are quite good at doing. If you think about our initial relationship with UPMC, that gave us an opportunity to take some very well-developed IP and then codify that and develop in a way it could be customized and obviously scaled for the broader markets. So I think that's something we’re very good at doing. If you look at Passport relative to other Medicaid plans around the country, I think what we saw, having been around the country is that, one, they are incredibly good at what they do. Two, the model that they had deployed, which is one that involves multiple providers that truly networks throughout the state and then also engages the local community organizations in a very meaningful way, that that model is what we’re seeing across the country that other states, other provider organization is going to be a part of. So in terms of their clinical knowledge, in terms of managing specific segments of that population, I think they have very unique assets there. Again, a lot of know-how in terms of how you engage providers and effectively engage patients and again our job, which has already started and I would say is off to a great start, is to take that knowledge and again embedded in our identified platform, which is highly scalable, but also in the way that we're working with other provider organizations. So right now off to a very good start.

Okay, that's helpful. And then when you were talking in your prepared comments about growth in the lives in the platform, I think you said it’s still likely to trend at that 30% new, 70% existing, I am curious. I guess that has been the case and maybe longer term, but given that you’re taking on some partnerships with a lot of existing lives and also [indiscernible] wind down, will that look a little different actually next year or is it still, you’re sticking in that 30-70 type ratio?

Yes. I think that's a good point. If you look at the historical average of 70-30 and what we would expect over a number of years, it is again in the 70-30 range. To your point, because we are bringing on a new organization with a large bolus of lives, you probably see that flip a little bit this year with again more growth coming from the new client side. So I don't have the exact ratio, but it might be closer to 50-50 this year, based on the addition of 280,000 lines.

Okay, perfect. And then maybe one more just going back to the Medicaid population, little bit more nuance there, as it seems like a big opportunity, but how do you integrate kind of the social services aspect of Care Delivery, which is probably much more important in that population with what we typically think of as the healthcare delivery portion?

Yes. And that's one thing that again I think Passport has been exceptional at. So they really have developed an effective mechanism to think about the network in much broader terms, right, it's not just a physician network or specialist network. It actually incorporates community organizations and in that process, they have developed a number of methodologies for engaging with those providers, connecting them directly with physician organizations, the identified platform again, which is sort of managing flow across the population kind of also be used to engage those providers in a meaningful way. So I think what we are really looking to do is build on the knowledge base of Passport, leverage it in the existing infrastructure and systems that we have and think about network to your point, in much broader terms where we are effectively leveraging other organizations that clearly can engage those patients and population in an effective way. So, again, that is one of the reasons why we identified Passport as one of the leading providers in the country that we wanted to work with.

Our next question is from Lisa Gill with JPMorgan. Please go ahead.

Good evening. It’s Mike Newshel in for Lisa. Can you give us some more color on the performance fees that you mentioned, both give us a sense of the size as a percentage of total revenues from that client and are you sharing the medical costs risk here or are there other performance metrics that those fees tied too.

Yes. So this is an existing client and I would say you’re talking sort of in aggregate to the $5 million to $10 million range of dollars at stake here, and it's actually the risk sharing arrangement is on sort of net outcomes based on the way the CMS is scoring this. So it is based on the medical side, medical performance, the measurement date will be pushed out to ‘17. That's where we sort of know it, because those revenues would not be available until ‘17 based on that measurement date.

I think from our perspective, we saw a very significant Medicare opportunity in this particular market. I think the health system partner we're working with also is quite excited by it and what we felt is that we can go in together potentially really grow that population over time and have a pretty exciting opportunity to improve clinical care and lower cost for the population. So it helps that we've already done a lot of work in that market, it helped that we really done the analysis of the Medicare population, it's already a very good relationship for us and we really view this as an opportunity to potentially generate pretty significant upside again if we continue to do what we've been able to do in that market. So excited about it and again I think lots of potential as we head into ‘17 and ‘18.

And are you expecting to do more arrangements like this in the future, and this is something that you would offer in terms of closing the new client or is it only something that you would want to attempt at this point with somebody you already have a track record with?

I think we’re only going to do this in selective situations where we have pretty deep knowledge of the market, a strong working relationship with the client again what we feel like we have control over the right factors, the high majority of our fees are obviously come in direct fee relationships, not interest-based arrangements, I don't think you're going to see a major change there, but in the right situation where we see an opportunity to really build an exciting financial opportunity for the health system and for the other one, I think we would consider.

The next question is from Charles Rhyee with Cowen and Company. Please go ahead.

Thanks for taking the question guys and congrats on the results here. Wondered, Nicky, maybe first for you. Obviously there is a question about the gross margins coming in better, but when I think about the EBITDA sort of the expected range for next year coming a lot better than I had expected, can you talk about what you’re anticipating in terms of expenses in the OpEx line as we move to the year and does this pull forward your expectations for breakeven in ‘17?

I would say generally speaking, Charles, the numbers we put out are marginally better than we had originally expected. I think you saw some gross margin uptick. We’re probably a little ahead of where we expected to be on gross margins, so that's coming into ‘16 as well. We are seeing a moderation in SG&A growth as well. So when we put it together, as I say, I think it’s modestly better than we expected. At this point, it would be premature to say, we are going to pull forward our expectations and breakeven. We continue to be focused on a year - fourth quarter 2017 breakeven. But we obviously wanted to set up ’16 in a way that painted a clear path to that and so we think working on both gross margin and EBITDA to exit 2016 in a place which gave us, as I said, a very clear path to that breakeven target. So again sort of working hard on that and want to make sure that’s a real focus for us as an organization.

Okay, great. And then maybe a question for you, Frank. Last quarter you talked about record number of Blueprints. Can you talk about how they are sitting within the pipeline today? I know you talked about a strong pipeline here earlier, how should we think about where those Blueprints are and how they potentially flow through into kind of signed contracts? And then secondly when you talk to, obviously a lot of focus on value-based reimbursement, not just with you guys, but with other types of companies that are maybe offering kind of point solutions, particularly at the facility level. How do you go about engaging with those health systems if they have already made some investments in some type of analytics platform or some type of population health platform? Are you looking to say, hey, let us bring Identifi in, because we think this is better or do you look to work with what they have and augment with that? Thanks.

I mean, two good questions. I would say, first of all, the Blueprint environment has been strong. We're still engaged with over 90% of the organization that we started within the fall. If you think about the work now, it really is analyzing the market, the financial opportunity for value-based launches towards the end of this year and into '17. So that's something we are going to continue to diligently work on through the first half of the year. We feel really good about some of the organizations that we are working with in the business cases. We obviously want to be selective to make sure there really is the commitment that really want to get to scale. And hopefully with enough in the pipeline we can be selective and again hit our target of about five organizations for this year. So, right now, I’d say we feel good and again some great organizations in the pipeline. On your second question, I think I’ve learned a long time ago you are never going to take one solution and offer that solution to every health system in the country. They are going to have different systems, they are going to have different needs. And I think we wanted to have a scalable, but also a flexible platform. So I think to your answer, many times what we see is organizations have purchased one-off tools that do not solve what they need to accomplish in a value-based care setting. Many times they've done it with an inpatient mindset. There's a number of things when you think about being a provider organization at risk that are not embedded in those tools. And a lot of time it’s our engagement process that really highlights some of the things that they are missing from the existing tool set. So in those cases, they recognize, look, what we have doesn’t meet our needs and we are really going to need the Identifi platform and the broader Evolent solution. If someone has purchased something where we have overlapping capabilities, you are absolutely right, we're not going to build a new data warehouse if they don’t need one. And we are going to try to work within the system that they have. We do believe that our analytics layer, our stratification layer is second to none and usually when people really analyze that aspect we definitely want to have that as part of the way to really direct the care management organization and ultimately lower clinical cost. So usually we will have that component, but a lot of flexibility on the other dimensions.

Great. Thanks a lot.

The next question is from David Larsen with Leerink. Please go ahead.

Hi. Congratulations on a good quarter. So, revenue in the quarter came in ahead of our expectations. Nicky, can you talk about that and how is revenue relative to your expectations and were there any performance fees that were in there? Thanks.

David, no performance fees in the quarter. I just talked about on the expense side, there were some benefits, but I think we had a solid quarter and transformation revenue was good in the quarter. We have talked at the end of Q3 that we had some work moving around between the quarters, so that came together nicely. We didn’t – to the earlier question on live, the lives is where we expected it to be, but P&L revenue was also up nicely just based on where I think it exactly came in the quarter. So in aggregate, nothing specific to point to, just solid transformation quarter and P&L largely where we expected it to be. So I think we try to – transformation is difficult to forecast, so we try to be somewhat conservative there, but in aggregate a good quarter from our perspective and thankfully in line and slightly ahead of our own expectations. So we are happy with that.

That’s great. And then did I hear you correctly saying that you expect a number of lives on the platform to double in 2016? So in 4Q of '16 roughly a doubling of the number of lives?

Yeah, I mean, we ended the year with north of 700,000. Frank talked about close to 300,000 coming on at Passport, so that gets you to 1 million. Open enrollment and some other new customers in the year, so as of February you would have 1.1 million. And so we would expect the year-end range to be in the 1.2 million to 1.4 million lives by the end of 2016, yes.

Okay, that’s great. And then, can you just remind me in terms of the degree of visibility you have into the 2016 revenue guide please.

So, we referenced specially about an 85% visibility across the full year. I would say the pieces of the puzzle yet to be completed out. It is always a portion of the transformation revenue that by nature of it, it comes in and it’s we got to go get that every year upfront in the implementation work. So there is peak to that there and then there is, I would say, at individual clients there's opportunities on new populations that we have to sort of go get and we’ve visibility towards them, but they don’t fit into that contracted revenue. So we sort of – our pipeline is strong as Frank talked about, so on the first part of it, we feel good about where we got to go and get that transformation revenue and then we know the work we have to do on the P&L side as well.

One way to think about is, if you think about the business where a lot of the lives are set for this year by clients, right, and even some of the things that are going to be additive, we are already very deep on or already contracted. So I think the 85% point is, it’s pretty unique for a business for the full year to have 85% of their revenues under contract and very high visibility there. So the gap that Nicky talked about is consistent with what we've seen historically, so you always have some additional revenue you will add, but it’s very consistent with what we've done historically, just meaning we feel very good about our forecast for this year.

Okay, that's great. That’s very helpful. And then just the impact of [indiscernible] I think that client was potentially rolling off, that’s fully accounted for obviously in the ‘16 guide?

Yes, nothing new there, nothing beyond what was talked about before, David.

Okay, wonderful. Thanks and congratulations on a good quarter and what appears to be to me a good guidance. Congrats.

Thanks.

[Operator Instructions] The next question comes from Richard Close with Canaccord Genuity. Please go ahead.

This is Brian Hoffman for Richard. Nicky, you said that transformation revenue is expected to be flat in 2016. How should we think about that over the fourth quarter? Will that be evenly split or are all somewhat back-end loaded?

That’s more, I would say, more evenly split, transformation we've – so transformation revenues we talked about a lot. It’s inherently difficult to forecast quarter-to-quarter. So there's nothing about the nature of it that is more back ended. So I would say, a good way to think about that is fairly equal over the fourth – over the full quarters.

Okay. And then on the last quarter's call you stated that 80% of the health system that attended your annual summit, having their own branded health plan is a critical component to their strategy, so that’s been I guess about a little over three months ago. Can you talk a little bit about any changes you've seen in the demand environment and how the summit has impacted your pipeline since then?

Yeah, I think the summit is an excellent way to get the health system CEOs and their boards many times away for a couple of days just thinking about their value-based strategy and just thinking about Evolent. So I think some stronger relationships were built there, it’s a way to enhance our credibility given that a lot of our clients are talking about our work together and the success that we’ve had. So I think it’s been very useful for building on what were already strong relationships. And as a result, as I mentioned in my remarks earlier, we have several organizations right now that are evaluating the launch of health plans and we are working with them on the market assessments and really trying to understand what the opportunity is, where the regulatory requirement is. And again, I would say, the overall market trend is tilting more towards health plans in certain markets where provider organizations have not been able to get good terms from payers in terms of taking on productive risk arrangements. So as a result, organizations that want to control their own destiny, that really see an ability to leverage their own brand locally in very discrete populations are deciding that they want to – ultimately launch health plan. So we're mid-process with a number of organizations right now and hopeful that we will have some [indiscernible] this year.

And, Brian, I would just clarify, my equal point on transformation. I actually thing 45% first half, 55% second half maybe a more accurate picture just starring at some data, so just to clarify that point.

Got it. Okay, thank you. That's helpful. And then last one for me. Where you sit today, when you look at the various segments in Medicaid, Medicare Advantage, employer solutions, where do you see the most or the biggest opportunities coming over the next several years?

Well, what I think is, I think we see movement in all of those segments. As I mentioned, the Medicare being the largest payer and being very aggressive and where brand locally is quite powerful in someone’s selection of a health plan, we do like that segment a lot, particularly given that the dilemma for a provider is do I want to accept declining fee-for-service rates or would I rather have more control over the premium and manage that more productively. So that's a natural place where we think a lot of providers will be moving into risk arrangements. We mentioned Medicaid where a lot of states are under strain and there really is a need for more coordinated provider solution. That’s a growing population. So I think in those two areas, I think those are quite attractive and then obviously the exchanges, very different for providers that are embedded in those markets where again they have a powerful brand, there is ability, there is a benefit to building a broader network and I do think over time as the exchanges rationalize, we also have providers there as well.

Excellent. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. We thank you very much for attending today's presentation. The conference has now concluded. You may now disconnect. Take care.