Welcome to Evolent Health's earnings conference call for the quarter ended September 30, 2019. 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 later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations. Here is some important introductory information. This call contains forward-looking statements under the U.S. 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 company's 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 second quarter news press release issued earlier today. As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the company's press release issued today and posted on the Investor Relations section of the company's website, ir.evolenthealth.com, and the 8-K filed by the company with the SEC earlier today. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.

Thank you, and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health, and I'm joined by John Johnson, our Chief Financial Officer; and Nicky McGrane, our Executive Vice President of Corporate Performance. I'll open the call this evening with a summary of our recent financial results as well as an update on the market, our current pipeline and progress on Evolent's key strategic priorities for the year ahead. I'll then hand it to John to take us through a more detailed financial review of the third quarter. I'll close with a brief summary of our market-leading position serving both payers and providers. And as always, we'll be happy to take questions at the end of the call. In terms of our results, total adjusted revenue for the quarter ended September 30, 2019, increased 46.7% to $220.3 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended September 30, 2019, was $3.3 million compared to $4.8 million for the quarter ended September 30, 2018. As of September 30, 2019, we had approximately 3.7 million total lives on the platform. And with the addition of Maryland Physicians Care this quarter, we welcomed 7 new partners to the Evolent national network this year. Overall, we're quite pleased with our top and bottom line results for the third quarter and the progress we've made in meeting our key strategic objectives for 2019. We're experiencing strong same-store growth, which is the result of delivering consistent performance improvement operationally, clinically and financially for our partners. In terms of new business, we're continuing to see a deep and diverse new business pipeline, thanks to a compelling macro environment and a portfolio of solutions that have successfully evolved with market demand. As we come into the end of the year, this…

Thanks, Frank, and good evening, everyone. Today, I will cover our financial results for the third quarter of 2019 and will finish with an overview of our 2019 outlook. Overall, we are pleased with our progress against our financial goals through the third quarter, including our return to adjusted EBITDA profitability in the quarter as well as our visibility into expected strong growth for next year. Beginning with our consolidated third quarter results. Adjusted revenue increased 46.7% year-over-year to $220.3 million, mostly through the impact of new partner additions, cross-sell, the New Century acquisition as well as growth within our True Health segment. Adjusted EBITDA was $3.3 million relative to $4.8 million in the prior period. Adjusted loss available for Class A and Class B common shareholders was negative $7.7 million or negative $0.09 per share for the quarter compared to negative $3 million or negative $0.04 per share in the same period of the prior year. As of November 1, 2019, there were 83.9 million shares of our Class A common stock outstanding and 0.7 million shares of our Class B common stock outstanding. Within consolidated adjusted EBITDA, adjusted cost of revenue, which includes claims expenses, increased to $163.8 million or 74.4% of adjusted revenue for the third quarter compared to $90 million or 59.9% of adjusted revenue in the same quarter of the prior year. Adjusted SG&A expenses decreased to $53.1 million or 24.1% of adjusted revenue for the third quarter compared to $55.4 million or 36.9% of adjusted revenue in the same quarter of the prior year. The increase in adjusted cost of revenue year-over-year was due primarily to incremental costs to serve new partner additions, cross-sell and costs assumed from the assets acquired as part of New Century. Combined, our total adjusted cost of revenue and…

Thanks, John. Overall, we've made significant progress on our strategic, operational and financial goals for the year. Strategically, we've established ourselves as a leading organization in the market that partners with both payers and providers on risk-based payment models and ultimately drives enhanced clinical and financial performance. Evolent is distinctive in having a fully integrated offering that brings together the clinical, administrative and financial capabilities that a payer or provider need to collaboratively drive demonstrable improvements in outcomes. With an increasing market focus on reducing growth in health care spending, the ability to drive clinical value is paramount given that it represents the lion's share of spending growth. Over the last several years, Evolent has developed highly sophisticated clinical analytics, risk stratification methodologies, clinical protocols in primary and specialty care and proven approaches to engage patients and providers effectively. Across the last several years, we've established a national network of payers and providers now covering more than 3.5 million lives and have successfully expanded our addressable market across 3 distinct but integrated offerings. From a growth perspective, the strategy has worked as we continue to see strong new partner additions, cross-sell and a strong pipeline. As a result, we have a large and growing service business with a diversified customer base, approaching $700 million in revenue in 2019 as well as a positive growth outlook for 2020 and beyond. We've also worked to streamline our operating model and drive efficiency in the business to drive bottom line scalability as the business continues to grow. Overall, we anticipate continued margin expansion going into 2020, driven by top line growth, G&A leverage and strong operational performance. In summary, we sit in a unique position in a large and expanding market with a strong track record on growth and an industry-leading team that is poised to drive high performance into 2020 and beyond. Thank you again for participating in tonight's call. With that, we'll end our formal remarks and take your questions.

[Operator Instructions] And our first question comes from Ryan Daniels of William Blair.

Appreciate all the color on the margin profile in the fourth quarter and the start-up expenses kind of depressing that. I think it's a good reason for it. My question is more for 2020. If we think of the robust same client growth that you're experiencing, how should we think about that from an incremental margin perspective? I assume same client growth is a lot more profitable given the lack of start-up cost, but I want to confirm that that's the case, if some of it is in novel business lines versus kind of the core clinical services.

Yes. Good question, Ryan. I would say, one, I do think we have good visibility on top line growth, as we talked about. That obviously helps from a margin perspective. When you think about current client growth, it does matter where it comes from. If you're adding lives in an existing line of business, then it's pretty straightforward. It's full flow-through with that usually. If it's a new population, for instance, if you're launching a new Medicare Advantage plan or you're adding something like New Century, then you actually are adding some cost base early on. And so therefore, the ramp will be a little bit different. And sometimes, it takes time. You're putting the cost basis in, but it takes some time for the associated revenue and then performance to ramp. So I think that's what we're going to see just going into the fourth quarter and the early part of next year. Again, the overall message, I think, is highly positive on driving a very strong top line. And we have high visibility into that. Some of that will ramp a little bit in the fourth quarter going into the first quarter of next year. And then overall, we do anticipate margin expansion obviously versus the second half when we look out to 2020.

Okay. That's helpful. And then if you think of the 2020 revenue outlook, I think you said 20% or more if the Kentucky contracts renewed, 10% or more even without it. What level of visibility do you have at this point to that? And how much more do you need to close over the next few months to achieve that? Or would anything that closes be above and beyond that growth metric?

Yes. I would say if we're going to throw out those targets. We have high visibility into those numbers and are not dependent on something significant closing. So we feel very comfortable with the minimum 10% that we talked about in the loss scenario and then being above 20% in the win scenario.

Okay. And then last one and I'll hop back in the queue. The -- it sounds like in Passport, you saw another 600 basis points. I think you said 1,400 or 14 percentage points total. I believe last quarter, it was 800. So what's driving the incremental 600 basis point improvement? It seems pretty significant on top of what you've already done there.

Yes. I mean look, I would say to go and drive a 14-point improvement in margins across 2 quarters is pretty impressive. And I just give the team at Passport, the team at Evolent, a lot of credit for incredible focus and discipline in terms of what we've tried to bring to the table as we were able, again, to really work on a number of different areas. So obviously, some of the benefit we talked about came from the rate. Most of that was in the April time frame, but we did get a little pickup in the third quarter. And then the remaining benefit really came from further execution on our clinical programs. Again, sometimes there's things that you do that have a lag in terms of the full impact, so more months of the work that we put in place in the early part of the year. We've obviously been thoughtful about network management and just making sure that we have high performance in terms of the provider network, continuing to streamline admin expense. We also expanded with New Century, which runs directly at specialty costs and I think also has had a pickup in terms of the benefit. So I think it's all of those things, incredible discipline and a lot of hard work from the team, but we feel good about progress at this point.

Our next question comes from Robert Jones of Goldman Sachs.

This is Jack Rogoff on for Bob. So on the Maryland Physicians Care win, it sounds like there's a ramp in the implementation. Will you be recognizing incremental PMPM dollars in 2020 and '21? Or do you get the all-in rate off the bat?

It will go live on the platform in 2021. We will recognize some implementation revenue across 2020 as that piece ramps.

Got it. And then is pricing for this win consistent with what we've come to expect for a full suite of Medicaid plan services?

Yes. Pricing is in line with historical expectations.

Our next question comes from Jamie Stockton of Wells Fargo.

I guess maybe just first of all, on Kentucky. I mean are we basically just sitting around an expected decision any day now? Have they communicated anything more specific about timing to you guys?

Yes. Jamie, no new information on the RFP. I think as we commented, we expect a decision in the near term, but we haven't heard anything regarding a formal date for decision. Obviously, when the information becomes public, we'll communicate it immediately if we're allowed to communicate it, but we don't have any new information in terms of when a decision will come.

Okay. And then it seems like maybe over the last month, we've seen a lot of incremental stories about the 2018 results for the ACO program. 2/3, I think, of participants or roughly thereabouts generated savings, but maybe more like 1/3 actually got paid something. Is that generating any change in the environment, people paying attention to those who got an actual payment? Just any color around that would be great.

Yes. I would say in our 2018 cohort, we've had pretty good performance. And I don't have the exact figure in front of me, but I think we've generated $40 million in savings or thereabouts in working with a number of partners in the program. So pretty significant savings generated. If you think about the noise that that's generated and if you go back to the Next Gen application process, I think, maybe 50 -- under 50 organizations applied for Next Gen. You then had a new administration, a new set of programs come out, all different flavors. And if you actually take direct contracting as an example, where there's still a lot of detail that needs to be laid out, I think there's over 1,000 applicants in the direct contracting program. So in my mind, what that says is that the market realizes that CMS, in particular, is going to move to value-based reimbursement. They've tried to create a number of flexible programs. They really are not going to let people stay in upside-only programs and qualify for a lot of -- the advanced payment benefits. And the market is recognizing that, and again, wanting to really evaluate participation in these programs. So some of them, there's still detail to come out. There'll still be final application processes. But again, for a payer, with the clout of CMS, the amount of dollars that flow through CMS, making such a sort of bold set of moves in terms of payment models, it's surely a good thing for us from a market perspective and the level of interest we're seeing out there, particularly in Medicare.

Our next question comes from Sean Wieland of Piper Jaffray.

A couple more on Passport, if I could. Do we know why the decision was delayed? I think we thought that, that decision was going to come in October. And do you -- in your view, is there any read-through on the outcome of today's election relative to the award?

Yes. As I said, again, we don't have any new information that's come out regarding the RFP and decision timing. In these processes that involve a state making a significant decision, going through a review process, you have delays. So it happens in a lot of these procurements, and it depends on a lot of factors. But we don't have any new information, again, as to why or timing. We just know that a decision hasn't occurred. And as best we know, as we said, we think it will happen in the near term. In terms of the election, we don't think it impacts the outcome. The decision process has already sort of moved through with the current administration in place. And again, we view our role as being a strong fiduciary for the state in serving Medicare -- Medicaid beneficiaries clinically in terms of great member service. That's our focus. And we're pretty -- in that sense, we're going to work with any administration that's working with the program. But a lot of the decision process obviously has occurred with the existing administration. And so I don't see much impact from the election.

Okay. That's helpful. And looking out into 2020, your comments around the revenue lift, do you -- am I right in thinking that we get there predominantly through a cross-sell of New Century, which means, for modeling purposes, like average PMPM sequentially increasing?

Yes. Again, if you look across the year, I think a combination of things are driving the growth. We have 7 new partner additions. We have a strong pipeline. There are some things that could add to that. We've had strong, I think, general cross-sell across the entire membership base. And I gave a bunch of examples, a few in Medicare Advantage, some other pickup of populations and lives that I view as positive. Both the Passport and CountyCare New Century are pretty significant. They're large contracts. So I do think it's fair to say we've got some strong revenue growth within New Century along with the other things that I talked about. We do count the lives of New Century as to separate and distinct lives because of the large PMPM, and we want that to be reflective in average PMPM. So you'll see, again, some pickup in PMPM, obviously. And then we have the growth in lives to 3.7 million, and that will obviously adjust as we move forward into next year.

Our next question comes from Matthew Gillmor of Robert Baird.

I wanted to try a follow-up on the Maryland Physicians MCO. It seems like maybe that's a larger relationship given the number of lives and the more comprehensive set of services that Evolent will provide. I think John had mentioned the pricing would be sort of in line with historical. Does -- would that mean sort of above the average of $16 PMPM and sort of more in line with some of the more comprehensive relationships you have? And then if you could speak to the implementation cycle. It seemed a bit longer than normal. Just curious what drove that.

I mean I would just say -- I mean this is a really well-regarded group. They've been in business for over 20 years. 200,000 lives is a lot of lives. So we feel really good about the win. I think what attracted us to them and them to us is the ability to integrate the administrative side and the clinical side, which has been a big point of differentiation that we tried to build into the platform. I think a lot of exciting things we can do there. In terms of the implementation period, a lot of times for an existing population that you're moving over to a new infrastructure and services, you can see implementations that are a year in length, which is roughly what we're talking about. Again, we'll pick up some nice implementation revenue next year. We'll have a long time to make sure that the implementation goes well, and then it will be a major contributor in 2021. So I think -- and in terms of the PMPM, I think the general answer that it's a PMPM we feel good about and strong relative to the size of the contract on average is probably the best way to go. We generally don't, for all sorts of reasons, share specific PMPMs with clients. But I think John was accurate in saying that it's reflective of our base business. And again, we feel the pricing is adequate in terms of the targets that we set.

Got it. Fair enough. On the 2019 revenue guidance, I just want to make sure we understood the changes there. It looks like the service revenue ticked up by, call it, $10 million or so and then the True Health revenue maybe came down by $5 million or so. Would you mind just walking us through those changes? Sort of what drove the better service revenues on some of these contracts coming on? And then also what drove the lower True Health?

Yes. So on the services side, I think the key theme of the year has been strong revenue growth. And that has exceeded our expectations across some of those populations, both revenue from new partners that were added during the year and the cross-sell, as Frank mentioned, that has caused us to increase the revenue guidance on the services side. On the True Health side, the principal change there is an early termination of the reinsurance agreement with New Mexico Health Connections, which we had expected to end at the end of the year. And as True Health -- our plan expects to launch its own individual product on the New Mexico exchanges next year. We decided to wind that down a little bit early.

And if you remember on the True Health side, there was largely a pass-through expense. We've done something that was in coordination with the state. We anticipated doing it at the end of the year, and it just made sense to end it within the quarter. So that's the plan.

Our next question comes from Richard Close of Canaccord Genuity.

With respect to SG&A expenses, obviously ticked down the last couple of quarters. Can you give us any guidance in terms of where you expect those SG&A over the next several quarters? Is that going to continue to tick down?

Richard, this has been a big focus of ours, as we've been talking about, over the course of the year to get the SG&A in the right place for the company. And without commenting specifically on outlook for 2020, I think we would expect that as a percentage of revenue, SG&A would continue to decline.

Okay. And then any update on Florida? I know obviously not a big contributor, but as we think about 2020 and the various regions you have there, what are you thinking about Florida managed Medicaid in terms of maybe the ramp or just the status there?

Yes. I think we've done a lot of work this year to get the cost structure in line. We've now had almost a year of operating experience under our belt. Those plans are active in the market. They're obviously working with physicians in the community, building their brand in the local communities that they serve. Our hope is we have an enrollment period coming up, but there's an opportunity to pick up membership. We're not counting on that in terms of our forecast for next year. But any incremental membership and incremental revenue will be strong flow-through in terms of profitability of that business. And if we do that, combined with the cost of things that we've done, I think it gets it to a good place going into next year. If, for some reason, we don't pick up the membership, then obviously, we'll continue to look at the cost side to make sure that, that business is operating reasonably from a financial perspective. So we'll know a lot more in the January time frame. A lot of activity going on in the market, as you can imagine, and again, much stronger brands than the rapid launch that happened at the end of last year. And we'll know a lot more, again, when we get into the February time frame.

Would you potentially shut down any of the regions, if you don't get that membership pickup?

I mean look, we're going to be aggressive at managing the plans to reasonable financial performance. We have partners there. There's all sorts of things that we do to work together collaboratively to make those contracts work. And I think we would be aggressive as to specifically whether we would shut something down. I mean that's really something that we discuss in collaboration with our partners. But we would surely want to make sure that our economics are reasonable given our participation across those 3 regions. Again, it helps to have 3 regions and the ability to add some lives there, which I think will help. We have a lower cost base. I think we're optimistic about where that can get into next year. And if for some reason it doesn't, then we're going to sit down with our partners and work out a reasonable solution and get that business to a reasonable place from a financial perspective.

Our next question comes from Charles Rhyee of Cowen.

Frank, I want to go back to Passport a little bit here again. You talked -- obviously, you talked about the strong improvement over the last couple of quarters. When we look at the stat filings and understanding that the stat filings are not the same as sort of GAAP reporting, it looks like the MLR improved at Passport. But EBIT there, at least according to the filings, were negative still. Can you talk about sort of where the margin actually is in terms of -- because I think you guys were talking about, at least when you -- I recall, maybe like a 1%, 2% margin was sort of what you were trying to get to. Are we there with Passport? And then the improvement, is it mostly coming in MLR? Or is it in SG&A?

Yes. I think the filings you may be referring to are going back to Q2. I don't believe there have been any new filings, surely, for the third quarter. So really what we're referring to is going back to the first quarter where there was a substantial loss, which I'm sure you saw in those filings. Our goal was to get in Q3 to breakeven performance. I think the good news is we're above that. We're above 1% operating margin there. And again, the drivers of that rate was a part of it. As you got from the first quarter into the second quarter, gave us probably 1/3 of the 14-point benefit came from the rate side. And then if you break it down, a lot of the things we've done clinically. We have a very proactive care management model. We've rolled out significant programs there in terms of complex care, transitions care. We've looked at every contract that the plan has and trying to make sure that the contract makes sense, that various organizations we work with are ultimately driving performance. We've looked at every element of admin expense to try to be as efficient as we can. But a 14-point improvement from Q1 to Q3 in any sort of health plan experience that I've seen is incredibly impressive and surely on the right track. Now we're not declaring victory. You've got to continue to drive performance improvement. You're going to have different things that happen with trend in various areas. And so we need to make sure that we're all over it in terms of the things that we're doing, and we continue to be aggressive on all of those elements. And I would say I feel confident that we have the right team in place, feel really good that we've been ahead of plan. We really didn't expect to get to positive operating margin until the fourth quarter. So I think that feels good, but work ahead, but I'm glad we're sitting where we're sitting today.

No. That sounds great. One question I had as it relates to maybe also Passport but also your other Medicaid businesses is obviously this year, there's been a lot of talk about Medicaid eligibility determinations. It's having some impact on enrollment. Can you just talk about sort of what kind of impact you're seeing? You made some comments just now earlier about Florida. Is that having an impact to you in any of the states that you're operating in? And I guess particularly, as you think about the Passport membership and also maybe even now when you're looking at the Maryland partnership you just announced, could you talk about 20% growth with Passport, at least 10% without? Does that factor in all sort of the net impact you would expect from enrollment changes?

I think it does. Passport has generally retained its membership across this year. So generally strong membership performance across the year in Florida. We picked up some membership. I wouldn't say there's been huge growth there, but some membership across the year. When we've looked at various forecasts on work requirement issues that those get put in place, that would have some impact on membership. Again, we don't think it's dramatic. And I don't think it would impact the top line estimates that we've given for 2020. We feel comfortable with the estimates that we've given. The work requirements, things are still going through a number of legislative and court hurdles, and we need to see where those come out. But for now, I think we feel like we have sufficient cushion in the forecast if we have some variations in membership related to the sorts of things that you're talking about.

Our next question comes from Sandy Draper of SunTrust.

A lot of my questions have been asked. So maybe just one more. I appreciate, Frank, that you don't have any more information. But I did wonder -- I don't know if you are aware. I guess there's some type of [indiscernible] Kentucky Medicaid broadly. And I'm just wondering if you win it, is there any suggestion that a fundamental approach that Kentucky is going to take to Medicaid or the way they're pricing or something? I wasn't clear what it is. I found out there's something going on there. I just didn't know if you had any information about that and if that may be related to delay or how it would impact your business going forward, if you won.

Yes. It was a little hard for me to hear you on the specific question. I think even if I'd heard it, I can give you a generic answer that -- is that there's nothing that we've heard at this point that substantially changes our view of the relationship Passport would have with the state and how the Medicaid program would function in the state, again, based on everything that we've heard. Occasionally, there will be some new ideas that come out in a state around how they want to handle something. We obviously make adjustments and try to build in the infrastructure to support that, but nothing we've heard to date that substantially changes our outlook going forward about how the program will operate.

Okay. Great. That's helpful. And then maybe the follow-up. Just as a reminder, when you talked about the 3 buckets, is the Identifi platform essentially the same applied to all 3 buckets? How scalable is it across those? I'm just trying to think as you grow in these different areas, how much leverage you actually get on the technology across the 3 areas.

Yes. I would say if you think about our primary platforms, Identifi really drives clinical value, largely around total cost of care. So that integrates with our health plan services offering. It also applies when we're working on total population health and total cost. For NCH, right now, it really is a separate platform that we use in NCH. That's due to the fact that we acquired NCH about a year ago. There are opportunities to integrate technology there. That's on our road map. It's something that we will do. So you will see greater integration on that piece, but Identifi really applies to 2 of the 3 areas that we outlined.

Our next question comes from Stephanie Demko of Citi.

Assuming that Passport does win this Kentucky Medicaid contract, is there an opportunity for Passport to expand beyond core Medicaid, kind of diversify their risk as a broader institution?

I would say potentially. I mean right now, we're pretty focused on Medicaid, on the 300,000 lives that we serve. We see a tremendous opportunity in the work that we're doing. We want to make sure we're driving strong performance. So right now, the focus is on that. And I think it will be for the foreseeable future. To your point, you obviously have a strong network of providers. We have a great infrastructure in place. There's surely other things that you could potentially do across time. But for now, our focus really is on the existing lives that we're serving and making sure we're, again, driving strong performance.

Okay. Understood. And then thinking about the cash on hand, I know that profitability is improving lately. But is this level of cash generation sustainable? Or will you have to look at the capital markets over the coming year to kind of fuel some of this Passport turnaround?

Look, I think what we've talked about is making sure we're always maintaining a healthy balance sheet, that we've got appropriate cushion for our cash needs. We've talked about the fact that if we were to do anything from a balance sheet perspective, it would be debt oriented. We believe we have flexible options there. So that would be our plan. And that's really how we're thinking about it today. And again, it will be dependent, as you said, on cash usage and where the business sits. But anything we're considering, at least in the short term, would be debt oriented.

This concludes our question-and-answer session. I would like to turn the conference back over to Frank Williams for any closing remarks.

Thanks, everyone, for participating in the call. I appreciate all the questions and look forward to obviously having an opportunity to communicate over the coming weeks. And thanks again for everyone participating.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.