Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended June 30, 2021. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, 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 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. Seth Blackley. Please go ahead.

Thank you, and good evening. I'm Seth Blackley, Chief Executive Officer of Evolent Health, and I'm joined by John Johnson, our Chief Financial Officer. I'll open up the call this evening with a summary of our recent results, including an update on our key investment themes, which are: one, strong organic growth; two, expanding EBITDA margins; and three, efficient capital allocation. Next, I'll share highlights from across the business and how our differentiated solutions drive value for our partners. Before providing details on our recently announced transaction with Vital Decisions. I'll then hand it to John to take us through a more detailed financial review of the second quarter results as well as provide third quarter guidance. I'll close the summary of our key focus areas. As always, we'll be happy to take questions at the end of the call. We have shared a summary of our quarterly financials and highlights and an overview of the Vital Decisions transaction for your reference and a presentation available on the Events section of our IR website, ir.evolenthealth.com. Turning to the financial overview and results for the quarter. Total revenue for the quarter ended June 30, 2021, was $222.1 million. Adjusted EBITDA for the quarter ended June 30, 2021, was $13.3 million. As of June 30, 2021, we had a total of 12.2 million lives on the platform including approximately 3 million lives on the full platform, plus an additional 9.2 million lives in our New Century Health Technology & Services Suite platform. Overall, we're very pleased that we achieved our key financial objectives for the quarter. and we feel good about our visibility into the quarters ahead. Turning to an update on our 3 investment themes. Our revenue result represents year-over-year organic growth of 42.3%, which excludes the divested assets as we…

Thanks, Seth, and good evening, everyone. Overall, we are pleased with another strong quarter of execution across our enterprise. Year-over-year organic growth, excluding divested assets, was 42.3% compared to the same period in the prior year. Growth is ramping across all areas of the business and has been particularly strong within our Clinical Solutions segment, which has benefited from multiple new go-lives and customer expansions at New Century Health. These new go-lives drove a net sequential increase in revenue of $7 million over our consolidated first quarter results. Year-over-year adjusted EBITDA margin expanded by 117 basis points to 6% for the quarter, consistent with our planned margin expansion trajectory. We are pleased to report that our cost reduction efforts, bringing further automation and machine learning to the administration of healthcare, is proceeding ahead of schedule setting up a compelling unit cost profile for our future growth, especially in our Evolent Health Services segment. As importantly, continued strong growth in our Clinical Solutions segment brings with it further margin expansion tailwinds and as our newer partnerships mature in the coming years and ramp to full impact from our value-based approach. Recall that our flow-through margin in these businesses can increase by 2 to 3x over the first couple of years as we stand up our clinical programs and drive the highest clinical quality and outcomes through the network. Cash usage in the quarter was minimal with Q2 ending available cash of $140.1 million, excluding cash held in regulated accounts for Passport, down $0.5 million from Q1. Cash deployed for software development and purchases of PP&E was $5.5 million. Net debt, which we define as the face value of our convertible notes less available cash was $176.2 million at quarter end, resulting in a net debt leverage of 2.8x versus LTM adjusted…

Thank you, John. In summary, we remain confident in the execution of our investment themes of: one, driving strong organic growth and achieving our mid-teens growth target; two, scaling the business to drive enhanced margins; and three, efficiently allocating capital. Thanks, everyone, for participating in tonight's call. With that, we'll end our formal remarks, and we're happy to take questions.

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

Congrats on the strong first half of the year and all the progress and on the Vital Decisions transaction. I want to dive a little bit deeper into that. Can you talk a little bit more about the background of that product and how it leverages not just communications with patients and engagement but also kind of care guidelines and how you think you can enhance that perhaps with your oncology and cardiology offerings to kind of integrate more best practices and drive not only a better patient experience, but maybe lower cost and better outcomes, especially as patients approach the end-of-life care?

Yes. Ryan, it's Seth. Great question. So if you think about what Vital does today, they use their algorithms and their technology to identify a group of patients out of a larger population that they want to reach out to communicate with, build out a care plan around that individual's preferences. And they do that directly on behalf of the payer, reaching out directly to the consumer or the patient, and they do it through a - basically a telehealth platform. And it works well and they have great results, and it's performed well for the payer clients that they have. But if you think about what New Century does and think about cancer as an example, and I mentioned cancer and cardiology are 50% of end-of-life situations, we have incredibly deep relationships with the cardiologists and the oncologists. And so our ability to coordinate, let's say, let's use cancer as a for instance, with the oncologist and get aligned between the oncologist Vital Decisions, New Century and the patient and get that entire group on the same page and the family frankly, we just think we can have considerably higher levels of engagement and overall lower cost. And in general, what happens is patients are on average, in many cases, cancer being a good example, receiving far more care, far more chemotherapy as an example. And they really want at the end of life. And so the ability to get those things aligned and as I said, add our ability to bring the oncologist into that conversation and get everybody on the same page, we think is a big addition. And again, we connect directly with patients today through New Century. But the master's level behavioral specialists that Vital has, we think, will be able to take that to another level, particularly around end-of-life conversation. So it really is one of these wonderful examples of bringing 2 things together that really should belong together, and we're very excited about it.

Is that the type of offering where even if you don't cross-sell it, you can probably integrate some of the solutions into your current business to drive better outcomes in cost savings and maybe benefit financially or benefit through expanded contracts because of the enhanced value proposition?

Yes, absolutely. And obviously, we're going to be trying to do both. But if you - just to answer your question specifically, the answer is absolutely yes. Particularly when you think about our Performance Suite, right, where we're accountable for managing the total cost of care on behalf of the payer and the ability to engage the patient in these end-of-life opportunities has, we think, a very significant opportunity to frankly, reduce the cost. And as I mentioned in the prepared remarks, that often amazingly ends up in a happier patient, longer lifespan. And so it's one of those win-win situations in being able to bring that in to the cardiologists, and we would be integrating and embedding this outreach into CarePro, right, so that the oncologist is brought into the process from a technology perspective, data perspective and ultimately into the conversation directly with the patient and their family.

Okay. Very helpful. And then switching gears. You've discussed the Molina contract, that's quite impressive. And I want to get a better feel or understanding for the revenue that's actually likely to hit a run rate versus what could be a potential run rate revenue. So I think you mentioned something like $75 million. Is that where you think you will actually be on a run rate upon full implementation? Or is that the opportunity longer term if you can continue to penetrate within the client?

Yes. So just a little context and I'll answer your question specifically, Ryan. Look, we're excited about Molina. It's a great team. We've had it - been there for now over 6 months in terms of doing work with them and have had a chance to prove out the value proposition that we have. And so we're really excited about it. We're excited about now being in 3 states, but probably most excited about kind of the proof case of going from the Tech Services Suite with our relationship into the full Performance Suite. And so that is a big deal. We think given that we have 9 million tech services lives and that conversion is very interesting to us, and we think it's very attractive for our partners as well. So that's playing out like we hoped. The $75 million is a specific number that we'd be at on a run rate basis next year, and we gave a little bit of timing guidance around that. So it's not a pie in the sky. We hope we get there, but it's something we see direct line of sight too, based on the things that we're doing right now.

Okay. Perfect. Thanks for all the color and again, excellent performance guys, congratulations.

The next question comes from Charles Rhyee of Cowen.

I wanted to ask about the renewals. I think you have - Cook County is one that you talked about. You're doing some initiatives for - to hit some ESG-related metrics. That contract in particular, is there anything about that in terms of renewal that is something that is worth calling out here? Or is that one that's on sort of a continuous evergreen kind of status?

Yes. Let me give you a little context on CountyCare. We're about 5 years into that relationship on the Evolent Health Services side and partnership has gone actually very well. And excited to be kind of lowest cost administrative ratio. If you look at the Milliman benchmarks in the market and highest quality and the like. So they're a great partner. They're a very happy partner and we spend a lot of time with them. Generally speaking, at the end of 5 years, the county guidelines call for renewing all contracts. So we're kind of at that normal course renewal process. And our expectation would be that they would have a more formal vendor procurement process across the next few months. And so that - it's kind of normal course what we expected. And again, this is for a 2023 renewal, Charles, to be clear and also just focus on Evolent Health Services, which is kind of 1/3 of that overall CountyCare relationship. And we feel very well set up for it.

Okay. That's helpful. And then maybe if I - when we look at on the Clinical Solutions side, the Performance Suite versus the Tech & Services, you kind of highlighted that if you can transition all the tech and services members, the lives over to Performance Suite, that's about $3 billion in revenue. So far, like what has that kind of conversion rate look like for you sort of on an annual basis? And what do you see helping you drive maybe a faster conversion of that? And then secondly, when we think about lives between Medicaid and Medicare, can you give us kind of a split? I know you talked about Tech & Services is driven more by the growth in Medicaid versus Performance Suite, which has been driven more in Medicare, but maybe you can give us a split what that kind of looks like currently in terms of lives?

Yes. Sure, Charles. Let me take the first one. I'll pass the second one to John. So on the conversion question, we just got announced with going live with this tech services piece right at the beginning of this year. And I think it's going to take 6, 12-plus months of performance to really show the value and then have the opportunity to come back, have those conversations and then look at a given state or market, particularly where there may be some pain for that given payer or risk-bearing provider and they need our support in greater detail. And so I wouldn't expect to have a lot of data points 6 months into it, although it's nice to have one. But I think later in the year and into next year, we'll have a lot of additional data on the opportunity to continue converting that. But that's part of the design is to be able to move quickly, get out across the market. It generates nice operating income as well, but it also is going to get us into a position of able to have those conversations later this year and into next year.

And Charles - go ahead. Was just going to jump in and answer your live question. Yes. On the live question, we're a little over 50% Medicaid right now. If you want a more detailed breakout, we do have that within our Q and then in Page 19 of the pack that we put up on our website, breaks down by segments by line of business. So that should give you some color there. Generally, what we see on a PMPM basis is Medicare, Medicare Advantage and Medicare Fee for Service tends to have a higher PMPM fee, services are more complex, than does Medicaid. So that's some of the dynamics that you'll see in our PMPMs over time. And hopefully, that gives you the answer you're looking for.

Okay. Yes. I'll look through that. And maybe just lastly on Vital Decisions. So you talked about being poorly managed. What do payers - what are payers doing to manage sort of end-of-life costs currently? Or is it just not doing much at all?

Yes. Look, I mean, they're - unfortunately, there's not that much going on if you look broadly, and that's - you look at some of the data points that I mentioned that 89% of people want to have an end-of-life conversation, 17% are actually having those conversations for instance. So unfortunately, the market is incredibly immature here. And there's some players that are doing the actual palliative care work, but we see a bigger part of the problem is upstream from that, meaning how does a family and their patient coordinate with their physician to make these decisions, right, and get clear on those decisions before you're in the crisis itself. And that, to us, is a very big opportunity. It's incredibly mission-driven and it's a pretty open space right now. So we're excited about it. And I think our team is energized by the mission component of it as well.

The next question comes from Richard Close of Canaccord Genuity.

Congratulations. Great presentation of all the progress you guys are making. Considering your target, the mid-teens organic growth, it sounds like that could be pretty conservative based on some of the things you've laid out here. How are you thinking about that? Are you just trying to remain conservative? Is that mid-teens 2 to 3 year outlook? Or how are you thinking about that?

Yes, it's a great question. I mean, obviously, at this point in the year, it's a little early to start talking about specifics around '22 and lots of things still in the pipeline that are exciting. And so it's just early to talk about that. I think if you think about our business coming up closer to $1 billion of revenue and adding mid-teens to that, it's a significant number, and we think an exciting path. Obviously, we've well exceeded that this year on a kind of a true organic basis, and we're always going to try to exceed all of our targets. And so as we get closer to next year, we'll have a view into that, but that's sort of how we're thinking about it right now.

Okay. That's helpful. And then the 6 to 8 new clients, you're doing well already through half of the year. How does the pipeline look maybe on each of the segments as we enter here in the second half?

Yes. Look, the pipeline is in a great place, and it's across all 3, which - we really like the balance across all 3. And each of the 3 businesses have a slightly different set of characteristics, Richard. So within the Evolent Health Services space, for example, they tend to be fewer but very significantly sized and the one we announced on the last quarter, which we haven't disclosed the name yet, but there's really significant opportunities there to continue expanding. And that feels really good, and there's a lot of other things coming behind that one. On New Century, and Evolent Care Partners, frankly, it's more broad-based and larger numbers in both, again, in a really good spot to set up 2022. So it feels great overall. I think the macro environment is part of that, which is just that the issues we're solving the ability to commit to driving real savings is always an evergreen issue, but I think right now is particularly resonating coming off of COVID and all the things that are going on in the macro environment. So overall, it feels quite good, and it really is balanced across all 3.

The next question comes from David Larsen of BTIG.

Congratulations on the very good quarter. Can you maybe just remind me what the in-sell potential is on a dollar basis for like, I think, Molina? And if you have 9 million lives on the platform at $20 per member per month, that's - I mean that's a very significant number, right? Are we talking in the billions of dollars? I'm sorry, can you please just take me through that math?

Yes. Sure, David. So on that second question first, and I'll come back around on your other one. The $9 million is in our new Tech Services Suite, which has the PMPMs that are published in the pack, but under $1. And that opportunity is really about going broad across lots of payers across the country as we've done and it gets a really nice foot in the door, if you will, to build the relationship and prove it out also has very nice contribution margins as we've talked about. And so that's the 9 million lives. The $3 billion opportunity is converting those 9 million lives into the typical Performance Suite PMPMs, which would be in the billions. We said $3 billion on the call. And so that's that opportunity. And then if you talk about the in-sell opportunity, some - at Molina or any of these various partners, some of it is converting the 9 million to the Performance Suite, which we've sized out at $3 billion. But we also sized, if you think about our top 10 relationships, we have about 10 million lives out of, I think, we said 35 million total lives within those payers. So the opportunity is twofold, right? It's to take the 9 million into the Performance Suite and then it's to take the total of 10.5 million that we have, closer to the 30-plus million that we have. So you can kind of do the math on those two, but it's obviously over $10 billion, probably when you do the math and think about the expansion opportunity across those multiple dimensions.

So you said over $10 billion of opportunity in sort of the - with the clients that you're working with now if they bought everything you had?

If they bought everything we had across all the solutions, correct. And that's - we don't want to think about it that way. We think about the opportunity to convert first to Performance Suite and then incrementally add from 10.5 million lives further towards that 30 million-plus lives.

Okay. And then can you just please remind me how many Molina lives do you have on your platform right now? And I think they have around 4 million in total that they manage?

Right now, Dave, this is John. It's a little less than 200,000 principally in Kentucky.

Okay. So I mean, is there anything preventing you from going from, say, 200,000 up to 2 million or 4 million Molina lives over time?

No. I mean it's the same dynamic, Dave. No. The answer is no. Nothing prevented us from doing it. We have to do a great job. We're in 3 states. We need to do an incredible job in those 3 states where we've been entrusted to manage the care for those members and we're going to do that and then being able to go back to that partner, share that with them as we build their confidence further and continue to go forward. And that's what we've done with Centene and Humana and we think, now doing it with Molina. It's not a silver bullet. It doesn't happen overnight, but it really does, we think, help us towards our medium-term objectives that we've been talking about.

The next question comes from Sean Wieland of Piper Sandler.

A couple more on Vital Decisions, if I could. What's the revenue model here? How do they get paid?

Sean, it's Seth. So the - effectively, the way we think about it is really on a PMPM basis across the close to 3 million lives that they touch today, and we talked about that in the pack and on the call. They actually have a slightly different way to monetize, which is they get paid on an engaged member basis, but it's effectively the same thing that we do, which is a PMPM across the population. It is fee-based today. We talked about it a little bit on the call, but as we integrate it with New Century, Sean, there are going to be some other ways for us to capture the value that we're helping create including on the New Century margin side, certainly also an opportunity from a product perspective to take more of a capitated arrangement around that population as well. They don't do that at Vital, but that would be an opportunity. But it's - I would think of it in the simplest form as a kind of a PMPM approach today.

And Sean, just to put a bit of a fine point on the numbers. As Seth said, they do bill based on engaged members. And what that translates to in terms of an average PMPM fee across their life basis around $0.60 and that's how we'll report it after the close of the transaction in our Tech & Services Suite.

What percentage of the members do they actually wind up actually engaged?

I'd have to look at that number specifically, but it's - you really have to look at it on a percentage basis, Sean, of those who should be engaged. And I want to say that number is in the 20% to 30% range of those who they target. Now as we think about adding New Century Health, we think that ability to go to 20% to 30% of engagement up to well north of that is very significant as you bring, say, an oncologist into that conversation, that's a really significant opportunity. As a benchmark, you probably know this, but the payer - traditional payer engagement rates are often under 5% for programs. So they actually, we think, have a very good engagement track record now, and we think we can move that number up in the ways that we've described in this call.

Okay. And then over the next 18 months during the earn-out, are there any limitations in terms of what you can do with the business? Or are you going to let it kind of run on its own until the earn-out is over?

No limitations and we plan to really tightly integrate it for all the reasons we described in this call. So we're not going to put a firewall up and hold it to the side. We're going to be very focused on integration right out of the gates. And it's - look, I mentioned a little bit, Sean, on the call, but it's a great team, a really talented team, and we're excited to work with them and they're going to, I think, be a great cultural fit for our organization as well.

So as I think about this, it's a tough call to make. It's probably a tougher call to receive. I'm sure it's a tougher call to receive. Shouldn't the doctor be having this conversation with the patients and not someone on the phone that you never talked to?

Yes. Look, our view, Sean, is that it's a combination of the 2 is what should be happening. Sadly, physicians are incredibly reticent to have this conversation. It's sort of surprising, but they're not trained to have these hard conversations either. And if you think about what Vital does, they have masters trained behavioral specialists and this is their expertise in life. Now wouldn't it be better if the oncologist introduced that behavioral specialist to the patient and their family is a member of his or her team that, we think, is the sweet spot, and that's exactly what we're going to be doing with Vital.

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

Thanks, everybody, for joining, and we'll look forward to connecting in the days and weeks ahead.

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