Evolent Health Inc (EVH) 2015 Q2 法說會逐字稿

Welcome to the Evolent Health's earnings conference call for the quarter ended June 30, 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.

Here are 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 second quarter news release. At this time, I will turn the call over to the Company's Chief Executive Officer, Mr. Frank Williams. Please go ahead, Sir.

Thank you and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health and I'm joined this evening by Nicky McGrane our Chief Financial Officer.

We have a three part agenda for today's call. First, I'll open up with a summary of our performance for the quarter covering our financial results and overview of what we're seeing in the market and how we see the environment influencing our business performance. I'll then turn it over to Nicky to take us through a more detailed review of the financials. Finally, I'll close with some additional thoughts on the quarter and an update on our key priorities for the remainder of the year. As always, we'll be happy to take questions at the end of the call.

Before we jump into the update on the quarter, as a new public company, I thought I'd provide a brief overview of Evolent Health and the specific market opportunity we're addressing as a primer for those of you who are new to the Company. Evolent was founded in 2011 with the backing of the Advisory Board Company and UPMC in order to support provider organizations in transitioning to value-based care. At the time when we look to the healthcare landscape, we saw a large and growing focus on healthcare costs and a strong desire of major payers in healthcare to move away from fee-for-service to performance-based reimbursement.

We formed Evolent with the belief that health systems are uniquely positioned to succeed in a value-based care environment due to their tight linkages with physicians, access to robust clinical data and their ability to effectively engage chronic patients in managing their health. Moreover, we're seeing that healthcare purchasers, including CMS, consumers on the public and private exchanges and more innovative employers were demonstrating growing interest in their own networks which created a new opportunity for health systems to actively manage the full premium dollar more efficiently.

However, the shift to value-based care requires a complex set of capabilities and represents a significant challenge for health systems to navigate this transition and successfully operate at scale. That's where Evolent comes in. Evolent provides technology, proprietary knowledge and deep expertise packaged in an integrated offering to enable this business model transformation. Our comprehensive set of solutions across the clinical, financial and operational continuum enable health systems to assume a comfortable level of risk across multiple populations, improved clinical performance, aligned physician networks and fine tune financial and administrative management all while supporting the transition with organizational change management and a robust technology platform.

Our unique position in the market centers around four key differentiators. Our broad integrative platform, our proven capabilities across multiple markets, our focus on delivering clinical and financial outcomes and the extensive depth of experienced talent that we bring to bear in all of our partnerships.

Our revenue model is characterized by two distinct segments; transformation and platform and operations. Transformation provides strategic business plan development and initial infrastructure and implementation to our early-stage clients. These are generally fixed fee engagements and represent the typical entry point for new partners. A high portion of our transformation clients transition to long-term partners and that provides us with strong visibility into future revenue.

Our platform and operations engagements are generally defined by long-term contracts with recurring revenue on a PMPM basis and have embedded organic growth opportunities as new populations are added in an existing market. Because the marginal cost to serve additional lives is quite low, you also see rapid growth in operating margins over time once you've scaled past the initial investment in centralized and local infrastructure. It is the inherent scalability in the fixed cost structure that ultimately drives attractive margin characteristics long-term. Hopefully that brief overview provides some greater depth around who we are and what we do for our provider partners.

In terms of our results for the quarter, from a financial perspective, total adjusted revenue for the quarter ended June 30, 2015, increased 51% to $36.5 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended June 30, 2015, was negative $10.2 million compared to adjusted EBITDA of negative $9.4 million for the quarter ended June 30, 2014.

We have 594,000 total lives on the platform as of June 30, 2015, up 108% year-over-year. All in all, we're pleased with our results for the quarter and are on track relative to our strategic, operational and financial objectives for 2015.

Our progress is largely a reflection of a number of factors we're seeing in the current market. As we look across the industry, there's continued movement towards value-based care in all segments of the market including CMS, State Medicaid programs, commercial payers and the public and private exchanges. Earlier this year, CMS announced a goal of moving 50% of Medicare payments into value-based care payment structures by 2018. With its rollout of the next generation MSSP track along with growing interest in tract three and bundled payments initiatives, CMS has signaled its intention to lead the way on payment reform through Medicare.

But the pressure to move to value isn't just coming from Medicare. We are also seeing it from the commercial segment where a number of payers are looking for more competitive products. In the Southeast, we're supporting our partner in designing an aligned narrow network product and have attracted significant interest from the market. We're actively negotiating delegated risk arrangements with a number of payers, one complete and others in progress, built around this high-performance network.

There's also been strong interest for individual exchange as well as group business, both self-insured and fully insured. We're seeing this in multiple markets across the country and are working closely with our health system customers to ensure they are entering into these value-based care arrangements under terms that position them for clinical and financial success.

In a number of areas, health system alliances are being formed across the region in order for systems to achieve broader geographic coverage for population management purposes as well as to achieve scale economies. A good example of this development is an operating partnership we recently announced with Propel Health, an alliance of seven health systems and one payer across the State of Oregon. By joining together, the members of Propel Health will have access to Evolent's value-based care platform, including our technology and care management services, that they would not otherwise be able to invest in as individual smaller systems.

They also achieved broader network coverage which gives them access to a much larger population base for contracting purposes. We're already deep in the transformation phase of our work with Propel which plans to build out their population health capabilities as an alliance before beginning to take on risk. The alliance will be bringing around 50,000 employee lives onto the platform as the first phase of the operating partnership in January of 2016. And we're seeing consortia like this one coming together in multiple markets, including large systems with significant risk bearing experience.

These alliances require alignment across this key stakeholders over the long-term to be successful and clear accountability from an operational perspective but offer the scale and network benefits of consolidation without having to fully merge several entities into one organization. Accordingly, these trends create fertile ground for attracting leading health systems to our national network as well as the opportunity to grow our existing customer relationships as health systems adapt to rapidly changing dynamics in their local markets.

In terms of our pipeline, we're seeing strong interest from health system executives in our transformation services to assist in strategy development and in many cases, to respond to competitive activity in their local markets. We just kicked off an engagement with one of the largest health systems in the country to help them develop customized strategies across multiple regions as well as to evaluate their physician network strategy.

While it's early in the engagement, the preliminary work on the business case suggests that they have a multiple billion dollar premium opportunity as they move more of their business to value-based arrangements in the most attractive market segments. We also kicked off an engagement with a sophisticated provider payer that is looking to expand regionally with a broader alliance strategy but doesn't have the necessary infrastructure and talent base to scale their clinical operations with prospective partners.

And we're not just working with large systems. In the Northeast, we're in the later stages of an engagement with a small regional health system that's interested in leveraging its strong local brand and well-developed physician network in a payer partnership strategy in order to substantially move market share versus other regional payers. Overall, transformation interest has been steady across multiple regions in the country with a slight uptake in larger systems evaluating our capabilities to assist in developing strategic blueprints and associated operational plans.

While new deals are important, we are also seeing a lot of growth in our existing markets through paired delegated risk deals as well as the addition of new populations. In the Midwest for example, we have a health system that's added three product lines and approximately 15,000 lives in 2015, and has bold expansion plans heading into the future. Even one of our smaller partners has added nearly 30,000 lives this year through their employer value advantage plan and a payer value alliance partnership in Medicare.

Looking across our customer base, of our 10 most mature customers, nine are in expansion mode adding a significant number of lives as well as new discrete populations to the platform. Despite the inevitable puts and takes across individual markets, in aggregate, cross sell represents a significant contributor to overall growth because of our immense expansion opportunity within our current clients. In fact, of the 308,000 lives that we added across the past year, over 53% are with existing customers demonstrating the cross sell potential within our $45 billion total addressable market.

In summary, we're feeling good about our overall industry dynamics, growth opportunities with our existing customer base and the demand on the front end for transformation services. Our focus continues to be on executing at a high standard across all phases of our work with customers. From defining the market opportunity and getting buy-in from the Executive team and Board of Directors, to moving through implementation and assuring consistent performance operationally once lives come onto the platform. With that, let me turn things over to Nicky to review our financials in more detail and then I'll finish with a few updates on product development, clinical outcomes and our organization.

Thanks, Frank, and good evening, everyone. As Frank alluded to, this is a solid quarter which keeps us on track with our objectives for 2015. In addition, we continue to invest in and execute on our key objective of supporting and growing with our existing partners as well as adding new partners to our platform. Today's financial review will cover the income statement results as well as the balance sheet and cash flow for the quarter ended June 30, 2015, and I will also provide an outlook for the remainder of calendar year 2015.

As a matter of housekeeping, I would first like to comment on the presentation of our financial statements and help make sense of our 10-Q. Evolent Health Inc., which is the reporting entity, completed a reorg of its corporate structure in June 4, 2015, in connection with the IPO of its Class A common stock. Prior to that reorg, Evolent Health Inc. had no operations. As a result, the financial statements set out in our 10-Q of Evolent Health Inc. for the three and six months ended June 30, 2015 and 2014, do not reflect a complete view of the operational results for those periods.

In order to provide consistent and comparable metrics for the periods before and after June 4, 2015, the adjusted results of Evolent Health Inc. presented and discussed in our press release reflect the reorg as if it had occurred in 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 4, 2015, as well as certain other adjustments. This is set out in the press release and I would also be glad to take questions on this in Q&A.

Let me first walk through the GAAP results and then I'll turn to the adjusted results which will be the focus of the call today. Evolent Health Inc. reported GAAP revenue of $10.4 million for the three and six months ended June 30, 2015, compared to $0 in the same periods in 2014. Cost of revenue was $7.9 million for the three and six months ended June 30, 2015, compared to $0 for the same periods in 2014 and operating income was negative $11.5 million for the three and six months ended June 30, 2015, again, compared to $0 for the same periods in 2014.

Net income or loss attributable to Evolent Health Inc. was $359.9 million and negative $5.9 million for the three month ended June 30, 2015, and June 30, 2014, respectively, and $348.6 million and negative $11.4 million for the six month ended June 30, 2015, and June 30, 2014, respectively. The net income was attributable to a gain in consolidation and that is set out in the press release for more information.

Earnings or loss per share available for common shareholders was $25.69 per basic share and $9.73 per diluted share for the three months ended June 30, 2015 and negative $3.17 per basic and diluted share for the three months ended June 30, 2014. Earnings or loss per share available for common shareholders was $40.69 per basic share and $10.96 per diluted share for the six months ended June 30, 2015, and negative $6.51 per basic and diluted share for the six months ended June 30, 2014.

Okay. Now turning to the adjusted results which include operations for the full period. For the quarter just ended, total adjusted revenue was $36.5 million an increase of 51% from $24.2 million in the same period of the prior year. As Frank mentioned, we derive our revenue from two sources. Transformation and platform and operations. For the quarter just ended, adjusted transformation revenue accounted for $8.4 million or 23.2% of our total adjusted revenue compared to a $8.5 million or 35.3% of adjusted transformation revenue in the prior year.

As a reminder, transformation revenues can fluctuate from quarter to quarter based on both the timing of when contracts are executed with partners and also the timing of work being performed. However, the remaining aggregate value of both our current transformation contracts and contracts in our pipeline is in line with our expectations at this point in the year and consistent with our outlook.

For the quarter just ended, adjusted platform and operations revenue accounted for $28 million of our total adjusted revenue representing an increase of 79% from $15.7 million in adjusted platform and operations revenue in the same period of 2014. This increase was primarily driven by a 108% increase in the number of lives in our platform from 285,000 as of June 30, 2014, to over 590,000 as of June 30, 2015. And this results from our increased partner count as well as growth in our existing markets.

As we discussed previously, we have seen our mix of lives on our platform shift more heavily towards payer value alliances. And this is an exciting segment given the movement towards high-performance narrow networks in the market place. As a result, we experienced a slight decline in our average PMPM fee from $17.82 during the quarter ending June 30,2014 to $17.41 during the quarter ending June 30, 2015. We ended the quarter with eight partners in our platform and operations phase as compared to five as of June 30, 2014 and we ended the quarter with 10 partners under long-term agreements, nine of which are expected to be in platform and operations phase as of the end of Q3.

In addition to solid top line growth, we continue to leverage our expense base in Q2. Adjusted cost of revenue for the quarter ending June 30, 2015, increased to $24.9 million or 68.4% of adjusted revenue compared to $17.8 million or 73.7% of adjusted revenue in the same quarter of the prior year.

The increase in expenses year-over-year is primarily related to additional staffing costs, third-party support fees and travel fees associated with the growth in the lives and customers on our platform. While our adjusted cost of revenue is expected to increase as our business grows, we do expect that over time these costs will decrease as a percentage of our total adjusted revenue due to the inherent scale in our model.

Adjusted SG&A increased to $21.8 million or 59.7% of adjusted revenue in the quarter ending June 30, 2015, compared to $15.7 million or 65% of adjusted revenue in the same quarter of the prior year. We are continuing to make targeted investments in our business development to marketing functions to build on our leadership position in the market and to capitalize on the market dynamics Frank previously referenced.

In addition, we're also continuing to selectively invest in our centralized infrastructure, focus on activities that support our technology infrastructure, clinical program development, data analytics and network development capabilities. Finally, we have seen increases in certain overhead departments and other infrastructure expenses needed to support scale in our business and to transition to being a public company. While we expect our adjusted SG&A expenses to continue to increase we do expect total expenses to decrease as a percentage of revenue over time.

Adjusted EBITDA for the quarter ending June 30, 2015, was a loss of $10.2 million compared to a loss of $9.4 million in the same quarter of the prior year. Adjusted depreciation and amortization expense in the quarter was $2.1 million or 5.9% of adjusted revenue compared to $0.6 million or 2.6% of adjusted revenue in the same quarter of the prior year. The increase was primarily due to approximately one month of amortization related to the intangible assets recorded as a result of the offering reorg and additional software assets placed in service. We expect depreciation and amortization expense to increase in future periods as we will have a full three months of amortization related to the intangibles in future quarters.

For the quarter just ended, adjusted loss available for common shareholders was a loss of $13.2 million and adjusted loss per share was a loss of $0.95 per basic and diluted share. These compared to adjusted loss for available common shareholders of a loss of $11.2 million and adjusted loss per share of $4.94 per basic and diluted share in the quarter ending June 30, 2014. As of August 3, 2015, there were 41,461,748 shares of our Class A common stock outstanding and 17,524,596 shares of our Class B common stock outstanding.

Turning to the balance sheet, as of June 30, 2015, total cash and cash equivalents and marketable securities were $219.4 million. Accounts receivable was $24 million and excluding certain non-trade AR, accounts receivable was $20.6 million. Total deferred revenues at the end of the quarter was $27.1 million and that reflects a downward adjustment due to the fair value of Evolent Health's LLC deferred revenue as a result of the reorg and associated purchase accounting.

Looking at cash flow under GAAP and as reported, cash used by operations was $5.8 million for the quarter ended June 30, 2015. If we were to include the operating results prior to our reorg, our cash used by operations was higher than what is reflected in our reported results. Cash provided by investing activities was $16.1 million, mostly a result of cash acquired upon consolidation of Evolent Health's LLC. Cash provided by financing activities was $209 million and a result of proceeds from our initial public offering net of offering costs.

Finally, with respect to Q3 and full-year 2015 guidance, the following comments are intended to fall under the Safe Harbor Provisions outlined at the beginning of the call and are based on preliminary assumptions which are subject to change over time. For the third quarter of 2015, we are forecasting total adjusted revenue to be in the range of approximately $42 million to $43 million and total adjusted EBITDA to be in the range of a loss of $8 million to and loss of $9 million.

For the full-year 2015, we are forecasting total adjusted revenue to be in the range of approximately $159 million to $161 million and adjusted EBITDA to be in the range of a loss from $37 million to a loss of $39 million. This concludes the financial summary and I'll now turn things back over to Frank.

Thanks, Nicky. I wanted to close with a few updates on product development, our clinical outcomes work and our overall organization. In terms of product development, one area in which we continue to invest significantly is our value-based technology platform, Identifi, which we believe is a significant differentiator in driving improved performance for our partners. Identifi is a fully interoperable, purpose built platform that cohesively drives and measures operational performance across the broad clinical and business teams responsible for the value-based business.

Identifi aggregates and integrates a wide range of data across the organization, optimizes and enhances value of the system's electronic medical records, provides access to clinical and business content and a suite of end-user applications that coordinate, drive integrated decisions and measure outcomes performance. One of our recent releases which is getting a lot of attention from both current and perspective health system, is our new utilization management capabilities that we've built directly into the Identifi platform.

Most population health systems are built from an inpatient perspective and do not incorporate critical provider payer management functions in an integrated way. By imbedding UM and other functions directly into the application, Evolent ensures NCQA and regulatory compliance, improves provider performance by trending and reviewing denials and appeals patterns and enables realtime integration with care management activities such as pre-discharge assessment by the inpatient care advisor. This level of integration can lead to a better care for the patient through increased use of evidence-based medicine, enhance member and provider engagement, improve clinical outcomes and better in-system utilization.

This is where purpose built makes a difference in ultimately driving performance. To that end, we're also heartened by some of our recent clinical results. Across the last several months, we've been devoting significant attention to measuring the impact of our clinical programs on reducing costs and improving quality now that we have enough longitudinal data to produce sufficiently powered studies. The results are promising including consistent examples of our ability to drive 50% reduction in costs and a 50% reduction in readmission rates in Medicare populations engaged in our complex care clinical programs.

Perhaps equally as exciting is the fact that we're also studying the levers that are driving these results so that we can isolate the key interventions, incorporate them into our clinical knowledge base and improve our ability to engage at risk in patients in order to drive higher-quality, more efficient care. For example, in managing our complex Medicare patients, we found that if we develop a comprehensive care plan that is built around an extended care team including pharmacists, social workers, behavioral health specialists and dietitians, we can address the patient's broader needs, more effectively engage them in their health and ultimately improve quality of care while lowering overall costs.

In terms of our organization, one of the foundations of our success is our focus on creating a world-class environment for star talent in healthcare. Today, our organization stands at 850 people strong and one of our key differentiators is to be able to assemble a broad set of experts that can take our partners through a very complex transition that includes clinical, financial, cultural, actuarial and technological dimensions just to name a few.

It starts with recruiting. Across the last year, we've received over 25,000 resumes and conducted over 7,000 interviews to ensure we are recruiting the best people in the industry who are not only technically proficient but also believe in our mission and shared values. Once we bring people into the organization, we believe engagement is critical. Since our founding, we've conducted employee engagement surveys twice yearly and we spend a tremendous amount of focus analyzing the data and working with our employees to address issues identified through the survey.

We were delighted to see our engagement scores trending even higher than our typical standard with over 85% of employees reporting high satisfaction working at Evolent and that promoter scores approaching 90%. It is incredibly exciting to work with such a vibrant landscape for talent and inspiring to build extraordinary teams that are working to transform our healthcare system nationwide.

Overall, we're excited about the opportunity in front of us and remain focused on market leadership. For the remainder of the year, our teams are working to drive positive outcomes and growth at our existing clients, expand our footprint by adding a few new health systems to our national network and continue to build a scalable and high-impact platform to drive consistent results. Thank you again for participating in tonight's call and we're now happy to take questions.

(Operator Instructions)

Robert Jones, Goldman Sachs.

Thanks, good evening. Thank you for taking the questions. I guess just looking at the growth you're implying for the back half, it looks like about 18% over the front half, more than 50% year-over-year. Can you maybe just talk a little bit about the visibility that you have into that anticipated growth? And I'm specifically thinking maybe even directionally talking a bit about how much of that growth is going to be from existing clients versus new clients?

Yes. I think if you look historically, I think I mentioned that our growth, over 50% of it has come from existing clients. We obviously have a lot of visibility into contracts, we're negotiating with payers, any new lives coming on the platform, so that is relatively known. We also have some clients in the blueprint process where they might be in the early implementation period. And we also know how those contracts are unfolding from a revenue perspective.

And then we'll have some newer ones that might be signing up for a blueprint across the next couple of months and again, that's a relatively small portion of our revenue. I would say we have a high degree of visibility at this point in the year in terms of what we can do. From a revenue perspective, we feel relatively on track. If you look at what I would call same-store growth out of our existing clients and then what we're seeing in the pipeline.

Okay. Great. And then I guess just the follow-up, if I look at the gross margins in the quarter, pretty strong performance relative especially to where we were. Could you maybe just share within that what are the margin profiles of some of your older customers versus maybe some of the margins you're seeing on lives coming on? I'm trying to get a better sense of what drove the margin performance in the quarter?

Hey Bob, it's Nicky. Overall, I would say that when we look at the quarter for gross margins, a good portion of it was just to do with flow through in terms of the revenue outperformance. And also in the quarter, when we looked at how resources were utilized, there was certain resources were utilized on an SG&A versus gross through the rest of the cost of revenue line.

But when we look over the course of the year, Bob, I don't think we would change our outlook on margins. I think we had a strong quarter. I think it was a pretty conservative estimate for the quarter. But I don't think we're seeing any change. And as we've talked about previously, certain the payer value alliance partners tend to come on the platform at higher margins than health plan clients who take a while to build. But overall, Bob, I don't think we can take what we see in the quarter and extrapolate it too far. I would say what we've talked about in margins in the past would be consistent with how we expect to perform going forward.

And I would just add, you asked about the most mature clients. We're seeing high gross margins that just reflect the inherent scale in the business. So gross margins above 50% in that case. And then as you have a newer client, obviously, those will be lower until you ramp lives and get more efficiency from your local base resources.

Got it. Appreciate all the color.

Thanks.

Lisa Gill, JPMorgan.

Thanks very much and good afternoon. Frank, just following onto that. In your prepared comments, you talk about cross sell being a significant contributor. Can you just us help us understand a little bit what you mean by cross sell? Obviously you talked about a lot of growth coming from existing customers, but is that individual customers buying more product, adding incremental tools on Identifi, how do we think about that?

I think there's three dimensions in terms of how we think about it. The first is, I've started out with a certain population so I might be starting with my employees and another product area and this coming year I want to get into Medicare Advantage or I want to enter a new product line. In some cases we will be adding a chunk of lives that have to do really with a new population with an existing client. Second, we will have clients decide that they want additional services and so that again, if they're taking on our PBM capabilities, if they're wanting us to support them in an additional area, that is a second way to grow.

And then third, as we mentioned before, we've seen more regional consortiums where we might start with a health system in a market and then they suddenly want to build out their network, other health systems approach them, physician groups that want to be part of what they're building. And then we're actually adding in that market by serving some additional institution.

So it's really those three areas where we see a lot of growth. And as you know, we're relatively underpenetrated and it's still a small portion of their overall revenues that are towards value-based care at this point. So you have a lot of growth within an existing client.

And then my second follow-up question would be, back a few weeks ago, we talked about as you're doing blueprints and you're out there talking to prospective customers, more and more people were looking for population health type tools. Can you maybe talk about the competitive landscape right now within population health? And do you think that you're helping people to get over that hurdle to work with Evolent in a more cohesive way? Or are you seeing more of people looking for that ad hoc of okay, I need a population health tool today and looking to Evolent for that?

I think it depends on who you talk to. I think if you start with the CEO and Boards of health systems, I think they really understand the execution complexity that they have in front of them when it comes to value-based care. Clearly, you need a lot more than a technology tool to execute on the strategy. You need to understand all the various populations from Medicare to Medicaid. You need to understand actuarial analysis, benefit design if you're working with employers, there's physician network development and thinking through how are you actually going to cover a geographic area, how are you going to incent the physicians.

Technology's an important component but it's only one piece. And so what I would say is I think we've been able to articulate pretty clearly how we're different and why, if you're going through this journey and it's a major component of your growth strategy, why it's pretty important to have a multidimensional provider such as Evolent. I do think our breadth and depth comes through. And as I mentioned before in most cases today, we don't see a lot of competitive activity.

I think your point is true that at the CIO level where you have lots of vendors selling pot health tools, there is a lot of noise in the market. A lot of it are systems really targeted at traditional inpatient and physician office and that really, in my mind, they're not really managing a population over a large geography through the episode of care. So I still think we're distinctive in terms of what we're offering from a technology perspective. But again, lots of noise and again, focused on the population health side versus what's the business side. How are you actually going to drive revenues and make sure that that part of the business is going well along with the clinical side. And again, I think we're pretty differentiated there.

That's very helpful. Thank you.

Ryan Daniels, William Blair.

Thanks for taking the questions, guys. Frank, thanks for the discussion as well on identifying some of the new capabilities. Two follow-ups there. One, I think you mentioned before that all your customers would be migrated to the latest platform by July. So first, curious if that took place and how the migration went? And number two, as you think about the market evolution and your solution sets and client needs, can you talk about how Evolent thinks about internal product development versus maybe working with partners to fill some of those capability gaps? Thanks.

Yes, I think both of those are good questions. First of all, on the migration. We have migrated everyone over to the new platform. I think it went very well. The technology team has done an amazing job of, I think, building a system that is quite easy to implement. And as you know, they're pulling in from a complex set of data elements and in general, it's gone very very well. We do believe that you look at the new functionality, the capabilities, we believe it's industry-leading in terms of organizations that are trying to manage risk based business. Your second question was -- let me think --

How do you think about internal development among business partners to fill --

Very helpful, thanks. Thanks for reminding me. Yes. There's a couple of areas where we feel we're pretty distinctive in development. We really have built a robust clinical team and the analytics that go into the tool, the way that cascades into our clinical programs. I think we're going to continue to do a lot of that internally. We feel like we've got a big lead there and again, across the network are adding to that content on a regular basis.

I think to your point, if we see areas where someone has built an excellent tool or someone already has a data warehouse, there's no reason for us to replace that functionality. I think you'll see some things done internally and I think by driving design and really thinking through places where we are differentiated. I think that's sort of the right approach but there will be a number of areas where we will look to partner organizations, we'll connect into other systems.

The nice thing is we might have a client that using a different application and we can begin working with that organization. If we think they're distinctive, we can then take that solution to other organizations in our network. I think you'll see a combination but again, for now, the bulk internally developed given that we don't see a lot of the functionality based on what we know that we want. We don't see in the market place today.

Okay. Perfect. And then a very quick follow-up for Nicky. One of the things we discussed about being reported quarterly before was the P&O run rate. I don't know if you have that or if that's something you're going to disclose, but I would be interested in that as a forward revenue indicator?

You're right, we did talk about that. I will say when we took a very careful look at it and when we dug into it, we would've had to exclude certain revenue from that calculation. As we talked about, there's some performance elements to the P&O and on just a definitional side we have had to exclude that. When you do that, we felt it caused more confusion than was helpful, quite honestly. It's not a number that was as robust as we thought or as helpful as we though.

What I would say as a proxy is, when we look at sequential life growth in the platform quarter to quarter, that was 24% in Q2 versus Q1. And I think that -- we obviously don't get the benefit over the full quarter, but I think the sequential life growth is sort of a similar metric and we will be reporting that going forward. But the P&O run rate ended up not being as helpful as we would've liked it to be when we dug into the definition.

Okay. That make sense and I guess it makes sense as well on the life growth. So that helpful. Thanks, guys.

Thanks.

Sandy Draper, SunTrust Robinson Humphrey

Thanks so much for taking the questions. My first question is a little bit of a follow-up to Lisa's question. Frank, when you're thinking about -- as you said, when you're dealing with a CIO, it's more of a tool focused approach. Once someone comes into the transformational part of the pipeline, have they pretty much moved past looking at things on a tool based or product based and looking into solution based sale? Or are they sort of dual tracking and saying hey, let's run the full solution of going with Evolent or we're going to think about maybe piecing together a bunch of tools to try to do this ourselves? Or once they get into the transformation, have they move past that decision?

Yes. That's a great question. I think we see different situations by client. In many cases we are presenting the Identifi capabilities. We're really working with, not just the IT group, but the business owners and really laying out the breadth and depth of what we do. A lot of times people feel like that it is one integrated platform, it's a one-stop shop solution for what we need, it's relatively cost-efficient, et cetera. And so many times we will sell them the full solution.

In some cases, someone may have just purchased a component and they may say look, we purchased this component, we're happy with it and as we've said before, we don't need to replace existing systems that are effective at doing certain things. Many times someone might have a data warehouse. They might have a tool that they're using and again, we can easily integrate with that and many times the evaluation will go in that direction.

Occasionally, you'll have parallel process. You may know this, but whole systems are very large organizations. You might have and end-user doing an evaluation in a part of the organization. What's nice is sometimes that will come through and the CIO will come to us and say by the way, we've been evaluating this and we'll be able to demonstrate how the identified tool actually covers that area and they don't need to do the additional purchase. So again, it's another way that the tool adds a lot of value but that's usually how it will work out. I'd say in most cases there's surely applications, tools that the organizations are purchasing, and they do that all the time, but identifies really the overarching solution for value-based care.

Great. That's really helpful. Thanks, Frank. And one other fairly high-level question. When the providers or the health systems are looking and talking about taking the risk and thinking, do we want to basically go to payers to take on more risk-based contracts versus let's start to actually build out a -- we actually want to take on some of the first dollar risk and become payers?

What is the thought process is it usually take a tiny step and we want to do that? Or is it really let's start with just going with more risk-based contract with a payer and then maybe eventually down the road, thinking about actually building out our own payer model? How does that thought process go?

Again. I think it's organization dependent. It's market dependent. You have some organizations where the CEO has decided we need to build these capabilities. We really need to shift our economics quickly and we want to control our own destiny so we're just going to move quickly. That might mean that they have their own health plan and they also have delegated arrangements with payers but they're going big right out of the gates.

You then have some organizations that have concluded that we need to move in this direction, it's important for our future, we want to start with our existing payers and see if we can negotiate reasonable arrangements and if we can, that's a great way to get started and that might be a wonderful long-term partnership for us in our market. You have to see if you can negotiate good terms. In some of those cases, you embark and we try and do that and then the payers in that market really are not offering the providers reasonable deals.

I think again, in those cases the provider will step back and say look, I can't be on my heels and reactive across the next several years. I need to get some experience here. So I'm actually going to move forward and launch my own plan. It might be in a distinct area but need to get some experience. I would say in most markets what we see is organizations wanting to start at a reasonable pace, not everything out of the gates. Starting with some payer arrangements and then over time maybe in a product area, they might either take full risk cap. They might launch their own plan, but it's something that would gradually happen over time.

Great. Thanks a bunch and congratulations on the first quarter as a public company.

Thank you. Appreciate it.

(Operator instructions)

David Larsen, Leerink

Congratulations on a very good quarter. Frank, in your prepared remarks you talked about potentially working with one of the largest health systems in the country. Can you give a little more color around that like, can you talk about the sales process? How you were introduced to this health system? Thanks very much.

Sure. We've obviously been in the industry for a long time. So with most large health systems we have existing relationships. This is an organization we've actually been talking to for some time and they weren't quite ready when we launched Evolent to really embark on the strategy. They needed to do some work internally. So we try to do a good job of keeping them engaged; visiting them regularly, talking about insights from our work. If we can get them to do a site tour and in this particular case, they actually did do a trip out and visited one of our partners which helped in the process. And then they were ready.

And we'd already built confidence with them. They'd had some exposure to our people and it was a very quick sales process at that point. It's an exciting relationship because they are spread across multiple regions of the country. They've got strong market share and capabilities where I think they could have value-based business. It's a multiple billion dollars in size. It's still a lot of work to do in building strategic consensus with the Board and with the Senior Executive Team, but we're really excited about the work that we're doing there.

So that's a new client and that revenue and earnings would flow through your P&L in the future. None of that has landed on the P&O yet, is that correct?

If not a P&O. As the blueprint work, we get paid for the blueprint work. So that would be flowing through the P&L in the transformation line but not in the definitive agreement stage and not in P&O.

Great. Thanks very which. And then if you were to size that health system relative to existing customers without getting too specific, is it -- would it be a top-five customer? Would it be a top-three customer?

Well there's two ways to look at it. From a revenue perspective, they would be more than double our average client in terms of size. I think in terms of estimating what the revenues will look like, that's really going to come out of the blueprint process. When we really understand how many regions are they going to move in, what product areas, what services will we provide for them? We obviously have to go through a process of getting the Board really to buy off on the investment plan and so we don't know where they will come out. I'd say the potential is very large but we actually have to work through the process to make that happen.

That's great. And then the 590,000 lives that you have on the platform at the end of the quarter, that's a fantastic sequential increase. Can you maybe talk about what drove that? Was that a couple of clients, in-selling to your existing base, any more color around that would be terrific?

Well again, I think we expected it based on the work we've been doing across the last year. I would say it's come really across almost all of our clients and so it's spread. There's a few examples where some clients have launched MA plans and therefore, they had open enrollment cycles that again, added into this year.

We have some with repair delegated deals where we've had a lot of strength across this year in negotiating some pretty interesting deals for clients. But I would say if you look across the client base, pretty consistent across, and then you might have some larger chunks of lives where we've been able to negotiate deals with multiple payers in a single market. And so that's probably where you'd see most of the growth.

Great. Things a lot.

Operator, if there's no further questions, I'd just like to make one clarifying point. If there are no further questions in the queue.

That is correct. I will turn it back to you for closing.

Okay. I just want to make a comment on EPS. A number of companies that have gone public and have had Rubik's cubed 10-Qs like we have had, have had some confusion around the EPS calculation. So there's a reported EPS number of a loss of $0.95 per share. That's based on an adjusted net loss of $13.3 million and here's where the complication comes in, and a weighted average share count of 14 million shares. So again, Evolent Health Inc. only came into operations in June 5. So the weighted average share count was very low.

That share count's a lot lower than our existing share count. FactSet is reporting a consensus Q2 non-GAAP EBITDA loss of $0.35 per share which -- negative $0.35 EPS. That based on a share count of approximately 54 million shares. If we recalculated our EPS using the 13.3 million and the same share count as FactSet, we would have an adjusted EPS of negative $0.25 per share which would outperform consensus.

We've been staring at this and it's a hard thing to calculate but the weighted average share count which is way lower than our actual share count. This will resolve itself. It will be a lot easier going forward in subsequent quarters. But just in terms of that number causing confusion in the marketplace, I just want to clarify that. Hopefully that clears that up and it's not an issue that we are wrestling with in the next day or so to come. That's it on our side.

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

Thanks all.