Evolent Health Inc (EVH) 2015 Q3 法說會逐字稿

Good day and welcome to Evolent Health earnings conference call for the quarter ended September 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 is some important introductory information. This call contains forward-looking statements under the US Federal Securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that are filed with the Securities and Exchange Commission including cautionary statements included in the current and periodic filings.

For additional information on the Company's results and outlook, please refer to its second-quarter news release.

At this time I will turn the call over to the Company's Chief Executive Officer, Mr. Frank Williams. Mr. Williams, the floor is yours, sir.

Thank you and good evening. I am Frank Williams, Chief Executive Officer of Evolent Health, and I am joined this evening by Nicky McGrane, our Chief Financial Officer. We have a three-part agenda for today's call.

First, I will open up with a summary of our performance for the quarter covering our financial results and an overview of what we are seeing in the market. I will then turn it over to Nicky to take us through a more detailed review of the financials. Finally I will close with some additional highlights on the quarter and an update on our key priorities for the remainder of the year.

As always, we will be happy to take questions at the end of the call.

In terms of our results for the quarter from a financial perspective, total adjusted revenue for the quarter ended September 30, 2015 increased 44.8%, $43.3 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended September 30, 2015 was negative $6.7 million compared to the adjusted EBITDA of negative $5.1 million for the quarter ended September 30, 2014.

We have over 717,000 lives on the platform as of September 30, 2015, up 146% year-over-year. We also closed our long-term partnership with Legacy Health last month. Legacy is a $1.7 billion health system based in Portland, Oregon made up of six medical centers, a children's hospital, 26 primary care clinics, and 400 employed positions.

All in all we are pleased with our results for the quarter and are on track relative to our strategic, operational and financial objectives for 2015.

In terms of the overall market environment, I thought it might be useful to look at it from a few different perspectives to get a sense for the primary drivers of demand as well as pacing in certain segments of the market.

Starting with a macro perspective, we held our annual health system summit this past week in Scottsdale, Arizona. The summit is a great opportunity to spend a couple of days with executives from our early stage and mature health system partners to understand their value-based care strategies and investment plans. This year we had our highest attendance yet with over 70 CXOs from health systems participating representing close to $150 billion in combined revenues.

In terms of the content, we had roughly one dozen client executives of partner systems talk about the significant progress they have made in putting in place the right infrastructure, engaging physicians in managing multiple populations successfully. It was heartening to see a group of systems making major inroads in their local markets and associating their relationship with Evolent as a key catalyst in their early success.

Also some interesting market data emerged from the systems in attendance. First, over 95% of the attendees felt there was a significant sea change occurring in the reimbursement environment and are significantly increasing their investment in value-based care activities. The vast majority of the attendees see Medicare Advantage, Medicaid and the exchanges as the first populations to focus on given the appeal of strong local brands and more narrow networks.

Lastly, over 80% of the participating health systems believe that having their own branded health plan will be an important component of their strategy even as they partner with innovative national health plans in delegated risk arrangements.

One of the best received sessions at the summit was a panel with executives from some of the large national payers. Their candid feedback on how they see the market evolving created a spirited debate about the changing dynamics between payers and providers and the need for greater collaboration despite some of the natural competitive overlap.

From an Evolent perspective, a few promising themes emerged from the broad market feedback. First, the presenting systems which represent a diverse cross-section of our customer base, feel they have made significant progress in transforming clinically and capturing value through value-based arrangements across multiple populations. It was fabulous for a number of our prospect institutions to get a clear sense of how Evolent can act as a catalyst to enhance operational and financial performance.

There was also widespread acknowledgment that the government is the largest and in many ways most active payer and that they are moving the market significantly. However, the attendees also noted that even in the commercial segment as a result of the Cadillac tax and private exchanges is moving aggressively toward value-based care as well.

Given these macro factors, health system executives recognize the need to prepare now. They see the shifting impact on all aspects of their business and feel urgently to begin the transformation process to be able to respond nimbly to rapidly approaching market changes. It feels like the risk equation is shifting rapidly and the cost of inaction may far outweigh the risks of value-based contracting.

Stepping out of the summit, it is also interesting to look at our current pipeline from late stage valuations through the blueprint and implementation process. Across the last several months we have seen a strong uptick in business development activity. We ultimately have to translate these opportunities into long-term partnerships but the overall movement in the market is quite promising.

Starting at the tail end of the pipeline, we are excited to add two substantial partnerships to our long-term platform in operation services. The first is Legacy Health, a leading health system in the Oregon market which I referenced earlier. We have made substantial progress in building their operational capabilities in anticipation of their emerging value-based care business. Our technical team has been on site rolling out the Identifi technology and the feedback from clinical and business users has been incredibly positive.

The second partnership is a new relationship with MedStar Family Choice, MedStar's Medicaid subsidiary. Adding 110,000 lives in a high growth health plan will not only expand our footprint substantially in the Mid-Atlantic but will also enhance our presence nationally in Medicaid. This is our first contract with the Family Choice Medicaid plan and given the anticipated expansion of Medicaid in the state of Maryland, this initial contract could represent substantial growth for Evolent in the future.

In the middle stage of the pipeline, we are seeing an acceleration across several markets. As an example, we just moved into the implementation phase with one of our transformation clients in the West who has several hundred thousand lives currently under management and represents a large opportunity for Evolent. As the relationship has developed, we are seeing an emerging opportunity to create a broader regional network in partnership with a system that could serve as a catalyst in moving several contiguous regions towards value-based care.

In addition to growth within our existing partner base, we continue to win new opportunities early in the pipeline with providers looking to utilize our blueprint offer. In these new strategy engagements, our transformation team work with the providers' Board of Directors and senior management to assess their ability to succeed in value-based payment models. This increased demand reflects the growing sentiment that health systems recognize the strategic imperative to diversify their revenue base and are looking for expertise to manage discrete populations.

We are struck both by the complex set of strategic issues our transformation teams are addressing as well as the breadth of operations and knowledge required to set up an organization for successful execution.

If you look at our current base of clients, we are helping with everything from new health plan launches and market entry approaches and Medicaid to delegated risk arrangements with national payers and clinical transformation strategies. All in all, we are seeing high demand for our transformation services and have signed a record number of blueprints in the last 90 days.

Lastly, in terms of a sense for the overall market, it is also helpful to look at some of the activity across our current customer base. As we mentioned previously, we are seeing significant interest in Medicare and Medicaid as excellent starting points for investments given future government reimbursement. In Medicare, several health systems are in expansion mode for MA plans. We also have four systems that have been accepted into Next Gen as well as a number of systems that are evaluating moving up the risk continue on.

While Piedmont WellStar has made the decision to exit MA due to unfavorable reimbursement dynamics in the Atlanta market, the vast majority of our current systems including those in the pipeline are expanding their participation in Medicare risk arrangements. The logic is simple, would I rather be on the receiving end of a declining per diem over time or would I rather capture a much higher portion of the total premium and manage the entire episode of care to a better outcome?

Given the tight linkages to clinicians as well as newly available clinical data and analytics, the vast majority of the provider systems we talk with are opting to enter value-based arrangements and control their own destiny.

Medicaid is also quite promising in a number of expansion states. The new 110,000 lives in 2016 with MedStar Family Choice notwithstanding, Medicaid is a very attractive growth area for provider systems to bring needed solutions to improve quality and lower costs.

We are now involved in several significant opportunities to bring a provider driven solution to address substantial financial pressure that has emerged from increased enrollment as a result of the ACA. We are confident that these investments will lead to Medicaid emerging as a substantial business line for Evolent across multiple geographies.

Outside of Medicare and Medicaid, we are also seeing examples of systems that are doubling down based on their early success clinically and pursuing multiple populations in an effort to build scale and value-based delivery. As an example, we are working with a system in the Midwest that is seeking to achieve real impact by building a diversified value-based care platform. Although they are in a relatively small market, they are building a broad network of aligned providers across their region and aggressively moving toward risk in their contracts with payers.

With approximately 50,000 lives currently under management across their Employee Plan, Medicare Advantage and commercial payer partnerships, they are expanding rapidly. They anticipate achieving over 100,000 lives under management by early 2017 through network growth, the launch of cobranded health plan products with a neighboring provider on health plan and launch of a full risk next-generation ACO with CMMI.

In order to manage risk and achieve high value-based care performance, they have upgraded their patient center medical home model to Evolent's model of care and they have built innovative channels to support Identifi real-time population health workflow into their epic EMR.

Overall, we continue to be pleased with the broader trends that we are seeing in the marketplace and the developing opportunities for Evolent across new and existing clients.

With that, let me now turn things over to Nicky to review our financials in more detail and then I will finish with a few updates on product development, clinical outcomes and our organization.

Thank you, Frank. Good evening, everyone, and thank you for joining our third-quarter earnings call.

Overall we delivered another solid quarter that exceeded the guidance we set forth during our last earnings call and that keeps us on track to meet our full-year guidance. We continue to invest for the opportunity we see ahead and to set the stage for strong future results driven by growth in our existing partners as well as adding new partners to our platform.

Today's financial review will cover the income statement, balance sheet and cash flow for the quarter ending September 30, 2015 and the outlook for the remainder of calendar year 2015.

As a reminder, the financial statements of Evolent Health Inc. for the nine months ended September 30, 2015, and for the three and nine months ended September 30, 2014, do not reflect a complete view of the operational results for those periods due to the reorganization completed in connection with our IPO offering in June.

Prior to the reorganization, Evolent Health Inc. had no operations. Therefore 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 reorganization as if it had occurred on the first day of the relevant period.

The adjusted results include the operations of Evolent Health LLC for the period from January 1, 2014 through June 4, 2015 as well as certain other adjustments. You can find further information in the financial statement presentation and non-GAAP financial measures section of our press release.

Let's get to the numbers. I will first present our GAAP results and then present adjusted results.

For the quarter ended September 30, 2015, Evolent Health Inc. reported GAAP revenue of $40.4 million compared to zero for the same period in 2014. Adjusted revenue, which I will detail in a moment, was $43.3 million for the third quarter. Cost of revenue for the third quarter was $24.8 million again compared to zero for the same period in 2014. Third-quarter operating income was negative $17.2 million compared to zero for the same period in 2014.

Net loss attributable to Evolent Health Inc. in the third quarter was negative $12 million compared to negative $3.2 million for the same period in 2014 and third-quarter earnings per share available for common shareholders was negative $0.29 per basic and diluted share compared to negative $2.07 per basic and diluted share for the same period in 2014.

Now let me turn to our adjusted results. For the quarter just ended, we are reporting record total adjusted revenue of $43.3 million, an increase of 44.8% from $29.9 million in the same period of the prior year.

As a reminder, we derive our revenue from two sources, transformation and platform and operation services. For the quarter just ended, adjusted transformation revenue accounted for $7.6 million or 17.5% of our total adjusted revenue. This represents a decrease of $4.3 million compared to the $11.9 million of adjusted transformation revenue during the same quarter last year. Much of this year-over-year difference was driven by an unusually high transformation number last year as a result of a specific health plan launch.

As we have explained in the past, transformation revenues can fluctuate quarter to quarter based on the timing of when contracts are executed with partners, the scope of delivery and the time of work being performed.

If you look at overall demand for transformation services across the past 90 days, we are seeing high demand for strategic consulting engagements and as Frank mentioned, have closed a record number of blueprint deals in the past 90 days.

As we mentioned previously, the blueprint process acts as a sales channel for long-term partnerships as a significant portion of providers that make an investment in a blueprint continue to partner with us in actively managing their value-based businesses. Accordingly, 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 full-year outlook.

For the quarter just ended, adjusted platform and operations revenue accounted for $35.7 million or 82.5% of our total adjusted revenue representing an increase of $17.7 million or 98.3% from $18 million in adjusted platform and operations revenue in the same period of 2014. This increase was primarily driven by a 146% increase in the number of lives in our platform from 291,000 as of September 30, 2014 to 717,000 as of September 30, 2015, resulting from our increased partner count as well as growth in our existing markets.

In addition, a portion of the $17.7 million increase versus prior year was associated with shared savings payments that were received and recognized in the third quarter. These payments are tied to arrangements with our partners that allow us to participate in medical savings generated through our population health efforts.

As expected, we have seen our mix of lives on platform continue to shift more heavily toward payer value alliances. As a result, we experienced a decline in our average PMPM fee from $20.81 during the quarter ending September 30, 2014 to $18.15 during the quarter ending September 30, 2015. We ended the quarter with 10 partners under long-term agreements and added one additional agreement after the close of the quarter bringing the current count to 11.

In addition to solid topline growth, we continue to leverage our expense based in Q3. Adjusted cost of revenue for the third quarter increased to $24.4 million or 56.3% of adjusted revenue compared to $19.3 million or 64.6% of adjusted revenue in the same quarter of the prior year. The increase in expense is primarily related to additional personnel costs and third-party support services associated with the growth in the lives on our platform and the expansion of our partner base.

One of our stated goals is to improve the efficiency of our client delivery model by refining the processes and procedures by which we deliver our services. As we make strides in this regard, we are seeing improvements in our gross margins quarter to quarter.

In Q3, a portion of the decline in adjusted cost of revenues as a percentage of adjusted revenues was attributable to the revenue associated with our shared savings programs. We do expect that over time adjusted cost of revenues will decrease as a percentage of total adjusted revenues.

Adjusted SG&A expenses increased to $25.6 million or 59.1% of adjusted revenue in the quarter ending September 30, 2015 compared to $15.7 million or 52.4% of adjusted revenue in the same quarter the prior year. The additions we have made to SG&A continue to be focused on areas that will ultimately drive long-term growth including business development and marketing as well as clinical program development, technology infrastructure, data analytics and network development capabilities.

Finally, compared to prior year, we have incurred increases in certain centralized departments and other infrastructure expenses needed to support scale in our business and to transition to being a public Company. We do expect total adjusted SG&A expenses to decrease as a percentage of our total adjusted revenue over time.

Combined, our total adjusted cost of revenue and SG&A expenses as a percent of total adjusted revenue declined to 115.4% in the third quarter of 2015 compared to 117% in the same quarter of the prior year.

Adjusted EBITDA for the third quarter was negative $6.7 million compared to negative $5.1 million in the same quarter of the prior year.

Adjusted depreciation and amortization expense in the quarter was $3.1 million or 7.1% of adjusted revenue and that compares to $0.7 million or 2.3% of adjusted revenue in the same quarter of the prior year. The increase was primarily due to $2.5 million in amortization of intangible assets recorded as a result of our offering reorganization. We expect adjusted depreciation and amortization to increase in future periods as additional software assets are placed in service.

For the quarter just ended, adjusted loss available for common shareholders was negative $9.6 million or negative $0.16 per share. These compared to adjusted loss available for common shareholders of negative $7.8 million or negative $0.31 per share in the quarter ending September 30, 2014.

As we have discussed previously, this metric of adjusted loss for common shareholders is intended to provide a complete economic measure of our earnings and thus excludes the portion of our earnings attributable to noncontrolling interest and takes into account all dilutive or potentially dilutive shares. We hope this will clarify any confusion we have had about our EPS calculations.

As of November 5, 2015, there were 41.4 million shares of our Class A common stock outstanding and 17.5 million shares of our Class B common stock outstanding. On the talent side, we continue to attract talent into our organization resulting in a headcount of 929 employees at quarter end.

Now turning to the balance sheet, we ended the quarter with $210 million of combined cash, cash equivalents and marketable securities, thereby a very strong liquidity position. You may note that our September 30 accounts receivable balance of $30.5 million was a bit higher than in past quarters. This increase is due to the growth in lives in our platform as well as the timing of certain customer payments that do not give us cause for concern. We have consistently enjoyed very strong AR days outstanding with zero bad debt and that continues to be the case.

Total deferred revenues as of the quarter end was $33.5 million, up from $27.1 million at the end of Q2. Again this increase was mostly a result of the growth in our lives on platform and increase in the number of partners in our platform and operations phase.

Looking at cash flow, under GAAP, cash used by operations was $6.3 million for the quarter ended September 30, 2015. Cash used by investing activities was $4.9 million and cash provided by financing activities was $0.1 million.

Finally with respect to 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.

Based on our year-to-date performance and our current expectations for the fourth quarter of 2015, we expect to be at or above the midpoint of our previously disclosed annual guidance ranges for each of our key performance measures. For the fourth quarter, we are forecasting total adjusted revenue to be in a range of $43 million to $44 million and adjusted EBITDA to be in the range of negative $9.5 million to negative $10.5 million.

For the full-year 2015, we are forecasting adjusted revenue to be in the range of $160 million to $161 million and adjusted EBITDA to be in the range of negative $35 million to negative $36 million.

This concludes the financial summary and I will now turn things back over to Frank.

Thanks, Nicky. I wanted to close with a few updates on product development, clinical outcomes work and our overall organization.

In terms of our platform, we are constantly looking for ways to drive unique sources of value for our client organizations. To that end, we do extensive development sessions with our clients on emerging clinical and business priorities that are critical to enhancing performance. One area that has generated high return on investment is continued innovation to our industry leading Identifi platform.

For those of you that are new to our platform, Identifi is a fully interoperable purpose built platform that enables and measures operational performance across both clinical and business teams responsible for the value-based business.

This quarter we released a new user module called Identifi Practice which provides physician practices direct access to the entire Identifi platform and their associated value-based and fee for service patient panels.

Identifi Practice automates coordination and workflow across the entire system and allows for real-time collaboration on issues such as open care gaps and other critical population health management functions driving care improvement and higher quality outcomes.

The integration automated and curated content database embedded within Identifi also provides a critical benefit for our customers as we continue to evaluate and refine our clinical impact through case-control studies. Recently we tested the output of the Identifi stratification and patient identification relative to the system currently in use by one of our more sophisticated partners.

We found that the Evolent stratification engine was better able to identify patients that were going to experience future avoidable adverse events and it identified nearly twice the impactable opportunity in the coming year.

For example, we identified over twice as many complex care patients as our partner stratification process that with the right intervention, can translate into several million dollars in clinical savings for our partners and improved health for countless patients just by identifying the right patients and predicting future avoidable events.

Looking at our organization and considering our rapid growth, we believe that investing in our leaders is critically important. To that end, we have been investing in building a capable senior leadership and management infrastructure including the development of a comprehensive leadership curriculum. This curriculum encompasses a training series for several different levels of leadership, including senior leaders, new managers as well as junior leaders identified within the organization.

We also completed our first leadership [in bay] earlier in this year during which over 150 leaders from across the organization gathered for training, presentations and discussion about the direction and development of the Company.

Finally, we continue to develop our leaders by providing quantitative and qualitative leadership dashboards to incorporate 360 degree feedback from firm-wide engagement surveys and to identify areas for individual growth and improvement. We strongly believe that by investing in the development of our people we are enhancing our ability to scale our organization and ultimately our impact in contributing toward the future growth of our Company.

In terms of priorities for the fourth quarter, we are entering into an important time of the year as health systems finalize their strategies and investment plans for 2016. Many systems across our client base are going through open enrollment and Medicare Advantage plans as well as in employee populations, exchanges and beyond.

It is also a critical time for organizations to be allocating investment dollars for their value-based care infrastructure in 2016. Accordingly, our business development team is focused on moving organizations in our pipeline to the next phase of their respective strategy and our operations team is working diligently to ensure that we maximize the open enrollment opportunities across the client base.

Overall we are pleased with our results for the third quarter and we have increased confidence about the size and scope of the emerging market for our value-based care platform. Our job now of course is to build a compelling strategic vision and investment plans client by client and to work hand-in-hand to successfully operationalize the strategy. Based on the opportunity in front of us, our team is extremely focused on strong execution across the next several months in order to set up a successful 2016 and beyond.

Thank you again for participating in tonight's call and now we are happy to take questions.

(Operator Instructions). Darlene Gill, JPMorgan.

Or Lisa Gill. Good afternoon, everyone. Let me start. Frank, you talked about record blueprint in the last 90 days. Can you put a number around that for us?

I don't have the specific number but I think if you remember what we are trying to generate year-over-year, we are wanting to add roughly five to six new long-term clients to our platform across the year. To generate that we are trying to do twice the number of blueprints assuming roughly a 50% conversion rate and we are well on track for that this year but several in the last 90 days.

Okay, great. And then if I just look at the lives added to the platform during the quarter was a little bit lower than we had anticipated. Was there a specific account that is taking longer to transition that to the platform or was there something else that happened in the quarter?

No, I think it was consistent with our expectations. I don't think we talked about a specific estimate on lives for the quarter. It is obviously a mix of what product areas, are they Medicare lives, are they health plan lives, etc., are they payer delegated? Ultimately we are right in the zone we wanted to be from a revenue perspective and we are feeling very good about the growth in terms of same-store as well as adding new clients. So right in the zone we wanted to be in.

Great. Then my last question I guess is may be for you or Nicky, just looking at the outlook for EBITDA for next quarter versus what you were able to do this quarter, are there incremental expenses as we go into the fourth quarter? I know, Frank, you made some comments about some of the investments that you are making but how do we think about that sequentially as to what we saw for EBITDA this quarter versus what we are seeing for the fourth quarter? I will stop there.

There is always an element of fourth quarter setting up for the subsequent year. So I would say yes, sequentially we would typically see Q4 being both in terms of discontinued growth -- you see sequential growth in SG&A Q3 over Q2 so some of it is just a natural sequential growth in SG&A in line with growth. And then some of it is a little bit incremental relative to I would say Q3 just based on year-end activity and what you tend to see coming into the close of the year.

But again relative to where we set out, we narrowed the band of full-year EBITDA relative to where we were so we sort of took the outperformance in Q2. Obviously added that into full-year guidance and then narrowed the range a little bit on EBITDA so I think all in all at or above where we were hoping to be for the full-year.

Okay, very helpful. Thank you.

Robert Jones, Goldman Sachs.

Thanks for the question. I guess, Frank, based on your prepared remarks, the interest level from new systems and the number of blueprints that you have been able to sign, I am curious if there is any potential you see for maybe adding more systems than previously contemplated? I know you just mentioned the goal was I think you said six to seven a year. I mean could you get to a point where it makes more sense to add more?

And I guess along those lines, if you did get to that type of good problem to have, how should we think about capacity constraints as we think about adding new systems beyond that in 2015 and 2017?

I think we have tried to set up a level of top and bottom line growth that we feel comfortable with. One of the things we are very committed to is driving strong consistent long-term growth. We are also committed to getting the business to profitability as we have talked about in the past. We always have a trade-off. If we were to have double the number of implementations, we obviously would need to increase upfront costs, some of that revenue takes time to ramp so that would have an impact on the financials.

If strategically we feel like there is incredible opportunities and we want to enhance capacity, that is something we could do. It is something obviously we would preview well in advance in terms of making that investment. Right now I think we are doing a good job of managing a number of really interesting opportunities across the country. Some that could be pretty massive in terms of their implications for us.

If we feel like we are at capacity, I think what we would do is maybe push some of those to slower development across next year so we are still working with them, we are still moving them along but maybe a little less aggressively on some of the opportunities. Maybe it will take a longer time to ramp. And then on the ones where we see a significant number of lives coming onto the platform in the short term, put more of our implementation resources there. That would obviously help us manage a strong topline but also keep the bottom line at a reasonable level.

So constantly trying to manage that balance but that is sort of how we think about it in terms of reasonable bottom line growth along with the top line.

Got it. Then I guess just one on the new lives added this quarter. I was wondering if there is anything you could share as far as what percentage of that roughly 124,000 additional lives this quarter were from existing customers versus new systems?

Very consistent with what we have said all along, Bob, which is about 70/30 mix, about 70% of lives from existing, 30% from new and this quarter was consistent with that.

All right, great. Nicky, just one last one for me off the top line really strong gross margin performance in the quarter up to 44%. I know you touched on some of the moving pieces but could you just give us a sense again of what led to that significant net sequential improvement? And then how should we think about that level of gross profit margin going forward?

Good question, Bob. I would say specifically in the quarter, I referenced the shared savings, shared medical savings that came in Q3. That is something we would have forecast to come across the year. There was a couple of million dollars of that in Q3 specifically so some of the outperformance was tied to that.

I would say the other thing and this is more of a trend, I also referenced this idea of driving efficiency in our client delivery model and so with that what happens is some folks move from client delivery down to product development so if you look at gross margin and SG&A, you will see a little bit of movement between the two.

But I think to answer your question, when I look at gross margins today year-to-date we are rent 35.5 and as I look at the full year, that is ahead of where we had expected to be. And I look at the full year, we will be at or above that level for the full year so we are seeing slightly higher gross margins than we had thought earlier in the year. But I think the year-to-date number is a good sort of guidepost, that and above I would say for the full-year.

Got it. Thanks so much, guys.

Jamie Stockton, Wells Fargo.

Good evening. Thanks for taking my questions. I guess maybe a real quick one on the per member per month, it ticked up sequentially. Should we interpret that as essentially you saw a higher mix of lives where you were also providing the TPA work around the health plan that covered those members? And maybe as a follow on to that, like how sustainable do we think this PMPM is over the next few quarters?

I would say overall, I think it is just -- when I look at the numbers I don't see any overarching trend. I mean I think the longer-term trend on PMPM we have talked about coming down over time remains the case. I wouldn't read too much into the sequential quarter-over-quarter PMPM. It is more to do with timing of exactly when lives come on in the quarter and that sort of thing. So it is more nuance than it is a trend I would say.

So during the year, the disproportionate number of lives coming on the platform or PM are payer value alliances were outside of open enrollment etc. But it is more of just a math, Jamie, than any longer-term trend. So I think what we have talked up out on PMPM remains consistent.

They one thing I would add that I referenced in my earlier remarks is we are seeing an uptick in interest from health systems that do want to launch their own plan. So I do think that is going to be an ongoing significant part of our business. The payer delegated arrangements are quite positive in the sense that we are able to get a lot of lives quickly and therefore even though the PMPM is coming down, we are matching that with pretty significant life growth. So I think both ways are very positive ways but we are also definitely seeing an increasing trend toward providers really wanting to have their own plans as well.

Okay, that is great. Maybe just one more question. And Frank, you mentioned that that there is this growing sense that providers need to get into a position to take on risk and adopt technology and services to take that on. Is there something that you believe is a catalyst let's say maybe over the next 12 to 18 months to really propel that forward?

I will throw one thing out and I would love your thoughts on it. I have heard a few DC consultants say that essentially the Obama administration is very dedicated to the notion of risk transitioning to providers and that they are going to be rolling out a lot of initiatives like the joint program that will put Medicare providers in a position where they have to take on risk, they have no choice. So I would love to know your thoughts on that.

I think without question, Medicare is emerging as the largest payer if you look at Medicare and Medicaid that will be 60% of a hospital's business. They have made very clear statements that they are going to move a high proportion of their payments to risk. They have introduced a number of programs to do that. We anticipate Medicare Advantage doubling in enrollment.

So I think if you just started on a catalyst very aggressive action by the government, bundled payments being what you reference but all forms of prepaid healthcare and wanting providers ultimately to perform against it. So I think that definitely has moved the market.

In a number of states, Medicaid has become a significant budget problem and again, those moving into risk arrangements. And then lastly, a lot of employers anticipating the Cadillac tax are changing their benefit structure so they are moving people on to exchanges, they are becoming more aggressive about moving to narrow network products and I think there is enough visibility on that activity now for providers to see that their profitability and mix is going to change pretty radically in the next several years. So I would say all of those factors are pretty significant.

You asked for one, but the Medicare part is very significant, the Cadillac tax is very significant and Medicaid as well. Then if you look at overall hospital pricing growth over the last couple of years, it is at its lowest. So while in some levels spending has gone up a little bit, pricing growth has been flat to negative and organizations are starting to feel that. There is some softening in volumes so there is enough signs out there that if I am a CEO of a large health system right now, I am recognizing that I need to make a move, I need to begin to get the infrastructure in place so I can create strategic option value in the future and that is really what we are seeing in the market right now.

Okay, that is great. Thank you.

Ryan Daniels, William Blair.

Good evening, guys. Thanks for taking the question. Frank, I want to continue with some high-level questions based on your comments and it really is falling off of the fact that your clients at the summit were telling you they are interested in MA and Medicaid and exchange lives. And I get the brand importance which they have and the ability to drive acceptance of narrow networks but conversely that is going into this with a lot more risk up front versus something like employee population health or a shared savings model. So do get the sense that the industry is willing to make that full jump in right off the bat to a plan and bear that financial risk, number one?

Number two, what do you think that does for your kind of business development pipeline or conversion out of the blueprint stage going forward?

I think it is a great question. I do think it is a continuum. So on the risk end of the continuum, we have a number of health systems that have been quite comfortable launching their own MA plans. They recognize there is going to be early volatility that is going to take some capital to get the business to scale. But they also feel in the structure of MA, they have control over a lot of things to manage the risk. So they are going to get full premium, they can control many elements of managing those patients. There is not complex attribution models and we have seen a number of providers and ones in our pipeline that are very interested in launching MA plans.

At the same time I think as others have referenced, CMS has tried to be creative about additional ways that organizations can begin to take risk but powering that risk. So you are getting some upside from performance, there might be a little downside but there is some protection so they are not jumping off of the high dive. We as I mentioned have four organizations that were accepted into Next Gen which is a new program from CMS. And again, that is a great catalyst for us to begin working with them on preparing for managing patients and getting the right infrastructure in place.

So I think if you think of those sort of that continuum, I think most providers are recognizing as you said that the government is moving pretty aggressively that they do have some advantages. Most of the decisions in MA are made locally, they are really thinking through is my doctor part of a network, do I know this organization and they tend to have very powerful brands.

And so I think what we will tend to see is most organizations starting to get some risk experience. A third, I think moving into upside and downside risk that is collared one third probably deciding to go all the way to launch their own MA plans given the growth in enrollment, and maybe a third being a little more conservative on the MA side.

Okay. Very helpful color. And then another one on the pipeline, as we think about kind of the blueprint stage I am curious if you are developing economies of learning or value-based contracting, things that could perhaps expedite the process to convert people out of that blueprint more rapidly or give you more scale without hiring more consulting teams or human capital to kind of allow that larger blueprint stage to turn into P&O more rapidly or at the same pace as that area grows?

Yes, I think there is a lot of elements there. I think one of the real promising things in the current pipeline is that we are actually talking with a number of organizations that actually have a number of lives today. So they have built their own provider owned plans, they did it sort of banded together a solution and now they really need that platform to serve much broader strategic ambitions and so they are needing the scale, the clinical program development, the technology and they are needing a lot of support to really engage a much broader network of physicians.

So the nice thing there is yes, there is some strategy and operational work up front but once you flip them over to P&O, you are not building up on the lives, you could have several hundred thousand lives that you are working with right away. So I think that is quite a positive.

Second, we just completed a piece of work for a very large health system on the West Coast and this is an organization that uses a lot of consulting resources in all aspects of their business. And the feedback I got from the CFO and COO was this is the best consulting engagement they have done in several years. And to your point, it is because we are on our 12th, 13th rep on the specific issue they were looking at and really understanding the financial impact of the strategy. And again the more of these we do, we begin to build on that experience to get more efficient in terms of the process and the insights we are providing. It will never be peopleless obviously because a lot of this is engaging, educating and really involving people in transformation and change management.

But I think to your point, yes, we can get people more rapidly through the process and then when we talked about payer delegated arrangements, you can imagine we are getting all lot of experience now working with payers in multiple markets, we are talking with payers at the national level. So rather than having to recut a deal from scratch when you are in a new market, we will have that experience we can apply, we can point to the fact we have these terms in other markets that we have a national deal. And again, that can be a very efficient way not only to get a great contract but also to build confidence with a client to move forward.

So I think all of those things helpful in getting us to scale faster and some efficiency in process. At the end of the day, you can't do it in one presentation. You have to bring people along and educate them so at some level we will always have process there but I do think we will have increased efficiency.

That is super helpful. And then last one, another follow up there. If you were seeing more of the blueprint with providers who are already bearing risk and need a bigger platform to continue to go forward and achieve the clinical and financial outcomes, does that give you a chance at a higher yield out of the pipeline because I assume a lot of times after the pipeline or blueprint is done they don't have the right network or risk tolerance to move forward. If you've already gotten through that hurdle, would you not expect your yield to actually increase?

That is our hope. We obviously have to convert those so we have to go from the strategic and operational planning phase to getting them to ultimately commit and then converting them into platform and operations. But to your point, I think the more of those we have in the pipeline and hopefully we are converting those at a relatively high standard, it does give us the opportunity to yield more from the number of blueprints that we are doing. We are working hard on that, we obviously have to close things out. That potential is there. We really won't know until we get through the next 60 to 90 days here but that is the hope.

Okay, congrats on all the momentum. Thank you.

Sandy Draper, SunTrust.

Thanks very much. Most of my questions have been asked and answered so maybe just a little bit similar to what Ryan was asking, Frank. When you think about people looking out there and competitively, when they are looking at and evaluating you are really to go into the transformation stage, are they really deciding okay, we're going to do this and so we are going to go with an Evolent in the transformation? Are they sort of bidding out multiple people? What is a competitive dynamic like in that early stage, are you trying to cobble together and say here is Evolent on one side and here are four companies we can put together to make an equivalent and let's think about? I am just curious what is going on competitively and if anybody new sort of seemed to be popping up more? Thanks.

One of the things I think we are heartened by is the high level of blueprint activity we have had over the last several months suggests that organizations are recognizing they can't do this on their own. So I feel really good about where we sit in the market. People looking at the complexity and needing to move quickly and wanting an integrated solution and so I think we feel about as good as we felt about the market from that perspective.

I think you are right that occasionally an organization may decide we are going to do an upfront consulting engagement. We might not be involved in that process. Occasionally they might decide look we're going to upgrade our technology because there are certain things we want to accomplish in an ACO pilot program. So they will still be looking at point solutions.

What we have tended to find is that when organizations decide that they really want to move comprehensively so they want to think about multiple populations, they want an integrated solution, they understand the importance of getting to scale, there are not many other alternatives out there. There are obviously payer organizations in the space who have similar breadth that we do but they are payers and they have had contentious relationships with providers traditionally that make it sometimes difficult to really be the intel inside for those organizations.

And so I think what is interesting is a lot of organizations that a year ago said look we're really going to do this on our own and to your point cobble together a solution have realized pretty quickly that it is extraordinarily difficult to do. And you don't get the benefits of one platform, a lot of the integration between clinical and financial and a lot of the functions like RAF and clinical engagement with the physicians that are really ultimately going to give a benefit.

So we will clearly have some organizations that make the decision to try to do it on their own. When we were launching the business we looked at the complexity of trying to do that and felt boy, there is very few organizations that are going to have the scale and capability to do that well particularly in a world where they are taking a lot of risk.

So again, we feel pretty uniquely positioned and in a lot of the situations in our pipeline, there really is not a lot of direct competition in terms of what we are doing and that is for people who are looking for one platform, transformational in nature or sitting again as I said, in a pretty unique position.

Great. Thanks very much. That is really helpful, Frank.

David Larsen, Leerink.

(inaudible - microphone inaccessible)

David, it is hard for us to hear you. I don't know if you are asking a question but difficult for us to hear you.

I am sorry. Can you hear me now? Can you give a little more color on the 123,000 lives that were added to the platform sequentially, were a lot of those health plan lives or were they lives on the provider side that were -- those providers were accepting more actuarial risk, any more color around those would be great.

In general, the majority of those would be payer delegated or payer value alliance lives sequentially just that is what tends to be the majority coming in through the course of the year. So Jamie had ask a question about the tick up in PMPM, I think that is just as I say a math issue more than a trend issue but the majority will be payer value alliance lives coming on in the quarter.

Okay. And then with all of the incremental blueprint engagements that you have been signing this past quarter, can you talk a little bit about the nature of those? Are those largely health plan oriented engagements or are they also hospital systems looking to potentially accept actuarial risk or are they more focused on not necessarily the risk but more value-based care types of programs? Thanks.

I would say it is a mix. As I mentioned, we have seen an uptick in interest in full provider on health plan launches. So I would say a number of them involve organizations that are really interested in doing health plan launches and they want to eventually have multiple populations on those platforms.

Also we have a few organizations that have a very large number of lives already and are looking for ways to more efficiently manage those to improve financial and clinical performance so again, those would be really serving existing provider owned health plans rather than new ones.

And then lastly, we have a number of organizations and blueprints that are looking at some of the new government programs like Next Gen and saying we got accepted, we now have to deliver and we need assistance in doing that. So they might be starting with Next Gen and possibly their own employees in terms of wanting to begin managing those two populations and then maybe holding back in some other areas.

But it is a really nice mix, some very large opportunities but again if we can convert would be just fabulous long-term arrangements for us. And I would say in general, a lot of organizations realizing that if they need to control their own destiny if they can't depend on the market coming to them, if they can't depend necessarily on payers offering attractive delegated deals, they really have to begin taking action, moving forward, getting experience and creating strategic option value if they are going to be prepared for a lot of the changes they anticipate in the next few years.

So if you go back two years ago, I would say we are really working with the innovators who were seeing ahead of the market. Now I would say most health system CEOs would absolutely acknowledge this change financially is coming and we need to get going and therefore they are moving more up the risk continuum than they might have a year or two ago.

And I'm just curious about (technical difficulty) some of the large commercial payers this past quarter. Can you give a little more color around what the large commercial plans were discussing and what Evolent in particular can do for the hospital systems to meet sort of those plans? And is my understanding that hospitals that maybe don't necessarily want to take actuarial risk there is still a lot of value-based care arrangements that they are going to be engaged in no matter what and I imagine that (inaudible) Evolent can serve them well. Is that correct?

Yes, I missed the first part of your question in terms of what you said they were trying to accomplish but I will start by answering the end of your question and then you can ask what you said at the front end.

There is obviously an opportunity for health systems for physician groups to participate in all sorts of different risk arrangements and there is many out there today. Some are very light shared savings arrangements where frankly very little is being delegated to the provider. There is quality metrics and some cost metrics and you get a bonus. There are some that are more extensive in terms of the bonuses available, some that involve downside risk.

What I would say is we have done a lot of analysis, our actuarial teams, our consulting teams on which arrangements are going to actually lead to successful financial platforms for our clients. And what we tend to see is shared savings, small ACO pilots that don't offer a high share of the savings and offer 20% of the savings to providers, simply don't work financially. Providers aren't getting great experience, they are not getting delegated in a lot of the functions, they lose more in downstream utilization than they get in terms of the bonuses. And so we have really counseled them to stay away from those types of arrangements.

There is a lot more value to a full risk life and so for those that feel ready for the risk that have really engaged their physician that have electronic clinical records, they can leverage the identified platform, there really is an ability for them to capture much more favorable economics if they were to move up the risk continuum. And I think to your point, some are going to sit not wanting to go that far but we would recommend that they at least get into situations where they can capture 50% plus of the savings that they are generating given how difficult that has been for traditional payers to do it on the clinical line.

So we do a lot of that analysis. We really help them with the strategic choices. We are not trying to overly push them in risk but to get the right mix of risk and economic upside so they can build viable businesses long-term.

Looks great. Thanks very much. Appreciate it.

At this time we have no further questions. This will conclude our question-and-answer session and today's conference call. I would like to thank management for their time today and we thank you all for attending today's presentation. At this time you may disconnect your times. Thank you. Take care and have a great day everyone.