Evolent Health Inc (EVH) 2016 Q1 法說會逐字稿

Welcome to Evolent Health's earnings conference call for the quarter ended March 31, 2016. 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 first-quarter news release.

As a reminder, the financial statements of Evolent Health, Inc. for the three months ended March 31, 2015 do not reflect a complete view of the operational results for those periods due to the reorganization completed in connection with our initial public offering in June 2015.

Prior to the reorganization, Evolent Health, Inc. had no operations. 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 January 1, 2015.

The adjusted results include the operations of Evolent Health LLC for the period from January 1, 2015 through March 31, 2015, as well as certain other adjustments. Reconciliations of adjusted results to GAAP results are available in the press release and the 8-K we filed. At this time, I will turn the conference 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 will open with a summary of our performance for the quarter covering our financial results and an overview of what we are seeing in the market. Nicky will then take us through a more detailed review of the financials, and I will close with some additional thoughts on the quarter and an update on our development priorities for 2016. As always, we will be happy to take questions at the end of the call.

From a financial perspective, our total adjusted revenue for the quarter ended March 31, 2016 increased 33.7% to $49.5 million compared to adjusted revenue of $37 million for the quarter ended March 31, 2015. Adjusted EBITDA for the quarter ended March 31, 2016 was negative $6.6 million compared to adjusted EBITDA of negative $8.8 million for the quarter ended March 31, 2015. We now have more than 1.2 million total lives on the platform as of March 31, 2016, up 160% year-over-year.

All in all, we are pleased with our results for the quarter as we've had strong operational and financial performance and continue to make significant strides in solidifying our position as a leader in supporting the provider movement to value-based care.

In terms of the overall market environment, we are continuing to see increasing pressure from healthcare purchasers who are looking for higher value, lower cost alternatives. Whereas the market momentum at the tail end of last year was driven by aggressive activity from CMS and Medicare, this year, we are also seeing a number of innovative employers pushing for higher value narrow network offerings with providers.

In several markets, we are working with providers to develop innovative offerings for employers that are built around a high-performance physician network, innovative wellness and clinical outreach programs, as well as leveraging new modalities to enhance convenience and access. The push for greater value alternatives across the governmental and commercial payor landscape is a wake-up call for providers that risk losing share in the most attractive market segments from a growth and profitability perspective.

In applying that market lens to Evolent, we are continuing to see consistent growth from our existing customer base that continues to add lives and services to their value-based portfolio, as well as the addition of new long-term partners to the Evolent network. To that end, our customers from a year ago have added over 260,000 lives across the last 12 months, which creates scale advantages for both our partners, as well as Evolent's shared infrastructure and technology.

In the first quarter of 2016 alone, we added over 50,000 lives in two markets through expansion into the Medicare Shared Savings Program and an additional 417,000 lives in Medicaid as of April 1.

Our latest new addition to the platform, Passport Health, is off to a strong start with early implementation going extremely well and with some exciting growth opportunities across the state moving forward as anticipated.

The other leg to our growth is adding new partners to our platform. As we've talked about for the past few quarters, our blueprint activity remains strong and our pipeline is robust. On that note, we are delighted to announce that we've signed a new provider system into our customer network, the Georgia Physicians for Accountable Care, also known as GPAC, with a presence across the state of Georgia. GPAC is an ACO with over 600 physicians across primary care and specialist groups, whose vision is to fundamentally change how healthcare is delivered through more proactive management of at-risk patient populations.

Through our partnership, GPAC physicians will be able to leverage our clinical and financial expertise, as well as the Identifi technology platform to provide the ACO with the tools it needs to understand the health and clinical opportunity areas for 70,000 patients currently under value-based arrangements.

Given GPAC's reach across more than 100 counties in Georgia, a patient panel representing well over 650,000 lives and a strong commitment of the physician owners, we see this as a significant long-term growth opportunity across the state as additional lives move to risk-based contracts.

Nationwide, we are also excited about opening up a direct-to-physician channel in markets where independent physician associations and large physician groups are pursuing risk-based arrangements and need support in navigating the clinical and administrative complexity that is critical for financial success.

Ultimately, it is our consistent track record in engaging physicians in a new model of care and managing to a clinical and financial outcome that differentiates Evolent in the marketplace and drives a very strong pipeline of near-term opportunities.

Between our current network of partners and our transformation engagements, we are actively supporting and engaging thousands of physicians in more effective approaches for proactively managing population health. In our experience, health systems need to address five core areas in concert to truly engage physicians and vastly improve performance.

Physician-led government structures that truly involve physicians in all aspects of clinical decision-making is the first. Technology that incorporates multiple sources of clinical and claims data and operates across the full episode of care being number two. The third, scalable clinical programs, physician support and care management infrastructure to give physicians the tools they need to be successful. High-performance network that aligns care delivery with the most effective settings for treatment; and lastly, data-driven analytics to drive focus and ongoing operational performance improvement.

You can see these elements come together on our work with several health systems across the country that have risk-based arrangements, but have struggled to get the physicians engaged and on board. Unlike traditional payors that tend to set medical policy, our approach has been to bring physicians to the table as decision-making thought leaders. The effort starts by forming an entity and governance structure around population health efforts, including physicians at the Board level and also as decision-makers around key clinical policy issues.

By putting physicians back in the center of policy and problem-solving and by deploying a combination of proprietary technology and clinical decision support, their level of engagement rises dramatically and previously intractable problems suddenly become solvable. In several cases where organizations had struggled to engage physicians around highly variable clinical outcomes, poor cost performance or lack of engagement around appropriate clinical coding, we've seen a dramatic improvement in performance, which builds confidence in the transformation process.

To drive network performance, we know that systems must ensure that care is delivered with the most effective providers in the most appropriate setting. That involves constructing a high-performance network, ensuring adequate geographic coverage and developing the mechanisms to direct referrals to high-performing physicians while also strengthening the level of teamwork between primary and specialty care. It requires deep expertise to do this well and that's why we've invested in tools for geo-access mapping, heavy analytical capabilities and analyzing outcomes performance and a physician report card system driven out of the Identifi platform to ensure effective decision-making.

High-powered analytics are essential in ensuring that critical decisions and patient routing are supported by accurate data and that course corrections are made in real-time to drive clinical and financial performance. Through the support of our national platform, we are able to quickly analyze what tactics are most effective across markets, continually enhancing our clinical performance analytics, network design algorithms and physician engagement methodologies.

By deploying solutions that help providers before, during and after the patient visit, we have the opportunity to also improve performance and productivity. For example, we've seen measurable improvements in metrics that matter such as 85% of patients with risk adjustment opportunities coming in to see their PCPs once a year and up to 90% of those patients being appropriately assessed at the time of the visit.

The ability to successfully engage entire networks in getting the upfront clinical assessment performed correctly makes a measurable difference in the treatment protocol in the financial performance of the network, not only in Medicare and Medicaid, but increasingly in commercial value-based payment arrangements.

Lastly, to make all of this happen across a disparate network of physicians and facilities, the Identifi platform pulls data from multiple clinical and financial sources, embeds decision support logic and pushes directly into workflow to ensure that all the relevant players from the finance and actuarial teams to physicians and clinicians have the right information embedded in workflow across the episode of care. The platform serves as a valuable tool to set up the physician organization for success and to integrate clinical and financial performance across all populations.

You can see the importance of engaging and enhancing physician performance when you apply it through the lens of the current marketplace. CMS continues to champion its goal of linking 50% of payments to performance-based models by 2018, recently releasing policy updates that aim to catalyze transformation and quality care delivery for both Medicare and Medicaid. CMS recently proposed a rule to put macro legislation into action, which carves two paths to incent physicians based on quality outcomes and cost measures.

Alternative payment models like some ACOs and merit-based incentive payment systems, called MIPS, providers will need to begin actively managing care as early as 2017, just a short eight months from now, if they want to be eligible for value-based payments in these new models.

As health systems and physician organizations look for support as the market increasingly moves to a pay performance system, Evolent's platform and demonstrable results position us as a truly differentiated partner in helping organizations reach their clinical and financial goals.

Overall, we are very pleased with our progress this past quarter and continue to see consistent operational performance across clients and a complex array of value-based contracts and patient populations. Our vision of an integrated and scalable platform is coming to life as we are realizing expected improvements in efficiency and effectiveness across all aspects of our operations.

Moreover, the macro market drivers continue to impact providers' needs for broad-based support, and as a result, we've added a number of compelling opportunities to the pipeline already this year. With that, let me now turn things over to Nicky to review our financial performance in more detail. I will then finish with additional perspective on our pipeline, product development and organizational updates.

Thanks, Frank. Today, I will cover our first-quarter financials and our outlook for Q2 and the remainder of 2016. We are off to a strong start in 2016 led by the ongoing growth in the number of lives in our platform and continued momentum in leveraging the investments we've made to capitalize on the long-term opportunities we see ahead.

Overall, first-quarter results exceeded our expectations with respect to our adjusted results. Adjusted revenue increased 33.7% to $49.5 million, up from $37 million in the same period of the prior year. Adjusted EBITDA for the quarter was negative $6.6 million, up from negative $8.8 million last year. For the quarter just ended, adjusted loss available for common shareholders was negative $9.7 million, or negative $0.16 per share. These compared to adjusted loss available for common shareholders of negative $11.6 million or negative $0.43 per share in the same period of the prior year.

The reconciliation of our GAAP results to adjusted results are available in the press release and the 8-K we filed today. The primary differences between GAAP and our adjusted results for the quarter are as follows -- $0.1 million in revenue adjustments to remove the results of purchase accounting; $4.4 million in stock-based compensation expense; $0.1 million in transaction-related expenses; and $1 million in adjustments to remove the results of a tax benefit tied to purchase accounting.

In addition, this quarter, we incurred an impairment to goodwill of $160.6 million. Evolent Health, Inc. was established at a time of the IPO in June of last year and our goodwill reflects our stock price at that time. As we have experienced a sustained decline in our share price, this has impaired the carrying value of our goodwill based on commonly accepted valuation methodology. The impairment is non-cash and has been excluded for purpose of calculating our adjusted results.

As a reminder, we derive our revenue from two sources -- transformation and platform and operations services. For the quarter just ended, adjusted transformation revenue accounted for $8.2 million, or 16.6% of our total adjusted revenue. This represents a decrease of $2.2 million compared to the $10.4 million of adjusted transformation revenue during the same quarter last year. Our transformation revenue can fluctuate from quarter to quarter based on the timing of when contracts are executed with new and existing partners, the scope of delivery and the timing of work being performed.

For the quarter just ended, adjusted platform and operations revenue accounted for $41.3 million, or 83.4% of our total adjusted revenue, representing an increase of $14.7 million, or 55%, from $26.7 million in adjusted platform and operations revenue in the same period of 2015. This increase was primarily driven by a 160.4% increase in the number of lives on our platform from 479,000 as of March 31, 2015 to 1.2 million as of March 31, 2016, resulting from our increased partner count, including the onboarding of Passport, as well as growth in our existing markets.

Sequentially, the number of lives on our platform increased by approximately 530,000 from the fourth quarter of last year, our strongest net add quarter ever. Our average PMPM for the quarter was $14.03 compared to $19.50 in the same period of the prior year. We ended the quarter with 12 P&O partners and added one additional partner after the close of the quarter bringing the current count to 13.

For the quarter just ended, adjusted cost of revenue increased to $28.2 million, or 56.8% of adjusted revenue, compared to $26 million or 70.2% of adjusted revenue in the same quarter of the prior year. The increase in total expense year-over-year is primarily related to additional personnel costs and third-party support services. The decrease in adjusted cost of revenues as a percent of adjusted revenue illustrates the scale we are driving in the business.

Adjusted SG&A expenses increased to $28 million, or 56.5% of adjusted revenue in the quarter ending March 31, 2016 compared to $19.9 million, or 53.7% of adjusted revenue in the same quarter of the prior year. The additions we've made to SG&A have been focused on the areas we expect will ultimately drive long-term growth, including business development and marketing and our Identifi platform.

On a percentage basis, adjusted SG&A grew 40.9% versus the first quarter of the last year. We expect total adjusted SG&A expenses to decrease as a percent of total adjusted revenue over time. Combined, our total adjusted cost of revenue and adjusted SG&A expenses as a percent of total adjusted revenue declined to 113.4% in the first quarter of 2016 compared to 123.9% in the same quarter of the prior year.

Adjusted depreciation and amortization expense in the quarter was $3.4 million, or 6.8% of adjusted revenue compared to $1.5 million, or 4% 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 re-org. We expect adjusted depreciation and amortization expense to increase in future periods as additional software assets are placed in service.

As of May 10, 2016, there were 42.6 million shares of our Class A common stock outstanding and 17.5 million of our Class B common stock outstanding. The balance sheet remains well-positioned with $165.3 million of combined cash, cash equivalents and investments as of March 31, 2016.

Looking at cash flow, under GAAP, cash used in operations was $18.4 million for the quarter ended March 31, 2016. Cash used in operations is typically highest in Q1 as it includes our annual bonus payments. Cash used in investing activities was $16.1 million. In Q1, in keeping with our stated goal of insourcing services we currently provide through third parties, we acquired contracts from Vestica Healthcare LLC to provide services to MedStar's Medicaid population. The acquisition closed on March 1 and is not material to our financial results. We had no material financing activities during the quarter.

Finally, with respect to 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 second quarter, we are forecasting adjusted revenue to be in the range of approximately $51 million to $52 million and adjusted EBITDA to be in the range of approximately negative $7 million to negative $6 million. We are reaffirming our full-year guidance with adjusted revenue in the range of approximately $212 million to $220 million and adjusted EBITDA in the range of approximately negative $28 million to negative $24 million. Based on our performance in the first quarter and our current guidance for the second quarter, we expect our full-year adjusted results to be at the higher end of the range for each of our key performance metrics.

In closing, we are encouraged by the strength of our first-quarter results and we are positioned for continued operating leverage over the coming quarters. This concludes the financial summary, and I will now turn things back over to Frank.

Thanks, Nicky. I want to close with a few updates on our pipeline, our product development focus and our organization overall. With the macro factors that I discussed earlier, we are seeing strong inbound interest across four primary areas. The first is organizations that are committed long term to value and are interested in launching their own branded health plans. Second are organizations who want to gain more experience in risk and are evaluating the viability of models like next-generation ACO and MSSP tracks in the wake of CMS policy announcement. Third are providers who see a significant opportunity in Medicaid from both a financial and mission perspective and need help in working across a broader network to catalyze opportunity. And finally, we are seeing direct outreach from providers looking to respond to innovative employers who are asking for a different approach to care delivery anchored in a population health philosophy.

We continue to organize our capabilities around these discrete areas in order to build efficiency, scale and to drive results. That's the benefit of developing a broad integrated platform. As we amass more and more clinical and financial data, we are able to analyze, adapt and deploy what's working so we can drive improved outcomes with greater speed and build confidence in the overall growth strategy.

On the product development front, one area I thought I would highlight is our recent focus on specialty pharmacy. Specialty drug costs are a significant driver of increasing costs in the system today accounting for nearly one-third of all drug spend and 2.5 times the level of price increase versus traditional drugs. Historically, pharmacy benefit management has tended to focus on specialty drugs that are covered as part of the prescription drug benefit of a health plan.

However, we know that about half of specialty drugs are claimed under the medical benefit of the health plan, which greatly impacts the ability to leverage a truly holistic view of patient health to effectively manage and coordinate care. Our pharmacy benefits management solution makes it possible for our customers to leverage the full spectrum of specialty drug information in a tightly integrated and coordinated manner, which helps providers see a more complete view of a patient's health profile.

In the last year alone, one of our customers was facing potential variation in cost per patient for three specialty drugs from $10,000 to $600,000 in total medical spend. Our specialty PBM solution aims to provide greater transparency and clinical education to understand precisely which drug should be used when and working to eliminate unexplainable pricing variation.

Due to the rising age of the US population at large and other key indicators, specialty drug utilization is expected to grow 15% to 25% in just a couple of years. It's critical that leading health systems put solutions in place to manage total medical effectiveness with a focus on specialty pharmacy.

Independent of the high unit cost of drugs as controlled by the pharmaceutical industry, we've identified at least five drivers of the health plan specialty cost issue that can be positively impacted by our PBM solution. We are excited about this opportunity to help our customers make care safer and more effective for millions of people through innovative specialty pharmacy benefits management programs. Pharmacy management is a perfect example of one area across a broad spectrum of clinical management that requires specialized and deep expertise, which most provider organizations do not have in-house.

Now looking inward to our organization, we believe in a continued focus on talent development and remain committed to driving performance, scale and efficiency. Mirroring the same recommendations we provide to our customers, we benchmark our performance and we look at what's working well in areas where performance is strong so we can spread those practices across departments and regions. Our goal is always to create an environment that retains and develops top talent in the industry through a focus on career growth and energizing culture.

Last year, we launched a voluntary learning series for people that are early in their management careers and I am pleased to see that over a quarter of the entire firm has participated in these self-led development opportunities, which has inspired us to pursue several learning and development events for employees at all levels this year. It's uplifting to work with such proactive, dedicated and mission-driven talent that is truly committed to transforming our healthcare system nationwide.

In closing, we are pleased with our results for the first quarter. We continue to be excited to be at the forefront of a massive transformation occurring in the healthcare marketplace and remain focused on meeting our strategic and financial objectives for 2016. We anticipate seeing many of you on the road in the coming weeks and are also looking forward to our Investor and Analyst Day, which we're hosting at our Arlington, Virginia office on May 25. Thank you again for participating in tonight's call, and now we will be happy to take your questions.

Thank you. (Operator Instructions). Robert Jones, Goldman Sachs.

Great. Thanks for the question, guys. Congratulations, first off, on the Georgia Physicians ACO announcement. I believe this is the first physician-led organization you guys have signed up, so I guess is that right and then should we think about this type of organization as you guys broadening out the type of clients that you are working with? And I guess just along those lines, maybe you could help us think about that ACO opportunity for Evolent.

Sure. Good question. If you think about our work historically, in almost every situation and market that we are working in, we are working quite collaboratively with physician organizations; in some cases with employed physicians, sometimes with independent IPAs, and so it's very consistent with the work we've done historically. However, you are correct; it's the first time we've had a direct contractual relationship with a physician organization.

So I don't see it as a shift in strategy. I think you are right that it does represent an opportunity for us in markets where the physicians are organized in a decent sized group and are committed to risk and ultimately need support for the types of populations that they are going after. So I don't think you'd see us working with a small physician group, but there are obviously several organizations around the country that have hundreds of physicians organized into a network and where I think our service offering is quite applicable.

And this is an exciting opportunity for us. It's a great physician organization, very well regarded across the state of Georgia. Already have about 70,000 lives that they are managing under value-based arrangements today and an ability to expand that over time. So I do think it's something we can build on and definitely will enhance our approach from a business development perspective.

Got it. Then, Frank, if I could just follow up, I was interested in your comments around the PBM offering related specifically to the specialty spend on the medical side. Without getting, I guess, too far into the actual offering or the approach, I'm just curious, because this is a major focus for managed care companies, obviously. As well, what is it that the offering or that Evolent brings to the table that the current managed care companies that are managing this medical expense within specialty can't currently do?

Yes, I think one of the most important things in managing this area is really engaging the physicians, and that takes a process of involving them and understanding what are the alternatives in a particular clinical category. What are the costs involved? What do the clinical outcomes suggest in terms of the use of this drug and the ultimate benefit the patient is going to get from an outcomes perspective.

So one is making sure that that education process happens and the physicians have the context around the drug, its impact and not only on the clinical side, but also on the cost side as well. I think there is a role obviously for us to be active when you think about delegating UM and having it being driven by the providers with the expertise we bring from our pharmacy team. So obviously, if we are more engaged in that process and more engaged with the docs; we are doing disease modeling; we are monitoring patients; we are providing alerts and education to providers in a much more integrated way. That has a huge benefit. It is definitely an area of increased costs.

I think, traditionally, no fault of the payors, but it is definitely viewed as punitive and you can do this and you can't do that versus having providers engaged on board and then having a set of resources that they trust that are really helping them to make better decisions where the cost and the clinical value is taken into consideration in managing the patient.

Got it. And just to clarify, Frank, is this a separate offering that's currently being sold, or is this just part of the PBM offering?

It's part of our PBM offering. Now, at times, there are certain functions that we start out with in working with a client and sometimes we will add on additional functions, so there may be situations where we are working with them in specific areas, but we are actually expanding what we are doing and including specialty in some of the UM delegation, but it is part of our broad offering in PBM.

Got it. I will stop there. Thanks so much.

Ryan Daniels, William Blair.

Thanks for taking the questions. Frank, one for you. Just curious if you could comment on some of the momentum you may be seeing around the market, either inside or outside of your client base around the next-gen ECO program as those applications come up for due date shortly?

Yes, I think as we've talked about previously, we view this as one of, if not the best payor deal in the country in terms of the terms, both upside and downside, the level of data sharing, the ability for providers to execute and do well. We've obviously spent a lot of time educating our current client base, as well as new. We have a client who is -- a few that are pursuing both next-gen and MSSP currently, so we have some early experience.

And if you look from a business development perspective, we have several provider systems that are putting in the initial application. There's obviously a few rounds to go through and they need to get approved, but I believe it'll be a significant opportunity and we are hopeful that several organizations will get approved as we head into the fall and again, a great place to start in terms of getting experience where there is significant downside risk and I think that's why organizations are interested in having the support of Evolent, and then obviously building on that into other populations over time. But it's been an exciting development and pushing the market, and as you asked, several organizations now evaluating participation.

Okay. Appreciate that color. And then Nicky mentioned this in his prepared comments. This was clearly the biggest net new lives additions in the history of the Company. Can you talk a little bit about that process in more detail? I guess any particular insights on how the platform is scaling, how your shared services are scaling in such a short period and does that give you maybe more comfort to take on even more business going forward, or are you still balancing the new starts with driving margin expansion?

Yes, I'd say the nice thing about the additional lives is it does highlight our sources of growth. Some of those lives are coming from existing customers, so we are expanding off a base that we've built. It's obviously highly scalable both for the customer and for us, and then a big chunk of the lives coming from a new relationship where we do have to be prepared to bring that client on and do it relatively rapidly. So we are successfully managing the lives under risk arrangements.

I think the great news is all the investment we've made across the last several years in building the national platform model and working across several markets, working out a lot of the kinks, the historical relationship and benefit that we had in having UPMC as a partner, all of those things have come together to create a very scalable platform, and I would say if you look at our metrics operationally, how fast are we getting people live, how many of the data connection points do we already have experience with, the mix of clinical programs that are built out that the client really needs from the outset, it feels like we are in a very strong position to scale and have capacity and I think you see that in just how smoothly these recent implementations have gone.

Okay, perfect. And then one final question and I will hop off. Just with the GPAC agreement, given that that's in the same market as Piedmont WellStar, which is kind of winding down as we well know over the next few years, does that give you an opportunity to better arbitrage shifting local market talent there, maybe protect the margins a little bit more than you would've expected six months ago?

As you suggested, PW is winding down across this year. GPAC doesn't have a major presence really in the Atlanta market, although they do in over 100 counties and we have some presence there, but smaller. So I don't see a lot of geographical overlap. That said, I think we do everything we can where we have a local market presence and can leverage that either in another region, and surely we will look to take advantage of those opportunities.

I don't think it would have a major impact here because we've been well-ahead of the curve in how we've managed the PW relationship. But you should definitely think that across the organization where we can use resources and support multiple markets and do it in an efficient way, it has huge benefits for the client because you have experienced staff that's scalable and leverageable, but it also, as you suggested, has benefits from a cost perspective as well.

Okay. Perfect. Thanks for the color and congrats on a strong start to the year.

Jamie Stockton, Wells Fargo.

Good evening. Thanks for taking my questions. I guess maybe the first one, just to circle back on the direct-to-physician market opportunity that you talked about, when you think about the number of lives that you hope to ultimately address that are at risk, can you ballpark a percentage of those lives that you think might come from relationships like Georgia Physicians where it's really a physician organization, not necessarily a health system that you are working with?

I think that's a little tough to estimate. I think if you look at our current pipeline, because of our lineage and historical focus, the bulk of those are focused on direct health system relationships. Now, as we suggested, in many of those relationships, IPAs, large physician organizations are part of the delivery mechanism and we are integrating those two things together.

The same thing goes on the physician side, we'd be working very collaboratively with hospital partners ultimately to deliver across the episode of care. I think if you look across the country, there are not as many groups around the country that are sophisticated, aggressively going after risk or very large in size. And so if you were asking me to estimate, you could see again that portion of our business growing. I think it could be a meaningful segment, but really our focus, just given that hospitals have acquired 60% of primary care physicians and close to 15% to 20% of specialists, we believe in most markets that's the best organizing principle. And again, the way our platform has really been oriented, and as you suggested again, a good new channel for us, but a little early to estimate exactly what percentage would come from there.

Okay. That's great. Maybe another somewhat big picture question. It seems like I have read and heard about health systems talking about the care management function lately and how scalable it is as they look to increase the number of lives that they have in risk-based contracts. Could you give us some sense for, over the history of Evolent, how you feel like the way you are bringing care management into these health systems has become maybe more scalable and not as labor-intensive, or can you give us some examples of things that you guys are working on to make the care management function as scalable as possible?

Sure. It sounds like you've been reading Care Manager Weekly, which I know is quite an exciting publication. Just kidding. In all honesty, I think what we have seen traditionally is there are many situations where care managers are deployed, sometimes by payors, sometimes by the health system, and yet they are not integrated with the physician group, they are not using technology that embeds into decision support and into their workflow. They are focused on the wrong clinical areas. They don't have the right care pathway, or the tools to communicate effectively with other providers across the continuum of care.

And then there's a broad cultural issue of is the whole team on board and is the care manager able to be effective. And so I think we've tried to attack that problem in a very holistic way. I think the investment in the Identifi Platform has been critical because, in one place, you've embedded all the data that you need to stratify the risk of the patient. You've been able to embed the clinical program. You are able to drive that directly into workflow. You are able to organize the tasks of the care manager in a given day on the most productive areas, and you are able to monitor what's our progress. Are we getting to all our high-priority patients?

And then there's all the soft things, which are important, but the upfront investment and working with the physician organization to get the system right and to make sure that the care manager is not sitting by themselves in the office, but is really part of the integrated care team.

So I think if you look at the investments in the technology platform, in building clinical knowledge, in driving into workflow and decision support and then all the other elements we bring to get physicians on board and to get the care team working together, that's ultimately what drives performance, and frankly, we've seen situations where there is an existing care management team in place, didn't have those tools and then once we put the tools in place and really engaged the physicians dramatic improvements in performance, highly scalable. We are constantly monitoring the impact of everything that we are doing and feeding that back into make sure that time is spent on the most important tasks. So I think it is a lot of the investment and we are already seeing the returns and we going to see more and more returns as we continue to analyze the clinical and financial data.

Okay. That's great. Thank you.

Richard Close, Canaccord Genuity.

Thank you for taking the questions. Congratulations. Obviously, pleasantly surprised on the lives on the platform. And I was wondering if you could just break down the additions in the quarter between maybe existing customers and then I believe Passport. And then I think Nicky mentioned you have 12 P&O at the end of the quarter and one coming on here in April. So just trying to think about how the lives on the platform are going to ramp throughout the rest of the year.

Thanks, Richard. Yes, listen, it was obviously a very strong quarter in terms of adds north of 0.5 million. When I laid out that Passport was in the region of 60% of that number. Of the rest of the number then it's a good mix of existing clients. We had two new clients come on the platform as well. So north of 60% in the aggregate will be coming from new clients, but very solid performance. Notably, we've talked about MedStar in particular, very strong performance there and across the border, existing clients, so a nice mix of new and existing in the quarter.

I would say as we look over the course of the year, we've talked about lives in the 1.2 million to 1.4 million range. We are obviously north of 1.2 million today and as we look at each individual client, there are opportunities over the course of the year to continue to add lives, so it'll be fairly well-distributed over the rest of the year. So nicely distributed across the year.

And then with the addition of this Georgia Physician Group, is there anything different in terms of how we should think about that ramping, or is it pretty much similar as compared to a health system in terms of ramp?

It will be very similar. 2016, in the near term, we will be focusing on more of the implementation activities. The lives will come on the platform at a later date, but it will come on in a similar fashion to a traditional customer.

Another question I have is a couple companies have talked about larger deals out there, maybe not direct comps to you guys, but larger deals out there taking longer, sales process taking longer, implementations taking longer, and I wonder if you guys can talk a little bit about that? Are you still seeing similar timelines, or any change in the timelines over the last several quarters?

I would just say having been in the industry for a long time, when you do see budget pressure then that can slow sales cycles and in our case, the budget pressure actually drives the urgency and need for our service because it is implying that organizations really do need to start moving to value-based arrangements and they've got pressure on the fee-for-service side. So I think, in general, where we see some market pressure, that's going to be helpful to our business.

I think if you look at sales cycles, what is true, if you think about organizations signing on for a 5, 7, 10-year relationship, these are big deals. They represent the growth strategy for the entire health system. It's important to get them right, and so it takes time to put that process together and we want to make sure we invest that time up front so that expectations are clear so we know we can be successful over the long term. And if you look at cycle time today versus when we launched the Company, I would say it's very similar. It's not something you generally are going to do in 30 days. It takes several months and you are obviously working with the Board and the executive team and we are in a number of those discussions today. We've got to push them all the way through, but I wouldn't say we've seen any real changes in cycle time from either an implementation or a sales perspective.

And my final question for Nicky, talk a little bit about the gross margin and the trends as we go throughout this year. Should the first quarter be used as a proxy, or should we see improvement off of first quarter?

Richard, we talked about a 40% gross margin over the course of the year. Obviously, came in a little bit ahead of that here. I would say that the 40% -- in this zone is where we will be quarter-over-quarter this year. I think people talked about we had a very strong Q4 of last year and we talked about that a few year-end adjustments that were factored into that, but I would say low 40% is a good place to think about for the full year.

Okay, thank you.

Charles Rhyee, Cowen and Company.

Thanks for taking the question, guys. I wanted to ask about -- Frank, you talked a little bit about the next-generation ACO program as well. Was curious about your ability to participate in some of these other programs like the complete joint replacement, as well as PPCI, which I think is still a closed program. Just curious how you are positioned for that program when I think it's supposed to open up again I guess maybe at the end of this year, next year?

Yes, what I would say is our approach has been to put in place an integrated platform that can apply to all of your performance-based business. So that would include joint replacement, it would include bundles, it would include duals, it would include -- go down a full list. Occasionally there might be something that comes up in a particular state that we have to do some preparatory work on based on the state requirements, but the whole idea of making the upfront investment was so you could apply it flexibly and yet have the tools, the scale with which to execute so you are efficient from a provider investment perspective.

So I would say what we tend to do is look across the range of populations that we see coming, things like bundles, things like next-gen. We do make a decision about how much do we want to invest in specialization around that population based on market size, based on ability to execute, etc., and you might see us make more investments in something like next-gen than we might make in a very discreet program that we think doesn't have the scale to really justify a full investment. But that's really how we've been treating it, and I would say we are well-positioned to accommodate most of the performance-based population risk arrangements that you see that are out there.

Okay. Thank you for that. If I could follow up, you talked about the scalable nature, how you feel about the platform here. When you guys are deploying, just curious as to how much are you able to standardize though the way you deliver and the way you actually implement each client because it sounds like a lot of your organizations are different, and obviously with the GPAC, it's a physician organization? Does that change the way you deploy the solution?

Yes, so I think you are correct in suggesting healthcare continues to be a local business. Every strategy is different based on the local market dynamics. I think what we've found is there are a core set of processes and infrastructure elements that apply 95% to all of those situations.

So I think the solution that we've built when we look at our recent deployments, as I mentioned earlier, we can see that. One, we've already connected into the various physician EMRs that we need to pull data from, so we don't need to build those connection again. That, the clinical rule set, is largely built. Now surely we would give it to the providers to review. They can make adjustments. They can author their own rules, but generally they are accepting 90% of what we've put together and then they are doing some level of customization.

The physician network composition, generally you are going to have employee physicians. You're going to have an IPA that you are working with, and so we've seen most of it across the markets we are working in today and rarely come across something new. If we do come across something new, then we have to make a decision, is this something that we think is going to be applicable to 30, 40, 50 customers and therefore we want to make the investment, or is it a one-off that in some way we want the client to handle.

Medicaid, as we've mentioned, next-gen are examples of places where we have felt that specific content, specific capabilities deployed across the platform make a lot of sense and they are going to have a huge yield for clients. And so you will see us be selective in where we are investing, but the good news is I think we are seeing a lot of scalability. You have to have some amount of customization for provider organizations. It's just the way physicians and clinical enterprises are wired. But most of it ends up being relatively standardized and they are making some additions and subtractions and again the implementations become more straightforward at that point.

Great. Thank you. And Nicky, just to clarify, I think someone asked earlier about the cadence of lives coming on. Should we just think about the range that you've given and then is it really a January 1, July 1 kind of phenomenon, or should we think of the lives ramping up ratably over time?

It's more the latter, Charles. It's not as clean-cut as January 1, July 1. I would think about it more across the quarters as opposed to a point in time.

Okay. Great. Thanks a lot.

Steve Halper, FBR.

Could you just comment on the 417,000 Medicaid lives that you talked about April 1? I wasn't really clear what you were referring to.

So that's a combination of Passport, which is the Medicaid population in Kentucky and then we also took on a significant Medicaid population for an existing client at MedStar, so it's a combination of those two that makes up that number.

Okay. But that's included in the 1.2 million, it's not like something happened after March 31?

No, that's included in it.

I was saying like you are beginning at April 1 with these additions during the quarter?

Yes, I'm not 100% positive on April 1, but, yes, the 417,000 lives are included in the life count, the 1.2 million lives at quarter-end.

Okay. Thank you very much for the clarification.

David Larsen, Leerink Partners.

Congratulations on a good quarter. Nicky, the revenue came in higher than we were modeling. Were there any one-time benefits in the figure this quarter?

No, nothing like that in this quarter. So just across the board -- slight upticks across the board.

Okay. And then the PMPM figure declined a bit. Can you maybe talk about the nature of that, please?

Sure. I think this is in line with the longer-term trend we've talked about, which is we've been talking about this for a while in terms of the longer-term trajectory of the PMPM and so wasn't surprising to us to see it tick down from Q4 into Q1. I would say as we look across the course of the year, we will continue to see that progression, and we've talked about where we are going to see the -- low double digits is the point where we will flatten out on the PMPM. But, yes, this is very much in line with what we expected. It's what we've always talked about in terms of mix.

Okay. So the mix of the lives coming on the platform in the quarter caused that trend and it's totally in line with expectations. Okay, great.

And then can you talk a bit about value-based arrangements? So for this Georgia Physicians customer, I think you said there are 70,000 patients in value-based care arrangements. Can you use the Identifi Platform to enable providers to manage members in these value-based care contracts, or is it typically the value-based care and risk? Is there a market there for value-based types of arrangements only?

No, I would say -- value-based arrangements, by the way, we are using a loose term, can incorporate both upside and downside risk. Sometimes they are upside-only bonuses, which may be what you are referring to, but the Identifi Platform, if you think about it, a physician organization, a health system, regardless of the type of contract, some of their payment is based on quality metrics and their performance, as well as various cost metrics.

So in cases where there's lots of downside risk, obviously, the Identifi Platform can really help and the whole care model we've built and clinical knowledge base and making sure that you are managing across the episode of care and focusing your resources in the right areas, all the things that we talked about earlier. But the nice thing about it is it also applies to more basic contracts where you might have a set of quality bonuses involved, but you still need to do a lot of the same activities to drive the result and get the payment.

So the nice thing is, and again just to repeat it and why I use the word integrated a lot, is because you'll see a lot of organizations that have five different systems and 20 different care management activities going on across the organization. What we really believe is you want one system that can do your quality scores. It can manage major risk arrangements. It can help physicians and support them in getting their quality bonuses, and therefore it's incorporating your best clinical knowledge. It's scalable because you are able to use your care management resources across those activities in a very focused way and ultimately delivers better results.

So again, to answer, I think it can apply to all of them. For the Georgia Group, they obviously have contracts that have meaningful incentives attached. They also have a desire to enter new arrangements, and so our clinical knowledge combined with what is a fabulous aligned physician group and the Identifi tool we are hoping can deliver against those metrics and make a big difference from a financial perspective.

Okay. That's very helpful. So when Medicare says that they want 90% of their dollars tied to performance by 2018, any physician that is seeing patients covered by Medicare, the Identifi Platform could basically further their efforts. So the market for the Identifi Platform is really any doc that's seeing Medicare patients?

Yes, although, as we talked about earlier, we have not been -- this is a fairly integrated platform. It's a sizable investment. It's not something you would go sell to an individual physician office. I think the nice thing though is if you think about a health system that has hundreds of physicians, independents, employed physicians that they are trying to build deeper relationships with relative to the health system, if Identifi can help them with their basic quality scores and quality bonuses with things like MACRA, that's a very meaningful direction that they are going in terms of moving physicians to performance-based payments, it is a big part of the value proposition of Identifi and the broader Evolent platform. And it is a way for health systems to extend a lot of value to network physicians, whether those are independents or ones that are employed or in large organized groups. It also obviously could be applied to an IPA or a large physician group that has a reasonable amount of risk.

Great. Thanks very much. Congrats on a great quarter.

Mike Newshel, JPMorgan.

Thanks for fitting me in, guys. Quickly, can you just update us on your confidence level in hitting your original target of breakeven EBITDA by the end of next year and if there is an opportunity to pull that milestone earlier into the year? How soon might you actually have that visibility?

I will just start and Nicky can comment. Look, we are quite confident; we are quite committed to it as we have been from the outset. I think, as I mentioned earlier, we are seeing scalability come in our operations as we've grown our revenue base and customer base. We've had strong performance this year on both the top and bottom line. And we are quite optimistic about our ability to hit it, and as to whether we can pull it forward, we haven't made any statements about that at this point. You should know we are being very aggressive about driving efficiency within the organization and making sure that we feel very good about scalability. And as we get updates and see how we progress across the year, we will keep you informed. But right now we feel very comfortable with our original commitment.

Thank you very much.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Frank Williams for any closing comments.

I think that's a wrap on the call. We appreciate everyone participating and as I said, we look forward to seeing many of you across the coming weeks. Thanks again.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.