Q4 2019 Earnings Call
[music].
Welcome to course, please. Hold an operator will be with you shortly.
Welcome to Evolent Health earnings conference call for the quarter and year ended December 31st 2019. As a reminder, this conference call is being recorded your host for the call today as Mr., Frank Williams, Chief Executive Officer of Evolent Health. This call will be archived and available later this evening.
Chorus call what conference would you like?
Thank you. Your first name is please.
Thanks and your company?
And for the next week by the webcast on the company's website and the section entitled Investor Relations. Here is some important introductory information. This call contains forward looking statements under U.S. Federal Securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ material.
Thanks. I'll join you in the listening only mode. It is being recorded.
Welcome Center uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings for additional information on a company's results in Outlook. Please refer to its second-quarter News Press release issued earlier today, as a reminder reconciliations of non-gaap measures discussed during today's came to the most direct comparable gaap measures are available in the company's press release issued today and posted on the investor relations section of the company's website at a m e n t h e a l t h o m a s e c earlier today at this time. I will turn the call over to the company's chief executive officer. Mr. Frank Williams.
<unk> from historical experience or present expectations, a description of some of the risks and uncertainties can be found in the company's reports that are filed with the securities and Exchange Commission, including cautionary statements included in the current and periodic filings for additional information on the company's results and outlook. Please refer to it second quarter.
News press release issued earlier today.
As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most directly comparable GAAP measures are available and the company's press release issued today and posted on the Investor Relations section of the company's website at <unk> arc Dot E.V.A.O.L.E. and T.
H E L T H dot com again, that's I, our dot Evolent health Dot Com and 8-K filed by the company would the FCC earlier today.
Thank you and good evening. I'm Frank Williams Chief Executive Officer of evolent health and I'm joined by Seth Blackley our president and John Johnson our Chief Financial Officer. I'll open the car off this evening with a summary of our recent Financial results as well as an update on the market our current Pipeline and overall performance across the Evelyn Network all then handed to them to take us through a more detailed financial review of the fourth quarter and full-year 2019 results. I'll close with a summary of our strategic.
At this time I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.
Thank you and good evening.
Frank Williams, Chief Executive Officer, a bubble and help and I'm joined by yourself walkway, our president and John Johnson, Our Chief Financial Officer.
I'll open the call. This evening with a summary of our recent financial results as well as an update on the market our current pipeline and overall performance across the other ones out work.
Well, then handed to John to take us through a more detailed financial review fourth quarter and full year 2019 results.
I'll close with a summary of our strategic focus and primary sources of differentiation as we head into 2020 and as always we'll be happy to take questions at the end of the call.
In terms of our results for the quarter total adjusted revenue for the quarter ended December 31st 2019 increased 22.9% to 237.5 million from the comparable quarter of the prior year.
Adjusted EBITDA for the quarter ended December 31st 2019 was 8.2 million compared to 5.6 million for the quarter ended December 31st 2018.
Adjusted revenue increased 34.1% to 848.3 million for the year ended December 31st 2019.
Compared to 632.4 million for the year ended December 30, Onest 2018.
Adjusted EBITDA for the year ended December 31st 2019 was negative 11 million compared to 23.2 million for the prior year period.
As of December 30, Onest 2019, we had approximately 3.7 million total lives on the platform.
Overall, we're pleased to we met our key strategic objectives for the year you haven't we delivered strong operational and clinical performance for our partner organizations.
We also achieved our primary financial objectives, returning to strong topline growth margin expansion over the course of the year.
Overall, we come into 2020 with substantial strategic momentum and high visibility in the 20% plus organic growth in our service business with continued margin expansion anticipated across the year.
Before touching on 2019 financial performance and our 2020 outlook in more detail I'd like to provide an update on the macro market environment and how the continued push for value based payments and risk transfer is translating into pipeline opportunities across our key solution areas.
Overall, we continue to see significant spending pressure on federal and state budgets related to increased enrollment and cost trends and Medicare and Medicaid.
The trend estimates across the next several years are projected to be substantial well not necessarily translate into better outcomes for patients.
As we've observed in our ongoing meetings with CMS HHS and on Capitol Hill, There's strong bipartisan support for counteracting. This unsustainable health care spending and tackling key drivers such as out of control pharmacy cost an inpatient utilization.
For providers and payers alike. These market pressures are driving an increased focus on managing cost and quality effectively particularly for patients with chronic conditions.
On the Medicaid side in particular providers and payers are struggling to care for emerging complex patient populations facing substance abuse behavioral health and many other factors complicated further by social determinants of health factors.
Payment models oriented towards population health are critical and driving a more proactive and integrated care model that engages members at home in the community and with a whole person approach to health and wellbeing.
Managed care payers face similar challenges as barriers of risk in Medicare and Medicaid.
The particular needs of discrete populations, such as oncology and cardiology it'd be corn quite complex and require incredible duff than expertise given the number of specialties and conditions that impact outcomes and financial performance, a number of national and regional payers are carving out specific areas and delegating pain.
And clinical management to providers and expert partners that can more effectively manage both cost trend and quality of care.
All of this increase focus and effort towards payment reform and improvements in cost and quality harbor requires payers and providers to work collaboratively well. This sounds easy to do decades of Miss Trust, which has been built up around fee schedule disputes utilization care management rules and perceptions around an equitable district.
Additional profits have created massive friction in driving meaningful for this intensifying market need to drive improved performance in collaboration across the continuum of both the financing and delivery of health care actually served as the basis for everyone's formation in 2011.
We see our role as serving as a bridge between payer and provider with a strong focus on clinical data aligned reimbursement models at a level of transparency that fosters a trust space relationship with both providers and patients.
We believe we're unique in the market in our ability to play this role while offering an integrated platform tying together, our clinical and administrative capabilities and understanding of what both payers and providers need to be successful.
Given the prevalent issues in Medicare and Medicaid, including persistent cost pressure increased administrative and clinical complexity and the challenge organizations face and effectively engaging providers and patients evolent as honed its strategic focus around three solution offerings for payers and providers.
First our total cost of care management solution is focused on a provider driven clinically based population health approach that involves engaging positions and leveraging end up clinical data and highly sophisticated interventions to proactively manage patient populations and drive significantly improved quality and.
Lower costs.
Because of our substance of experience across populations in regions. We can support the full gamut of CMS as hcl programs as well as delegated risk arrangements between traditional payers and providers.
Second our specialty care management solution through new century health is focused on managing the cost and quality of cardiac and cancer care to specialties that account for about 25% of Medicare spending.
An important distinction here is that this is not a traditional utilization management model, which can be abrasive for providers.
Our comprehensive programs are based on an end up that ongoing review of clinical literature and incorporate evidenced based clinical pathway is a proprietary formulary financially align payment models and peer to peer engagement.
Lastly, our comprehensive health plan administrative services solution is uniquely positioned to help payers streamline operations and provide an outstanding service experience to members and participating providers. The simplification of the administrative side of health care is enabled by the high level of integration across clinical.
Administrative and operational functions in our core platform.
The breadth of these solutions has expanded our total addressable market to over $130 billion has successfully diversified our end markets to include physician organizations.
Those hospitals, and health systems, and regional and National payers.
These solutions are extremely relevant in the present market, regardless of the pace of the value movement, because both payer and provider organizations vantage large complex patient populations across lines of business and urgently need help and moving the needle in terms of cost service and quality.
National and regional payers alone manage over 150 million lives under some form of underwriting risk.
By serving as a bridge between providers and payers and providing an integrated set of technology enabled clinically driven solutions. We serve it has done a line partner that can drive consistent performance.
Everyone's unique position in a rapidly expanding market helped to drive overall revenue performance in 2019 as little as a strong set up for 2020 and beyond.
On the new business development side, we added southern new payer and provider partners in 2019.
The breadth of our new partner base across the three Solutionary as I outlined earlier is a testament to strong market demand and the robustness of our diversification strategy.
We also helped our new Hcl partners enter the revamped Medicare shared savings program pathways to success and are now managing total cost of care for more than 60000 lives in the program.
Surely the fact that we had two AC goes in the top five performing organizations nationally in 2018 help to attract tier one AC goes to join the Evolent network this past year.
In 2019, we also have the strongest cross sell performance in our history as many current partners increased the number of lives under risk arrangements and several expanded into new solution areas.
In particular, we saw very strong cross sell momentum with new century health.
The new centuries ability to drive meaningful improvements in oncology and cardiology costs of quality.
It becomes a fairly easy proposition to extend our current offering with several partners to include specialty care management.
Taken together, our new partner additions and cross sell performance gives us high visibility into a minimum of 20% organic revenue growth in our service business for 2020, which has tremendous progress off of the base of over 689 million in services revenue in 2019.
Overall this momentum is continuing in the early part of 2020 with a strong pipeline of new partner and same store growth opportunities driven by market demand and the differentiated solution strategy I referenced earlier.
On the new century health front, we're excited to announce a new partnership with the national payer organization that needed support in managing oncology cost and quality.
Given that oncology drug spending increased over 50% nationally across the last several years, it's not surprising that this area is getting a lot of attention from the national payer community. This particular payer sees the relationship with new century help as highly strategic and as initially deploying a light it so.
Oh version of the offering across five states out of the gates, New century health will focus initially a leveraging its evidenced based precision pathways and peer based collaboration model to focus on improving cost and quality overtime, we look forward to potentially expanding our service offering and geographic footprint with this partner.
In the future.
We're also excited to announce that new century has expanded its existing partnership with Humana centuries provided humana with comprehensive oncology management services in Medicare for some time and will now also provide clinical pathway review and provider engagement services in Medicaid in an initial pilot.
This expansion in Medicaid opens up the opportunity to be adds significant lives and more expansive performance based services as humana grows across time.
Well, our new partnership announcement and expansion of Humana, we'll have a nominal impact on 2020 revenues given the ramp across the year and SL model, both were exciting growth opportunities in 2021 and beyond.
In summary, we believe our strong recent pipeline activity is driven by two key factors.
First is our emphasis on driving demonstrably improvements in health outcomes particular in Medicare and Medicaid populations, where we continue to see significant market pressure to dramatically lower costs and improve quality.
Second is our ability to deliver an integrated suite of solutions that addresses a comprehensive set of pain points for payers and providers.
Our solutions focused on better management of total cost of care.
Greater simplification of health plan operations and administration.
Significant improvements in specialty care outcomes, particularly in oncology and cardiology.
Our ability to create differentiated value came to life across 2019, as we delivered strong results across our national network payer and provider partners.
In terms of our clinical solutions, we help make a considerable impact on patients and members on behalf of our partners engaging over 60000 patients in our clinical programs.
Not only did these interventions improve their quality of life, but it also lowered inpatient admissions reduced total cost of care and improved key quality of care indicators.
We believe that our population health driven approach, including our analytics clinical knowledge base and patient engagement capabilities is critical important to successfully bending the cost curve and improving community health.
With that end with our Medicare Hcl work as an example, we're proud that our next generation cohort of partners generated more than $100 million in gross savings across the 2017 in 2018 performance years.
Along with CMS is announcement last month two of our next generation FCO partners were ranked in the top five nationally for 2018 in terms of total savings.
We're obviously proud of the financial results and even more heartened to see our vision of serving as a bridge connecting payers and providers come to life to elevate population health across multiple regions nationally.
True Hall, our commercial health plan in New Mexico also reflects the impact that are provider focused clinically driven approach can have on member engagement.
Across this past year the plan demonstrated very strong ml our performance in the high Seventys and continues to grow through an expansion into the individual one of the business as little as the federal employee health benefit program.
Our ability to drive strong clinical results is based in large part on the rigor of our analytics and clinical program development.
In 2019, we became the first company in the nation to earn National Committee for quality assurance population health accreditation, which reflects our commitment to working with payers and providers to significantly improve care quality and the care experience in the same year. We also earned three year in seek.
The way accreditations for both utilization management in case management.
This offer substantial benefit for our partners as they are able to leverage nationally accredited programs to collaboratively improve care and service for their members.
Looking at specialty care management outcomes, you century consistently delivered 10% to 15% annual savings and oncology costs across its national network driving high levels of compliance to its precision pathways.
It's the level of rigor and these types of demonstrably results. They continue to drive strong interest from both national and regional payers.
Lastly, in Medicaid our experience with close to 2 million members across multiple regions as enhance the breadth and depth of our offer.
For example, we're leveraging experience in both urban largely rural environments to integrate social determinants of health data into our stratification process and develop strategies to address care access and issues related to housing transportation and nutrition to name a few.
We're also exploring and implementing multiple modalities to more effectively engaged members the substance abuse and complex behavioral health issues in order to elevate health outcomes and reduce downstream medical and social costs.
We've seen our comprehensive investment in clinical innovation come to life across the class here with our partner passport health plan in Kentucky, which is on solid operational and financial footing heading into 2020.
Across the last several quarters, we've worked closely with the past 14 to continue to drive strong operational performance as evidenced in part by 13, and a half point turnaround and operating margin from the first quarter to the second half of 2019.
As many of you are aware passport formally submitted its response to the Kentucky Medicaid RFP on February seven anticipates, an official decision from the Commonwealth in the spring timeframe for the new contract commencing on one 121.
In the meantime, we're continuing to focus on a number of important clinical and operational initiatives in the first half of this year, while also delivering an excellent service experience to providers and members.
Overall, we feel very well positioned strategically in today's healthcare environment. We're pleased is a year with a strong topline growth outlook.
We're seeing a growing pipeline across our major solution areas and consistent clinical results, which we believe will ultimately drive strong partner retention and long term margin expansion.
Got overview I'll turn it over to John to speak financial performance on the quarter and our outlook for the year.
Thanks, Frank and good evening, everyone today, I will cover our financial results for the fourth quarter of 2019, and we'll finish with an overview of our 2020 outlook overall, we're pleased with our progress against our financial goals in 2019, including our returned to strong topline growth greater efficiency in our cost structure.
And positive adjusted EBITDA profitability in the back half of the year.
We anticipate this improvement in both the top and bottom line in the second half of 2019 to continue into 2020, as we have high visibility into strong revenue growth as well as EBITDA expansion for the coming here.
Beginning with our consolidated fourth quarter results adjusted revenue increased 22.9% year over year to 237.5 million, mostly to the impact of new partner additions and cross sell.
Adjusted EBITDA grew to 8.2 million relative to 5.6 million in the same period of the prior year.
Adjusted loss available for class, a common shareholders with minus 5.8 million or minus seven cents per common share for the quarter compared to minus 5.4 million or minus seven cents per common share in the same period of the prior year.
As of February 21, 2020, there were 84.7 million shares of our class a common stock outstanding.
For the full year of 2019, we had adjusted revenue of 848.3 million, representing 34.1% growth from 632.4 million of adjusted revenue in 2018.
Adjusted EBITDA for the full year was minus 11 million compared to 23.2 million in 2018, and we saw continued improvement on our bottom line sequentially across the year as part of our overall profitability agenda.
Now, let me provide some more details for the fourth quarter.
Within consolidated adjusted EBITDA adjusted cost of revenue, which includes claims expenses increased to 182.9 million were 77% of adjusted revenue for the fourth quarter compared to 130.6 million were 67.6% adjusted revenue.
In the same quarter in the prior year.
Adjusted SGN expenses decreased to 46.5 million or 19.6% of adjusted revenue for the fourth quarter compared to 57.1 million or 29.5% and adjusted revenue in the same quarter of the prior here.
The increase in adjusted cost of revenue year over year with due primarily to incremental cost to serve new partner additions and cross sell expansion.
The decrease in adjusted EPS DNA expenses was principally driven by our cost reduction efforts across 2019.
Combined our total adjusted cost of revenue and adjusted EPS DNA expenses as a percentage of total adjusted revenue was 96.6% in the fourth quarter of 2019 compared to 97.1% in the same quarter as the prior year now I will take you through the fourth quarter results by segment.
And our services segment fourth quarter adjusted services revenue increased 19.5% to 205 million.
Up from 171.5 million in the same period as the prior year.
Adjusted transformation revenue in the fourth quarter accounted for 4.7 million or 2.3% of our total adjusted services revenue for the fourth quarter compared to 9 million in the same quarter last year.
Adjusted platform and operations revenue accounted for 200.3 million or 97.7% of our total adjusted services revenue for the fourth quarter compared to 162.5 million in the same quarter last year.
On a year over year basis, the increase in adjusted services revenue was primarily driven by new partner additions and cross sell expansions within our existing partner base as of December Thirtyth 2019, we had approximately 3.7 million lives on our services platform.
Our average PMPM fee for the quarter with $18, a 19 cents compared to $14.99 in the same period as the prior year.
This trend towards higher PMPM is principally driven by mix shift towards higher revenue services as well as this strategic move away from low PMPM subscale revenue partnerships.
As a result in the first half of the coming here. We anticipate continued strong growth in PMPM with lives in the low to mid 3 million range adjusted EBITDA from our services segment for the quarter with 6.5 million compared to 4.6 million in the prior here.
Performance in the fourth quarter continued the profit expansion trend, we drove across 2019 with adjusted EBITDA in the services segment, increasing by 3.4 million sequentially versus the third quarter.
Turning to our through health segment, we had premium revenue of 35.8 million in the fourth quarter up 10.4 million from the same quarter last year largely due to the amended reinsurance agreement the new Mexico health connection entered into during the fourth quarter of 2018 and it was terminated during.
In the fourth quarter 2019.
Our own health plan Truhealth served an average of just over 17000 large and small group members in new Mexico in the quarter generating 24.2 million of the total 35.8 million of premium revenue in the quarter claims expenses as a percentage at premium revenue was 75.7% in the fourth quarter.
A few points better than our experience to the first nine months of the year.
As a result, adjusted EBITDA from two health for the quarter was 1.7 million.
Turning to the balance sheet during the quarter, we closed on a credit facility with Aeris Capital Corporation.
Under the terms of the credit agreement Aries extended credit in two forms.
And initial term loan in the aggregate principal amount of 75 million.
And second a delayed draw term loan facility in the aggregate principal amount of up to 50 million.
The proceeds of the initial term loan were used to replenish our balance sheet from the passport transaction and fees and expenses occurred in connection there.
The proceeds of the delayed draw facility may be used to finance the repayment or repurchase of our 2021 convertible notes or to fund permitted acquisitions.
Long term debt at quarter end consisted of 293.7 million of our 2021 and 2025 convertible senior notes as well as our initial term loan with areas.
Regarding our cash position, we finished the fourth quarter with 119.6 million in cash and cash equivalence and investments.
An increase of 4 million relative to the end of the third quarter of 2019.
During the quarter cash provided by operations was 14 million.
Cash used in investing activities with 79.2 million and largely attributable to the passport transaction as well as 9.2 million of capitalized software development expenses and purchases that pp any.
Cash used in financing activities during the quarter with 12 million and largely comprised 82.3 million of decreases to restricted cash account held on behalf of our partners for claims processing purposes.
As well as $70.3 million of net proceeds received from the interim initial term loan with area.
The passport transaction closed on December Thirtyth 2019.
We are accounting for our investment in passport using the equity method.
We continue to be encouraged by the performance at the plan with passport generating a positive operating profit in both Q3 in Q4 2019.
Finally, we havent noncash goodwill impairment charge in the quarter.
With a lengthy extension around the RFP and continued uncertainty around the outcome the impact on our share price triggered a quantitative analysis of our goodwill.
Resulted in a charge of 199.8 million that does not impact cash or our forward financial projections.
Overall, the balance sheet feel strong relative to our cash needs and the availability of the delayed draw term loan gives us good visibility well into 2021 on our convertible notes.
Overall, we're pleased with the progress we have made towards our long term financial objectives. Importantly, we expect the combination of our ramp in profitability and a reduction in our capitalized software development costs to allow us to generate positive free cash now beginning by the fall this year.
Before I turn to guidance I wanted to highlight a couple of themes that will inform our financial performance this year.
On the topline we come into the year with full visibility to exceed 20% organic growth in our services segment.
We are forecasting minimal revenue impact from in your signings in that number from the bottom end of our revenue range for which we would expect revenues to be relatively even quarter to quarter. After several launches in Q1.
In terms of profitability, we anticipate modest expansion across 2020 from our run rate in the second half of 2019.
Our EBITDA arc through the year would be more weighted to the back half as a result of three factors.
First we have additional costs associated with seven first quarter launches given the aggregate implementation and launch costs.
Second our new Nch Medicaid business as well as the new AC or partnerships will see a ramp and profitability in the second half as a result of the contract structure and the full impact of our clinical management platform.
Third regarding passport given our focus on supporting strong performance the submission of the RFP and clinical savings innovation, we're carrying additional costs, which we expect broken out in the middle of the second quarter.
Ill now we anticipate roughly a 30 70 split in EBITDA between the first and second half of the year.
And by Q4, we anticipate an exit adjusted EBITDA run rate of 40 to 50 million.
For true health, we exited the reinsurance arrangement as expected during Q4, the remaining core business is experiencing growth within over 40% anticipated increase in enrollment.
As a result of expanding into the individual and federal lines of business. This expansion sets the segment up nicely for multiyear growth and required incremental infrastructure investment in 2020 in total we expect to healthy EBITDA to be breakeven to modestly negative for the here.
With that background, let me turn into 2020 guidance.
We are forecasting total adjusted revenue of 935 to 985 million for the calendar year 2020, with our topline relatively consistent across the quarters.
The components of full year 2020, adjusted revenue are as follows.
We expect adjusted services revenue to be in the range of 820 to 860 million.
We are forecasting true health segment revenues of 125 to 135 million.
We are forecasting intercompany eliminations of minus 10 million.
With respect to full year adjusted EBITDA, we are forecasting a range of 24 to 32 million.
For the first quarter, specifically, we are forecasting total adjusted revenue a 233.5 to 245.5 million.
The components of adjusted revenue for the first quarter 2020 are as follows.
We expect adjusted services revenue of 205 to 215 million.
We are forecasting true health segment revenues of 31 to 33 million.
We are forecasting intercompany eliminations of minus 2.5 million.
And we are forecasting adjusted EBITDA of two to 500 line.
With that I will turn back over to Frank.
Thanks, Chuck in closing, we entered 2020, well on our way to achieving a number of the major company or the fact that we've discussed with many of you across the last several quarters.
First of all we've established a highly differentiated position in a large and rapidly expanding market, serving both payors and providers and driving demonstrably improvements in health outcomes.
Our suite of solutions oriented and addressing total cost of care management specialty care management and administrative simplification address critical pain points, and a 130 billion dollar addressable market and offer a compelling growth opportunity for years to come.
Second our heavy investment in analytics clinical program development integrated technology, and effective strategies for engaging providers and numbers is paying off.
For decades health care costs have been out of control largely driven by the inability to manage medical trend and we're consistently working with payers and providers to bend the cost curve, particularly in Medicare and Medicaid populations that are complex clinical needs.
Third we have made considerable progress of passport leveraging our full suite of capabilities and expertise. This past year and are encouraged by the strong and consistent operational performance across the last several months.
We anticipate news on the RFP outcome later, this spring and I couldn't be prouder of the team and the work we're doing with 300000, Medicaid beneficiaries with very complex clinical and social needs.
Fourth we've made considerable progress and ensuring that everyone is on sound financial footing heading into 2020 in 2021.
We returned to profitability in the second half 2019, and expect margins to continue to ramp across 2020.
We successfully executed a $125 billion credit facility that strengthens our balance sheet coming into the year and we also anticipate becoming cash flow positive in the fall timeframe with a strong exit run rate heading into 2021.
Lastly across the board our greatest differentiator has been our core talent base and an extraordinarily strong and diverse leadership team.
Despite the strong labor market, we received over 90000 resumes this past year and continue to see strong progress in terms of diversity and inclusion initiatives employee in management engagement and internal talent going new and emerging leadership roles. The benefit of evolutions historical focus on talent reveals itself.
In a fast paced emerging market were strategic discipline extraordinary effort and an unwavering focus on execution are critical factors for long term success.
Thank you again for participating in tonight's call without will end, our formal remarks, and we're happy to take questions.
I will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
If you are using speakerphone, please pick up your handset for pressing the Keith.
So your question. Please press Star then Q.
Our first question comes from Ryan Daniels with William Blair.
Hi, Good evening. This is Jerry passing for Ryan. Thanks for the questions, maybe just looking at the fourth quarter numbers.
It looks like you know with adjusted EBITDA coming in kind of at the low end of guidance, while sales came in more towards the high end should we think about that is maybe pulling forward. Some those sort of organic investments that you guys have in making or how should we kind of think about kind of the balance between now versus maybe product mix driving some of that any additional color there would be great. Thanks.
Yes, I'll start with that and then pass it to John Thanks for the question.
In the fourth quarter, sometimes when we do have this number of launches starting at the beginning.
Of this year you tend to have some implementation expense come into the quarter on and you're obviously trying to staff up or what we will then be.
Those those new organizations coming onto the platform. So I do think you see just some seasonality.
In the in this cost structure there.
And then we will have some movement between quarters.
Bill will will create some of those differences from as an example, Q4 to Q1, but John if you want to provide anymore color there.
Yeah, I think you hit it Frank the only thing that I'd add to that is that some of the revenue that we did pull into the quarter. It does take some time to ramp to full profitability. That's another piece of that dynamic to.
Okay got it thank you.
Our next question comes from Robert Jones with Goldman Sachs.
Great. Thanks for taking my questions. This is Jack wrote off on for Bob.
For the pathways to success AC goes where these incremental customers, where they incremental lives are where they previously in the MSP or nexgen programs for you guys on your platform.
Yes, three of them are on new Agios that were working west of the force is a piece of an existing partner that we work with US is really the physician organization. So in some ways, all four or new but one of them really is.
Conversion to the program and I think where you see the excitement is theres been a lot of iterations to go back to pioneer and next generation and now. This program. There has been a lot of improvements to the way they are doing benchmarking attribution.
We really screen the partners. So we selected for this in terms of their historical in all our performance Theres a real commitment from the physician organizations to a lot of the things that we need to do to be successful. So we're really encouraged by the start I think off to a very good start.
Well within the range of lives that we thought we would be and we also have some of our previous Nextgen partners that are.
Jumping into these programs as well, but those would sort of qualify as evolution of existing relationships, but to your question, specifically three of them or new relationships.
Got it that's helpful and then thinking about the new century health win with the new National payer I guess when thinking about the opportunity for expansion there how large do say it is on a.
Lives basis proportional to what you're going to start with interest as far as the overall opportunity.
Yeah. This is a sub I can take that one.
Just to step back for a second on the on the when we're obviously excited about it.
Engaging with the new national payer, it's it I think solidifies our entry onto the Medicaid side I mean, obviously done some of that last year and this is another.
Significant moment the relationship and again as Frank mentioned is pretty light, it's a really a fixed fee model for this year and is in these five states overtime. This is a very material payer that sort of asked us not to disclose the details of.
What they're doing in their strategy on the specialty side, but it's it's a significant large organization and we'll have two types of opportunity for for expanded their relationship one will be in the form of moving from this sort of center model to more of a performance based pricing model and the other obviously be geographic and others.
Say there is very significant upside that given all the details of the individual payer very significant upside beyond the five states geographically.
Makes sense, thanks that helps get good.
Our next question comes from Jamie Stockton with Wells Fargo.
Yeah. Good even thanks for taking my questions I guess, maybe just a couple of follow ups on the on the Ace CEO activity that you guys have in Q1.
I can you help us understand.
What portion of kind of existing a CEO race you like relationship you guys have I.
I guess specifically around Medicare.
That have kind of committed to the new model versus guys, who are still trying to figure out what they're going to do.
Yeah, I would say we've had a couple that are committed and young.
There are a few and we just hosted a summary of our partner base and we had representatives from HHS and CMS just a couple of weeks ago, and I would say one across the whole cohort high engagement in wanting to continue in the program I think some of the hesitation has been around direct.
Contracting where people see potentially an ability to move more towards all what is almost a direct capitation delegated capitation model. The issue is there's a lot of details still missing from the program that are quite important figuring out your financial model. So that was one of the reason.
As we actually brought all of these organizations in the room with the government to give their feedback on elements of the program, which would really encourage their participation. So I would say.
Specifically few organizations just continued right in and stayed on the program. A few have decided that they really are interested in direct contracting on how are you thinking there is going to commit but they need the ultimate details.
So that would be later in the year and meant a few that at least for right now are waiting and probably likely.
To come back in more towards the end of this coming year, but but again overall.
Feel good about the fact that the cohort.
Oh pretty significant savings and then when we see the improvements to the existing program.
We feel that not only will we drive savings, but we'll see expansion of lives with a lot of the Ceos that we're currently working well.
Okay, that's great.
And then maybe just another follow up on.
On kind of the profitability profile as we move through the year.
I.
I think I've got it that you guys had some activity the ramped up in Q4, not only around kind of business that showed up in Q4, but also some business that you expect.
In Q1.
And I guess when I when I model out the year.
It seems like you know costs definitely need to go down.
As we kind of move through the year.
You know just any color on.
Like level of confidence in that.
Or is there some sort of a change in the composition of what you expect to flow into revenue that might be beneficial.
On the gross margin front, specifically just any color there would be great.
Yeah. This is Frank I'll take the summit I think when you think about the arc of the year in terms of profitability. The good news is we have a fairly strong visibility into how the year is going to lay out I think as John emphasized high visibility on the revenue side.
So we're not counting on any new partners coming on to so to meet the minimum revenue in the guidance. So that's always a big piece of profitability second when you think about the elements.
That are back sort of driving more back weighted profitability.
The things John mentioned, one just the ramp costs that go into a new launch in the ramping of revenues. So that's largely known and we know we'll see that picked up as we got into the middle of the year second quarter in middle of the year seconds for Nch specifically in Medicaid.
When you think about all the things that they do there is some ramp to being able to implement all of those things and how full effectiveness of the bottle and then there was also in both of those elements a structure to the contracts, which make the profitability a little more back weighted so I'd argue on that pretty.
Strong visibility and again to profitability improvement as we as we get into the year and then third is just some of the cost were occurring on the passport side.
Pre our key.
And obviously those would go directly into passport pushed our Ti. So you take all of those and I'd say pretty strong visibility into revenue into the cost side. We obviously have things we're always working on that will come quarter over quarter, but when we just look at the overall are actually a pretty good visibility getting.
As to where we want to get to by the second half.
Okay. Thank you.
Our next question comes from Matthew Gilmore with Robert Baird.
Matthew Your line is open on Iran, Maybe hey.
Thanks, sorry about that.
Yeah I wanted to ask about some of the membership comments I think John said the members are being the low to mid three range, which implies a little bit of declined versus the 3.7 at yearend and I think you also mentioned some lower PMPM members were coming out and obviously not having a big impact on revenue, but just wanted to get a sense for what this membership.
We'll be rolling off so we can understand that metric as we go through the year.
Yes, Thanks, Matt and I think I just did hit on it revenue very feeling very strong there as we think about the composition that alive and PMPM, we do expect continued.
Expansion on the PMPM side.
In terms of some of the dynamics, let me give an example of some of what we're seeing in the customer base and we've talked before about the seamless relationship which is transitioning from.
Relatively low PMPM, but high member phase into the second phase, which is at higher PMPM, but a lower initial membership count I.
I think that sets it up nicely for profitability growth over time and could certainly grow membership from there and that's the sort of dynamic that you're seeing that gets us to that low to mid 3 million number.
Okay, and then maybe one follow up on on just the new century wins.
Clean out to two important relationships on the Medicaid side.
Along with the past for expansion last year, what what's driving the traction within Medicaid is that just your salesforce getting out into the market or is there. Some other dynamic that's making the offering more attractive to those payers.
Yeah. Matt. This is says we can take that one I think the main dynamic is that when we acquired the business. The organization was focused on Medicare and Haddon pushed into the Medicaid market one of the things we've done since we have a number of Medicaid partners nationally have a lot of experience there.
Analytics team that can help us think about it is sort of apply the precision pathways in the algorithms into that population and look at what the impact would have been and you know well I think we're seeing is sort of approve case that.
The same approach works quite well in Medicaid as it has in Medicare. So I don't think there was any giant.
Silver bullet other than porting over what was working well into into a new population.
You know very proud of the new century team and being able to innovate in that direction they've done some nice work, but that is the main dynamic I think there is.
Secondary factor, though that is is true for Medicaid and Medicare, but I think in Medicaid populations budgets are so tight.
The oncology drug pipeline has created a challenge for the managed care community and I'd say, there's a lot to a lot of paying right now across the board and in the Medicaid World.
That just things are tighter in general and so we've had a lot of traction just helping address a key pain point in particular on the oncology said.
Great. Thanks very much.
Sure. Thanks.
Next question comes from Richard close with Canaccord Genuity.
Great. Thanks for the questions.
Frank specifically, maybe on the pipeline I'm just curious what you can say about the composition is that viewing more towards the new century or is it other service areas as well just any comments there and as you think about the pipeline.
Do you think it supports a 20% like services growth.
So for the next several years or does it moderates back into the mid teen.
Yeah. Thanks for the question I would say if you look across particularly our last.
Seven wins, you know it came from a pretty.
Diverse set of customer types, and you know a solution types for us I think the good news is we've not only seen depth in the pipeline, but we've seen BREP across those solutions I think what Chuck mentioned.
On the new century side is just the fact that when you can reduce cost and improve quality.
Right out of the gates for a major pay or whether that's a regional payer or national payer and it has that fear of an ROI I do think we're seeing strong demand for that in the marketplace, but the good news as we also see it in the total cost of care pop health side and on the administrative side as well so.
I do feel like the investment we've made across the last 24 months in just thinking through our end markets.
Where we're focused diversifying the customer base gives us a lot of confidence coming into this year and I think we'll see some wins across all of those solutionary as part of it also gives us a lot of confidence going into next year and beyond as well as we've talked about we're getting a service business.
Now approaching 1 billion in revenue.
We've got a market size well over 100 billion. We think we're distinctive so we do feel that we can drive you know very strong growth for the foreseeable future.
What our size I think mid teens is probably an appropriate level I mean, obviously, we're coming off a year, where we could be a well north of 20%, but I think it's if you're asking for medium term growth rate for business of this size I don't know too many.
Billion dollar service companies that are seeing mid teens organic growth rates, but I do think just with the market sizing and just the feel of the pipeline today.
I do think mid teens could be supported.
For the foreseeable future.
Okay. That's helpful. Thanks, and John maybe a untrue health what does the what's the reason for the step down in 2020. There in terms of revenue is that just the agreement going away or reinsurance agreement.
Yeah, you've got it related to the termination of the reinsurance agreement, partially offset by some membership growth within the core business.
Okay, great. Thank you.
Our next question comes from Donald Hooker with Keybanc.
Good afternoon.
Can you update us in terms of the service revenues that you.
Generated from passport this quarter and maybe update us on your.
I'll look for those services revenues in 2020.
Hi, This is Frank I'll comment on it I mean, I think you know the the quarterly service revenues for passport. If you think about how we're working with them I gets across all three solution or is that we talked about earlier, so they're using the administrative platform privacy working with them broadly on par.
Upheld and total cost of care and then also they recently.
Look on the specialty management side, if you take all of those three were roughly roughly $50 million a quarter, we see that being relatively flat across this year. So we don't you know it will depend a little bit on whether there's life growth.
Lives appear to be relatively stable, but if there was.
Life growth than you might see some variability but.
We would we would think that would stay reasonably stable across this year.
Okay, Gotcha and it sounded like you had some some nice ads to your tier client base.
He may be on on the flip side have you seen any pressure in terms of besides business that you've walked away from any pressure from any consolidation among your clients or any other events. It might have caused some attrition how would you recommend we think about attrition or what have you baked in your guidance to be safe.
Yeah, I would say, we have really strong visibility on this year. So.
No.
We sort of have a sense of where our network stands where they are in terms of their plans for the year again, we'll have some variability sometimes lives quarter to quarter and things like that but.
When we say visibility, we're we're very confident in revenues for the year I.
I would say if you look at our overall renewal arc.
We obviously had a very strong year last year. When you look at overall cross sell performance just the base of revenue coming from the existing network and it was the highest growth rate in our history.
I think what John mentioned is something we've been pretty directed about which is we think about margin expansion and really driving.
Strong bottom line, we have been very careful and looking out some relationships we've had that have been reasonably low PMT.
Reasonably low revenue base I mean, you know surely you.
Relationships, we care about but we just don't see a long term profitability arc, we don't see a lot of growth and so in those cases, I think we've been pretty disciplined about pricing.
I am happy to to walk away from those relationships and still feel comfortable we can deliver over 20% growth.
So I would say you know probably.
Some of the strongest renewal performance you know that we've had in our history and across the last several years, we will be fine if some relationships and they've done a renewal business just for a long time.
Some level you will you will have some attrition we feel very comfortable with the level of attrition, we have today and our ability to drive again the revenue. We've talked you. After this year, but also mid teens on an ongoing basis.
Okay Super that's helpful. Maybe just if I could squeeze one last one on dovetailing off of that can you update us a how many specific clients are you serving at this point is 30 or 40 or where are you at in terms of a baseline.
Yeah, I don't have the exact number in front of me, but I, just well over 40 clients. Okay Super. Thanks, so much. Thanks.
Our next question comes from Sean Wieland with Piper Jaffray.
Thanks, I think that that was a mistake I think its Piper Sandler now my bad I just wanted to make sure I understand passport impact on 2020 revenue, what you're saying last quarter, you said a passport when the RFP services growth in 2000, Tony will be 20%.
Does your guidance today, assuming a full year passport or half of a year.
Hi, Sean right now because the contract when the RFP was.
Tossed out and a new RFP was issued a they clarified that the current contract. The one that we're serving today at passport will continue through the remainder of this year. So the new contract now begins on one 120, so we have whole visibility into passport Robin.
<unk> for the full calendar year.
Okay. So as I understand that and that's largely consistent than your outlook for 2020 is largely consistent with what you're saying last quarter and am I understanding that right.
Well, there's a difference because even if passport now were to lose the RFP.
We would still have the same revenues, we projected for the year because the contract will continue before if you go back to last quarter. The contract would have ended in the <unk> in the June Thirtyth timeframe and so we would have had a delta in revenue with passport relative to a win and loss there was no Dell.
Right now because the contract continues for the full year.
Okay.
Can you give us a any guidance on a on anything either cash flow guidance free cash flow guidance or or anything below the EBITDA line.
Hey, John This is John I think the on the free cash flow side targeting at crossing that milestone by the fall.
As we think a cash arc through the year, usually Q1 is our highest the use of cash quarter add for working capital and settling out after they're driving towards that that free cash flow number.
Thanks, and then one last one is can you just talk.
About your your thinking on what is a target or an appropriate target EBITDA margin for this business and the timeline to get there.
Yeah.
So we think about where we're expecting to end this year, adding a couple of points to where we exited 2019.
To get to that to the mid single digits range.
As we think about the growth opportunity that Frank's been talking about.
That mid teens growth rate.
For the next couple of few years.
We see an opportunity to continue to add a couple of points of sequential EBITDA margin.
Each year.
Getting up above that 10% into the teams have range.
Okay. Thank you very much.
Thanks.
Our next question comes from Stan Berenshteyn with Suntrust.
Hi, Thanks for squeezing man [noise] asking on behalf of Sandy I, maybe an offshoot of Sean's question.
Just thinking more big picture as you're selling.
You know higher PMPM services and exiting the you know some lower margin businesses does that mix shift change the longer term on gross margin profile for the company and if so would you able to maybe frame or quantify what that could look like thanks.
Yeah. So I think certainly as you look at at the gross margin.
After the.
Purchase of new century, certainly looks different than it did beforehand I think as we look at.
Our aggregate opportunity to drive the kind of EBITDA margins at that I was just talking about that hasn't changed and largely driven by the scalability as it across the platform at both new century and in some of the core business.
Got it thank you.
Thanks.
Our next question comes from Charles Rhyee with Cowen.
Yeah, Thanks for taking question.
Just a question on the EBITDA ramp to the year, Frank just wanted to get a sense here.
Is there a difference in sort of the ramp up cost when it comes to different types of clients.
And in particular, I guess with the number of Hcl clients getting ramped up is that a higher cost that kind of comes off faster or maybe if you can give us a sense on the relative differences in.
Ramp up times versus.
Recognizing the you know the revenues et cetera, I mean, some characteristics between different types of clients.
Sure.
So if you think about the for a C O launches we talked about in.
The CMS program.
It's a new year right. It's a launch of these four as she goes into the program and some of what we do here is obviously performance based so we have that component to our relationship and when you're in the initial year you don't begin to get sound measurement on performance into.
Well the second half of the year.
So again.
Relative to our total number of lives this isn't.
Huge number of lives, but because of value we have some back waiting as we start up as all the lives come on as you're going to begin to get a sense or performance. Then the second half then you tend to have a ramp.
With with EBITDA in the first calendar year that will smooth as you get into the out years, but it does apply to those four ratio relationships.
Within C. H specifically in if you think about you know we had a couple of launches and two in Medicaid that were pretty rapid launches and if you think about all that nch does from deploying pathways from educating the network from analytics formulary compliance peer to peer reviewed decision support you reimbursed.
Model design.
Some of that takes time to put in place so you're not going to have all of those things in place out of the gates. So that again, because these have performance basis can come back weight.
Your your profitability and specifically, we also had some contract terms, where we were giving greater savings in the first part of the year and then you know contractually about clips and we have visibility into higher levels of profitability as we get into the second half. So I think you take off.
All of those components there are a little unique to this year and the answer to the rapid launches.
But that's that's generally you know what you tend to see on the whole plan administration side.
Sometimes we'll have a long implementation ramp if you'll remember, Maryland, which were implementing as we speak doesn't launch until the beginning of next year.
She will have a longer implementation cycle and then usually a large number of lives that hit right out of the gates and so you'd be usually at your target level of profitability right when that rolls onto the platform. So it does depend a little bit on mix and if you look at mix for this year for the reasons that I mentioned, you see it more back weighted.
I mean, the good news is we have high visibility into it in the most of it there's a little bit of a performance component, but we have historical experience there and sort of consistent performance that we have a pretty good sense of and so that's how it then creates the arc across this coming year.
That's helpful and just on the steel ones. When you go into a new year with existing clients does that change because I'd imagine you would be collecting performance related bonuses.
Even after the calendar year as you get the results and for the end of the year is that right. When you think about us all else equal.
Next year first half would be a little bit stronger.
Generally speaking.
I think that's the whole on the existing but you're right, but yeah, you're right that there's there is a delay in sort of true up just when you get the data from CMS. So therefore, you don't you know your revenues can fall outside of the period, you know where you're actually doing a lot of the work in dry.
Having performance and so you you stand out and create the type of tail, you're talking about where you got.
You know a additional revenues in the in the forward period as a result to that timeline.
And just a follow up there is there a lot of additional work for existing is Joe customers. When the new plan. Your starts if theres a lot of changes in a program or is it because you've already ramped up love. The initial work is it's just a little bit of incremental cost.
If it's in the same program then usually there would not be a lot of incremental cost you know, there's not a fact you'd probably getting more scalable at that point, if they're moving into a completely new program. There may be different measurement things different different data feeds you're getting there may be a new network that you're standing up.
So if it's a new program you're going to have some additional cost, but if there are continuing in an existing program and you tend to have more scalability a year over year.
Okay, well, let's clarification with the new hope and partner plus I guess, the three new Asias. It would you is it right to say we have four new partner signings. So far this year or is the is that they're able to commit.
No I think the right way to counted as we have one news signing which is the.
The payer across five states that we mentioned, which again, we think is quite significant in terms of the long term growth potential the agios that we launched on Jan one are the ones that we.
Announced towards the tail end of last year. So I think we were just trying to.
Let everyone know that we got to the launch of the program successful launches are up and running you know were well within target for the lives that we expected and feel good about you know how its going from the first few months. So the program, but those those would count towards last year.
Okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Frank Williams for any closing remarks.
Well, we appreciate everyone participating in the call. We'll obviously see a number of you out on the road in the coming weeks and look forward to continuing the dialogue and thanks for participating in the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.