Q4 2024 Evolent Health Inc Earnings Call
Speaker Change: After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two as a reminder, this conference call is being recorded your host for the call today from Avalon are Seth Blackley, Chief Executive Officer, and John Johnson Chief.
Speaker Change: Officer this call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations I will now hand, the call to Seth Frank evidenced Vice President of Investor Relations.
Speaker Change: Thank you and good evening. This conference call will contain forward looking statements under the U S Federal work.
Speaker Change: These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
Speaker Change: 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 our current and periodic filings for additional information on the company's results and outlook. Please refer to our fourth quarter press release issued earlier today.
Speaker Change: Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on its Investor Relations website IR Evelyn.
Speaker Change: Dot com.
And the form 8-K filed by the company with the SEC earlier today. In addition to reconciliations we provide details on the numbers and operating metrics for the quarter and both our press release and supplemental investor presentation.
Speaker Change: And now I'll turn the call over to Avalon CEO Seth Blackley.
Speaker Change: Thank you for joining us this evening.
Speaker Change: Earlier today, we released our earnings for the fourth quarter and full year 2024.
Speaker Change: We've also provided our financial outlook for 2025.
Speaker Change: Both our 2024 results and our 2025 outlook are consistent with our expectations.
We're happy with the progress we've made over the last three months.
Speaker Change: Sort of you. We ended 2024 with revenue of $2.55 billion with growth of 30% versus 2023.
Speaker Change: Adjusted EBITDA of $165 million within but at the low end of our guidance range provided in November impacted by continued elevation in oncology and expenses in our performance.
Speaker Change: But I I will comment on our progress with that our three pillars of stakeholder value creation of one <unk>.
Speaker Change: Growing the business organically.
Speaker Change: Two expanding our profitability and three allocating capital to increase shareholder value.
Speaker Change: Then I'll update you on operational initiatives, which we believe will enhance our visibility into earnings including an evolving.
Speaker Change: Our performance suite products.
Speaker Change: John will then go through the numbers for 2024, and our 2025 outlook.
Speaker Change: And we'll open it up for questions after that.
Speaker Change: Beginning with the first pillar of strong organic growth. The 2025 outlook. We established today guys to a growth rate of approximately 15% to 18% after adjusting for one time contract conversions and revenue recognition impacts.
Speaker Change: I will go through in detail.
Speaker Change: According the announcements today, we have high visibility into achieving this range based on both contracted business and strength of our pipeline.
Speaker Change: Now, let's turn to the details of the revenue agreements and significant expansions we're announcing today.
This quarter, we had two new revenue announcements to share. The first is a technology and services contract with a large health plan in new England surveying approximately 2 million members across most states.
Speaker Change: This plan, which is a legacy N I a customer renewed its relationship with Avalon and importantly expanded our agreements, including new members geographies and lines of business, including Medicare advantage.
Speaker Change: As part of the expansion, we also increased our scope of services and product offerings.
Speaker Change: For 2025 will cover an additional $1 9 million checking services product members across cardiology M. S K and imaging at typical P. S. Yes.
Speaker Change: Second I want to highlight a large primary care practice and the mid Atlantic region that joined our complex care E. C. O M. S. N P performance year 2045. This.
Speaker Change: This group came from another ACO and so it was a competitive win continues to demonstrate the strength of our work in this area.
Speaker Change: The practice will be using a complex care services for over 15000 M. S. S. B patients across 40 provider offices in their catchment area.
Speaker Change: In terms of other highlights our surgical management M. S. K offering had a strong growth quarter due to significant expansion with a large existing payer clients in the Midwest and strong seasonal performance in the final quarter of the year.
Speaker Change: The sales pipeline continues to be strong and there are a number of deals we anticipate closing in the first half of the year with a strong outlook for further geographic and specialty expansion, but number of long standing clients as well as newer organizations for both tech and services and performance fees.
Speaker Change: Early sales results from our adjusted performance Street models suggest it will be well positioned for what the market demand.
Speaker Change: Finally, we're proud of our client satisfaction and renewal results for 2024.
Speaker Change: Despite a challenging environment and a number of performance. We renegotiations, we are 100% logo renewal rate for our top customers in 2024, which together represent more than 90% of our revenue.
Speaker Change: Importantly, we recently extended our contract with Centene for an additional year. We believe this relationship extension represents the confidence and value that teen season, our partnership.
Speaker Change: Extension also includes several contract adjustments that will allow us to bring to bear important patient and physician friendly automation initiatives to benefit our P&L in 2026 and beyond.
Speaker Change: Turning to our second pillar of margin expansion I want to update you on both the performance suite and the technology and services.
Speaker Change: As noted on slide five of the presentation issued today.
Speaker Change: We set a goal in November to quickly renegotiate three performance suite contracts to cover the unusual escalation in cancer medical cost we experienced in 2024.
Speaker Change: In January we disclosed two of three contracts are fully secured for over $100 million earnings improvement through improved rates and moving one contract for the time being to the technology and services.
Speaker Change: Today, we're reporting that we have now also signed a third agreement across all three agreements, we secured $115 billion in projected adjusted EBITDA improvement compared to our Q4 exit run rate higher than the total we previewed at an Investor Conference in January.
Speaker Change: We believe the rate increases along with enhanced go forward contractual protections restores everyone's oncology performance suite portfolio to profitability for 2025 and sets the table for additional margin expansion overtime with approximately 300 basis points of additional margin match.
Speaker Change: Duration available on our current book of business.
Speaker Change: Consistent with our prior disclosures, we continue to forecast oncology cost increases in 2025 to be 12% at the midpoint of the range as.
Speaker Change: As John will discuss later, we feel confident that this assumption creates a conservative starting point for 2025 guidance.
Regarding our technology services business, we continue to invest in automation and efficiencies to drive.
Speaker Change: Increased margins and better patient experience.
Speaker Change: We have integrated the machine of Fi off assets acquired in 2024, and our platform now rebranded all intelligence.
Speaker Change: Platform is on track and is live in our first new test markets based on early returns are best and our other efficiency work. We are currently expecting to achieve an improvement in our direct costs exceeding $20 million annualized by the end of 2025 relative to our run rate coming into the year.
Speaker Change: Longer term, we continue to expect the net value of these efforts will be over $50 million annually once fully ramped up.
Speaker Change: Importantly, we believe this is more than cost efficiency. This innovation fundamentally reflects faster and more effective service to physicians health plans and patience that reinforces our strong position in the market.
Speaker Change: While meaningfully accretive to 2026 and beyond we do expect net implementation costs for this AI based automation work to be a drag on 2025, adjusted EBITDA of approximately $10 million and that one time investment is reflected in our outlook today.
Finally regarding our third pillar of efficient capital allocation, our priorities are unchanged.
Speaker Change: Primarily investing in internal product development and reduce leverage.
Speaker Change: <unk> team is highly focused in the near term on executing our growth objectives and accelerating operational excellence.
Speaker Change: Longer term, we expect M&A to be a component of our strategic growth plans as well.
Speaker Change: Before I hand, it to John do you go through the numbers in detail, let me step back and highlight the bigger picture as we see it today.
Speaker Change: After a tumultuous year in the health care industry in 2024, we believe Evelyn enters 2025 and a position of strength.
Speaker Change: We have a solution to an important and growing problem facing Americans.
Speaker Change: Have contractually improved our ability to forecast earnings with narrowed ranges for our performance suite business.
Speaker Change: And we're pursuing a clear shareholder value creation plan.
Speaker Change: The need for condition management in complex conditions like cancer, and cardiovascular disease has never been greater.
Speaker Change: To give an example in oncology the United States is expected to see over 2 million new cancer cases, this year a record high surpassing the 2 million Mark for the first time.
Speaker Change: The growth in cases is due to increased diagnoses for many common cancers as well as the aging and growing population.
Speaker Change: Incredible advances in targeted therapies have contributed to significantly extended lifespan for many cancer patients at.
Speaker Change: At the same time the cost of these therapies can be staggering for.
Speaker Change: For example, a year's worth of checkpoint inhibitor infusion.
Speaker Change: Cost Medicare nearly $200000.
Speaker Change: For certain indications that therapy provides a clear benefit for others. The science is less clear.
Speaker Change: That resulted in patients wasting precious time pursuing treatments that are unlikely to work.
Speaker Change: We believe that patients and physicians deserve access to the best clinical information that is available today, providing that information as core to our mission.
Speaker Change: We do believe that when it provides a clinically driven model and supports treating physicians and their patients with these conditions seeking to offer guidance through both our technology and physician peer to peer interactions.
Speaker Change: 2020 for everyone conditions conducted over 240000 peer to peer conversations to understand nuanced patient needs and provide evidence based guidance treating physicians.
Speaker Change: That's close to 1000 physician to physician touch points each day.
Speaker Change: Our team of over 350 physicians are able to review and analyze significant volumes of the latest most relevant clinical evidence providing real time clinical recommendations on an individualized basis.
Speaker Change: Our clinically focused approach, we believe positions us well in a world of rapid scientific and technological advances.
Speaker Change: This model also has outstanding results today, we've demonstrated that our work often increases here, it's the best evidenced by over 20% in key conditions. For example in cancer care, we often see average adherence to our best evidence of approximately 65% before everyone enters the market.
Speaker Change: Above 80% after Avalon is engaged in that market for at least a year.
Speaker Change: This improvement increases the quality of care for the patient and on average reduces the cost to patients and payers.
Speaker Change: At the same time everyone's satisfaction scores from physicians and staff have historically been in the 80% range demonstrating our ability to drive change through collaboration and clinical credibility.
Speaker Change: We pursue this aim guided by our values at that point.
Speaker Change: The core of our values and our mission is to ensure that patients are receiving the same care, we would want far own family members.
Speaker Change: In an era of national debt prices and high annual healthcare premium increases hitting all Americans. We also believe that we have to be able to balance affordability on these complex treatments. For example, a recent study by the Blue Cross Blue Shield Association showed that removing work somewhere to what everyone does for patients and.
Speaker Change: <unk> would cause immediate health care cost inflation of up to 10%.
Speaker Change: Because of this delicate tension the need to manage health care affordability, but do it through collaboration with physicians and with patients best interest first we believe <unk> will be a durable growing and important part of the health care system for many years to come.
With that let me turn it over to John who will review the financial highlights and our 2025.
John Johnson: Thanks des revenue in Q4 with $646 5 million across an average of $83 5 million product members. Our products membership was up by 4% year over year, Despite a 6% estimated headwind from Medicaid redetermination.
John Johnson: Q4, adjusted gross margin of 11, 9% represented steady state margins in our tech and services business offset by a lower performance suite margin of 3% dominated by losses of negative, 7% and our oncology book.
John Johnson: Adjusted SG&A of $54.4 million with seasonally higher than Q3, and approximately 3 million lower than typical due to lower incentive accruals on the balance sheet, we ended the quarter with cash and equivalents of $104 million.
John Johnson: Cash used in operations was $26 2 million driven by working capital needs as we initiated reconciliations for certain loss, making performance fee contracts that have since been restructured.
John Johnson: Net leverage on 12 31 was three six times.
John Johnson: Note that our 2025 convertible notes due this October are now reflected as current and the accrued liabilities line.
John Johnson: As planned we borrowed our available credit facility at the end of January and adjusting for that transaction cash on 12, 31 would have been $300 million, leaving significant available cash for liability management across 2025.
John Johnson: Our claims reserve ended the quarter at $318 million modestly up from the Q3 balance despite lower performance fee revenue, reflecting our conservative reserving approach.
John Johnson: Prior year development in the quarter was minimal.
John Johnson: Let's go to our 2025 outlook.
John Johnson: We are projecting organic growth of 15% to 18% off the 'twenty 'twenty four reported revenue results adjusted for onetime contractual updates, which we referred to as adjusted revenue in the accompanying presentation.
John Johnson: These adjustments result from changes to three performance suite contracts.
John Johnson: First the conversion of one large oncology performance big contract to technology and services as discussed in January.
John Johnson: Second we are making changes to the contractual terms of two additional specialty performance fee contracts one in complex care and one in advanced imaging.
John Johnson: We expect these changes will result in net revenue recognition for these two contracts as opposed to current gross revenue recognition.
John Johnson: This will also have the effect of simplifying our performance suite revenue reporting to focus on our core oncology and cardiology.
John Johnson: Importantly, neither our 2025 expected profitability, nor our long term margin expectations for these two contracts are impacted by these changes.
And this revenue recognition change does not affect any oncology cardiology contracts.
John Johnson: We will continue to report these contracts in our performance suite is the bottom line opportunity is unchanged.
John Johnson: As page five of the presentation shows. These two contracts are separate from the three performance rate renegotiations and again, the only material impact from these changes will be on the revenue recognition front.
John Johnson: In total across the one performance suite slipped to CNS plus these two revenue recognition changes. These conversions represent a one time reduction of approximately $765 million in revenue across three clients for an adjusted baseline of one point to seven 9 billion.
John Johnson: Our 2025 revenue guidance is therefore 2.06 to 2.11 billion.
John Johnson: As you can see on page eight of the presentation. This forecast assumes onetime headwinds from membership changes in 2025 of 7% offset by expected growth of 22% to 25%.
John Johnson: We are projecting similar topline revenue and M. S. S P as experienced in 2024.
John Johnson: On the bottom line, we are projecting adjusted EBITDA between 135 and $165 million.
John Johnson: The presentation shows a bridge from Q4 actuals to the midpoint of this range.
John Johnson: Normalizing Q4 for seasonality and incentive accruals and adding in the benefit of the $115 million and improvements from our performance suite negotiations result in an exit run rate of about $178 million.
John Johnson: As previewed at the Investor Conference in January we are forecasting approximately $45 million in headwinds this year, including $20 million from partners exiting certain of their health plans, mostly MMA.
John Johnson: And $25 million from our assumption of elevated trend in oncology.
John Johnson: In addition, as Jeff noted we are accelerating our work in automation this year to capture significant benefits in 26, and beyond which will impact our 2025 EBITDA by approximately $10 million from onetime investments.
John Johnson: Finally, our guidance midpoint contemplates adjusted EBITDA expansion from organic growth of $25 million, which is inclusive of items that have been announced but not yet implemented.
John Johnson: At the midpoint of our guidance, we project 20 per cent of profits to come from our performance suite and 80% to come from our fee based business.
John Johnson: Page six in the deck shows additional detail regarding the oncology trend for 2020 five.
John Johnson: In Q4 of 'twenty 'twenty, four we estimate that the experienced year over year growth of 11% in oncology expenses after adjusting for the impact of Medicaid Redetermination.
John Johnson: As we've previously noted our historical annual oncology cost increase has been approximately 8% under normal conditions.
John Johnson: On the acceleration, we experienced across the fall and the desire to ground our outlook and an appropriate level of conservatism, we are assuming oncology cost growth in 2025 of 12%.
John Johnson: To size. This for you our 'twenty 'twenty four performance suite margins declined by approximately 800 basis points relative to our six year historical average.
John Johnson: We project that the rate increases and contractual updates that Seth mentioned offset by this higher cost trend will recover about half or approximately 400 basis points of that decline.
John Johnson: Well the adjusted performance suite features will cap, our medical expense ratio and high cost environments and put a floor on it in lower cost environments. We do believe that a stabilization of trend will enable at least 300 basis points of additional margin over time and the performance feet as compared to our 2025 Guy.
John Johnson: I'd like to give a concrete example of how we deliver on bending the cost trend each year.
John Johnson: As mentioned earlier checkpoint inhibitors are one of the fastest growing categories in cancer therapy, delivering incredible outcomes for certain categories of tumor types with specific profiles.
John Johnson: They are also one of the biggest cost drivers with over $25 billion of spending growth from 2019 to 23 alone.
John Johnson: However, a recent study estimated that while 56% of cancer patients are now eligible for a CPI treatment only 20% are likely to respond.
John Johnson: Working closely with the treating oncologist to identify early those patients who are non responsive to a CPI requires deep clinical expertise and credibility, enabling rapid action to shift to a different therapy. It is more likely to be effective for that patient.
John Johnson: As an example of this approach in action for a large Medicaid plan that went live in 2023 Evelyn intervention during 'twenty four led to a 10% decrease in total checkpoint inhibitor expense relative to initial treatment plants.
John Johnson: Actions that bend the cost curve in a way we believe no other entity can do at scale.
John Johnson: We believe this results and more effective care for the member and more sustainable expense outcomes for the system.
John Johnson: Finishing with cash we anticipate working capital will be a modest drag on cash this year as we finalize client reconciliations from 'twenty 'twenty four for underperforming risk contracts that have since been restructured.
John Johnson: We expect to deploy approximately $35 million and capitalized software development and we plan to deploy free cash generated by operations towards liability management and debt pay down, including our 2025 convertible notes and then our senior term loan.
John Johnson: For the first quarter of 2025, we anticipate revenue of between $440 million to $470 million.
John Johnson: We anticipate the first quarter of 2025, adjusted EBITDA will be between $31 million and $37 million.
John Johnson: And in terms of earnings cadence, we anticipate that about 48% of our adjusted EBITDA will be generated during the first half of 2025.
Scott: With that I'll hand, it back to Scott.
Scott: Thank you John and closing.
Speaker Change: I want to summarize our long term value creation plan. Please.
Scott: Please take a look at slide four of the presentation for a summary.
First we plan to continue to grow our business organically, 15% per year or better off of the adjusted 2024 revenue baseline.
Scott: Second we plan to expand our margins through automation and efficiency, enabling us to grow our adjusted EBITDA earnings stream and at least 20% per year off of our 2025 years old.
Scott: And third we will continue to allocate capital with discipline to support our growth strategy and drive strong cash flow overtime.
Scott: Based on the industry wide challenges in the previous year, we have made strong progress on a fourth pillar of value creation, which is to enhance the visibility and consistency of our earnings by evolving our performance suite as discussed earlier in the call we.
Scott: We reset our profitability baseline quickly migrated certain performance, we've partnerships to a narrower more predictable economic model, one where we are providing more upside for our clients and placing a cap on everyone's downside risk.
Scott: To be clear this is a trade off as our long term performance weak margins in this involve risk structure are lower than our traditional performance.
Scott: Needless to say 2024 was difficult year.
Scott: As such we understand the importance of reestablishing trust and credibility with our stakeholders. This begins with establishing an outlook that we can meet or exceed even in the face of historic cost trend headwinds.
Scott: We believe we have done that and we believe that the benefits of this approach to both our customers and our investors will become evident as we report results over the ensuing quarters.
Jim and I are proud of the rapid progress we've made entering this year.
Scott: And we remain committed to delivering strong results across 2025 and beyond.
Scott: With that we'll open it up for your questions.
Scott: [laughter].
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on <unk>.
Scott: If you're using a speakerphone please pick up your handset pickup pressing the keys.
Scott: If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then perhaps start at this time, we will pause momentarily to assemble our roster.
Scott: Yes.
Matthew Gillmor: The first question comes from Matthew Gillmor with PPL Barclays. Please go ahead. Please go ahead.
Matthew Gillmor: Hey, guys. Thanks for the question and all the details.
Matthew Gillmor: So it seems like Youre trying to signal degree.
Matthew Gillmor: I'm sorry.
Matthew Gillmor: Is it fair to say that.
Matthew Gillmor: Yes.
Matthew Gillmor: The oncology trends and the higher weighting of even higher.
Matthew Gillmor: And then the changes you've made.
Matthew Gillmor: Is that kind of how to think about it or are there other areas sort of uncertain.
Matthew Gillmor: To call out.
Matthew Gillmor: Sure.
Matthew Gillmor: Yeah.
John Johnson: Hey, Matt Yeah, I think that's the right way to think about it yes and that is our intense youre right to come into the year with a lot of confidence for the reasons I said at the at the end of the call.
Matthew Gillmor: <unk> be very committed to.
Speaker Change: Now what I hit them all.
John Johnson: And hopefully exceed our expectations throughout the year and I'll, let John talk a little bit about these important data point, Matt around.
John Johnson: What would happen if trend is higher lower and I'll, let John talk a little bit about that which I think is part and parcel to your point yes.
John Johnson: Yeah, Hey, Matt just maybe to put it.
John Johnson: Some sizing around that 12% oncology trends. If you look at the size of that book. This year was smaller than it was last year and the corridor that we've put into place we see some as demonstrated here to the upside where for example, a 14% trend across the book.
John Johnson: 2% higher than our forecast.
John Johnson: Would be a $9 million estimated to adjusted EBITDA.
John Johnson: And a.
John Johnson: 10% trends at 2% better.
John Johnson: And forecasts.
John Johnson: It would be $12 million to the good.
So that hopefully bounds.
John Johnson: The volatility there a little bit for you.
Speaker Change: Yeah, that's great and then one clarification you had.
John Johnson: 300 <unk>.
John Johnson: The margin maturation our performance suite.
John Johnson: Separately, you had mentioned $50 million.
John Johnson: Longer term environment.
John Johnson: Are those discrete items.
John Johnson: The 300 basis point 300 basis point.
Matthew Gillmor: Yes. Good question, Matt those are discrete items.
John Johnson: Alright, thank you.
The next question comes from Charles <unk> with TD Cowen. Please go ahead. Please go ahead.
Speaker Change: Yes, thanks for taking the questions.
Speaker Change: Maybe just a little digging into sort of two sort of coffee trend again John.
Speaker Change: John I appreciate it John kind of bouncing the sort of the ranges on the volatility here, Brian 30 year Brian.
Speaker Change: You think about that now you have about 75% of your performance we revenue covered by sort of these enhanced features.
Speaker Change: <unk> sort of rate adjustments were prevalent is it still right to think that the comparison between 11% and for Q2 of 'twenty four.
Speaker Change: 12% or 25 trend or are these still really apples to apples comparison, when we think about sort of the potential impact for you guys and then I have one quick follow up.
Charles: Yeah, It's a good question Charles.
Speaker Change: They are.
Speaker Change: Hi.
Speaker Change: Our difference right.
Speaker Change: Look at the incremental protections that we negotiated for this business beginning this year.
As you know it covers the majority of our performance suite revenue.
Speaker Change: And so while there's certainly still motion.
Speaker Change: Dan.
Dan: Look in terms of where does Max Lance unmanned how do we manage it down.
Dan: The corridors on both the.
Dan: Cap and that the other side down that range, a little more than we.
Dan: We experienced last year.
Dan: Got it and then as a follow up.
Dan: Just wanted to hear a little bit more of an update on cardiology, just sort of the trends that you're seeing here given that.
Dan: It was signaled that called out cardiac trend pressure on their call just the other week.
Dan: So I'm just trying to get a little bit of better sense of what you're seeing here.
Dan: And then just as an aside I just want to wish you a happy birthday as well.
Speaker Change: That's how I've always wanted to spend my birthday Charles.
Dan: Yeah.
Speaker Change: Yeah, cardiology I'll take that one to start it its a smaller trend clearly than in oncology.
Speaker Change: And while we saw a bit of elevation across 2020, or hey that was explainable by.
Speaker Change: Or is that a prevalent metrics and so on.
Speaker Change: I will say that consistent with the oncology approach and our overall sort of outlook here, we are taking a conservative approach for cardiology trend as well.
Speaker Change: In our forecast or 'twenty five.
Speaker Change: So it is modestly above what we experienced in 2004, but certainly not nearly as large of a move here Charles as we're seeing in oncology.
Speaker Change: But its right to think that the the way the contracts are all restructured it includes both oncology and cardiology in terms of authority the narrower kind of risk corridor that you're facing.
Speaker Change: That is correct.
Speaker Change: Got it alright, perfect. Thanks, a lot.
Thanks Charles.
Andrea Alfonso: The next question comes from Andrea Alfonso with UBS. Please go ahead.
Speaker Change: Hi, Thanks, everybody and thank you Charles for Flagging Seth Bernstein.
Andrea Alfonso: Just wanted to follow up.
Andrea Alfonso: Just thinking about the puts and takes the EBIDTA guidance for 25, Yeah, just curious which impacts could screen most conservative to you such that it would represent the greatest swing factor to the downside because I'm sorry, just looking at the breakdown, but can and stress testing I'm curious what really gets you to that lowest end of the $1 30.
Andrea Alfonso: The 135 million ballpark, particularly after signing the new contract is it just sort of a lack of organic growth is it.
Andrea Alfonso: Ecology spending just far worse than expectations. Thank.
Andrea Alfonso: Thank you so much.
Andrea Alfonso: Yeah.
Andrea Alfonso: Really is around feeling a desire to have a buffer or surprise medical cost inflation.
Andrea Alfonso: It is meaningfully beyond our current expectation.
Andrea Alfonso: We feel it doesn't comment on that's really good about it.
Andrea Alfonso: Within the bag and then whats the pipeline in terms of organic growth this year.
Andrea Alfonso: Out of the other items that you see on the page.
Sam: Notable Sam.
Sam: That's really the source of potential variability in the year.
Sam: The next question that comes from.
Joel Anderson: Next question comes from Joel Anderson with true Securities. Please go ahead.
Joel Anderson: Yes, Thank you and thanks for taking my questions. So I want to go back to the 12% growth in college trends expected in 2025. So on slide nine when you talk about $25 million impact from that that's just reflecting the annual impact of the trends you saw in late Q4 I'm assuming of the late Q4 was higher than.
Joel Anderson: 11 person you were talking about in Q4, so essentially a guidance does not assume then get any worse than where you exited 2024 and to that point can you talk about oncology trends you have seen in 2025, thus far.
Joel Anderson: Yeah, So let me be really explicit here.
Joel Anderson: Hey.
Joel Anderson: Q4 is our jumping off point.
Joel Anderson: You look at the actual projected year on year.
Joel Anderson: Trend for Q1, it is significantly higher than 12%.
Joel Anderson: Part because of Medicaid redetermination.
Joel Anderson: Really precise there.
The Q4 number as the jump off point of care.
Joel Anderson: And.
Joel Anderson: The.
Joel Anderson: I guess, that's my main answer.
Joel Anderson: And so the trend and anything that so far the shared Florida 2025, thus far.
Joel Anderson: So as you can imagine we don't have a lot of claims completion at this point.
Joel Anderson: Or.
Joel Anderson: Six weeks here.
Joel Anderson: But what we have seen so far in our leading indicator data.
Joel Anderson: The authorization information is consistent with what we would expect given this forecast.
Joel Anderson: Okay, and then I missed the first few questions you talked about some feedback but.
Speaker Change: On the one third of your performance suite book, which have not been part of your recent negotiations. It seems you've got there I think I've matured margins can you provide any update on bad book and why do you not see a risk of higher cost trends impacting bad book, just trying to understand why not get proactive in terms of having some down.
Joel Anderson: Syed protections for dos contract side as well.
Speaker Change: Yeah, Julien do so.
Joel Anderson: The way we approached it.
Joel Anderson: The renegotiations is really focused on where we felt like we had the most urgent need to make changes.
Joel Anderson: And in other cases, either because the original contract structure or protections or the way those given markets were running.
Joel Anderson: We didn't feel like the risk reward on opening up the contract says.
Joel Anderson: We always have that option in the future.
Joel Anderson: We certainly look for opportunities to add those protections.
Joel Anderson: We feel like the risk reward trade off is the right one.
Joel Anderson: Got it thanks guys.
Welcome.
Speaker Change: The next question comes from Ryan Daniels with William Blair. Please go ahead.
Ryan Daniels: Yes, Seth I'll add to the happy birthday chorus, and thanks for taking the questions.
Speaker Change: Maybe a big picture one I'm curious why you decided to narrow the scope for some of the solutions outside of the core oncology cardiology and.
Speaker Change: And simplifying reporting there was that getting ahead of any potential issues from lessons learned with what occurred last year with oncology or was it a client request to simplify reporting just curious what drove that given that there's kind of not a bottom line impact.
Ryan Daniels: Yeah. It's good question Ryan there's I'll say, a few things one is driven by us.
Speaker Change: And it is principally around okay alright.
Speaker Change: As we are.
Ryan Daniels: Okay.
Ryan Daniels: Growing our operating resources and the way that Youre doing that ends up impacting on your.
Ryan Daniels: Youre accountant accounting treatment and some of these capitation contracts.
That is the rationale.
Ryan Daniels: Yeah, Ryan I'd, just add to that part.
Ryan Daniels: Well the whole theme I hope everybody is feeling from this call and everything we put out which is around consistency of results.
Ryan Daniels: So any volatility.
Ryan Daniels: And those results those changes were consistent with that same thing Brian.
Ryan Daniels: Yeah.
Ryan Daniels: And maybe I could ask a follow up to that exact point to put a finer point on that.
Speaker Change: You mentioned earlier in the call that a 200 basis point uptick under the new contract terms would hit EBITDA by about $9 million. If we go back to the start of last year and I told you we're going to see a 200 basis point uptick off oncology trends how would.
Speaker Change: Would it have been impacted EBITDA. So its 9 million now how big of an impact would that have been before you did all of this to kind of show us how much more visibility you have.
Speaker Change: Yeah, It would have been 20% 25, Brian.
Speaker Change: So it does tie to that Okay. And then maybe last question just the $10 million and kind of operational investments in platform is all of that isolated to 2025. So that we should think of $10 million hit this year, but then a $20 million yield in automation and AI next year, leading to a $30 million increase.
Speaker Change: On a net net basis for 2026 is that fair or too aggressive.
Speaker Change: That is approximately correct right.
Speaker Change: Our guidance for 'twenty thing and that is how we're thinking about it.
Speaker Change: Okay perfect. Thanks for the color again happy birthday.
Brian: Thanks, Brian.
Brian: The next question comes from Jeff Garrow with Stephens. Please go ahead.
Jeff Garrow: Yeah, good afternoon, and thanks for taking the question wanted to ask about the $25 million in core organic growth in the that fly twenty-five bridge detail.
Speaker Change: To ask more detail on both timing and mix of first time on timing, we would assume that would be front half loaded but wanted to check in there and then on mix, we would normally assume zero profitability contribution from year, one performance suite, but want to see if that assumption should change given some of the enhanced contractual features you guys had been implemented thanks.
Jeff Garrow: Yeah, Yeah. Good question so.
Jeff Garrow: Yeah.
Jeff Garrow: Timing first you are right.
Jeff Garrow: The bulk of this spread will be driven by annualized thing.
Jeff Garrow: Over the last year and the.
Jeff Garrow: Go lives that are principally already happened or are in process of happening during the first half of the year.
Jeff Garrow: The bulk of that EBITDA will be driven by.
Jeff Garrow: Deals that are going live earlier in the year on the top line a book.
Jeff Garrow: The growth there.
Jeff Garrow: Hey.
Jeff Garrow: Page is of course, driven by performance suites.
Jeff Garrow: She could lag a little later in the year.
Jeff Garrow: And Theyre well, we haven't changed our expectations for initial profitability performance fee contracts.
Jeff Garrow: We don't expect that.
Jeff Garrow: As much EBITDA from those go lives this year.
Jeff Garrow: We do anticipate a faster ramp with the new mature margins.
Jeff Garrow: Hey, where prior we had talked about a three year ramp.
Jeff Garrow: As you mature margins, we now see that in call it 18 months.
Jeff Garrow: Yes, I'll just answer a question that hasn't exactly been asked this related which as you know the new performance. We relationships that were planned to go live with this year and going forward, we'll have some.
Jeff Garrow: To your point all the protections that we've been talking about.
Speaker Change: Great and then one specific follow up there I guess would be the top five national plan.
Speaker Change: Performance suite, when that was announced last quarter, just any incremental update on the timing of that I think would be helpful. Given the size of it.
Speaker Change: Yeah, I mean, we would expect you know mid year towards the middle of the year when that starts to go live and where everything feels like we're moving in the right direction.
Speaker Change: Got it thanks again.
Speaker Change: The next question comes from Anne Samuel with Jpmorgan. Please go ahead.
Speaker Change: Okay.
Anne Samuel: Hi, Thanks, so much for taking the question I was hoping maybe you could just speak to your kind of pipeline for 2025, new partnerships and perhaps just given some of the pressure that you experienced this year you know what is your aptitude for adding more performance fee contracts.
Speaker Change: Yeah and so.
Speaker Change: Pipeline looks very good as I mentioned in the script I think any time you have just sort of dislocation that has existed in the market over the last year or two on costs.
Speaker Change: Each plan trying to manage this tension around affordability and their pricing and membership and all of these dynamics.
Speaker Change: For a really really good sales environment and that continues to be the case I would say our new performance. We bottle right. This narrower shares for the ups with the clients that has more protection for us.
Speaker Change: It's working.
Speaker Change: And it feels like that.
Is sellable and the markets have been issued and demands of the marketplace.
Speaker Change: Terms of the specifics of this year and into next year, we continue to have a good mix and like for.
Speaker Change: Performance suite with the protection and Tech and services and I think that will continue.
Speaker Change: In terms of this year, specifically in the guidance for this year, we have really good line of sight.
Speaker Change: Script.
Speaker Change: Doing the things we need to do to achieve the.
Speaker Change: Growth rates that we guided to.
Great. Thank you.
Speaker Change: Welcome.
Speaker Change: The next question comes from Richard close with Canaccord Genuity. Please go ahead.
Speaker Change: Yeah. Thanks, Thanks for the questions.
Speaker Change: Understand the 25 guidance contemplates the MMA market exits, but I'm curious how you're thinking about.
Speaker Change: Potential policy changes on the Medicaid side, maybe a cart and map.
Speaker Change: What that.
Speaker Change: Maybe it does to your business from an enrollment declines there. So that's 33% of revenue in 'twenty four or so just thoughts there, it's probably more a 2006 impact if anything happens, but how are you thinking about it.
Speaker Change: Yeah, Yeah. So look I think you hit on one of the points, which is to diversify the business sort of one of the guys.
Speaker Change: Medicare while the commercial as well.
Speaker Change: I mean, I think with respect to Medicaid and really any line of business, where you have <unk>.
Speaker Change: Pressure.
Speaker Change: Compressed funding in some different way it compresses, the P&L where profitability of any given plant that does have a negative <unk> <unk>.
Speaker Change: Chip, it's short term.
Speaker Change: Outside of it will be I think.
Speaker Change: Sales momentum around <unk>.
Speaker Change: Initiatives to help drive profitability back into the business.
Speaker Change: So I think it'll be one of those yet and Yang type issues.
And obviously, we can't forecast where that is going to go specifically with how Hawaii, that's how I'd answer it and then the last thing I'd say is again, whether it's Medicaid or any other line of business.
Speaker Change: Broader societal thing Thats going on right now around health care, the debate of affordability and quality.
Speaker Change: I do think.
Speaker Change: Solutions like ours, where we can help drive affordability and improve quality at the same time you know.
Speaker Change: Setting aside given changes in one year. The next I think theyre going to have a tailwind to them.
Speaker Change: You know over time because of the ability to achieve both of those objectives.
Speaker Change: Okay, and alright, maybe a follow up you mentioned the Centene contract.
Speaker Change: Pension and some adjustments there.
Speaker Change: Could you go over those adjustments and what is the benefit to you guys.
Speaker Change: Yeah, Yeah look I mean with all of our major key partnerships since he and included.
Speaker Change: We're always seeking to balance what's the right thing for the partner was the right thing for Us and I think we identified.
Speaker Change: Always with our partners are there opportunities to do something together that creates more value for both of US I think the changes that we made collectively.
Speaker Change: So this partnership are an example of that.
Speaker Change: More than 25 as a for instance.
Speaker Change: The things that we're doing with that I think create fundamental value for both of us and we can share that value over time, and having an extra year on the relationship as part of making that equation work for.
Speaker Change: I met us and making it the best possible partnership it could be in terms of efficiency and good for patients. Good for physician, so think of it as us investing more this year.
Speaker Change: It's really around somebody's automation things that things that are better for patients.
Speaker Change: And for physicians and back then yields positive results for our P&L over time and then there's additional year added to the end of the contract that's really the summary of it.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: The next question comes from Jessica Tucson with Piper Sandler. Please go ahead.
Hi, guys. Thanks, very much for taking my question and I'm happy birthday.
So I guess I'm curious to know what percent of the performance suite book ultimately ended up being profitable in 2024 and just the question is really you know given the fourth quarter acceleration was there an increase from that 50% our performance suite.
Speaker Change: The balance of <unk> to something less than that for the year and then I have one quick follow up.
That's a good question Jeff.
Speaker Change: The mix is about the same.
Speaker Change: The overall profitability curve shifted down.
Speaker Change: But those contracts that were underwater remained underwater and they were profitable remains profitable.
Speaker Change: That's all.
Speaker Change: Okay. That's really helpful. And then just for the portion of the business that was profitable in 2024, and essentially wasn't subject to rate revisions or enhance corridor that EBITDA level contract and twenty-five because youre seeing trends accelerate.
Speaker Change: And youre not protected by rate revision.
Speaker Change: <unk> corridor or is there some other protection that we should be aware of there. Thank you guys again.
Speaker Change: Yeah, Hey, there is modest contraction there Jeff.
Speaker Change: A part.
Speaker Change: What I mentioned.
Speaker Change: Repaired remarks around seeing an 800 basis point decline, but then recapturing 400 basis points of that.
Speaker Change: This decline in 'twenty five.
Speaker Change: Got it alright, thank you.
Speaker Change: The next question comes from David Larsen with B T. I G. Please go ahead.
Speaker Change: Hi, happy birthday.
Speaker Change: Can you maybe talk a bit about what you expected.
Speaker Change: <unk> increases are going to be in 'twenty, five and going forward because it seems to me like a 12% trend in oncology.
Speaker Change: Is that your new normal and it also seems like a lot of the plans are raising premiums by anywhere from 10% to 15%. So I would think your starting point for any year going forward would be at least 10% growth in the P. M. P M rates youre collecting from plans.
Speaker Change: And then also in the <unk> transcript.
Speaker Change: Page 17. It shows that you were going to get $50 million of price increases in addition to the 100 million.
Speaker Change: Renegotiations I would've thought that that 50 million, but are offset.
Speaker Change: The you know the estimated.
Speaker Change: Estimated impact of $25 million from the 12% oncology trends so.
Speaker Change: Just just any color on expectations for your price increases or youre going to see.
Speaker Change: Going forward, especially if 12% of your new normal thank you.
Speaker Change: Let me say, a couple of things and stuff they fill in as well.
Speaker Change: I think whether it's in our business it narrow to oncology and cardiology or in the broader managed care market. There is no world in which tend to 12% annual healthcare inflation is sustainable.
Speaker Change: And so that's part of what we're seeking to do as part of the mission of the company.
Speaker Change: Do not believe sitting here today that a 12% annual oncology trend is.
Yeah.
I think theres another forecast out there that would suggest that it's certainly though is what we are projecting for 2025 based on a variety of factors how.
Speaker Change: How do we enter that pricing perspective, as we've talked before.
Speaker Change: Think of this in.
The two buckets, we have a standard annual inflator.
Speaker Change: Based on an atypical discounts to atypical trends, so that might be six or seven or 8% annually.
Speaker Change: And then we have.
Mechanical and formulaic update each year.
Speaker Change: Just on changes to the population that happened in the prior year.
Speaker Change: So that.
Speaker Change: That might translate in a year like we're having this year to add 12 14, 15% increase.
Speaker Change: There was a significant change in that population in the prior year.
Speaker Change: But I wouldn't expect that that is a new normal going forward.
David Larsen: Yeah, David the only thing the only thing I'd add to it.
Speaker Change: The way.
Speaker Change: Our business works, whether it's an E C.
Speaker Change: Season, like we have now a higher inflation lower replacement, we have to be able to be better than the next best alternative for our parks.
Speaker Change: That's where we got a lot of confidence we can then price.
Speaker Change: You know whatever that Delta is.
Speaker Change: And again the key to that is our ability to have the best clinical teams with the best evidence technology the right interventions in the ligand today, we remain really confident.
Speaker Change: Pricing in this case, but the fundamental value creation, it's been up always get delta between.
Speaker Change: We can create and what normal plant and created for all of the competitors and that's the key.
Speaker Change: Proposition.
Speaker Change: Okay.
Speaker Change: Great and just one more quick one if I can let's say, there's an adjustment during budget reconciliation, where Republicans ease up the pressure on the V 2008.
Speaker Change: It's a benefit to the plans is there anything in your contracts that will enable you to capture some of that some of that benefit. Thank you.
Speaker Change: There is no direct linkage there.
Speaker Change: Planned premium.
Speaker Change: Our fees so no, although it's always easier and likes to have happy partners.
Speaker Change: Okay. Thanks very much.
Daniel: The next question comes from Daniel <unk> with Citi. Please go ahead.
Speaker Change: Hi, Thanks for taking the question just had one about how to think about profitability. In 2026, you you've given us a few kind of factors here the $30 million swing from investment in client efficiencies from 'twenty five.
Speaker Change: 2% to 26% potentially 300 basis points of our performance suite improvement if trend remains stable I'm, just trying to square that with the longer term growth target of 20% is.
Speaker Change: 26 should we think about growth being a bit higher because 25 years. So depressed or are you, saying for 'twenty six we should really view of $150 million or so as the rate base slide and grow that 20%. Thank you.
Speaker Change: Yeah, let me start and setting fill it in.
Speaker Change: You're hearing us say today, Dan is our core mission, we believe right now.
Speaker Change: Is rebuilding trust with our stakeholder community and part D.
Speaker Change: That we believe is putting out an outlook that is highly achievable.
Speaker Change: We're not going to comment on 26 right now.
Speaker Change: Other than to say, we feel really good about what we're kind of pulling out today and our ability to grow at 20% plus per year on top of that.
Speaker Change: Got it okay. Okay, and then as we think about the the.
Speaker Change: M a headwind to revenue.
Speaker Change: And and profitability as well can you help us think through.
Speaker Change: The impact on or the split between performance suite and take it services.
Speaker Change: Yeah.
It's certainly across both right and you can sort of see that by the implied math of losing $20 million in EBITDA and $125 million revenue.
Speaker Change: So it's both some long standing performance fee clients they were operating at mature margins and.
Speaker Change: <unk>.
Speaker Change: <unk>.
Speaker Change: Second service clients as well.
Got it thank you.
Speaker Change: The next question comes from Matthew <unk> with Needham. Please go ahead.
Speaker Change: Yeah Happy birthday, Seth and thank you for taking the question.
Speaker Change: You know you guys are moving more aggressively to scale implementation of machine to fire off intelligence curious does this change or accelerate your expectations around gross gross margin benefits from.
Speaker Change: I know you're still orienting towards 'twenty 'twenty six to begin seeing improvement, but given this was sort of the prior expectation and now you're stepping on the gas wondering if we could maybe see some benefits come through earlier than expected.
Speaker Change: Yeah. So for life in a few markets as I mentioned in the prepared remarks and the early returns are pretty positive.
Both in terms of overall efficiency, but more.
Speaker Change: Ultimately here for.
Speaker Change: <unk> ability at partner satisfaction et cetera. So we're excited about this and that's one of the reasons why we are as you know.
Speaker Change: Our foot on the gas on implementing this across the book this year.
Speaker Change: And pulling forward some of that overall gross margin improvements that we project.
Speaker Change: Okay, and then maybe just quickly on the selling environment sounds like demand remains high headed into 2025, I guess aside from demand generally being up is that is this demand, creating faster deal cycles or deal velocity wondering if given the rising need for solutions to control cost youre seeing deals get.
Speaker Change: Proved quicker just anything to call out in terms of time to close the deal.
Speaker Change: Yeah, I don't think it's changed dramatically on the sales cycles duration, maybe slightly better slightly faster.
Speaker Change: The overall scope of the pipeline I think is what has really expanded bills.
Speaker Change: Good right now.
Speaker Change: Understood. Thanks, guys.
Speaker Change: There are no further questions. This concludes our question and answer session and the conference call. Thank you for attending today's presentation. You may now disconnect.