Q2 2019 Earnings Call
Welcome to Evolent Health earnings Conference call for the quarter ended June Thirtyth 2019.
As a reminder, this conference call is being recorded.
Your host for the call today is Mr., Frank Williams, Chief Executive Officer of Evolent Health.
This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations.
Here is some important introductory information. This call contains forward looking statements under the U.S. Federal Securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.
A description of some of the risks and uncertainties can be found in the 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 its 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 in the company's press release issued today and posted on the Investor Relations section of the company's website.
Our dog Evolent health Dot Com and the 8-K filed by the company with the FCC earlier today.
At this time I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.
Thank you and good evening, Hi, Frank Williams, Chief Executive Officer of Evolent Health and I'm joined by John Johnson, Our Chief Financial Officer, and Nicky Mcgrane, Our executive Vice President of corporate performance.
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 progress on our key strategic priorities for the year.
I'll, then hand, it to John to take us through a more detailed financial review of the second quarter.
I'll close with a summary of our key differentiators and how they drive tangible value per person and as always well be happy to take questions at the end of the call.
In terms of our results total adjusted revenue for the quarter ended June Thirtyth 2019 increased 32.9% to 192.1 million from the comparable quarter of the prior year.
Adjusted EBITDA for the quarter ended June Thirtyth 2019 was negative 7.7 million compared to 4.9 million for the quarter ended June Thirtyth 2018.
As of June Thirtyth 2019, we had approximately 3.5 million total lives on the platform.
And with three partner additions this quarter, we welcome six new partners to the other one national network already this year.
Overall, we're pleased with our top line results for the second quarter and the progress we've made and meeting our key strategic objectives for 2019.
With strong operational and clinical performance across our network, we're seeing solid same store growth as long as one of the strongest new business pipelines in our history.
As a result, we enter the second half of the year with increasing visibility into significant growth both on the top and bottom line as we head into 2020.
In terms of the macro environment. We're pleased to see continued strong momentum in the core markets that we serve.
In Medicaid and Medicare the administration's actions demonstrate a core commitment to moving the market to value based reimbursement.
Over the past nine months CMS revamped its Medicare shared savings program pathways to success launched a primary cares initiative and is in the final stages of creating a direct contracting model with providers.
All of these offerings creates several paths forward for providers interested in pursuing risk based reimbursement for their Medicare patient population.
Oh, the Medicare advantage side were total enrollment is expected to double over the next decade.
We continue to see strong policy support program improvements and consistent annual rate increases from CMS.
Our health policy team continues to serve as a convener for our partner network to work closely with the administration on new program concepts as well as modifications to existing programs that will encourage brought industry participation.
For example, we're currently weighing out on the next version of CMS is oncology care model, which aims to provide higher quality integrated oncology care at a lower cost of Medicare.
Based on our extensive experience in cancer care with new century, how we have an exciting opportunity to drive financial and clinical results for organizations participating in the oncology care model and we look forward to driving demonstrable improvement in clinical and financial outcomes.
We're also seeing the same trend in specialty care management with national and regional payers.
Both cancer and cardiovascular care represent significant pain points for pairs that struggled to manage a broad network of physicians complex drug regimens rapidly evolving clinical pathways and appropriate side of service given the high variability in cost.
New century has deep expertise in total cost of care management through innovative data analysis halfway development and specialists to specialist engagement offers a unique solution do address rapid increases in medical trend and suboptimal clinical outcomes.
Given the market dynamics in fact that oncology and cardiology represent 25% of Medicare spend we expect government policy will continue to be an additional catalyst in spring ongoing demand for these services in the market.
Its the combination of increasing cost pressure administrative and clinical complexity and the inability to effectively engage providers and patients that's opening up significant opportunities for evolent across all lines of business.
The breadth of our current offerings, which serves the population health health plan services and specialty care management markets has doubled our total addressable market for ensuring we have multiple entry points and cross sell opportunities across our partner network.
You can see the diversification of our solutions reflected in several of our last partnership announcements.
A blue Cross plan, we're helping to manage an exchange population.
Existing Medicaid plans, we're providing our full suite of health plan services.
Medicare a C O has that been integrated solutions to effectively engage patients with chronic conditions.
And comprehensive oncology specialty management services for a Medicaid plan with rapidly rising drug costs and above market cost trends.
As a result, the breadth of our offering a market leadership position have translated into one of the largest weighted pipelines in our history with several opportunities either recently closed or late stage evaluation.
In terms of new partners. One area of recent focus has been identifying high performing physician groups in markets, where we can add a significant number of lives and leverage our integrated platform to liver market, leading clinical and financial performance.
The new way C O program sponsored by CMS or an excellent catalyst for market expansion and to that end I'm excited to announce new partnerships with three provider organizations, Michigan health professionals integrated AC show and the south in the clinic.
These organizations are high performance provider groups that have a line of sight to significant Medicare lives in their respective markets.
Michigan Health professionals as a network of nearly 400 independent physicians in the Detroit area, who support nearly 25000 Medicare beneficiaries in its Medicare a CEO .
Integrated a C. O is a network of 55 physician practices spread across several major markets in Texas.
Over the years integrated a C. O is earned a strong reputation for delivering a fish huh.
High quality care to more than 10000, Medicare beneficiaries and has significant growth opportunities in the Austin and San Antonio markets.
The South Bend the clinic as an independent employed provider group in Indiana that currently manages over 7000, Medicare beneficiaries and its Medicare Hcl.
Also on the Medicare Asias segment weight of Medicaid community care has decided to evolve its partnership with Avalon by agreeing to enter MSS pay next year.
Over the last several years W. KCC has earned a fantastic reputation as a market leader that consistently provides high value care to the population that serves.
Entering the Medicare a C. O program is not only a vote of confidence in our partnership will also make a significant impact on the lives of Medicare beneficiaries in North Carolina.
Across those four partners in 2020, we anticipate supporting more than 60000 lives initially and CMS is pathways to success program and expect to substantially increase the number of Medicare risk lives under management across the next several years.
Along with WK C.C.. We're currently in the midst of one of the largest same store growth cycles in our company's history as several partners are expanding their service space with Avalon or adding new populations.
This obviously represents an exciting vote of confidence in our partnership model as well as the broader movement to value based care.
A few examples include two partners entering the Medicare advantage segment, leveraging other ones platform to support market entry and operations.
A large Jay Seo, adding several pair delegated risk arrangements to substantially expand total premiums under management.
Addition of well over 300000 Medicaid lives for new century, how across several markets for both oncology and cardiovascular services.
Supporting an existing health system partner to develop a clinically integrated network to rapidly expand its value based footprint.
Having this level of same store sales a new partner additions at this time of the year gives us high visibility into an exciting revenue outlook for next year.
To that end in terms of setting up 2020 for strong revenue and margin expansion and solidifying our market leadership position, we've made steady progress towards our three key priorities for the year.
Driving topline growth.
Stabilizing and improving performance at passport health plan and aligning our cost structure to reflect our approach to the market.
On the topline our focus for the year has been to achieve double digit year over year growth by Q4 and set up a resumption of mid teens organic growth in 2020.
Given the positive market dynamics that are referenced earlier and a great effort by our business development team, we're on track to achieve those goals.
In the fourth quarter, we expect our topline to be north of 10% growth versus Q4 of last year, and we have high visibility given that over 90% of our estimated revenues for Q4 are currently under contract.
The building blocks of the sequential growth in the year include higher transformation revenues as we expect to step up and implementations in Q3 and Q4 as we prepare for a CEO and Medicare advantage launches in 2020.
Continued ramp up of partnerships already announced this year.
In power River City Medical group and from Era will all be fully operational by the fourth quarter and these three partners will out over 375000 lives to the platform.
Same store sales across our partner network, most notably with new century successfully cross selling into passport and other clients in Q4.
Passport kicked off on August 1st and we'll leave fully up and running in the fourth quarter.
Lastly, we have a few late stage pipeline opportunities that we expect to start within the calendar year.
All in we have a diverse and balanced set of new business coming on in the second half and Q1 of next year that sets us up well for a resumption of mid teens growth in 2020.
Our second priority has been around returning passport to profitability and responding to the recently released Medicaid RFP.
As of June we've seen an eight percentage point improvement in margins and anticipate an additional four points of improvement to continue in the third quarter.
The improvement has been generated through multiple medical expense initiatives higher payment rates, lower admin spending and a more integrated approach to behavioral health dental and pharmacy.
We've also been incredibly positive feedback from members, which as a reminder, as to why passport has had consistently strong member satisfaction scores over the years. According to consumer assessment of healthcare providers at sort of survey system data.
We've also seen incredibly positive service feedback from members, which as a reminder, as to why passport has had consistently strong member satisfaction scores over the years. According to consumer assessment of healthcare providers and system survey data.
As we look to Q4 and our goal of positive contribution we will have an additional modest rate increase effective in Q3 as well as the full complement of medical expense initiatives in place.
Improvement in both of these metrics gives us a clear line of sight for meeting our goal of driving a positive margin in the plan.
In terms of the RFP passport submitted a comprehensive response on July 3rd and anticipates The award decision to come in the month of October .
Last week, the attorney General announced that his office has approved the transaction and while other approvals are still needed. We remain on track to close the deal in Q4 of this year.
Lastly, passports board announced that they are dropping their lawsuit with the state regarding retroactive rate relief, which we believe is a very positive step in establishing a collaborative and productive relationship with the Commonwealth.
Clearly an incredible effort and tremendous progress by the team in a short period of time with an exciting opportunity to build on passports 20 year history as a leading Medicaid plan in Kentucky.
Our last objective for this year has been to enter 2020 with a leaner cost structure, which combined with strong topline growth will drive significant margin expansion.
Across this year, we've worked to streamline operations eliminate unnecessary redundancy leverage AI and machine learning in our core processes and focus on improved contract profitability with select partners.
As we look to Q4, we remain focused on achieving a run rate adjusted EBITDA of 40 to 50 million, which implies a 20 million dollar improvement versus the second quarter.
The sources of that improvement are twofold first our Q4 top line forecast is substantially contracted with 40 million higher revenue than in Q2, and we expect to see a flow through of approximately 25%.
That implies that one half of the EBITDA improvement in the back half of the year is coming from revenue growth.
The other half of the EBITDA improvement is coming from cost initiatives through Q2 that have already lowered operating expenses by $11 million in the quarter and will contribute roughly $10 million of additional improvement with a full quarter impact by Q4.
All in all we're well on our way to achieving our key objectives for setting up 2020 with mid teens growth and strong margin expansion.
With six new partners. This year, a strong new partner pipeline and strong same store growth, we feel very good about our overall growth strategy and continued position as a market leader.
We've also made excellent progress with passport, providing significant cost reductions strong clinical outcomes at high levels of service satisfaction for its members.
That overview I will turn it over to John to speak about our financial performance on the quarter and our outlook for the remainder of the year.
Thanks, Frank and good evening, everyone today, I will cover our financial results for the second quarter of 2019, and we'll finish with an overview of our 2019 outlook.
Overall as Frank mentioned, we made significant progress during the second quarter towards our goal of $40 million to $50 million run rate adjusted EBITDA by the end of the year and our second quarter results track. According to our expectations across revenue operating expenses and adjusted EBITDA.
Beginning with our consolidated second quarter results.
Adjusted revenue increased 32.9% year over year to 192.1 million, mostly through the impact of the new century acquisition as well as growth within our true health segment from the previously announced reinsurance agreements with New Mexico health connections.
Adjusted EBITDA decreased $12.6 million year over year to minus 7.7 million.
Adjusted loss available for class, a and class B common shareholders was minus $21.4 million or minus 26 cents per share for the quarter compared to minus $2.3 million or minus three cents per share in the same period of the prior year.
As of August five 2019, there were 83.8 million shares of our class a common stock outstanding and 0.7 million shares of our class B common stock outstanding.
Within consolidated adjusted EBITDA adjusted cost of revenue, which includes claims expenses increased to $142.7 million or 74.3% of adjusted revenue for the second quarter compared to $86.6 million or 59.9% and adjusted revenue in the same quarter of the prior year.
Adjusted EPS DNA expenses increased to 57.1 million or 29.7% of adjusted revenue for the second quarter compared to 53.0 million or 36.7% and adjusted revenue in the same quarter of the prior year.
The increase in both adjusted cost of revenue and adjusted EPS DNA expenses year over year was due primarily to the costs assumed from the assets acquired as part of the new century transaction as well as additional personnel costs and third party support services across the organization.
Combined our total adjusted cost of revenue and adjusted EPS DNA expenses as a percentage of total adjusted revenue increased to 104% in the second quarter of 2019 compared to 96.6% in the same quarter of the prior year.
Now I will take you through the second quarter results by segment.
In our services segment second quarter adjusted services revenue increased 19.4% to $149.7 million.
Up from $125.4 million in the same period of the prior year.
Adjusted transformation revenue in the second quarter accounted for $1.9 million or 1.3% of our total adjusted services revenue for the second quarter compared to $8.2 million in the same quarter last year.
Adjusted platform and operations revenue accounted for 147.8 million or 98.7% of our total adjusted services revenue for the second quarter compared to $117.2 million in the same quarter last year.
On a year over year basis, the increase in adjusted services revenue was primarily driven by the impact of the acquisition of new century.
As of June Thirtyth 2019, we had approximately 3.5 million lives on our services platform.
Our average PMPM fee for the quarter at $14.22 compared to $13.24 in the same period in the prior year.
Adjusted EBITDA from our services segment for the quarter was minus $8.8 million down $14.4 million from $5.6 million in the prior year.
Our performance in the second quarter was on track relative to our expectation with adjusted EBITDA, increasing by 6.7 million sequentially versus the first quarter.
With the combined effect of revenue growth and the impact of cost reduction efforts, we expect to achieve a run rate target of 40 to 50 million in adjusted EBITDA by Q4, driving a material turnaround in profitability from the first half of the year.
Turning to our two health segment, we had premium revenue at $45.8 million in the second quarter up $22.8 million from the same quarter last year, largely due to the amended reinsurance agreements with new Mexico health connections entered into during the fourth quarter of 2018.
Our own health plan to help served an average of just over 17000 large and small group members in new Mexico in the quarter generating 22.4 million the total $45.8 million a premium revenue in the quarter.
Adjusted EBITDA from true health for the quarter was $1.1 million.
Our combined medical cost ratio was 78.8% in the second quarter and in line with the 79.8% NCR we experian.
In the second quarter were a 40 million dollar loan to passport health and a 15 million dollar investment in our true health JV with global health in Oklahoma.
With regard to passport commensurate with formally filing the RFP, we chose to increase our plan to advance to $40 million to put some extra cushion on the balance sheet.
Long term debt at quarter end consisted of $225.6 million net carrying value of our 2021 and 2025 convertible senior notes.
For the second quarter cash used by operations was $13.5 million.
Cash used in investing activities during the quarter was $65.3 million and largely attributable to approximately $8.3 million of capitalized software development expenses and purchases of PPD.
$3.3 million of purchases of investments.
$15 million of investments associated with the previously announced global health partnership.
And $40 million advanced to passport for regulatory capital requirements.
Cash used by financing activities during the quarter was $11.4 million in predominantly due to decreases to restricted cash accounts held on behalf of our partners for claims processing purposes.
In summary, as Frank laid out in his comments, we are on track to achieve our top line and adjusted EBITDA targets for the fourth quarter, thus, marking a material improvement over the first half of the year.
However, timing delays on contracts start dates and realization of cost savings is impacting on our third quarter and thus full year outlook and we are adjusting our guidance accordingly.
We're now forecasting total revenue of $825 million to $850 million for the calendar year 2019.
The components of revenue are as follows.
For the full year 2018, we expect adjusted services revenues to be in the range of $664 million to $684 million.
For the full year 2019, we are forecasting true health segment revenues of $175 million to $180 million.
For the full year, we are forecasting intercompany eliminations of minus $14 million.
With respect to full year adjusted EBITDA, we're now forecasting a range of minus 10 to minus $2 million.
For the third quarter, specifically, we are forecasting total revenue of $213.5 million to $225.5 million.
The components of revenue are as follows.
For the third quarter of 2019, we expect services revenues of $175 million to $185 million.
For the third quarter of 2019, we are forecasting true health segment revenues of $42 million to $44 million.
For the third quarter, we are forecasting intercompany eliminations of minus $3.5 million.
We are forecasting adjusted EBITDA of $2 million to $6 million.
With that I will turn it back over to Frank.
Thanks, Sean.
I want to close with a brief recap of our primary sources of differentiation that drive value for our partners and establish our position as a leader in the market.
First the level of clinical administrative and operational integration in our core platform is highly unique in what is a very fragmented industry.
If youre provider or health plan, managing a value based risk business. It's critical to have an integrated platform that pulls in a variety of data to drive clinical workflow, including claims and comprehensive medical information on the population that your service.
For instance, if you have members of risk for an acute care episode or you able to identify them early and then provide the appropriate level of support and follow up to avoid a hospital stay or further deterioration.
The ability to have a consolidated view into claims individual benefits information and important clinical details allows you to take the right action in a matter of hours instead of weeks.
This ability to pull together comprehensive data sets in one easy place to drive clinical workflow and prospectively impact of course of care has been a struggle historically for most payers.
The issue is even more difficult for providers that many times have completely different systems and reporting requirements for the variety of payers that they serve.
Having an integrated platform as a one stop shop that can work across Payors, Poland is critical claims and clinical data and essentially act as a connector between payer and provider is a real differentiator and drive significant improvements in clinical and financial performance.
Second Evolent brings a wealth of health plan to clinical and operational expertise in serving Medicaid Medicare commercial and exchange populations experience, we've amassed serving over 35 partners and 3.5 million lives.
The uniqueness in our role and acting as a bridge between payers and providers to facilitate much more collaborative and effective approaches to managing complex patient populations.
This takes deep expertise experience working with both providers and payers and collaborative solutions, which balance the objectives of payers providers and patients.
Our employee base over 3000 strong is one of the most talented groups assembled in the health care services World and is absolutely committed to improving the health of the partner communities we serve.
Lastly, patients with chronic conditions drive a substantial portion of health care spending in the us and require a thoughtful and evidence based approach driven by sophisticated.
Data analytics comprehensive clinical program development and unique modalities for effective provider and patient engagement.
Across the last eight years, everyone has developed deep expertise in managing chronic condition patients and driving improved health outcomes and significant reductions in total costs.
In part. This is the result of our continued investment in sophisticated analytics predictive patient identification and selecting the correct modality to most effectively engage and graduate patients in our clinical programs.
These are critical competencies to managing large complex patient populations and ultimately represent the difference in market leading performance in a health care world increasingly focused on driving reimbursement systems based on demonstrably outcomes.
Thank you again for participating in tonight's call with that we'll end our formal remarks and take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
And our first question comes from Ryan Daniels of William Blair. Please go ahead.
Hi, guys. Thanks for all the details I wanted to dive into the pipeline and a little bit more color.
Frank I think you've talked about the weighted pipeline being the largest or one of the largest in company history. So I'm curious if you can talk about that in several aspects one is really around care management TCPA.
Two is it kind of the core Evelyn or more the new century, and then three any specific payer categories that you are seeing particular strength in.
Great. Thanks, Ryan.
So one of the things that we've talked about.
Recently is the fact that we really have diversified our service portfolio.
If you think about our original market being in population health, that's obviously, where we've built up a lot of infrastructure and capability.
Still a lot of growth and momentum with what's going on with the CMS a C O programs or new launches. There. We also have the health plan services side, which serves existing provider plans as well as regional health plans and then we have specialty care management, which goes all the way from provider plans to regional plans to national plans.
What that is effectively done is increased our addressable market and obviously given us a much more diverse approach to the market.
If you step back one obviously feel good about the fact that we have six partners and again very diverse set of partners in the beginning of the year across that spectrum that I just mentioned.
And then if you look in the.
Late stage pipeline.
And sort of what you see there I would say.
Across all of them. So we still have a number of organizations that are interested in the government AC O programs and see that as a good way to enter Medicare.
We have organizations focused on Medicare advantage.
And see possibilities there between now and the end of the year on the health plan services side.
Continued opportunities with.
Regional Medicaid plans that already have lives and scale, but want greater sophistication in terms of infrastructure and the clinical tie that we have to the identifi platform.
And then if you look at new century, I would say a very diverse pipeline really spanning.
Medicaid and Medicare, which is nice because that's been a new additions since the acquisition is seeing very strong application in Medicaid, but also across both.
Regional and National plans so.
If you step back and again look at the weighted pipe and how we think about it I would say one we've already closed.
Enough business to give us very strong confidence in mid teens growth for next year. So thats highly visible based on where we sit today and then you look at the additional things we have in the pipeline and I would say, we close a few of what our very large opportunities in late stages, and we see even accelerated growth over that level. So we don't need to.
Sweep the pipeline when you basically nothing to add or very little to add to feel very confident in mid teens and I would say a few of the things in the pipeline.
That close would give us confidence to go beyond that.
Going into next year, So I would say one of the best six months that we've had from a pipeline perspective and also what I feel good about is the fact that a lot of it's coming from our existing partner base. So.
To to have substantial growth that nch across a few of our Medicaid partners across several hundred thousand lives. That's big a big add in terms of revenue I mentioned, the Medicare advantage additions with with two of our partners. Some delegated risk arrangements. So very diverse across almost all segments that we serve and again very strong visibility going into next year.
Okay very helpful color and then as a follow up here and this may be difficult to discuss on a public earnings call, but largest pipeline you've seen one of the best same store growth outlooks in company history, which is a great data point.
Passport clearly improving yet your stock and sitting here at an all time low so I'm curious what the board.
Hence thought of potential strategic alternatives are ways to create value share repurchases anything of that nature that you could share with the investment community. Thanks.
Yes, I think we've been very focused obviously on a specific agenda. We have this year one was our returning topline growth.
To double digit growth by the second half of the year and then teens growth next year are driving significant margin expansion.
If you if you do all of that you have a service business approaching a billion in revenue.
Which again, we believe on a comparable basis surely drives.
A lot of equity value.
Second we realize there was a lot of questions about the investment in passport whether that was a shift in strategy, whether that was going to be a good investment for us. We believe were proving out the thesis that we can drive strong financial performance that surely the investment from a value perspective.
Past for wins, the RFP will be seen.
As a very strong investment and obviously a lot of strategic options as to how we evolve our relationship there.
How we leverage the network.
How we continue to collaborate with our provider partners, but we think it's a very valuable asset.
In Kentucky and that it can have massive economic benefit for us over time. So our immediate focus has been executing on that and we felt very strongly that as we deliver against that that we'll see.
A rebound in the stock price and generally.
In investor confidence and hopefully some of the things we're talking about on the call today in terms of visibility.
And really achieving the main tenets of our plan by the fourth quarter and into next year, you will help to build that confidence.
What I would say is we're always mindful of lifting up our heads and seeing where we sit strategically in the market where are we from.
As value perspective, where do we sit view sub lease the various players in the market rebuilding a valuable and differentiated asset are we thinking through the options for how to take advantage of that and monetize that.
And I would just say that we've got a board that is obviously highly experienced and if we didnt see a rebound to the to the equity and yet the strong performance that we anticipate that obviously that might open up various options. Some of the ones that you described whether that's.
Strategic positioning of the company with us.
Stock repurchase all of those things would be would be on the table based on on where we set but right now I think it's been building confidence in our plan executing on it getting to where we want it to get by the fourth quarter setting up a service business approaching a billion in revenue with mid teens potentially higher growth and strong margin expansion and then having demonstrated that we could invest in an asset that we believe is a very valuable asset.
And begin to demonstrate that value and it obviously has its own standalone asset value and I think a smart investor will look at that and say got to add up these pieces, particularly relative to comparable companies and the addressable market that level and has and and we will be back to where we want to be from a stock price perspective, So thats right now our current focus.
Okay I really appreciate that fair comment. Thank you so much.
Thanks.
Our next question comes from Robert Jones of Goldman Sachs. Please go ahead.
Great. Thanks for the question, Yes, Frank just wanted to go back to your expectations for mid teens growth next year.
Clearly sounds like a lot of confidence good line of sight into getting to at least that number but I wanted to ask on a few of the assumptions behind some key swing factors. So maybe just throw out three of them and just hear what you guys are thinking as far as how they play out relative to that expectation. So I guess the first obvious one would just be.
Passport and the success level assumed in the in the Kentucky RFP process.
I know to mid year, but I'm sure we would have some impact on on next year.
The other one would just be what are you assuming around the incremental Medicaid enrollment in Florida.
And then just the last one would be around the expectation around beacon health in light of the.
The proposed acquisition of that plan, so just kind of even directionally, how you're thinking about those three three swing factors relative to that mid teens growth would be helpful.
Yes, great question first on passport.
If we win the RFP based on what we see today with largely.
Things that are contracted we would be at high teens potentially higher with passport, winning with passport or losing we'd be more in the neighborhood of low teens. So either way, we still see very strong revenue growth heading into next year.
With Florida, we do believe that we have the opportunity to increase membership growth there, but we're not assuming that in any of the assumptions that I. Just gave you about growth. So any upside there would be upside on the numbers that I just gave you.
And then on Beacon Beacon has reiterated their commitment to excellence and our partnership.
We work together in several markets where value we're viewed as a very important.
Strategic partner for them, we actually work together at passport, which as you can imagine is a very large contract that they would be part of.
Our RFP response.
We work with them in Arkansas, we work with them in New York, So we see that as.
Something that.
He has been going well that will expand over time, we obviously want to make sure that we have a very integrated approach with our offerings. So thats very important that were delivered delivering seamless service to members and that were being innovative there. So theres a lot we ask of them in terms of how they evolve.
And obviously, we need to work together, well, but we see that as a very strong relationship and if anything thats been reiterated since the acquisition. So that hopefully gives you a sense we're not.
Again, depending on.
A bunch of new and different things to get us to where we need to get to from a revenue perspective for 2020.
No no that makes a ton of sense and then I guess just on on the EBITDA.
And clearly the confidence.
You know to any exit the year at the run rate that you guys had been pointing to.
But you know obviously yet in the quarter you.
Your your your lowering expectations for the year.
You know next quarter I think look based on the guidance.
Not as robust as what do you expect to be in Fourq can you, maybe just talk a little bit about how EBITDA has played out and what's kind of been impacting the profitability, causing a little bit more volatility and then obviously as it relates to that the what gives you the confidence that the the year end exit rate is still very much intact.
Yeah, I'll start and then I'll have John .
Comment on specifics, if you think about where we started the year.
We had a relatively ambitious agenda, we want it to get to double digit growth and 40% to $50 million in contribution by the fourth quarter that was really our goal and what we really care about is the set up for 2020 ongoing growth and margin expansion I think the message you're getting on the call is we are very confident in our path.
Towards our objectives in 2020 and that we feel very good about Q4, what you do see in our business.
When you're driving that kind of increase from Q1 to Q4 is as you're bringing on new topline revenue start dates really matter. So we had a couple of contracts that we expected to start mid Q2, one at the beginning of Q3 and those moved a couple of months because of regulatory approvals again, some things outside of our control. So you have a couple of things move that are fairly large opportunities. We have another thing again expected to start mid Q3, which will start at the beginning of Q4 and that can then influence the flow of EBITDA in Q2 and Q3. The good news is all those things are contracted we have a clear line of sight on start dates there's no ambiguity of.
Those starting.
And running through Q4, and then John will comment on this but on the cost side. You will also have some things that you anticipate are going to be fully in place by the second quarter and a certain part of it slips into the third quarter and so we've had a little bit of that in the middle of the year I would say on overall targets and what we needed to do.
We obviously took on a lot at the beginning of the year and I feel very good about where we are but you will see some of those quarter to quarter fluctuations John anything you want to add to that.
Yes, I just add one piece of color around the cost side, if you look at the.
Opex in the services line from Q1 to Q2.
We saw an $11 million sequential improvement there that does not fully reflect the full impact.
The initiatives and actions, we put in place during the quarter and so as Frank indicated we will see.
Incremental improvement flowing into Q3, and then again into Q4 at from actions that have already been taken.
Understood. Thank you.
Thanks.
Our next question comes from Jamie Stockton of Wells Fargo. Please go ahead.
Hi, good evening, Thanks for taking my questions, maybe just one more on on where Bob started.
As far as the kind of mid teens outlook for next year, the premium piece of the revenue.
Is it reasonable to assume that and mid teens growth number that you're assuming that the premium pieces really maybe just growing mid single digits or something like that.
So on the premium piece, we're not assuming.
Significant growth on the premium piece, so I wouldnt really when we're talking mid teens growth, we're really talking the service part of our business.
On.
On the new Mexico side.
We do anticipate some growth, but I'm not really factoring that in into the mid teens part were really talking about the the core service business.
Okay, that's great.
And then my other question is about the balance sheet.
I think John .
Thrown out like a $110 million cash number.
You guys haven't closed the passport deal, which is going to be 70.
If you could just talk about.
Now how what are your thoughts on how kind of you managed balance sheet from here.
Obviously, you're seeing.
You know in improvement and adjusted EBITDA, which presumably is going to have a beneficial impact on kind of what free cash flow looks like.
But just what your thoughts are on the balance sheet from here would be great.
Hey, Jamie its Nikki and I would say on that point.
Two things one is.
As you said I mean, we would expect to be cash flow neutral between for the remainder of the year based on that on that dynamic in the business. So that's one thing and secondly, as we've talked about before we would look to replenish the balance sheet and add more cash to the balance sheet, we've looked at and debt options in debt with the passport timing likely a Q4 event, we'll visited line that up that action up with posted to the timing there, but we're comfortable with where we sit with what the outlook is on the on a cash flow basis for the year end and our options to replenish the balance sheet. So all in all we feel comfortable where we sit.
Okay. Thank you.
Thanks.
Our next question comes from Sean Wieland of Piper Jaffray. Please go ahead.
Hi, Thanks, So I've got a follow up on Bob's line of questioning on that on the growth rate you characterize passport as taking it from a high teens growth to a low teens growth, which if that's maybe 500 basis points in revenue.
Would size passport in the maybe $40 million to $50 million range.
I thought it was more than that and so can you set me straight on that.
Yes.
And John can chime in.
If you think about past four weve.
Steve passport will still serve out the membership through the middle of the year. So you've still got 50% of your full run rate revenue for the year and you still have some run out probably on revenues. So you'd have a portion of that revenue come off and thats. The difference between a high teens and a low teens rate.
Okay got it so but the overall passport contribution to revenue is in the $150 million range or will be once it's all.
Built out.
TCH ramps it could be higher than that I mean, we're just starting that contract in August so we need to see the number of lives that the Nch services apply to and we will have better visibility on that as we get towards the end of the year, but we sort of set our bases I remember was in the 80 $92 million range.
Initially.
We thought new century, as well as some of the additional services we are adding this year.
I would add to that and so I would think about it as.
Well over 150, but but in that zone with potential to grow beyond that as we go into next year.
Okay and is it fair to ask what the contribution to EBITDA is.
Yes, I'd say on EBITDA I mean, it has similar contribution margins to our overall business. So I mean, John you can just in terms of overall contribution margins at similar its not an outsize contract from that perspective, but if you run the math that obviously is important from a contribution margin perspective.
Okay, and one more if I could what was the 9.6 million dollar gain in the quarter did I Miss something.
Yes that was related to the global transaction the gain and the assets that we contributed to the JV.
Okay. Thank you very much.
Thanks.
Our next question comes from Matthew Gilmore of Robert Baird. Please go ahead.
Hi, Thanks for the question, but wanted to get an update on passports financial position you made some comments about their margin trajectory that same very positive.
Well its profitability metrics on an EBITDA basis, our net income and then you also talked about the $40 million.
Plan advance.
Just given their trajectory on margins can you give us some sense for when you'd recoup that line.
Yes, I would say.
The plan is a nonprofit.
So there are not a tax payer if you look at the margin improvement that its occurred it's been about eight points of improvement. If you look at January run rate to June run rate.
So that pretty significant some of that coming from the rate increase that was.
Effective April 1st the other portion coming from.
Expense initiatives clinical programs that we've put in place, which are engaging a higher proportion of patients and therefore, having an impact on hospitalizations and medical costs, we expect an additional four points of margin improvement.
Coming into this quarter some of that is based on a small rate improvement that will be effective in Q3. So additional the one that happened in April . We'll also have a full quarter of our expense reduction initiatives coming into the quarter, and then new century, which will take a little while to ramp but launched August 1st.
So we probably won't get the full benefit of that until the until the fourth quarter, but right now we're feeling pretty good about.
Exiting Q3 at breakeven at least and then as we head into Q4 with news.
Keith we brought we're working very closely with passport team.
And again.
Feel very good about where we are on your last question.
Going into the RFP I think we wanted to.
Top off the balance sheet, so that we have appropriate cushion there from a capital perspective.
As we entered that process and as we begin to generate positive contribution on a monthly basis that would obviously less than the level of ongoing balance sheet support we won't likely close the transaction until the very end of the year and so you can sort of balance those two things and we think we'll be it at roughly where our original estimates were in terms of capital contribution.
Alright fair enough.
And then on the pipeline side, Frank you mentioned, there's a several sort of late stage deals that could close and potentially get launched it sounds like those were relatively chunky opportunities can can you at least give us some sense for.
Sort of where they would fit in that business is that more on the health plan services side or are more specialty management or pop health.
Yep.
And just to be clear what weve.
What we've said is that 95% of our Q4 run rates is contracted so high visibility.
Those are contracts that we know are starting.
In between now and the fourth quarter. So we're really talking about a small amount of incremental revenue in terms of our Q4 run rate. So what I'm really referring to is we want to add additional growth in setting up 20, and 21 beyond mid teens.
It's been looking to what's what's in the late stage pipeline and I would say, they're a combination of a few things a few existing plans that are looking.
To improve the sophistication of their health plan services platform that once the tie into identify so they can continue to innovate clinically I would say those make up a few and.
Some of those are Medicaid oriented, but also in Medicare and then the second piece.
His new century, where I would say.
For what has been a short time since we acquired the business in the fourth quarter of last year I think we put a pretty strong team against that we've leveraged our existing network as we talked about and then also been really thoughtful about our go to market approach and I would say, we have a very strong pipeline there as well some of those opportunities because you're working with.
Existing regional plans that have a large number of lives have the potential to be quite significant in terms of their revenue contribution will generally have an implementation cycles. So those probably wouldnt.
Wouldn't implement until the end of the first quarter of next year, but those could be substantial contributors to 20 in 2021.
Got it thank you.
Thanks.
Our next question comes from Richard close of Canaccord Genuity. Please go ahead.
Great. Thanks for the update here and the question just on the same store growth I was wondering Frank if you can just maybe talk a little bit about.
The total number of lives that you are talking about with with all that business and maybe the timing of when all that comes on.
Yeah.
I would say if you look at.
A few segments. The M&A lives with two partners that I mentioned would come on in January I don't have an exact estimate but again, there you're going to be ramping new plan. So.
It probably would be under 10000 wise, but their their Medicare lives, so a higher PMPM probably about.
10000 there.
I mentioned that we have some that we've already announced which are over 300000 lives, which will come on by the fourth quarter.
Actually some of those are new so to be fair not not same store.
If you look at Nch at passports and a couple of the other opportunities we see in the Medicaid segment and with one of our Medicare client, it's probably 300000 lives over 300000 lives across those plans Thats, obviously, a higher RPM PMSO.
Thats a substantial revenue generator and then we have.
A.
A partner in a CEO that's.
Expecting to add pretty substantial book of.
Delegated risk lives that could be again hard to estimate but that could be over 100000. It could range from 50 to 150000.
Lives from that perspective so.
If you add all that up Thats, a substantial growth into next year coming from same store, which again, we feel very good about it's obviously easier.
To scale when you already have the relationship and then with six new additions this year on the on the new side as well as the pipeline that I just referenced.
We have the potential to go beyond that that growth estimate for next year.
Okay, and a follow up maybe on the pathways program.
How are you seeing that shake shake out obviously, you had some success and adding new people or new clients. This quarter, how do you think that trends.
So.
As we enter 2020.
Yes, I would just say our plan has been to be highly selective in terms of new partners, we add in that program.
And the Hcl programs in general we want partners that have a strong historical track record of MSR performance with their Medicaid populations that have a large geographic area of potential population to scale to that potentially have interest in other population. So we don't end up with us in a situation, where we're working with 5000 lives and we're really not driving scale in those markets. So we want to be working with winners that ultimately can add tens of thousands of lives over 50000 lives over 100000 lives in their markets across time, and so I would say were less focus on numbers. There are a number of partners, but selecting the right ones and having ones that successfully scale and grow over time, So I think you'll see some additional.
Announcements there as we continue to add organizations to that program, but we're not planning on building a very large cohort of.
Does that have a small number of lives that's not where our business focuses.
Okay. Thank you.
Thanks.
Our next question comes from Mohan Naidu of Oppenheimer. Please go ahead.
Thanks for taking my questions Frank them first on the.
Pipelines trend than the six partnerships that you have seen so far.
Can you talk about your implementation capacity to handle that and especially as you see more pipeline converting towards the second half of this year.
Yes, Thats a good question.
Obviously, when we have this kind of growth to accommodate across.
A variety of different segments, we need to make sure we're ready.
To launch that we have the capacity that we can hit the ground running on day, one I would say we feel good about our capacity at this point and ability to deliver.
Based on the opportunities that I, just talked about I would say if we got.
Additional wins, we probably will need to think about staffing up for those implementations that we have the accurate lead time.
Because we're obviously stretch to accommodate the growth going into next year. So that's something we've dealt with in the past, we obviously have a very strong pipeline.
In our overall recruiting efforts and feel like we can accommodate that but but we would need to respond quickly and we definitely we need to do some incremental hiring.
As we as we head into next year.
Thanks for that color, maybe one quick one on Cook County care any updates on the program position and what you're seeing.
That program, so far and.
Given that the state budget Lucerne is not such an envious position right now how do you see that program sustaining.
Yes, I would say.
We really have had a strong relationship with county care.
They've got a very strong leadership team in place and the health plan.
We've expanded our relationship across time.
I think they're very highly regarded plan in the community and we think that they will continue to be a great partner for us going into the future.
The state is obviously under economic pressure.
There's been.
No.
A lot of speculation about what's going to happen in the state Medicaid plan et cetera.
It's our belief that.
It's a very important community asset it contributes a lot to the broader health system.
With that it's incredibly important to beneficiaries in the county and has a lot of political support and we think there will be a strong plan going forward and I think if you ultimately look at.
How they are performing how they contribute to the overall health system that they are part of.
They make a very important and significant contribution if you look at the full picture of the economics. They drive for the whole system. So I think a very valuable asset again, one we've had a strong working relationship with.
Obviously, we want them to be as efficient as we can and I think thats one of the reasons. We have the partnership we do because of the scale, we bring the additional ways, we can add value for them things like.
New century.
Which frankly for all of our partners that are in the risk business can can add value over time and looking for those types of opportunities but.
Again strong relationship and we think they will be around for a long time.
Thanks for the color Frank.
Our next question comes from Charles Rise of Cowen. Please go ahead.
Yes. Thanks for taking the question just a quick question I think you talked about investing capital of 40 million.
In the past where is that separate from the $20 million line of credit.
That was announced on the original deal.
And then secondly.
Any kind of color you can give around sort of the the bid submission.
I guess I would assume from from this investment as well as a line of credit.
You bet.
Any kind of requirements needed for bidding on passport.
Yes, just to clarify the 40 is inclusive of the 20.
The RFP happened after we announced the deal going into the RFP I think we wanted them to have some more balance.
She cushion and so we put an additional 21.
Commensurate with the RFP process, you know the RFP responses were due July so.
Passport submitted a comprehensive response.
We expect to hear in the October October timeframe based on what we've heard from the department of Medicaid.
No comment on potential winners or anything like that we don't obviously have any information or would we comment on that.
We obviously feel that passport.
It is a real asset and the community strong track record across the last 20 years incredible member satisfaction ratings, we think that.
It's an important plan, that's having a really important impact on the Medicaid recipients that they serve and we're hopeful and looking forward to try to build on that but but no specific comments on the RFP.
Great. Thank you and if I could just follow up you talked about sort of the investments we're making.
It's also helped drive the growth next year as well when the investments you're making on the passport side is that captured off income statements sort of as part of the equity line or is that.
Are you carrying costs on the.
So in the Evolent incomes, Dave piano.
That would benefit sort of passport side just to.
Trying to understand that a little bit.
Yes, no right now we don't own the planned turnarounds, so any any investments around our on our side of the ledger and.
Obviously this is in the in the context of the services. We provide today. So as we clinical program, then PTA et cetera, So kind of normal course in our line of business and then on our side of the ledger.
So then would that change once the transaction closes in the fall and let's assume that you you passport gets renewed.
Would some of the costs that you're carrying now on the Evelyn side without shipbuilder because it would be ostensibly part of operating the plan.
Again, I think in a minute.
Probably not just because they are these are services were service provider to them.
So we keep that relationship so I would say those capabilities would sit on our side.
Okay.
That's helpful. Thank you.
Our next question comes from Stephanie Demko of Citi. Please go ahead.
Hi, guys. Thank you for taking my question.
Just kind of Dovetailing on the strategic alternative question from before.
Is there anything structurally our philosophically that would keep you from a take private like an advantage as selling other public player.
Yes, Debbie this is Mickey I mean, you know not something we can really comment on at this point in terms of.
I think Frank talked about it earlier with.
In response to Ryan's question about how we look at the World and how we think about it where we're focused right now but in terms of structural or other issues and it's not really something we comment on just in as Frank said were heads down focused on delivering value. When we got a lot in front of us and Thats, where were focused today and not really something that we can comment on.
So there is.
Thank you I want the only public players are selling for solutions in the state.
No there's nothing that no.
Nothing specific like that no.
Okay understood and then.
I haven't the last question, we talk about the spend associated with the past for performance improvement.
Could you tell me a little about how that's impacted EBITDA for the year and how we could have thought about EBITDA without that level. Thanks.
[noise].
I would say that.
If I go back to John's comment to sort of looking at the arc of the year really to the point, we're referring to here is in Q3 and Thats at timing primarily to do with how these contracts started so yes, I mean, I think you're seeing some impact in Q3 of the combination effect of.
When the contract started in some of the most in the expenses that it went against them. So we were sort of ready to go expenses in place the contracts and the revenue recognition came in a little bit. After later than we expected and so it's a combination it's really just to do with the timing and.
I don't think there's an undue level of investment into passport that was not anticipated. It's more just to do with when his contract started up and you're seeing the.
Q3 is when we're seeing the impact of that primarily versus.
Q4, we are contracts are up and running for a full quarter et cetera. So.
I think more timing than investment would be that the issue at hand in Q3.
Thank you and one last quick one just given some of the attrition.
Earlier this year should we still think about that seven to nine new wins.
The number need to hit your growth targets.
That's right.
Hi, This is Frank I mean, I would say we've made it pretty clear that we don't really need a lot of new wins to help our growth target and are set up for next year, we obviously want to keep growing our partner network given the fact, we're at six for the year.
I think we adopt our range into the eight to 10 range just given our.
Our overall size so right now we feel comfortable.
Being in that range of eight to 10.
Across this year.
Hi, good afternoon, ladies and gentlemen.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Frank Williams for any closing remarks.
We appreciate everyone participating in the call, we'll obviously see many of you.
Add up and coming conferences and on the road across the next several couple of weeks on and again, thanks for participating.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.