INNV - NASDAQ

Good day and thank you for standing by. Welcome to the InnovAge First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ryan Kubota, Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you all for joining the InnovAge 2026 fiscal first quarter earnings call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal first quarter results. You may access the release on the Investor Relations section of our company website, InnovAge.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, November 4, 2025, and have not been updated subsequent to this call. During our call we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment and redetermination processing delays, seasonality of cost trends, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick?

Thank you, Ryan, and good afternoon, everyone. I know it feels like we just held our fourth quarter results and full year earnings call, and we did. The first quarter reporting cycle always comes quickly due to SEC requirements and companies needing more time to complete and audit their year-end financial results. As a result, we're meeting about 6 weeks after our last call. So today, I'll spend less time on new headline numbers and more on the progress we're making against our strategic priorities, the continued strength of our model and the momentum that we expect to carry us through fiscal year 2026. This afternoon, we reported total revenue of $236.1 million, center-level contribution margin of $51.4 million and adjusted EBITDA of $17.6 million. Compared with the first quarter of fiscal 2025, total revenue increased 15% and adjusted EBITDA more than doubled. Census grew to an all-time high of 7,890 participants, up nearly 2% quarter-over-quarter. These results reflect continued strong medical cost management and better-than-expected census growth as the Medicaid redetermination cleanup is progressing well in the first 90 days. The quarter also reflects positive momentum in our new Florida centers, particularly in Tampa where our partnership with Tampa General is off to a strong start. The operating environment for many value-based care models remains challenging. Medicare Advantage and Medicaid managed long-term supports and services are experiencing lower or declining reimbursement levels, higher-than-expected medical service utilization and growing regulatory scrutiny around risk adjustment and quality measures. In contrast, InnovAge and the PACE model have remained resilient. While many plans are retreating from markets or reporting financial strain from escalating medical costs, PACE offers a fundamentally different approach, one built on direct accountability for every aspect of participant care. At InnovAge, our providers not only deliver care within our centers, but also oversee, approve and coordinate nearly all healthcare services that occur outside our walls. This closed-loop model gives us a high degree of visibility and control over cost trends, allowing us to manage participant needs more responsibly than reacting well after the fact. These differences are showing up in the numbers. While many managed care organizations are reporting higher-than-expected medical cost trends this calendar year, our total participant expense per month declined sequentially relative to the fourth quarter of fiscal 2025. What we see in our business is also supported by independent research. In its recent report to Congress, MACPAC identified PACE as the most fully integrated care model available to dual eligibles. The study found that PACE participants, though typically older, frailer and facing more comorbidities, are generally less likely to be hospitalized, less likely to visit the emergency department, less likely to require institutional care and without increased mortality rates. Simply put, PACE works. Our job is to continue educating policymakers and payers about its value so we can expand access and unlock the program's full potential. And within the PACE sector, InnovAge is the largest provider by census in the country, serving nearly 8,000 participants across 20 centers in 6 states. That scale not only gives us operating leverage, but also unique insight to what drives consistent outcomes for frail seniors. As I approach my fourth anniversary as CEO, I've been reflecting on how much has changed. Over the last 11 quarters, we've delivered steady revenue growth, more than doubled adjusted EBITDA over the last 2 fiscal years and achieved positive net income this quarter for the first time since 2021. These results stem from disciplined execution, executing a multipronged growth strategy across markets, including existing center growth, joint ventures, M&A and de novo centers; cleaned up the balance sheet through the divestiture of multiple noncore assets and investments; upgrading systems and processes to strengthen quality, compliance and financial performance; strategically in-sourcing key services such as pharmacy and hospice to tighten cost control and improve coordination; improving center-level staffing and reducing operating model variation, supported by the enterprise rollout of the Epic EMR, the Oracle financial platform and rigorously managing corporate overhead to improve efficiency and productivity. These efforts have reshaped both the culture and the economics of InnovAge, which I believe has positioned us for sustained success. Before turning to our outlook, I want to touch on recent leadership changes. Over the past several years, we've built a strong leadership bench capable of stepping up when changes occur. Leadership transitions, some planned, some unplanned, are inevitable in a multiyear transformation, but they have not disrupted our momentum. We've made several important additions and adjustments. Dr. Paul Taheri, a widely respected clinical leader, joined this week as our new Chief Medical Officer. Meredith Delk recently joined as Chief Administrative Officer, leading pharmacy, home care, behavioral health and government affairs. Matt Huray has expanded his role to include sales in addition to his strategy and corporate development responsibilities as our Chief Growth Officer. Additionally, last week, we announced that Michael Scarbrough, our President and COO, will be leaving at the end of the month for personal reasons. Michael has done an excellent job strengthening our operations and positioning InnovAge for long-term success. He leaves behind a capable team and a strong foundation. These moves underscore the depth of our leadership and the growing appeal of InnovAge as a destination for top talent in the industry. Leadership change creates opportunities for internal advancement and professional growth among our next generation of leaders. At the same time, we've taken proactive steps to strengthen how the organization operates. We recently completed a spans and layers review, a structured evaluation of the size and shape of our corporate organization. This initiative focused on our shared services teams, which support our centers but do not deliver care directly to participants. Through that process, we identified opportunities to reduce management layers and streamline support functions, resulting in a smaller, more focused shared services workforce. We expect these changes to improve decision-making speed, enhance accountability and more closely align our cost structure with best-in-class benchmarks. It's a tangible example of our cost discipline and the operational maturity we continue to build across the company. Taken together, we expect that these leadership and organizational changes strengthen rather than distract from our progress. They demonstrate that InnovAge has both the talent and the structure to execute consistently through change. At its core, InnovAge exists to help seniors live safely and independently at home for as long as possible. Our integrated model reduces the burden on state and federal partners, and brings peace of mind to families. Our recent participant satisfaction survey tells that story clearly. 90% overall satisfaction and 97% of participants said they would choose InnovAge over a nursing home. Before I close, I want to share a recent testimonial from one of our participant's daughters that reminds us of our mission at InnovAge, our value proposition to families and the integrated PACE model in action. For my mom, InnovAge has been such a reassurance. At her age, if she wakes up feeling not quite right, it used to spiral into worry and that worry could turn into something worse. Now everything she needs is right there in the center: her doctor, her physical therapist, her dentist, even her eye care. Her care team shares her chart in real-time, so there is no guessing, no repeating, no gaps in her care. It's all connected. That kind of coordination gives her confidence and gives me peace of mind. It's just amazing. Stories like this remind us why our work matters and why we're so focused on execution. Behind every number we report is a person whose life and family's life is better because of this model. So, in closing, we're off to a strong start to the fiscal year. Our Q1 results were ahead of expectations, but I want to caution against annualizing them. Due to the relatively small scale of our business, the timing of Medicaid redeterminations, and the inherent seasonality of certain cost trends, first quarter results should not be indicative of full-year performance. We'll continue to execute with discipline, invest in talent and technology, and build on the foundation we've created. Continuous improvement has become part of our DNA. We remain confident in our strategy, proud of our progress, and committed to delivering sustainable growth and superior outcomes for the seniors and families we serve. With that, I'll turn it over to Ben for more detail on the financials.

Thank you, Patrick. Today, I will provide some highlights from our first quarter fiscal year 2026 financial performance and insight into some of the trends we are seeing in the current quarter. Starting with census, we served approximately 7,890 participants across 20 centers as of September 30, 2025, which represents growth of 9.4% compared to the first quarter of fiscal year 2025 and sequential quarter growth of 1.9%. We reported 23,500 member months in the first quarter, an increase of approximately 9.9% compared to the first quarter of fiscal year 2025 and an increase of approximately 2.2% over the fourth quarter. Our first quarter census growth was modestly better than expected and was primarily driven by our ability to reinstate more participants that had lost Medicaid coverage than expected and timing delays associated with disenrolling participants that have lost coverage and have not been able to regain eligibility in a few markets. Total revenues of $236.1 million increased 15.1% compared to $205.1 million in the first quarter of fiscal year 2025, driven by an increase in member months and capitation rates. The increase in member months was primarily due to growth in our existing California, Florida and Colorado centers. The increase in capitation rates was primarily due to an annual increase in Medicaid and Medicare capitation rates, partially offset by revenue reserve. Compared to the fourth quarter of fiscal year 2025, total revenues increased 6.6% due to an increase in member months and capitation rates. The increase in capitation rates was driven by annual rate increases in Colorado, New Mexico and Virginia, and an annual Medicare rate increase, all effective July 1, 2025. We incurred $108.9 million of external provider costs during the first quarter of fiscal year 2026, an increase of 1.5% compared to the first quarter of fiscal year 2025. The increase was driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility and short-stay skilled nursing facility utilization and a decrease in pharmacy expense associated with higher rebates and the transition to in-house pharmacy services. This decrease in cost per participant was partially offset by an increase in assisted living and permanent nursing facility unit costs. Compared to the fourth quarter, external provider costs increased 0.6%. The increase was primarily driven by the increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was due to lower short-stay utilization, partially offset by higher assisted living utilization and an increase in assisted living and nursing facility unit costs. Cost of care, excluding depreciation and amortization, was $75.9 million, an increase of 19.7% compared to the first quarter of fiscal year 2025. The increase was due to an increase in member months coupled with an increase in cost per participant. The increase in cost per participant was primarily driven by higher salaries, wages and benefits associated with increased headcount and higher wage rates, higher third-party fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation. Cost of care, excluding depreciation and amortization, increased 5.5% compared to the fourth quarter. The increase was due to an increase in cost per participant, coupled with an increase in member months. The increase in cost per participant was primarily driven by higher wage rates and fleet costs, including contract transportation. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $51.4 million for the quarter compared to $41.3 million for the fourth quarter of fiscal year 2025. As a percentage of revenue, center-level contribution margin of 21.8% increased by approximately 320 basis points in the quarter compared to 18.6% in the fourth quarter of fiscal year 2025. Sales and marketing expenses of approximately $7.6 million increased 17.1% compared to the first quarter of fiscal year 2025 due to an increased headcount and wage rates to support growth, coupled with increased marketing spend. Sales and marketing expenses increased by approximately 7.1% compared to the fourth quarter of 2025 due to an increase in headcount and wage rates and increased marketing spend. Corporate, general and administrative expenses of $30.3 million increased 9.9% compared to the first quarter of fiscal year 2025. The increase was primarily due to an increase in employee compensation and benefits as a result of greater headcount and an increase in wage rates to support compliance and bolster organizational capabilities, software license fees, and contract and professional services. These increases were partially offset by a decrease in legal fees. Corporate, general and administrative expenses increased 8.8% compared to the fourth quarter of 2025, primarily due to higher wage rates and an increase in contract and professional services. Net income was $7.7 million compared to net loss of $5.7 million in the first quarter of fiscal year 2025. We reported net income per share of $0.06, and our weighted average share count was approximately 136.8 million shares for the quarter on a fully diluted basis. Adjusted EBITDA was $17.6 million for the quarter compared to $6.5 million in the first quarter of fiscal year 2025 and $11.3 million in the fourth quarter of fiscal year 2025. Our adjusted EBITDA margin was 7.5% for the quarter compared to 3.2% in the first quarter of fiscal year 2025 and 5.1% in the fourth quarter of fiscal year 2025. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. For the first quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $4.1 million of de novo losses in the first quarter of fiscal year 2025 and $3.8 million of de novo losses in the fourth quarter of fiscal year 2025. Turning to our balance sheet. We ended the quarter with $67.1 million in cash and equivalents plus $42.3 million in short-term investments. We had $71.5 million in total debt on the balance sheet, representing debt under our senior secured term loan revolving credit facility and finance leases. For the first quarter, we recorded positive cash flow from operations of $3.9 million and had $4.1 million of capital expenditures. We are reaffirming our fiscal year 2026 guidance, which we laid out in September. Based on information as of today, we expect our ending census for the fiscal year 2026 to be between 7,900 and 8,100 participants, and member months to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million, and we anticipate that de novo losses for fiscal year 2026 will be in the $13.4 million to $15.4 million range. In closing, we are pleased with our first quarter results and believe we are off to a strong start to fiscal 2026. We are closely monitoring our census in light of the eligibility and enrollment system redesign due to state Medicaid redetermination that we spoke about on the last earnings call, and we look forward to providing an update on our second quarter call in February. Operator, that concludes our prepared remarks. Please open the call for questions.

[Operator Instructions] Our first question comes from the line of Benjamin Rossi with JPMorgan.

So you've previously mentioned that the calendar 3Q is typically one of your softer margin quarters as a result of open enrollment. I guess just under your reaffirmed guidance setup, how are you thinking about margin progression for the remainder of the year? And then just curious if you could walk us through some of your assumptions for the remainder of the year and how you're thinking about impact from things like the aforementioned Medicaid eligibility changes, your cost savings initiatives and then some of the broader shift into the MA V28 model.

Yes. Ben, it's Ben Adams, and I'm here with Patrick and the rest of the team. We don't give quarterly guidance. So what I would probably say is there are a couple of things that are causing a little bit of noise in the progression this year. And why don't I walk through a couple of them just so you understand what's going on. You may remember in the last call, we talked about the fact that we had a number of folks who were what we call [ LOMI ] status, people lost their Medicaid eligibility, and we were either working to reestablish it or to help them find a program that better fit their needs. That process has been ongoing. I think it probably went a little bit better in the first quarter of the year than we anticipated, but we also think it may drag on a little bit longer than we thought. So that's something that's influenced us a little bit in the first quarter. In the second quarter, there are kind of a couple of things that happened in the second quarter. We have the October Medicare fee schedule increases. We have some risk score decay, which incurs in the second quarter where the risk scores get reset on July 1. We will, again, have sort of a full quarter of our merit increases, which were implemented in the back half of Q1. And we'll probably have a little bit higher utilization as we roll into sort of cold and flu season. So we'll have those factors to deal with in Q2. And then in Q3 is really where we start to see usually a little flattening in what happens with our net enrollments because some of that is sort of a byproduct of going through the open enrollment period. And then we sort of return to kind of a more normalized Q4. So those are some of the factors that are going on. This year, because of what's happening with our population around Medicaid eligibility in the first quarter and working through some of the issues there, probably is going to make a little bit more lumpiness in the front half of the year than in the past. But we're still good where we are with guidance. So hopefully, that provides a little color on how to think about the quarters.

Really, yes, I appreciate the color there. I guess just as a follow-up, just taking a step back as we're making our way through open enrollment and Medicare Advantage. There's just been some commentary from brokers regarding an uptick in Special Needs plans offerings as some of the traditional MA plans are generally pared back. I appreciate that PACE possesses unique eligibility and processing requirements relative to those SNFs. But just curious how you describe maybe the competitive dynamics of this cycle and whether you've maybe seen any spillover into how you're thinking about your risk pool going into this upcoming year.

This is Patrick. I'll get to start and maybe hand off to Matt. I think what we're experiencing is a market that still remains pretty competitive. I certainly see some of the extraction of certain Medicare Advantage plans. But to your point, the Special Needs Plans still remain a strong presence. I think in terms of how we're responding to that, I think we got out there very early into the market, working with our referral channels and working with our participants just to make sure that people were aware of the strength of our offering, how our offer differentiates between a Medicare Advantage set of benefits, how much more comprehensive we are and integrated we are. And I think for the most part, I think we're feeling good about our position in the market. I think it's taken a few years, but people are, I think, gaining a better understanding of PACE as it relates and compares to any sort of Medicare Advantage plan, whether that be a Special Needs Plan or a traditional Medicare Advantage plan. And I think that distinction, we're getting better at articulating that value proposition in all of our markets. And so I think we're feeling pretty good about our relative positioning in the markets. I think it is still very competitive, but I think we're getting much better at telling the PACE story, and that's certainly helping. But Matt Huray is here with us today, and I'll ask him to add any of his thoughts.

Thanks Patrick. Patrick articulated it well. I would start with just the difference in the models themselves. PACE is a vertically integrated offering. It's a comprehensive set of services and there's 0 out of cost. And so we're focused on making sure that folks for whom either is an alternative. And you'll recall, within the dual eligible population, only a small subset would be PACE eligible based on clinical frailty. But when we find folks who that overlaps, we make sure to hit those differentiated points. And year-to-date, it's early days, but it's going well.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

I wanted to ask about some of the cost trends that you reported. And I think we tend to look at sort of total cost PMPM because it normalizes for the in-sourcing you've done on pharmacy and hospice, but really impressive results again this quarter. I wanted to see if there was any lingering benefit as the acuity of the population has normalized or if that's fully behind you. And then just what would you attribute the lower SNF utilization to in terms of your clinical efforts in the market?

This is Patrick. I'll start. Ben did have some thoughts he wants to share. On your last point about sort of post-acute, we put a lot of work into optimizing our discharges from the hospital into the appropriate level of care with skilled nursing and have put a lot of work into the contracts themselves to ensure that we're optimizing the unit cost side of things as well as the level of care and care coordination side. I think we've gotten a lot better in that area as well of doing sort of our version of prior authorization, just making sure that the individual does, in fact, need to go to a SNF versus go back home. Really one of PACE's strengths is our ability to build a support structure around the home through our resources and family members, et cetera, to help people get back home when in many other programs, they're going to go to a SNF. And so I think that's a big part of it. And then just trying to align incentives as well with our network partners, that's really helped us a great deal with our SNF. But overall, each year, we've got a portfolio of what we call clinical value initiatives and OVIs, our operating value initiatives. And so in addition to the work we've done in SNF, we've done a lot of work on inpatient hospitalizations as well, conversions of short-stay inpatient stays into observations. We're doing a really tight management of readmission of our patients; our doctors play a big role. We've put work into our audits of hospital claims and are working with top-tier organizations to make sure we're not paying any more than we should. Lots of work around the ER as well. Pharmacy is one. I think Ben has mentioned it in the past, we brought pharmacy in-house. But that's allowed us to work with a lot of different elements of the cost structure there, not only how we fulfill the care, but how we fulfill the drugs, how we distribute the drugs, how we package the drugs, the care management that we put around the prescribing patterns. There's just a lot of work in that sort of CDI bucket that touches on all these areas. And we sort of build a plan at the beginning of the year. Some of those are successful. Some of them maybe aren't as successful. Some of them we get to the value quicker. Some of them, it takes longer to get to the value. And I think that we've done a really nice job on executing on those. And I think the more we get into the why, you probably saw some of it in my opening remarks about just this unique model where we control -- our doctors really control so much of the care that gets delivered. And we're really leaning into that and delivering great high-quality care, care with very high satisfaction. But I think our risk portfolio more broadly, I think we've got modestly better in terms of our mix. And so if you think about our mix, we've talked about independent living, assisted living and then people that are in a permanent nursing home. Because we're now enrolling people post sanction, we're enrolling a lot of individuals that are independent and living in the community. And so that's helping a bit with our mix. And I think that overall, the team is just doing a really outstanding job. And Ben, anything you want to add?

Yes. I mean, I guess the only thing I'd add to that is if you're looking at trend in kind of a Q-over-Q fashion, one thing that's probably worth being aware is that with the in-housing of pharmacy, it's moved a few expenses around in terms of the geography of the income statement. And we don't break it out, although there's some discussion of it in the 10-Q itself. But let me just give you a little guidance to think about it. If you think about our external provider costs, they went up Q-over-Q by 1.5%. Obviously we had a 9.9%, almost a 10% increase in member months. And so we had an offsetting amount to get there. And some of it had to do with improved utilization. Some of it also had to do with slightly better rebates on the pharmacy side and also the benefits of what our in-house pharmacy does to our external provider cost trend. So think about that is there's a little bit of a model transition when you do the Q-over-Q comparison. Similarly, if you look at the cost of care line item for us, it looks like it went up 19.7%, which is huge in comparison to the increase in member month. But if you sort of get behind it, you'll see in some of the description, we talk about the fact that there's an increase in SWB that's pretty large. And there's also a $4.9 million increase in consulting fees and shipping costs related to the in-housing of our pharmacy. So if you were to sort of realign things back geographically, which you really don't have all the pieces to do, but it will become more apparent as we get further through the course of the year and things begin to annualize out, you'll see the cost trends sort of make more intuitive sense as opposed to what the real Q-over-Q numbers would suggest.

Yes. No, I appreciate that. We tend to look at the external provider costs and the cost of care together right now just because of that geography. Let me ask kind of one follow-up. Patrick, I was curious as you're thinking about these clinical value initiatives just how far along the path do you think you are in terms of standardizing some of these processes like working with the discharge planners at the hospitals to try to get people home. How much runway is there to go? I assume it's a long runway, but just wanted to get your sense in terms of the degree of maturity for these programs as you roll them out across your markets.

Thank you. It's a great question and one that we sort of think a lot about. And what I would say, if I had to sort of put it into percentage terms, I'd say we're about 50% there. And our 100%, I don't put on sort of the caliber of your best MA plans, for example. So just -- but what are we capable of? I'd say we're about 50% there. And you're right, as we go through, as I go through inpatient and I think about what we're doing there, when I go through emergency room services or PTOT, dermal medical equipment, labs, those are post-acute that we talked about. You think about for all of those, what we've done is tightened coordination, tighten communication, leveraged our new Epic EMR to the fullest, got under the cover on unit costs and renegotiated where we could on unit cost. What's left -- and this is where you kind of go from good to great. What's left is really ordering behavior. The point about we control so much of the healthcare dollar, it means we also are responsible for deciding what we're going to do and what we're not going to do. So where do I think there's more opportunity in that back half? It's things like very thoughtful technology-based clinical guidelines and utilization review guidelines. So what we find is across our 20 centers, you could find variations in ordering patterns and variations in decision-making on when does someone go to assisted living. When do we make the decision for someone to go into a nursing home? How much of the specialist care that's recommended is supported with clinical guidelines. So it's that sort of reducing variation of care across our system and using clinical guidelines to help direct us and help guide us there. And so this intersects with -- you saw -- I think it was yesterday, we announced Paul Taheri is joining us. And if you think about Paul's leadership, he brings tremendous experience with sort of systems thinking. He brings tremendous experience leading physicians through this sort of transformation, understanding the unique dynamics and culture of our providers and how they make decisions and how to address resistance, frankly, to change. And then he just has a great collaborative leadership style and he's just an all-around great guy. So he's here to help us address that next 50%. And we think there's value there. It takes time to get to. It doesn't happen in a quarter or 2 quarters. But over the next couple of years, we feel really good about our ability to deliver high-quality, cost-effective care.