EVH - NYSE

Welcome to the Evolent Earnings conference call for the First Quarter Ended March 31, 2024. As a reminder, this conference call is being recorded. Your host for the call today from Evolent are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations. I will now hand the call to Seth Frank, Evolent's Vice President of Investor Relations. Please go ahead.

Thank you, and good evening. This conference call will contain forward-looking statements under the U.S. federal 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 our current and periodic filings. For additional information on the company's results and outlook, please refer to our first quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measure are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the IR section of the company's ir.evolenthealth.com and Form 8-K filed with the company with the SEC earlier today. Finally, in addition to the reconciliations, we've provided details on the numbers and operating metrics for the quarter in both our press release and our supplemental investor presentation on the IR website. With that done, I'm going to hand the call over to Evolent's CEO, Seth Blackley.

Good evening, and thanks for joining the call. Evolent had a strong first quarter with above-expectations revenue growth and adjusted EBITDA in line with the first quarter guidance. Tonight, we'll cover updates on various fronts, including new customer arrangements, new client go-lives, an announcement of the completion of our M&A integration work stream and our technology innovation agenda. Let me first provide a few highlights from our first quarter results. Revenue totaled $639.7 million, growth of 49.6% year-over-year. This result exceeded the top end of our Q1 revenue guide of $610 million by almost $30 million. This high revenue growth is driven by strong membership in our Performance Suite arrangements and new specialty technology and services agreements. Evolent specialty care offerings now account for 91% of total revenue, up from 60% just 3 years ago, enabling our organization to focus on our specialty strategy. Year-over-year, specialty care revenue grew approximately 69% as reported and 62% after normalizing for the NIA acquisition in January 2023. On the membership front, we averaged 39.9 million unique members, net of Medicaid redeterminations and new implementations during the quarter. Total product members eclipsed 80.6 million in the first quarter or just over 2 products per unique member on average. On the profitability front, adjusted EBITDA was in line with the midpoint of our guidance at $54.1 million. Our cash position remained strong with $165.1 million in cash and equivalents after what is always a historically high cash outflow quarter associated with higher working capital requirements that moderate as the year progresses. Let me now update you on each of our 3 principles for shareholder value creation of: One, strong organic growth; two, expanding profitability; and three, disciplined capital allocation. On the first principle of organic growth, we announced -- we're announcing today that we signed 3 new revenue agreements during the first quarter. Two of our new revenue agreements are with Molina, building on that highly successful long-term partnership. We will be implementing both cardiology and oncology performance suite across both Medicaid and exchange lives in South Carolina and Mississippi. We anticipate implementing these solutions by the fourth quarter of this year. Financially, we anticipate the impact of South Carolina and Mississippi to contribute together at least $50 million of new annual revenue contribution once live. The addition of these states increases our presence with Molina to 9 states after these 2 states go live. Our revenue will be below 50% of the total opportunity at Molina within the current scope of services we provide today, excluding new solutions like MSK Performance Suite, leaving what we believe to be a significant opportunity to continue expanding our partnership and impact for our partner. Our third new revenue agreement is a Specialty Technology and Services contract we signed with a long-standing Evolent Medicaid health plan in the East Coast. This health plan will be adding our MSK specialty offering to help manage orthopedic surgery costs, utilization and outcomes. We anticipate implementing this solution in the third quarter across several hundred thousand Medicaid members. This contract will contribute towards the $4 million of quarterly adjusted EBITDA earnings go-get we provided in our bridge illustration for achieving the 2024 year-end exit adjusted EBITDA target. Today's announcements bring us to 7 new revenue agreements year-to-date. In addition to new revenue agreements, Q1 was productive for successful go-lives. In total, we launched 25 specialty go-lives across multiple health plan customers for the Performance Suite and the Technology and Services Suite. These included major go-lives in new geographies for Performance Suite, including oncology and cardiology for Molina in Florida and cardiology for Florida Blue. During the quarter, we also began a national implementation with Centene for our MSK Technology and Services Suite covering several million members. Recall, we announced this agreement back in February, fulfilling a significant portion of the promised initial revenue synergies from the NIA acquisition. From a macro perspective, industry demand remains very strong. Beyond our normal product value proposition, health care utilization pressure and health plan margin pressure are accelerating our core inbound sales opportunities. Our belief is that typical savings levers outside of specialty care are more limited in the current environment, making high-cost specialty management a critical and growing focus for health plans. As a result of these factors, our sales pipeline remains very strong, driven by interest in both regional and large national health plans. As a result of all of these dynamics, we are raising the midpoint of our revenue guidance for 2024 by $115 million, as John will detail shortly. Moving to our second operating priority expanding profitability, I'm excited to announce that in March, we successfully wound down the NIA transition services agreement we had in place since January of 2023 with NIA's former owner. The transition was the largest and most complex IT project in the company's history, involving hundreds of professionals globally. Most importantly, we were able to continue serving all of our customers with limited disruption. I want to thank the Evolent teams who worked tirelessly through weekends to achieve this important transition. This transition in the quarter marks another important step towards our year-end run rate EBITDA target and the achievement of our $15 million of NIA cost synergies. Next, I'm pleased to share that we continue investing in the artificial intelligence opportunity at Evolent through our initial product testing. Based on our work thus far, we believe that there is a significant opportunity to reduce the cost for specialty case review while maintaining or even enhancing service quality and providing a superior user experience. As additional benefit of our AI investments, we expect we'd be able to redeploy our human capital pool to higher-value work streams that improve our product and our value proposition. We expect these benefits to begin making a more significant impact in 2025. Third, our results in Q1 demonstrate the benefit of our balanced approach to value-based specialty care with earnings growth from both our non-risk and risk products, and our nonrisk products continue to account for approximately 70% of our annual adjusted EBITDA. As John will share in detail, we saw increased utilization in our Performance Suite risk business in Q1, and we have lower data visibility than is typical for this point in the year. Those factors do impact our Q2 guide. But because our data visibility will increase across the year, because the increases in utilization have moderated across early Q2 and because of the contractual protections available to us around prevalence and other population changes that John will detail, we remain confident in our 2024 exit run rate adjusted EBITDA commitment of $300 million and our annual guidance. Finally, I'm proud of the team for continuing to drive efficiency as we grow with our SG&A expense down sequentially versus Q4 despite substantial revenue growth. And I feel we've been able to drive these efficiencies while maintaining a strong culture and talent orientation. Regarding our third investment theme of disciplined capital allocation, our principles remain consistent with our communications over the last few years, which are ensuring strong organic innovation, carefully managing to our leverage targets and pursuing accretive M&A to accelerate our leadership position in value-based specialty care. With respect to organic innovation, we have consistently talked about building more services to help members and their families navigate their conditions in their moments of need. Our strong belief is that shared decision-making with an engaged member helps drive the highest quality, most efficient care. We've addressed this opportunity thus far through our end-of-life solution, which we primarily bundle into our Performance Suite. Our data shows that when our end-of-life solution is integrated with our oncology and cardiology solutions, we have materially higher member engagement rates generating greater referrals into palliative care reducing the overall total cost of care versus the status quo while most importantly, aligning clinical care with patient identified goals and values in order to improve their quality of life. Last August, we also announced a pilot program with a large Blue Cross Blue Shield plan partner to offer shared decision-making and better navigation of the health care system for patients diagnosed with cancer. Today, we're accelerating this initial navigation work by announcing a strategic partnership with Careology, a privately held U.K.-based company with what we believe to be the most robust digital cancer care platform available. The Careology platform is being used extensively across the U.K. National Health Service to connect patients to caregivers to monitor and report symptoms associated with chemotherapy, and to monitor vital signs of overall well-being. In addition, the platform manages schedules and appointments in the overall care process. We believe this solution will help manage the cost and quality of our Performance Suite members, as a bundled offering and potentially become an Evolent technology and services offering in the future. From a business perspective, Evolent has secured the exclusive long-term right to distribute and integrate the product in the United States for the payer market. We believe this patient navigation arrangement is another good example of both innovating our solution and doing so in a capital-efficient way. Before I hand it to John to talk through our financials and guidance, I want to take a step back and comment on where I believe Evolent is headed in the future. First, we are proud to have built an incredible and what we believe is a differentiated specialty platform, currently growing organically at over 50% annually, driving strong profitability and cash flow. The strong growth and profitability, we believe are indicators of customer confidence in our ability to innovate and execute over the long term. Second, a rising utilization environment creates significant financial and operational pressures on health plans, requiring more innovative solutions given the need to aggressively manage utilization pressures in specialty care. This will create, I believe, an important opportunity for our company for years to come. And third, our innovation across areas like patient navigation, artificial intelligence and specialty expansion, all provide meaningful opportunities to accelerate our platform. We understand the investing environment for small and mid-cap publicly traded health care organizations has been challenged as of late and Evolent is no exception. However, we remain very optimistic about our future and fully committed to using all the tools available to ensure shareholder value creation. With that, let me hand it to John.

Thanks, Seth. We are pleased with our first quarter results and anticipate the continued solid outlook for 2024. We are raising the midpoint of our revenue guidance by $115 million and reiterating both our in-year adjusted EBITDA outlook of $235 million to $265 million and our 2024 year-end exit run rate of $300 million in adjusted EBITDA. Revenue growth was nearly 50% year-over-year versus the same quarter last year, outperforming internal and external expectations from 2 factors: first, about $25 million from membership growth across our Performance Suite. We expect this level to be the new quarterly baseline for the rest of the year. Second, based on CMS data we received in the quarter and our consistent revenue recognition policies, we recognized an additional $18 million in shared savings for MSSP performance year 2023, along with an offsetting expense accrual of $14 million in gain share for our physician partners for $4 million of adjusted EBITDA. Both items were ahead of our expectations for this time in the year. Note that consistent with our past practice, our cumulative accrual for QY 2023 shared savings remains at the conservative end based on data received to date and we anticipate an incremental step-up once final settlement data is received in Q3. Demand for our Technology and Services product also continues to be strong. We generated Q1 revenue of $89 million despite losing an estimated $6 million in quarterly Tech and Services revenue to Medicaid redeterminations and conversions to our Performance Suite, representing underlying year-over-year growth of nearly 25%. Regarding Medicaid redeterminations, we estimate that the process for our Medicaid population was over 80% complete as of 3/31, and we estimate a same-store weighted membership decline of 10% as of the same date. Recall that our biggest Medicaid states started the process later. So our commentary here differs slightly from national MCOs. Our outlook continues to anticipate a gross decline in the mid-teens when the process is complete in the summer, consistent with our expectations and our initial forecast in 2023. Turning to profitability. We continue to drive efficiencies in our cost structure as we grow with adjusted SG&A costs of 8% of revenue, down by 166 basis points sequentially versus Q4. Adjusted gross margin in the quarter was 16.4%, down 185 basis points sequentially versus Q4. The change in gross margin is principally driven by growth in our Performance Suite products, combined with higher unit medical expenses. The drivers of medical expenses in the quarter are as follows: first, net favorable prior year claims development in the quarter was approximately $15 million consistent with our expectations and demonstrating our continued, prudent, actuarial processes and conservative approach to reserving in our risk business. This $15 million was associated with revenue refunds to our clients from corridors of approximately $10 million for an approximate net $5 million benefit to gross profits, again consistent with our expectations. This favorability was offset by higher estimated medical expenses for Q1, driven both by lower data visibility and our continuous review of leading indicators. On the first, because of the dynamics impacting our partners, including the change healthcare outage, we closed the quarter with lower claims visibility than a typical even for long-standing clients. This is exacerbated by the volume of recently launched Performance Suite revenue approximately 2.5x more than the same quarter last year, which typically has lower visibility overall. The mechanics of this lower visibility in our reserving approach, combined with macro commentary across the industry regarding elevated utilization creates incremental conservatism for the first quarter and our guide for Q2. Second, we incorporate leading indicators like volume and disease prevalence from authorization requests into our reserving models and our reliance on these leading indicators is higher if our claims visibility is lower, like it was for this quarter. During the latter part of the first quarter, we saw increasing activity on these indicators rising to a peak in March. This observed activity from our authorization data was in both oncology and cardiology specialties for particular markets in both MA and Medicaid. Note that these indicators declined in April from their March peak. Now as a reminder, we've previously highlighted 2 distinctive features of our model. The first is that we have intentionally built a diversified business that balances both risk and non-risk products. And we continue to generate close to 70% of our expected adjusted EBITDA across the year from our Technology and Services business. And so any potential impact of higher utilization in our Performance Suite is buffered by the other 2/3 of our EBITDA guidance. The second is that our Performance Suite products typically contain certain contractual protections that may adjust our capitation rates based on population changes outside of our control. So as Q1 claims complete and our visibility improves, if these elevated leading indicators translate into elevated paid claims, we estimate that over 70% of the reported cost increases in Q1 can be addressed by contractual adjustments resulting in rate changes over the next 3 to 12 months. It is important to note that this is a normal course part of our business. Over the last few years, we have regularly used these mechanisms to work with our partners to update rates or changes at the market and line of business levels. You will also recall that we included in our original adjusted EBITDA guidance for 2024, a $10 million buffer for changes in medical utilization based on dynamics in the market. If the leading indicators from Q1 persist beyond March and translate into claims, we will be quickly implementing the contractual changes available to us. However, there may be a timing lag between that elevated cost and increased fees to Evolent, which could cause our results for Q2 to be adversely impacted. As a result, we are taking a conservative approach to our adjusted EBITDA guidance for Q2, with a range of $48 million to $62 million. Let me be specific about what could take us to the high or the low end of this range for the second quarter. In scenarios where the leading indicator data in late Q1 is transitory, and/or we obtain increases in our capitation rates for the quarter, we could see the top end of our range for the quarter or beyond. In scenarios where that leading indicator data translates into persistently elevated claims expense and the process for obtaining corresponding rate increases extends beyond the quarter, we can see the lower end of the range. Because trends mitigated in April and because we have several levers to drive profitability across the year, including but not limited to these contractual protections I mentioned, we remain confident in our full year adjusted EBITDA guidance and our $300 million exit run rate target. Let's go through the path to that exit run rate target, further updating the bridge we provided on the February call. On Medicaid redeterminations, currently, we are running in line relative to our forecast, for a $3.5 million quarterly headwind versus Q4 '23, with 1 quarter to go. We estimate a Q1 in-quarter impact of about $2.5 million. On NIA synergies, as Seth discussed, we are on track to realize the total $8.75 million quarterly benefits by the end of this year across both cost and revenue items with about half of this value included in Q1 results. On the Performance suite, we are still early in our journey to capture the first leg of maturation that drives the $12.5 million quarterly expectation here. But we are pleased with the leading indicators of value creation in populations launched in '23 and '24. Authorization data suggests that new plan members under our management are on average experiencing higher quality, more cost-effective treatment regimens in oncology and cardiology, and we look forward to seeing these shifts reflected in the claims data. Finally, on the organic growth side, we estimate that the combination of strong membership performance and recently announced Tech and Services deals closes approximately 25% of our quarterly adjusted EBITDA go-get leaving just under $3 million as a go-get. Shifting to cash generation. First, we remain on track to meet or exceed our target of $150 million in cash flow from operations for calendar '24. Recall that the first quarter of the year is seasonally our biggest use of cash given the timing of working capital changes. Second, after the quarter closed, we closed out the NIA earnout for $88.75 million, slightly ahead of our initial expectations based on what has been a very successful acquisition that was additive to our corporate performance during 2023. We elected to fund 100% of this earnout in cash, avoiding dilution to our common shareholders. Turning to guidance. For the full year, we are raising our revenue outlook to between $2.53 billion and $2.6 billion and reiterating our adjusted EBITDA outlook of between $235 million and $265 million, as mentioned above. We continue to expect capitalized software development of approximately $30 million and total cash flow from operations in excess of $150 million, including the technology initiatives that Seth discussed. For the second quarter, we are anticipating revenues between $625 million to $645 million and adjusted EBITDA between $48 million and $62 million. In closing, we remain confident in the value of our unique and diversified platform and we are excited to continue driving value for shareholders, employees and the partners and patients we serve. With that, we will now open it up for Q&A.

[Operator Instructions] Our first question today comes from Anne Samuel with JPMorgan.

This is Kyle Aikman for Anne. Congrats on the quarter. I was wondering if you could touch more on the macro payer landscape, things that you could point to that are pressuring these health plans. Has this gotten incrementally worse in the quarter? And does this mean that deals are closing quicker? How is it benefiting Evolent in the long term?

Yes, sure. Happy to take that one. So look, I think it's a bit of a perfect storm on the payers over the last handful of quarters. One piece is reimbursement, one piece is around V28 risk adjustment, one piece is around pricing and benefits and one piece is around utilization. And I think the fact that those are all hitting kind of over the last 6, 9 months, has created a lot of pressure that we all know about. And I think one of the remaining levers that's available to the payer community is obviously around specialty management. So that's become, I'd say, one of the top 1 or 2 issues when we talk to most of these payers is how do I better manage specialty costs, if I can't do as much on risk adjustment or as much with primary care, much go down the list. And so it has definitely increased interest in what we're doing, and I think it's increased the imbalance to the top of the funnel. I wouldn't say it necessarily has accelerated the sales cycle but I think it's -- there's just generally a lot more in the funnel. And it may -- we'll see it may increase sales cycle in certain situations but it definitely added a lot more to the funnel. And I think it -- what I really like about this dynamic is even setting aside the more immediate pressures, I think it's very clear this management of these high-cost specialties is a very long-term issue. A lot of it is driven by pharmacy innovation and the like, that's not going away.

The next question is from Jeff Garro with Stephens.

Maybe we can dig in a little bit on the topic of the contractual protection. You mentioned the 3- to 12-month lag on capturing any potential rate changes. That's a bit of a wide range of time and some of it could fall out of FY '25 at the high end of that range. So maybe you could help us further understand how that timing would most likely play out and how a rate change would also play out in terms of either retrospective or prospective adjustments to your rates and in turn revenue.

Yes. Good question, Jeff. I'll hit 3 things. First, on the retrospective question, many of these changes do occur retroactively. So that's an important piece here. The second thing, I'd note, is that in each of these contracts, the way it's treated is different and that has to do with the particular payers' needs and how that particular contract is structured. The last piece that I'd say is that 12 months is from 3/31, right, from the end of Q1, so in place by Q1 of next year as we're exiting this year.

The next question is from Kevin Caliendo with UBS.

It's Andrea Alfonso for Kevin. John, thank you so much for providing all that color on why sort of the inputs for that wider range in 2Q. I wonder you could just dig into that a little bit. I think the key question being, how much of that directly related to sort of that lower claims visibility on change versus that leading indicator volume? You had talked about guidance building in a $10 million buffer for EBITDA. How does that tie in versus sort of which [ should be ] expectations for 2Q? And then just as a follow-up for that, apologies for the loaded question. But are you embedding onboarding costs for some of these customers versus prior expectations that could be depressing that number as well?

Yes. Good question, Andrea. On the mix question, how much of this sort of outlook and conservatism is from leading indicators that we're seeing, in particular, we saw March versus lower claims visibility. I think the truth of the matter there is they're inextricably lengths. And in situations where we have lower claims visibility, we have to rely more on leading indicators and the leading indicator, reserving is naturally more conservative. And so they sort of reinforce each other. And what I would say also is in a quarter where we have, what we'll call, normal level of visibility where that's less of an issue, we would place less reliance on a change -- 1 month's worth of change in leading indicators. So there's -- that's how we think about that. On your second question around start-up costs and otherwise, those are incorporated in the outlook typically not that significant sort of operational lift to get these contracts live.

The next question is from Charles Rhyee with TD Cowen.

I wanted to talk a little bit more about these leading indicators and just sort of -- because I know in the last couple of quarters when you've been asked about how utilization is trending, you've kind of commented that it's been in line with your expectations. Here, you're kind of talking that you're seeing some change but that you've also seen to start to moderate. I guess when you're -- in the context of when you're signing new partnership deals, particularly, let's say, the new ones here with Molina, how do you factor in then the trend that you're seeing at the moment as it gets factored into the agreement, is that a moving target then for each new partner as it gets signed at that moment in time?

That's a good question, Charles. I'll reiterate what I said earlier that it does depend on the specific contract with a specific partner, it varies. But in most cases, for these sorts of moments, we will have, what we call, a true-up embedded in the contract that resets the capitation rate upon go-live based on trends to that point. So for example, if we go live on September 1 or October 1, we would reset the capitation rate for that contract based on claims through that point.

The next question is from Jessica Tassan with Piper Sandler.

I just want to verify, you guys saw a positive prior year development related to MSSP in the first quarter of '24. And then can you just, I guess, our understanding was that these MSSP reconciliations hit in the third quarter. So just can you verify that you had not -- that you have not recognized any prior year development related to MSSP in 3Q '23 and that, I guess, this first quarter recon was the first that you've seen?

Yes. Yes. Let me go through just how we do revenue recognition for MSSP. Typically, we will start recognizing revenue in the third quarter of the performance here. And so the first dollar of revenue we recognized for the '23 performance year was in Q3 of last year. And each quarter, we received from CMS an updated claims file, other external factors, regional benchmarks and risk adjustment information and so on. That allows us to narrow our actuarial range. And each quarter, we're then doing a true-up based on that narrowed range. Our orientation is to be conservative here. And so as we're doing that true-up each quarter, we're remaining on the conservative end. We're still booked well below where the percent shared savings came out for QY '22, for example. And we'd expect to true up to the final number in this Q3 when we get the final settlement information.

Awesome. That's so helpful. And then my quick last question is on the Medicaid redeterminations, did you see an incremental sequential headwind related to Medicaid redeterminations or was the number you cited in aggregate?

Yes. Good question. That was incremental. And so said another way, cumulatively, since the whole process began, we have seen a headwind of $5.5 million per quarter headwind to adjusted EBITDA. That's consistent with our expectations. It's about where we thought the quarter would end.

The next question is from Ryan Daniels with William Blair.

Congrats on the strong start to the year. I hate to ask another one on this but you probably anticipated it. In regards to the leading indicators kind of peaking in March and then declining in April, if we take a broader purview and look at the data through the first 4 months of the year, acknowledging it's somewhat limited due to change. But if we look at the 4-month period, how does that period reflect upon your guidance for the full year and assumptions for the Performance Suite?

Yes, it's a good question, Ryan. I think what you're seeing here in our second quarter guide is the -- is that $10 million buffer that we talked about for the full year. And so the -- if March is a new normal, right, then we would initiate some of these contractual protections, and we may be in the lower end of that guide. If March was an aberration and April is more normal, more like the rest of the year, then we could be closer to the higher end of the guidance. So it's always a little tricky in a risk business to draw a line between just 2 points. So we've sought not to do that. But given the lower visibility, it is appropriate at this time.

And then a quick follow-up, if I could. Regarding the contract provisions you have, are those kind of automatic where you just go back with the data and there's an agreement for things like if there's increased cancer prevalence that's not your fault, you're paid to manage the cases, not to avoid cases. So is it automatic? Or do you have to go back and actually kind of negotiate things with these payers?

It depends on the specific contract. Generally speaking, the contracts will outline the specific sort of calculations and corridors and there is a real mathematical element to it.

Brian, it's Seth. I'll add 1 other comment to your question but also Jeff's question earlier. As we said in the prepared remarks, this is not sort of a new territory for us. This is something we regularly participate in each year. It's a little bit different this year given the data, but it's not really a different process. So we understand how it works. We've done it multiple times in the past and are able to, I think, pretty accurately bake all that into our forecast. So when we reiterate this or just Q2, it's with a lot of experience having done this many times before and have a pretty good sense of how it play out.

Yes, that's a good call. And I think there's just heightened sensitivity to it but that makes a ton of sense.

The next question is from Jailendra Singh with Truist Securities.

Actually, I want to go back to the gross margin discussion. Can you speak to your 180 basis point decline in the quarter. So MSSP revenue, which came through likely helps the gross margin but offsetting you called out more Performance Suite revenue, higher reserves on claims visibility and authorization. Can you provide a little bit more granularity like on the individual buckets on those gross margin impact? And related to that, how do you think about gross margin trends for the rest of year?

Yes. Let me take that last question first, Jailendra and then I can add a little bit more color. As we've gone through before, the biggest driver of our enterprise percent gross margin is the mix between Performance Suite and Tech and Services. And so what you saw in Q1 and what you saw in Q4, also was the impact of continued rapid growth in the Performance Suite, which has a lower gross margin. It's also true that the Q1 gross margin is depressed because of a lot of new go-lives. For example, we had over $125 million of performance revenue in the quarter that was still relatively new and contributing minimally to the gross profit line. If you were to pro forma that closer to target margins, that would increase enterprise gross margins by 230 basis points plus. So as we think about gross margin trends across the year, absent new go-lives in the Performance Suite, we would anticipate them ticking up, right? As we think longer term, it's going to continue to be driven by the mix of our growth between the Performance Suite and the Tech and Services Suite, which, as I sort of highlighted in the prepared remarks, we seek to have a balance.

Then my quick follow-up. Actually, I want to go back to 2025 MA final notice, clearly, a lot of focus there. I want to ask a question to this. Like first, how are your conversations with payers progressing in terms of carving out some list of new customers are taking more risk with existing customers because of the cost pressures they're seeing. And I would be curious on your thoughts regarding potential membership changes that might occur in 2025 as some plans focus on pricing for margin. Just maybe provide some color there.

Yes. Seth, do you want to talk about the conversations?

Yes. Look, I think, Jailendra, what I would say is that, as I mentioned in the prepared remarks, just a lot of pressure on the payer community right now, which is driving good demand in the product. And I continue to think that our ability to more effectively manage these categories, whether it's under Performance Suite or Tech Services, that is a platform opportunity that I think we accrue over time, and we continue to take market share and grow for that reason. In Terms of the negotiations to your very specific question, I don't think a lot has changed there. We have always had a number of different protections. It's always part of the conversation. It's always part of a negotiation to get those aligned in terms of how it's set up. One of the things that's also true is that we can do it different ways. We have relationships where baked in the trend is much higher, our trend on our fee, meaning our annual inflator on the fee is pretty significant because we're taking fewer protections and the opposite can also be true. And there's not been a huge change there. To the earlier question, obviously, we have to take in the most recent data and pick the right market-based trend to use in that negotiation but that's a fact that's not that hard to get our hands around and get aligned on. So that's sort of the dynamic in the marketplace. And again, there's some puts and takes on these kinds of moments, I think, as we've been saying for a while, we think it's a net positive, the pressure that exists in the market in terms of the demand side.

The next question is from Sean Dodge with RBC Capital Markets.

Just on the performance suite indicators, I guess, can you give us any more detail on why you think it stepped up in March? Was it concentrated -- was this concentrated in any particular geography or payer or population? And was it -- you said volume, so it sounds like it was more tied to prevalent than it was cost but correct me if I'm wrong there?

Yes, you're not wrong, Sean. We see in that authorization data, the majority of the increase is driven by what we see as changes in the population. So things like disease prevalence. I'd say they're not localized to a particular geography or line of business, there are pockets here, pockets there and something, obviously, that we're watching closely as we go through this quarter.

The next question is from Daniel Grosslight with Citi.

Last quarter, you mentioned that you would expect to see around 10 percentage points of margin improvement of 2023 Performance Suite launches in '24, similar to what you saw from '22 to '23. Given some of these utilization pressures, are you still comfortable with the assumption around margin improvement of 2023 Performance Suite launches? And as you look at utilization and some of these pressures, is there any difference between newer launches versus more mature launches or more mature Performance Suite arrangements?

Yes. Both good questions. Let me take the second one first. There is not. So this isn't specific to a new population or more recent growth. It really is in sort of pockets of both older clients and newer populations. So to your first question, are we still confident in that 10% execution and the margin maturation for the performance suite as we're exiting this year? The answer is definitively yes. We feel very good based on what we're seeing in terms of the interventions that we're doing, the value that we're creating, the incremental quality that we're delivering to those members. It is true that the -- we may need to adjust the capitation rate or 2 as we sometimes do but on our ability to create value by lowering the cost of care, we feel very good about that.

The next question is from Jack Wallace with Guggenheim.

Just wanted to get an idea for the -- it sounds like the end market building quite a bit of demand. And thinking about the Performance Suite, if you're able to pull in more new customers for the Performance Suite and transfer -- or transition some of your Tech and Services customers to Performance Suite. Is there a potential that enough of that demand would put an impact on your year-end EBITDA target? To said differently, would any of the upfront costs and actuarial assumptions for the incremental Performance Suite lives, potentially be a drag in good scenario for the medium and long term?

Yes, Jack. So good question. I don't think so for this year. We continue to, first of all, have a nice pipeline across Performance Suite, and the Tech and Services side, it's pretty balanced, if I looked at what's in there. And so I don't see a skew, point one. And then, I'd say, the second point would be just that I don't think at this stage in the year, from a timing perspective, likelihood that, that would happen. And even as we look into next year, if you've asked the question differently, I think it's the same response, which is we continue to have a pretty balanced pipeline. We like it that way. We've sort of always like the balance between the 2 segments for the reasons that we've been talking about and that continues to be what it looks like.

Excellent. And then how should we be thinking about the economics from the Careology deal? It sounds like it's a pretty interesting partnership. Should we think about that as some potential upside for this year? Is that really more of a '25 story?

Yes, Jack. So we are very excited about Careology too. The team is -- our team has done a great job; their team, it's an exciting partnership. I think that it's not going to have an effect on this year. We'll probably go live with our first health plan partner late this year, if I had to guess. So it's down the road a little bit. And we're going to really be targeting our Performance Suite relationships first. And at some point, it may becoming Tech and Services product as well but it's really about embedding it into our Performance Suite relationships similar to what we do with our end-of-life product.

The next question is from Stephanie Davis with SVB Leerink (sic) [ Barclays. ]

Guys, I'm actually with Barclays. Glad to be at new home. You provided a really helpful bridge on profitability. I was hoping to split hairs a little bit more and ask which of these, like the new win mix will be more of an impact to gross margins and which of these we should think of as a headwind to gross profit dollars?

I'm not sure I understand the question, Stephanie, sorry.

So is there a reason you would see a year-over-year decline in gross profit dollars as opposed to just a headwind to gross margin mix?

Good question. Yes. So from Q4 to Q1, gross profit is relatively flat, largely driven by the elevated indicators in March, as I mentioned. As we go through this year, continue to drive performance in the Performance Suite and those cost improvements that I mentioned, If the benefit of some of the new launches that we've seen, which are mostly in the Tech and Services suite in the first half of this year would that -- should drive it forward. And then when the newly announced Molina deals go live later this year, you'd see another dip on the percentage side but I wouldn't necessarily anticipate a dip there on the dollar side. We expect that to continue to grow as we sort of laid out the EBITDA ramp continuing to grow.

All right. Helpful. And just a quick 1 on the Molina contracts. How should we think about what would happen if Molina loses Florida? Does that have any impact to your business?

Yes. Too early to say what happens. We're not close to it. I think we've previously specked out that sort of Molina, Florida revenue in Medicaid at less than $15 million. So that would be the top line impact if something were to change there.

[Operator Instructions] The next question is from David Larsen from BTIG.

congratulations on the good quarter. For the $300 million of annualized EBITDA, should we be thinking about $75 million of EBITDA for the fourth quarter of '24? Or does the $300 million of annualized EBITDA mean in December of '24, you will be trending at like 1/12th of $300 million of annual EBITDA?

Yes. Dave, the way we think about it is it's exit number and so Q4 is probably little under that and Q1 is probably little over that.

Okay. And then in terms of different components to getting to the $300 million. There is Performance Suite maturation, there is new growth and then there is earnings from NIA and IPG. Just any update on those numbers would be great, in particular like the new growth figure, I think that was $50 million. Just -- are those all tracking in line with or ahead of expectations?

Yes, in line. So we mentioned from the NIA synergies anticipating $8.75 million in quarterly benefit there, about half of that is already in Q1, and well on track to achieve the rest of that. I comments on Performance Suite already and on the new growth mentions that with the 7 new relationships that we've already announced -- 7 new agreements we've already announced this year, strong membership taken that go-get to under -- just under $3 million a quarter.

Great. And then just quickly on cash, just expectations for cash flow for the year or free cash for the year and then how should we be thinking about that for 2Q, 3Q, 4Q and how does that compare to EBITDA, please?

We affirmed our expectations of $150 million or more in operating cash flow for the year. Q1 right in line with our expectations on that metric and we'll build cash across the year.

This concludes our question-and-answer session. I would like to turn the conference back over to Seth Blackley for any closing remarks.

All right. Thank you for the questions tonight. We'll look forward to catching up offline. Have a good evening.