Frank Williams - CEO Nicky McGrane - CFO.

Adam Noble - Goldman Sachs Ryan Daniels - William Blair Mike Newshel - JPMorgan Charles Rhyee - Cowen and Company David Larsen - Leerink Brian Hoffman - Canaccord Genuity.

Welcome to Evolent Health’s earnings conference call for the quarter ended December 31, 2015. 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 beginning later this evening for the next 90 days via the webcast on the company's website in the section entitled Investor Relations. [Operator Instructions] Here is some important introductory information. This call contains forward-looking statements under the US 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 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 fourth quarter and full year news release.

As a reminder, the financial statements of Evolent Health Incorporated for the 12 months ended December 31, 2015 and for the three and 12 months ended December 31, 2014 do not reflect a complete view of the operational results for those periods due to the reorganization completed in connection with our initial public offering in June.

Prior to the reorganization, Evolent Health Incorporated had no operations.

In order to provide consistent and comparable metrics for the periods before and after June 4, 2015, the adjusted results for Evolent Health Incorporated presented and discussed in our press reflect the reorganization as if it had occurred on the first day of the relevant period.

The adjusted results include the operations of Evolent Health LLC for the period from January 1, 2014 through June 3, 2015 as well as certain other adjustments. Reconciliations of adjusted results to GAAP results are available in the press release we issued today, as well as the 8-K we filed today with the SEC.

You can find further information in the financial statement presentation and non-GAAP financial measures sections of our press release. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams. Please go ahead. .

Thank you and good evening. I am Frank Williams, Chief Executive Officer of Evolent Health, and I am joined this evening by Nicky McGrane, our Chief Financial Officer. We have a three-part agenda for today’s call.

First, I will open with a summary of our performance for the quarter and the calendar year covering our financial results and an overview of what we are seeing in the market. I will then turn it over to Nicky to take us through a more detailed review of the financials.

Finally, I will close with some additional highlights on the quarter and an update on our key priorities for 2016. As always, we will be happy to take questions at the end of the call.

In terms of our results for the quarter, from a financial perspective, total adjusted revenue for the quarter ended December 31, 2015 increased 74.9% to $46.7 million from the comparable quarter of the prior year.

Adjusted EBITDA for the quarter ended December 31, 2015 was negative $5.9 million compared to adjusted EBITDA of negative $13.1 million for the quarter ended December 31, 2014. For the calendar year ending December 31, 2015, adjusted revenue increased 62.1% to $163.5 million compared to $100.9 million for the full year ended December 31, 2014.

Adjusted EBITDA for the full year ended December 31, 2015 was negative $31.7 million compared to negative $37.1 million for the full year ended December 31, 2014. We have over 717,000 total lives on the platform as of December 31, 2015, up 66% year-over-year.

All in all, we are very pleased with our financial results for the year as we exceeded our guidance for the fourth quarter and for the calendar year and also made significant strides strategically and operationally, solidifying our leadership position in supporting providers in their movement to value-based care.

In terms of the overall market environment, we are in the early stages of the significant transformation occurring across all segments of the healthcare market. Healthcare purchasers from CMS to state governments, to employers can no longer afford double-digit increases in cost and are demanding higher value care with improved outcomes.

While this movement has been underway for some time, we are seeing some significant catalysts as we enter 2016 that are accelerating market movement to value. CMS, which oversees the Federal Medicare program is the largest payer in the United States with total expenditures expected to approach $1.4 trillion in 2016.

Last spring, the leadership at CMS announced that they intend to move 90% of payments to performance basis by 2018. Some of that growth will come in Medicare Advantage where anticipated enrolment is expected to increase by 5 million enrollees to 22 million people by 2020.

Other growth will come from innovative programs recently introduced to reward providers for managing total population cost and quality.

Track 3 of the Medicare Shared Savings Program and the next generation ACO model are examples of CMS pushing the envelope to give providers an opportunity to capture significant savings generated from proved clinical care, while also exposing providers to significant downside should cost increase.

In January, CMS announced the initial list of participants in these new initiatives and several of our customers and prospects have either been accepted this year or evaluating participation in 2017.

As providers recognized that to earn substantive increases in reimbursement for driving improved outcomes, they are also similarly exposed to significant downside risk. Many realized that they need the technology, analytics, clinical knowledge base and network management capabilities that Evolent can provide to ensure strong performance.

As of today’s call, we are working with several organizations that are either currently operating or evaluating Medicare Advantage plans or participation in the next-gen program for the coming year.

Another catalyst that we touched on in the fall is a growing need for provider-driven solutions to address substantial growth in Medicaid enrollment and associated increases in cost.

We are now in discussions in several states with providers that are considering entering the Medicaid market as the landscape in their state shift towards value-based care.

Currently 39 states in the District of Columbia offer Managed Medicaid and health systems are beginning to see this as a significant opportunity to extend their value-based care strategies. If you take Medicare and Medicaid alone, these two populations represent over 50% of the average health system’s total revenue base.

As a result, shifts in fee-for-service reimbursement dynamics also drive substantial interest in the Evolent platform as providers grapple with the inherent execution challenges, new technology requirements and significant financial downside involved in risk arrangements.

In short, we believe that in 2016 and 2017, we will see increasing momentum from forces that are driving providers to value-based reimbursement and given our leadership position, we believe we are well positioned to capture increased demand in an emerging $45 billion market for technology, analytics and associated services.

As we enter 2016, we are excited to continue our strong pace of growth coming off of great year in 2015. Our growth is driven by two primary factors, adding new customers to our network and growing revenues from our existing customers by expanding our base of services and increasing lives in our value-based arrangements.

In terms of new customers, from the tail-end of December 2014 through the end of year 2015, we signed five health systems to our long-term customer network.

Two of the five went live in 2015, two were launched at the beginning of 2016, and our recently announced partnership with Passport Health Plan based in Louisville, Kentucky was effective as of this month.

Passport represents an incredibly exciting partnership for us as we are adding 280,000 lives with one of the top Medicaid plans in the country across the ten year commercial relationship. While this relationship will phase in across the course of 2016, we expect it will contribute significantly to our future revenues.

Also, our formation of the Medicaid Center of Excellence will combine our industry leading technology and broad infrastructure with Passport’s deep clinical expertise and know-how in managing the nation’s most rapidly growing market segment.

We see this partnership strengthening both our business development acumen, as well as our ability to drive performance. You can also see the diversity of our sources of growth when you look at our other new client wins.

One of our recent health system additions in the south has their own branded health plan and offers Medicare and commercial products in their local market with an ambition to expand regionally.

As second system in the Midwest has already added 100,000 lives to the platform and is developing payer partnership arrangements to capture additional lives and market share.

A six hospital system in the west started with 20,000 employee lives and anticipates adding commercial lives as they finalize payer partnership contracts across 2016 to finish the year with upwards of 50,000 lives.

Finally, we also began working with an alliance of regional providers that is seeking to use their combined scale to build a diverse value-based business with a superior provider-driven clinical model. All different strategies that get to scale are supported by highly flexible and scalable platform.

You can see the same-store growth opportunity playing out with our more mature clients as well. Across time, we expect roughly 70% of our growth on average to come from existing clients expanding their relationship with Evolent as they add new populations and additional services.

As an example, we have a system in the east, add over 80,000 lives through a series of delegated risk arrangements with local payers in 2015 and is now considering expanding this year into the Medicare next-generation ACO program. Another system in the Midwest added nearly 25,000 lives through the launch of Medicare Advantage and commercial plans.

Across the fourth quarter, we completed a strong annual enrollment period and launched several new populations. This influx of patients across multiple product areas is incredibly complex to manage operationally and the level of execution was quite strong as we consistently had tight deadlines and met key client objectives across the board.

Overall, we are excited about where we stand entering 2016 from a growth perspective and have a high degree of visibility into our anticipated revenues for the year given the recurring nature and long lead time involved in our contracting process.

As we discussed earlier, we have seen consistent growth from our existing base of customers and we brought on a number of very high quality new health system partners, all of them had strong near-term growth potential.

Moreover, our new relationship with Passport Health represents a significant customer win with a nationally respected provider organization as well as the opportunity to pursue several emerging Medicaid opportunities nationwide. With that, let me now turn things over to Nicky to review our financial performance in more detail.

I’ll then finish with additional perspective on our outlook for the coming as well as a few updates on product development in our organization. .

Thanks, Frank. In terms of the focus of today’s financial review, I will start by covering the income statement results for the quarter and fiscal year ended December 31, 2015, our December 31, 2015 balance sheet and cash flow statement for the quarter ended December 31, 2015.

This is also the time of the year in which we have the highest visibility into our growth for the coming 12 months and I look forward to sharing our outlook for 2016. During this discussion, I will be comparing fourth quarter and fiscal year 2015 results with comparable 2014 results on an adjusted basis.

The reconciliations of our adjusted results to the most comparable GAAP results are available in the press release we issued today and also the 8-K we filed with the SEC. Overall, I am pleased with our results for the fourth quarter and fiscal year.

In terms of the fiscal year, we had adjusted revenues of $153.5 million or 62.1% growth from $100.9 million in 2014. In 2015, we grew the lives in our platform by 66% and as a result, we saw a significant expansion in our adjusted gross margins from 28.3% to 39%.

This reflects the scalability of our service model as we are able to leverage local market infrastructure over growing membership at our existing clients. We continue to invest in our capabilities with a particular focus on our Identifi platform as well our go-to market resources.

Adjusted EBITDA for the year was negative $31.7 million compared to negative $37.1 million in 2014. Turning to our adjusted results for the quarter, our adjusted revenue increased 74.9% to $46.7 million, up from $26.7 million in the same period of the prior year.

Adjusted EBITDA for the quarter was negative $5.9 million, up from negative $13.9 million last year. For the quarter just ended, adjusted loss available for common shareholders was negative $3.1 million or negative $0.05 per share.

This compares to an adjusted loss for common shareholders of negative $16 million or negative $0.65 per share in the quarter ending December 31, 2014.

As a reminder, the metric of adjusted loss available for common shareholders is intended to provide a complete economic measure of our earnings and thus excludes the portion of earnings attributable to non-controlling interests and take into account all dilutive or potentially dilutive shares.

The primary differences between GAAP and our adjusted results for the quarter were $0.7 million in adjustments to remove the results of purchase accounting, $4.2 million in stock-based compensation expense, and $0.2 million in transaction costs primarily related to our initial public offering in June.

As a reminder, we derive our revenue from two sources; transformation and platform and operation services. For the quarter just ended, adjusted transformation revenue accounted for $10.8 million or 23.1% of our total adjusted revenue.

This represents an increase of $2.3 million compared to the $8.5 million of adjusted transformation revenue during the same quarter last year.

Much of the year-over-year growth was driven by a handful of contracts that were completed in the most recent quarter and that were associated with the completion of integrating data to new population into Identifi in advance of 2016 go-live dates.

As was explained in the past, transformation revenue can fluctuate from quarter to quarter based on the timing of when contracts are executed with partners, the scope of delivery, and a timing of work being performed.

For the quarter just ended, adjusted platform and operations revenue accounted for $35.9 million or 76.9% of our total adjusted revenue, representing an increase of $17.7 million or 96.7% from $18.3 million in adjusted platform and operations revenues in the same period of 2014.

This increase was driven primarily by a 66% increase in the number of lives in our platform from 432,837 as of December 31, 2014 to 717,526 as of December 31, 2015 resulting from our increased partner account as well as growth in our existing markets.

Our average PMPMC for the quarter was $16.70 compared to $16.82 in the same period of the prior year. We ended the quarter with 12 executed long-term agreements with one of the 12 effective as of February this year after finalizing regulatory approval.

For the quarter just ended, adjusted cost of revenue increased to $24.4 million or 52.2% of adjusted revenue compared to $20.5 million or 76.8% of adjusted revenue in the same quarter of the prior year.

The increase in expense year over year is primarily related to additional personal cost and third-party support services associated with the growth in the lives on our platform. Offset in part by some one-time items in the current quarter.

In addition to significant year over year improvements in adjusted gross margin, we also saw 4.1% improvement in adjusted gross margins in the third quarter of 2015.

Adjusted SG&A expenses increased to $28.3 million or 65% of adjusted revenue in the quarter ending December 31 2015 compared to $19.3 million or 72.2% of adjusted revenue in the same quarter of the prior year.

Relative to the prior year the additions we made to SG&A continued to be focused on the areas we expect will ultimately drive long-term growth including business development and marketing as well as scalability to investments in Identifi platform.

Adjusted SG&A grew $2.7 million versus the third quarter of 2015, much of this increase was attributable to seasonal corporate expenses and a lower utilization rates during the holiday season that shifted certain expenses from adjusted cost of revenue to adjusted SG&A.

We do expect total adjusted SG&A expenses to continue to decrease as a percentage of total adjusted revenue over time.

Combined, our total adjusted cost of revenue and adjusted SG&A expenses as a percent of total adjusted revenue declined to a 112.7% in the fourth quarter of 2015 compared to 149% in the same quarter of the prior year as well as compared to 115.4% in the third quarter of 2015.

Adjusted depreciation and amortization expense in the quarter was $3.1 million or 6.7% of adjusted revenue compared to $1.7 million or 6.4% of adjusted revenue in the same quarter of the prior year. The increase was primarily due to $2.5 million in amortization of intangibles assets recorded as a result of our offering o in the organization.

We expect adjusted precision depreciation and amortization expense to increase in future periods as additional software assets are placed in service. As of February 23, 2015 there were 42,558,769 shares of our class A common stock outstanding and 17,524,596 shares of our class B common stock outstanding.

Turning to the balance sheet, we ended the year with $199.8 million of combined cash, cash equivalents and investments. Total accounts receivable ended the year at $20.4 million. Total deferred revenue as of the end of the year was $14.8 million which was lower than the average 2015 deferred revenue balance of $26.6 million.

This is largely attributable to timing, as of the end of 2015 we waited to confirm January enrolment figures for many of our partners prior to advanced billing for 2015 services. Looking at cash flow, under GAAP cash used in operations was $7.7 million for the quarter ended December 31, 2015.

Cash used in investing activities was $54.8 million and cash provided by financing activities was $0.1 million. Finally, as we turn to guidance for fiscal year 2016, the following comments are intended to fall under the safe harbor provisions outlined at the beginning of the call.

We are introducing fiscal year 2016 guidance that reflects our current expectations for adjusted revenue and adjusted EBITDA. Our guidance depends on preliminary assumptions which are subject to change over time. Our full-year 2016 guidance is as follows.

We expect adjusted revenue to be in the range of approximately $212 million to $220 million reflecting growth of 30% to 35%. We expect adjusted EBITDA to be in the range of approximately negative $28 million to negative $24 million. Our guidance reflects the following.

Strong same-store sales growth at the existing clients, the impact of three new partners who will be ramping up over the course of 2016 as well as the full year effect of two new partners who came on the platform in 2015, transformation revenues which we expect to be roughly flat versus 2015, the reduction in services at one of our existing partners as previously disclosed, and the impact of an amendment and another partner where we plan to add lives under our risk sharing program and made a portion of our fees contingent on performance.

The performance fees would only be available to be recognized in 2017 based on the measurement date. In the aggregate, taking all these pieces into consideration, we have a high degree of visibility into our revenue forecast as 85% of our revenue is currently available under contract.

From a timing point of view, we expect our 2016 forecast to be more back-end weighted based specifically on the timing of contracted go-live dates. Regarding lives in our platform, we expect them to be nearly double versus the end of 2015 as we’ve seen strong growth from our existing partners as well as from new partners going live in 2016.

In terms of operating expenses, in 2016, we expect our gross margins to remain close to full year 2015 levels. Regarding adjusted SG&A, we expect slower growth in 2016 versus 2015 and remain committed to our goal of breaking even in late 2017.

We also expect to see improvement in adjusted EBITDA in the second half of the year, in line with the timing of our revenues.

Looking ahead to the first quarter of 2016, we are forecasting adjusted revenue to be in the range of approximately $47 million to $48 million and adjusted EBITDA to be in the range of approximately negative $9.5 million to negative $8.5 million. This concludes the financial summary and I will now turn things back over to Frank..

Thanks Nicky. I wanted to close with a few updates on our pipeline moving into 2016, our product development focus and our overall organization. Looking forward in 2016, we’re excited about both the quantity and quality of health systems in our active pipeline.

Given the lead time for execution and readiness, many health systems executive teams are working to finalize their strategic and operational plans in the first half of this year in anticipation of value-based care launches in late ‘16 and early ‘17.

For example, we continue to see health systems developing substance of risk arrangements with regional or national payers as a tactic to quickly scale their value-based business.

Currently, we’re supporting our partners in 15 payer risk contracts as well as several systems in our pipeline were in the early stages of negotiations around shared savings and delegated capitation agreements.

At the same time, we're finding that a number of systems we work with are determining that they want increased option value in their go-to market strategy and are pursuing their own health plans.

Within our pipeline, there are half a dozen organizations that are engaged in market and financial feasibility analysis around the viability of launching their own health plans to serve discrete populations in the region.

In terms of platform development, we’re consistently seeking to support our clients in innovative ways to effectively power their value-based business strategies.

Many of our health system clients are in active discussions to offer high-performance neural network offerings to local employers and we’ve made a consorted effort to develop a highly effective scalable offering in this area.

To our employer value advantage product, we assist health systems in developing compelling provider networks, tailored clinical programs, and wellness and benefit plan designs to lower total cost and improve employee productivity.

As an example, one of our long-term partners is in negotiations with several local employers including a large school district and a county government. The combination of the strong provider ground locally and a highly sophisticated employer solution powered by Evolent creates a strong differentiated value proposition in winning commercial accounts.

We believe that our employer solutions can continue to open up an attractive segment for our partners and in January we hosted 50 leaders from partner and perspective partner organizations for an employer provider summit.

The summit revealed that there is early traction in engaging local employers and innovative provider driven solutions that can offer a high value product to the marketplace that more effectively engages employees in managing their health. Also, we continue to invest in and refine our industry-leading Identifi technology platform.

For those of you who are new to our platform, Identifi is a fully interoperable purposeful platform that enables and measures operational performance across both clinical and business teams responsible for the value-based business.

We recently released the latest version of the platform, Identifi 5.0 which improves workflow and technical integration for communication between the entire care team in order to easily close care gaps, accurately code for risk adjustment and effectively coordinate care.

The updated Identifi care features enhanced patient level assessment, care plan and reporting navigation.

New features such as care plan accessibility between Identifi and the provider EMR, simplify, productive cross team collaboration and allow our partner systems to deliver maximum impact to their patients more efficiently, improving the health of patients, while reducing costs.

Looking internally into our organization, we have continued investing in recruiting, training and retaining the highest caliber talent in the industry. We strongly believe that our talent is a real competitive advantage and we regularly measures ourselves in how we are continuing to engage our Evolenteers.

Since our founding, we've conducted employee engagement surveys twice yearly, and we spend a tremendous amount of focus analyzing the data, and working with our employees to address issues identified through the survey.

We were delighted to see our employee engagement scores continue to hit an all-time high with 85% of employees reporting high satisfaction working in Evolent and net promoter scores approaching 90%.

It is incredibly inspiring to work in an environment with hard-working, dedicated and mission driven talent that is truly committed to transforming our healthcare system nationwide. Overall, we are pleased with our results for the fourth quarter and for the calendar year.

We continue to be excited to be at the forefront of a massive transformation that is occurring in the healthcare marketplace and we are very focused on strong execution to meet our strategic and financial objectives for 2016 and beyond. Thank you again for participating in tonight's call and now, we are happy to take questions..

We will now begin the question-and-answer session. [Operator Instructions] First question comes today from Robert Jones with Goldman Sachs. Please go ahead..

Thanks for the question. This is Adam Noble in for Bob.

Just wanted to ask around the platform lives in the quarter and just curious, was the number in line with your expectations heading into the fourth quarter, with potentially, flat sequentially with 3Q and I understand a lot of the enrolment that goes on 4Q will really show up in 1Q, but is there anything to call out, given the strong existing client growth you guys talked about why there wasn't a little bit more of a step up in 4Q?.

Yes. Bob, I would start by saying it was in line, sorry, Adam, it was in line with expectations. The way we -- earlier in the year, we had one or two contracts or populations we thought might hit in the fourth quarter, those are now slated to begin in 2016.

In general, I think what you will see is in the fourth quarter, not a lot will happen, not a lot of new lives generally coming on just based on the way that the year pans out. So nothing surprising to us. I think as Frank talked about, as of February, we are up to 1.1 million lives.

So you do see a nice step-up in Q1 and so things in line with expectations and we're making the progress we expect to make in life growth..

Got you. That makes a lot of sense.

I guess also the gross margin, again, it was a lot above our expectations for the second straight quarter, you mentioned last quarter having some gain share utilization, was that the case again here in 4Q, and thinking about the -- talking about gross margin for 2016, you said it should be flat year-over-year, how should we think about I guess the appropriate baseline for the year and maybe the fluctuations that we might see..

I will take it in two parts, Adam. Specifically on Q4, so the two pieces to that puzzle, one is that we saw a very strong transformation revenue in the fourth quarter, so relative to the third quarter, we had $7 million uptick in transformation, which is very good flow through, and we also did mention that in Q4, we actually had some rebate.

It’s not revenue, it comes through the – it’s a deduct to expenses and rebate income and some other year-end adjustments that were kind of one time in nature and favorable. So that explains the delta from Q3 to Q4. For the full year, we are just under 40% and I think we see that as a sustainable basis going into 2016.

So I think 40% is a good number to work with for full year 16 on the gross margin line..

Next question is from Ryan Daniels with William Blair. Please go ahead..

Yeah. Thanks for taking the questions guys.

Frank, I wanted to ask one of you in regards to the Passport relationship and really your broader Medicaid population health strategy, how do you use an organization effectively institutionalize their decades of learnings and then kind of take that and move that into other markets to assist with Medicaid population?.

Yes. What I would say is that’s something that I think we are quite good at doing. If you think about our initial relationship with UPMC, that gave us an opportunity to take some very well-developed IP and then codify that and develop in a way it could be customized and obviously scaled for the broader markets.

So I think that's something we’re very good at doing. If you look at Passport relative to other Medicaid plans around the country, I think what we saw, having been around the country is that, one, they are incredibly good at what they do.

Two, the model that they had deployed, which is one that involves multiple providers that truly networks throughout the state and then also engages the local community organizations in a very meaningful way, that that model is what we’re seeing across the country that other states, other provider organization is going to be a part of.

So in terms of their clinical knowledge, in terms of managing specific segments of that population, I think they have very unique assets there.

Again, a lot of know-how in terms of how you engage providers and effectively engage patients and again our job, which has already started and I would say is off to a great start, is to take that knowledge and again embedded in our identified platform, which is highly scalable, but also in the way that we're working with other provider organizations.

So right now off to a very good start..

Okay, that's helpful. And then when you were talking in your prepared comments about growth in the lives in the platform, I think you said it’s still likely to trend at that 30% new, 70% existing, I am curious.

I guess that has been the case and maybe longer term, but given that you’re taking on some partnerships with a lot of existing lives and also [indiscernible] wind down, will that look a little different actually next year or is it still, you’re sticking in that 30-70 type ratio?.

Yes. I think that's a good point. If you look at the historical average of 70-30 and what we would expect over a number of years, it is again in the 70-30 range.

To your point, because we are bringing on a new organization with a large bolus of lives, you probably see that flip a little bit this year with again more growth coming from the new client side. So I don't have the exact ratio, but it might be closer to 50-50 this year, based on the addition of 280,000 lines..

Okay, perfect.

And then maybe one more just going back to the Medicaid population, little bit more nuance there, as it seems like a big opportunity, but how do you integrate kind of the social services aspect of Care Delivery, which is probably much more important in that population with what we typically think of as the healthcare delivery portion?.

Yes. And that's one thing that again I think Passport has been exceptional at. So they really have developed an effective mechanism to think about the network in much broader terms, right, it's not just a physician network or specialist network.

It actually incorporates community organizations and in that process, they have developed a number of methodologies for engaging with those providers, connecting them directly with physician organizations, the identified platform again, which is sort of managing flow across the population kind of also be used to engage those providers in a meaningful way.

So I think what we are really looking to do is build on the knowledge base of Passport, leverage it in the existing infrastructure and systems that we have and think about network to your point, in much broader terms where we are effectively leveraging other organizations that clearly can engage those patients and population in an effective way.

So, again, that is one of the reasons why we identified Passport as one of the leading providers in the country that we wanted to work with..

Our next question is from Lisa Gill with JPMorgan. Please go ahead..

Good evening. It’s Mike Newshel in for Lisa. Can you give us some more color on the performance fees that you mentioned, both give us a sense of the size as a percentage of total revenues from that client and are you sharing the medical costs risk here or are there other performance metrics that those fees tied too..

Yes. So this is an existing client and I would say you’re talking sort of in aggregate to the $5 million to $10 million range of dollars at stake here, and it's actually the risk sharing arrangement is on sort of net outcomes based on the way the CMS is scoring this.

So it is based on the medical side, medical performance, the measurement date will be pushed out to ‘17. That's where we sort of know it, because those revenues would not be available until ‘17 based on that measurement date..

I think from our perspective, we saw a very significant Medicare opportunity in this particular market.

I think the health system partner we're working with also is quite excited by it and what we felt is that we can go in together potentially really grow that population over time and have a pretty exciting opportunity to improve clinical care and lower cost for the population.

So it helps that we've already done a lot of work in that market, it helped that we really done the analysis of the Medicare population, it's already a very good relationship for us and we really view this as an opportunity to potentially generate pretty significant upside again if we continue to do what we've been able to do in that market.

So excited about it and again I think lots of potential as we head into ‘17 and ‘18..

And are you expecting to do more arrangements like this in the future, and this is something that you would offer in terms of closing the new client or is it only something that you would want to attempt at this point with somebody you already have a track record with?.

I think we’re only going to do this in selective situations where we have pretty deep knowledge of the market, a strong working relationship with the client again what we feel like we have control over the right factors, the high majority of our fees are obviously come in direct fee relationships, not interest-based arrangements, I don't think you're going to see a major change there, but in the right situation where we see an opportunity to really build an exciting financial opportunity for the health system and for the other one, I think we would consider..

The next question is from Charles Rhyee with Cowen and Company. Please go ahead..

Thanks for taking the question guys and congrats on the results here. Wondered, Nicky, maybe first for you.

Obviously there is a question about the gross margins coming in better, but when I think about the EBITDA sort of the expected range for next year coming a lot better than I had expected, can you talk about what you’re anticipating in terms of expenses in the OpEx line as we move to the year and does this pull forward your expectations for breakeven in ‘17?.

I would say generally speaking, Charles, the numbers we put out are marginally better than we had originally expected. I think you saw some gross margin uptick. We’re probably a little ahead of where we expected to be on gross margins, so that's coming into ‘16 as well. We are seeing a moderation in SG&A growth as well.

So when we put it together, as I say, I think it’s modestly better than we expected. At this point, it would be premature to say, we are going to pull forward our expectations and breakeven. We continue to be focused on a year - fourth quarter 2017 breakeven.

But we obviously wanted to set up ’16 in a way that painted a clear path to that and so we think working on both gross margin and EBITDA to exit 2016 in a place which gave us, as I said, a very clear path to that breakeven target. So again sort of working hard on that and want to make sure that’s a real focus for us as an organization..

Okay, great. And then maybe a question for you, Frank. Last quarter you talked about record number of Blueprints.

Can you talk about how they are sitting within the pipeline today? I know you talked about a strong pipeline here earlier, how should we think about where those Blueprints are and how they potentially flow through into kind of signed contracts? And then secondly when you talk to, obviously a lot of focus on value-based reimbursement, not just with you guys, but with other types of companies that are maybe offering kind of point solutions, particularly at the facility level.

How do you go about engaging with those health systems if they have already made some investments in some type of analytics platform or some type of population health platform? Are you looking to say, hey, let us bring Identifi in, because we think this is better or do you look to work with what they have and augment with that? Thanks..

I mean, two good questions. I would say, first of all, the Blueprint environment has been strong. We're still engaged with over 90% of the organization that we started within the fall. If you think about the work now, it really is analyzing the market, the financial opportunity for value-based launches towards the end of this year and into '17.

So that's something we are going to continue to diligently work on through the first half of the year. We feel really good about some of the organizations that we are working with in the business cases. We obviously want to be selective to make sure there really is the commitment that really want to get to scale.

And hopefully with enough in the pipeline we can be selective and again hit our target of about five organizations for this year. So, right now, I’d say we feel good and again some great organizations in the pipeline.

On your second question, I think I’ve learned a long time ago you are never going to take one solution and offer that solution to every health system in the country. They are going to have different systems, they are going to have different needs. And I think we wanted to have a scalable, but also a flexible platform.

So I think to your answer, many times what we see is organizations have purchased one-off tools that do not solve what they need to accomplish in a value-based care setting. Many times they've done it with an inpatient mindset. There's a number of things when you think about being a provider organization at risk that are not embedded in those tools.

And a lot of time it’s our engagement process that really highlights some of the things that they are missing from the existing tool set. So in those cases, they recognize, look, what we have doesn’t meet our needs and we are really going to need the Identifi platform and the broader Evolent solution.

If someone has purchased something where we have overlapping capabilities, you are absolutely right, we're not going to build a new data warehouse if they don’t need one. And we are going to try to work within the system that they have.

We do believe that our analytics layer, our stratification layer is second to none and usually when people really analyze that aspect we definitely want to have that as part of the way to really direct the care management organization and ultimately lower clinical cost.

So usually we will have that component, but a lot of flexibility on the other dimensions. .

Great. Thanks a lot..

The next question is from David Larsen with Leerink. Please go ahead..

Hi. Congratulations on a good quarter. So, revenue in the quarter came in ahead of our expectations. Nicky, can you talk about that and how is revenue relative to your expectations and were there any performance fees that were in there? Thanks..

David, no performance fees in the quarter. I just talked about on the expense side, there were some benefits, but I think we had a solid quarter and transformation revenue was good in the quarter. We have talked at the end of Q3 that we had some work moving around between the quarters, so that came together nicely.

We didn’t – to the earlier question on live, the lives is where we expected it to be, but P&L revenue was also up nicely just based on where I think it exactly came in the quarter. So in aggregate, nothing specific to point to, just solid transformation quarter and P&L largely where we expected it to be.

So I think we try to – transformation is difficult to forecast, so we try to be somewhat conservative there, but in aggregate a good quarter from our perspective and thankfully in line and slightly ahead of our own expectations. So we are happy with that. .

That’s great.

And then did I hear you correctly saying that you expect a number of lives on the platform to double in 2016? So in 4Q of '16 roughly a doubling of the number of lives?.

Yeah, I mean, we ended the year with north of 700,000. Frank talked about close to 300,000 coming on at Passport, so that gets you to 1 million. Open enrollment and some other new customers in the year, so as of February you would have 1.1 million.

And so we would expect the year-end range to be in the 1.2 million to 1.4 million lives by the end of 2016, yes..

Okay, that’s great. And then, can you just remind me in terms of the degree of visibility you have into the 2016 revenue guide please. .

So, we referenced specially about an 85% visibility across the full year. I would say the pieces of the puzzle yet to be completed out. It is always a portion of the transformation revenue that by nature of it, it comes in and it’s we got to go get that every year upfront in the implementation work.

So there is peak to that there and then there is, I would say, at individual clients there's opportunities on new populations that we have to sort of go get and we’ve visibility towards them, but they don’t fit into that contracted revenue.

So we sort of – our pipeline is strong as Frank talked about, so on the first part of it, we feel good about where we got to go and get that transformation revenue and then we know the work we have to do on the P&L side as well..

One way to think about is, if you think about the business where a lot of the lives are set for this year by clients, right, and even some of the things that are going to be additive, we are already very deep on or already contracted.

So I think the 85% point is, it’s pretty unique for a business for the full year to have 85% of their revenues under contract and very high visibility there.

So the gap that Nicky talked about is consistent with what we've seen historically, so you always have some additional revenue you will add, but it’s very consistent with what we've done historically, just meaning we feel very good about our forecast for this year..

Okay, that's great. That’s very helpful.

And then just the impact of [indiscernible] I think that client was potentially rolling off, that’s fully accounted for obviously in the ‘16 guide?.

Yes, nothing new there, nothing beyond what was talked about before, David..

Okay, wonderful. Thanks and congratulations on a good quarter and what appears to be to me a good guidance. Congrats..

Thanks..

[Operator Instructions] The next question comes from Richard Close with Canaccord Genuity. Please go ahead..

This is Brian Hoffman for Richard. Nicky, you said that transformation revenue is expected to be flat in 2016.

How should we think about that over the fourth quarter? Will that be evenly split or are all somewhat back-end loaded?.

That’s more, I would say, more evenly split, transformation we've – so transformation revenues we talked about a lot. It’s inherently difficult to forecast quarter-to-quarter. So there's nothing about the nature of it that is more back ended. So I would say, a good way to think about that is fairly equal over the fourth – over the full quarters..

Okay. And then on the last quarter's call you stated that 80% of the health system that attended your annual summit, having their own branded health plan is a critical component to their strategy, so that’s been I guess about a little over three months ago.

Can you talk a little bit about any changes you've seen in the demand environment and how the summit has impacted your pipeline since then?.

Yeah, I think the summit is an excellent way to get the health system CEOs and their boards many times away for a couple of days just thinking about their value-based strategy and just thinking about Evolent.

So I think some stronger relationships were built there, it’s a way to enhance our credibility given that a lot of our clients are talking about our work together and the success that we’ve had. So I think it’s been very useful for building on what were already strong relationships.

And as a result, as I mentioned in my remarks earlier, we have several organizations right now that are evaluating the launch of health plans and we are working with them on the market assessments and really trying to understand what the opportunity is, where the regulatory requirement is.

And again, I would say, the overall market trend is tilting more towards health plans in certain markets where provider organizations have not been able to get good terms from payers in terms of taking on productive risk arrangements.

So as a result, organizations that want to control their own destiny, that really see an ability to leverage their own brand locally in very discrete populations are deciding that they want to – ultimately launch health plan. So we're mid-process with a number of organizations right now and hopeful that we will have some [indiscernible] this year..

And, Brian, I would just clarify, my equal point on transformation. I actually thing 45% first half, 55% second half maybe a more accurate picture just starring at some data, so just to clarify that point..

Got it. Okay, thank you. That's helpful. And then last one for me.

Where you sit today, when you look at the various segments in Medicaid, Medicare Advantage, employer solutions, where do you see the most or the biggest opportunities coming over the next several years?.

Well, what I think is, I think we see movement in all of those segments.

As I mentioned, the Medicare being the largest payer and being very aggressive and where brand locally is quite powerful in someone’s selection of a health plan, we do like that segment a lot, particularly given that the dilemma for a provider is do I want to accept declining fee-for-service rates or would I rather have more control over the premium and manage that more productively.

So that's a natural place where we think a lot of providers will be moving into risk arrangements. We mentioned Medicaid where a lot of states are under strain and there really is a need for more coordinated provider solution. That’s a growing population.

So I think in those two areas, I think those are quite attractive and then obviously the exchanges, very different for providers that are embedded in those markets where again they have a powerful brand, there is ability, there is a benefit to building a broader network and I do think over time as the exchanges rationalize, we also have providers there as well.

.

Excellent. Thank you..

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. We thank you very much for attending today's presentation. The conference has now concluded. You may now disconnect. Take care. .

Thanks..