Frank Williams - CEO Nicky McGrane - CFO.

Robert Jones - Goldman Sachs Lisa Gill - JP Morgan Ryan Daniels - William Blair Jamie Stockton - Wells Fargo Charles Rhyee - Cowen and Company Sean Dodge - Jefferies Richard Close - Canaccord Genuity David Larsen - Leerink Partners.

Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended June 30, 2016. 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 Web cast on the Company's Web site in the section entitled Investor Relations. Here is some important introductory information; this call contains forward-looking statements under the U.S. Federal Securities Laws.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.

A description of some of the risks and uncertainties can be found in the reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the Company's results and outlook, please refer to its second quarter news release.

As a reminder, the financial statements of Evolent Health Inc. for the three and six months ended June 30, 2015 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 2015. Prior to the reorganization, Evolent Health Inc.

had no operations and accounted for Evolent Health LLC as an equity method investment. In order to provide consistent and comparable metrics for the periods before and after June 4, 2015, the adjusted results of Evolent Health Inc.

presented and discussed in our press release and during this call, reflect the reorganization as if it had occurred on January 1, 2015 and therefore include the results of Evolent Health LLC for the entire three and six months ended June 30, 2015, as well as certain other adjustments.

Reconciliations of adjusted results to GAAP results are available in the press release and the 8-K we filed earlier today. At this time, I will turn the call over to the Company's Chief Executive Officer, Mr. Frank Williams. Please go ahead sir..

Thank you and good evening. I am Frank Williams, Chief Executive Officer of Evolent Health and I am joined by Nicky McGrane, our Chief Financial Officer. I will open the call today with a summary of our performance for the quarter and our overall perspective on the market and pipeline.

I will then hand it over to Nicky to take us through a detailed review of our second quarter results. I will then close with some additional detail on our product development and organizational focus. As always, we will be happy to take questions at the end of the call.

From a financial perspective, our total adjusted revenue for the quarter ended June 30, 2016, increased 55% to $56.5 million compared to adjusted revenue of $36.5 million for the quarter ended June 30, 2015.

Adjusted EBITDA for the quarter ended June 30, 2016 was negative $3.9 million, compared to adjusted EBITDA of negative $10.2 million for the quarter ended June 30, 2015. We now have approximately 1.4 million total lives on the platform as of June 30, 2016, an increase of 135% year-over-year.

We are pleased with our results for the quarter and continue to see growth within our existing client base, as well as a number of high quality prospects in our current pipeline. Overall, market forces continue to move at a steady pace, as governmental and commercial payers continue to look for value based solutions.

We see this particularly with government programs like Medicare and Medicaid, as well as employers and commercial payers, who are seeking high value, high performance networks. In terms of growth, you will remember our two primary sources; growth from our existing partners and new business development.

Our partners continue to pursue opportunities with us to increase lives on the platform and expand our scope of services to support their business objectives.

To that end, we recently enhanced our service offering with an existing partner, to provide support in risk adjustment, additional resources in care management and comprehensive support in ensuring additional lives under Medicare value based contracts.

Across our customer base, we added 147,000 lives on a variety of existing and new populations in the second quarter alone.

Expanding the number of lives in value based arrangements helps our clients to achieve scale economies and drive meaningful behavior change across their respective organizations, while also enhancing Evolent's return on investment in a local market.

On the new business side, we are pleased to announce our third definitive agreement this year, with St. Luke's Health Partners, the risk bearing entity of St. Luke's health system based in Boise, Idaho. St.

Luke's has a strong clinical reputation, and with more than $1.7 billion in revenue, seven hospitals, 150 clinics and 2,100 physician partners, it is a leading innovator across the entire state of Idaho.

Our long term operating partnership is expected to add more than 150,000 lives to the identified platform initially, which we expect will grow over time, as opportunities to pursue additional populations emerge.

In the near term, the focus of the partnership will be on laying the groundwork for measurable clinical outcomes through the implementation of Identifi and our suite of clinical programs, while also working collaboratively to engage physicians and their care teams in an enhanced and proven approach to population health management.

In the market more broadly, we also continue to garner interest from a number of health systems and independent physician groups that need support in evaluating their readiness, to take on risk based contracts, which drives demand for our transformation services.

We continue to see consistent interest across the country from a number of prospects that are actively engaged in early implementation work at this time of the year, preparing for January 2017, as well as 2018 launches.

At this point in the year, we felt good about our current pipeline and believe we are well positioned as we enter the second half of the year, with high visibility into our transformation revenues, existing partner growth, and the potential for new long term partnerships.

As a result of our financial and operational performance year-to-date, we are raising our guidance which Nicky will speak to momentarily.

Turning for a moment to Evolent's position in the large emerging market for value based care technology and services, we are excited about our recent announcement to acquire Valence Health, and believe it strengthens our offering and differentiation in the marketplace.

The rationale for this strategic combination is pretty straight forward and based on four key principles; first, we believe it will strengthen our operational capabilities and expertise, particularly in the Medicaid and pediatric space.

Second, it will improve our ability to scale through a combination of greater efficiency and operations, and a larger base of revenues to spread our upfront investment in the national support platform.

Third, it will continue to diversify our customer base, by adding 10 long term partners to our network, and more than 90 healthcare organizations, that have a relationship with Valence today.

And lastly, and specifically, we expect it will accelerate our path to adjusted EBITDA breakeven, by one to two quarters next year, which will allow us to meet an important financial objective for the business.

One of the reasons we are excited about bringing the organizations together, is the inherent benefit of broadening and deepening our provider centric, clinically oriented platform across all lines of business and all types of patient populations.

We foresee immediate benefits in the richness of the data collection methodology, the sophistication of the analytics we can deploy, the robustness of our approach to physician engagement, and the depth of our clinical programs in driving improved health outcomes.

Clinical value is ultimately what the market is asking for, and what enables our partners to win in their local markets.

What makes the Evolent model attractive to partners, is that we bring a foundation of operational experience and leading technology, that we are constantly refining, as we analyze what works and what does not at a rigorous level, to drive continuous performance improvement.

What we have learned so far from our investment in Identifi and the development of a sophisticated clinical model, is that there are four ingredients that any health system or physician group must have in place in order to create and sustain measurable success.

First, you need a combination of clinical data, administrative data, and other personal health data that are integrated in clinically relative constructs to give you a full view of the patient, so you can identify the right intervention.

To give you a sense of what we have accomplished in this realm, Identifi is connected to more than 35 payer and administrative system in just 17 data types and can interface with a variety of inpatient and physician practice EMRs.

Second, to be successful, you need sophisticated machine learning techniques that accurately predicts potential adverse outcomes for individual patients, so you can focus on high yield interventions. In this regard, Identifi churns through over 1,400 clinical rules that comprise our rules engine.

We have a feedback loop for testing and proving how those rules are working that we iterate over time. This means the platform is learning, as we take in more data from our growing customer base.

The third ingredient you need for sustained success, is a high performing network of physicians, who are supported by a broad and integrated care team, and we are onboard to quarterback the care delivery process, as well as the process for measuring success.

Accordingly, we have developed an approach for physician engagement, that includes developing the right governance structure, ongoing training and education, physician led care program development, and data driven performance management.

Lastly, the fourth ingredient you must have is well developed programs with the infrastructure to effectively implement them. Identifi not only embeds the care program into workflow, it allows physicians, care teams and administrators to monitor all the follow-up steps for every patient.

This is hugely valuable when attempting to manage care across disparate geographies, networks, and populations. We have gone through 19 EMR integration efforts to-date to support physician workflow, and that becomes more scalable and replicable, with each implementation.

Overall, our ongoing investment in making the platform and programs smarter and more effective is paying off, literally and figuratively.

Earlier this year, we were recognized by the Care Innovations Validations Institute, a third party organization comprised of statistical and population health experts, who independently validate the integrity and performance of companies who provide population health services.

The institute, as well as Al Lewis, who many in the industry consider to be the leading authority on population health and the greatest critic of case study methodologies, have said that our approach to analyzing clinical programs and proving results is among the best they have seen.

When we are in conversations out in the market, our goal is to help providers step back to look at the rigor of our case studies, how they try to identify, and how that relates to financial and clinical results.

When we tell that story effectively, providers begin to understand what an extensive investment they would need to make on their own, in order to achieve the same level of success and risk arrangements. Its these proven methodologies and replicable experience that continue to attract innovative health systems to Evolent.

We don't believe there is anyone in the industry with this comprehensive of an offering, around driving clinical performance improvement, that is also willing to commit to clinical and financial outcomes. As a result, our initial vision of leading health systems coming together at a national network, is becoming a reality.

Since the start of 2016, we have added more than 677,000 lives, signed three new health system partners and have announced our plan to expand our footprint and advance the comprehensiveness of our platform, with the pending combination with Valence Health.

With all of these market forces in action, we remain focused on driving strong execution and delivering value to our partners, as the key tenants to driving strong long term financial performance.

With that, let me turn it over to our Chief Financial Officer, Nicky McGrane, to walk you through the financial details or performance in the second quarter..

Thanks Frank and good evening everyone. Today, I will cover the financial results for the second quarter and our outlook for the third quarter and the remainder of 2016. We continue to drive strong results in the second quarter, including adjusted revenue growth of 55% over the same quarter in the prior year.

Additionally, we continued the momentum in leveraging the investments we have made to capitalize on the long term opportunities we see ahead. Overall, our second quarter adjusted results exceeded our expectations. Adjusted revenue increased 55% to $56.5 million, up from $36.5 million in the same period of the prior year.

Adjusted EBITDA for the quarter was negative $3.9 million, up from negative $10.2 million in the prior year; and adjusted loss available for common shareholders was negative $7.2 million or negative $0.12 per share for the quarter, compared to negative $13.3 million or negative $0.36 per share in the same period of the prior year.

The reconciliations of our GAAP results to adjusted results are available in the press release and the 8-K we filed earlier today. As a reminder, we derive our revenue from two sources, transformation and platform and operation services.

Adjusted transformation revenue accounted for $10.4 million or 18.4% of our total adjusted revenue for the second quarter, representing an increase of $1.9 million or 23% compared to the same quarter last year. We continue to see strong demand for our transformation services.

In addition, we had a handful of contracts that were completed in the second quarter, ahead of expectations. As we have noted in the past, transformation revenue can fluctuate from quarter-to-quarter based on the timing of when contracts are executed with new and existing partners, the scope of delivering, and the timing of work being performed.

Adjusted platform and operations revenue accounted for $46.1 million or 81.6% of a total adjusted revenue for the second quarter, representing an increase of $18.1 million or 64.7% compared to the same quarter last year.

The increase was driven primarily by a 134.8% increase in the number of lives on our platform, from approximately 600,000 as of June 30, 2015 to almost 1.4 million as of June 30, 2016, resulting from our increased partner count, as well as growth in our existing markets.

Our average PMPM fee for the quarter was $11.64 compared to $17.41 in the same period of the prior year. We ended the quarter with 13 PNO partners and as Frank mentioned, added one additional partner after the close of the quarter, St. Luke's Health Partners, bringing the current count to 14.

Adjusted cost of revenue increased to $32.1 million or 56.9% of adjusted revenue for the second quarter, compared to $24.9 million or 68.4% of adjusted revenue in the same quarter of the prior year. The increase in expense year-over-year was primarily related to additional personnel costs and third party support services.

The decrease in adjusted cost of revenue as a percentage of adjusted revenue period-over-period illustrates the scale we are driving in the business.

Adjusted selling, general and administrative expenses increased to $28.3 million or 50% of adjusted revenue for the second quarter compared to $21.8 million or 59.7% of adjusted revenue in the same quarter of the prior year.

Additional expenses incurred within the SG&A have been focused on those areas we expect, will ultimately drive our long term growth. Specifically in our business development and marketing efforts, as well as our Identifi platform development. On a percentage basis, adjusted SG&A for the quarter grew 29.8% over the second quarter of last year.

This is the fourth consecutive quarter, where SG&A as a percentage of adjusted revenues has declined versus the same metric in the prior year, and reflects the fact that a majority of our investments are now in place. We continue to expect total adjusted SG&A expenses 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 percentage of total adjusted revenue, declined to 106.9% in the second quarter of 2016 compared to 128.1% in the same quarter of the prior year.

Adjusted depreciation and amortization expenses in the quarter were $3.6 million or 6.4% of adjusted revenue compared to $2.1 million or 5.9% of adjusted revenue in the same quarter the prior year. The increase was primarily due to $2.5 million in amortization of intangible assets recorded as a result of our operating reorganization.

We expect adjusted depreciation and amortization expense to increase in future periods, as additional software assets are placed in service. As of August 2, 2016, there were 42.6 million shares of our Class A common stock outstanding and 17.5 million shares of our Class B common stock outstanding.

Our balance sheet remains strong, with $156.9 million of combined cash, cash equivalents and investments, as of June 30, 2016. Looking at cash flow, cash used in operations was $1.1 million and cash used in investing activities was $4.8 million for the quarter ended June 30, 2016, and we had no material financing activities during the quarter.

Finally, with respect to guidance, the following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call, and are based on preliminary assumptions, which are subject to change over time.

For the third quarter, we are forecasting adjusted revenue to be in the range of approximately $58 million to $59 million, and adjusted EBITDA to be in the range of approximately negative $5 million to negative $4 million.

We are increasing our full year guidance with adjusted revenue in the range of approximately $224 million to $226 million and adjusted EBITDA in the range of approximately negative $21 million to negative $19 million. The measures discussed here do not take into account any potential impact, as a result of our pending acquisition of Valence Health.

With respect to Valence Health, if the transaction were to close, such that the results of Valence would be included in our full fourth quarter results, we expect that it would add approximately $20 million in revenue for the quarter, and increase our projected adjusted EBITDA loss.

However, we expect to reach adjusted EBITDA breakeven one or two quarters earlier than originally projected, due to the additional growth expected from Valence in 2017, and synergies from the combination.

In summary, we entered the second half of the year with a solid financial and market position and we remain focused on delivering a successful year.

The strength of our business, not only reflects the results of the investments we have made in our product offering in teams, but more importantly, it allows us to continue on our path to drive long term profitable growth for Evolent and our shareholders. This concludes the financial summary, and I will now turn things back over to Frank..

Thanks Nicky. I want to close with a few updates on our product development focus and organization overall. We spoke earlier about how our providers need to go from raw data, all the way to reaching the physician and the patient, across many population groups, to achieve financial and clinical results.

The investment we have made in Identifi, integrates and brings those interactions together, in a way that allows a health system to execute successfully across a very diverse patient population.

The tool is SaaS based, with single sign-on capability, for physicians that pushes alerts into the EMR, pulls data from multiple sources, has applications for care management, utilization management, physician reporting and a half dozen other critical used cases.

Ultimately, it serves as the control center for scaling clinical knowledge and interventions across the health system.

In addition to the need for an integrated technology platform and day-to-day operational know-how, we have also seen that health system leaders need support in understanding the implications of rapid changes in the healthcare policy landscape, at the federal and state level.

As a result, we have made a concerted effort to be the conduit between policymakers and healthcare delivery systems, in assessing the implications of policy changes on an operational and financial performance, as well as from a long term strategic perspective.

Accordingly, we work with Capitol Hill to assess the reality of how a policy might play out in the market, so that policymakers can achieve their desired objectives. And we are also helping health system executives respond strategically and operationally, to rapidly evolving market trends.

The coming months are sure to present a litany of new implications for healthcare leaders, with a proposed macro rule being finalized this fall, continued budget pressure on government healthcare spending, and the pending presidential election. This constant fluidity creates yet another example of the drivers of momentum in the market.

Through our involvement in the healthcare transformation taskforce and the Department of Health and Human Services Learning Action Network, we are helping our customers understand the new regulations and implications of a variety of scenarios.

Beyond our involvement in assessing these larger healthcare trends, we have also cultivated talent within our organization, that brings deep industry and policy knowledge to assist our partners in near term operational decision-making.

We look forward to putting these emerging policy insights on display at our Fall Partner Summit in Arizona in October, where we anticipate more than 150 leading CXOs from across the country in attendance to learn and share best practices in value based care.

In closing, we are pleased with our results for the second quarter and remain confident about achieving our key strategic and financial objectives for calendar year 2016.

The Evolent team is committed to being at the forefront of the transformation that is occurring in the healthcare marketplace and is collectively focused on delivering strong and consistent results for our partner organizations. Thank you again for participating in tonight's call, and now we will be happy to take your questions..

Thank you, Mr. Williams. [Operator Instructions]. And the first question will come from Robert Jones of Goldman Sachs. Please go ahead..

Thanks for the questions. Frank, as we think about the mix of the significant wins you have had this year or customers that you will be serving, increasingly go forward like Passport or some of Valence customers, Georgia Physicians last quarter; St.

Luke's this quarter; how should we be thinking about the PMPM trend? Is there any direction you can give us obviously, as the mix continually changes as you bring on new customers? Anything you can point to from PMPM and maybe when you would expect to hit a steady state or an equilibrium on that metric?.

Hey Bob, it's Nicky. I will take that one. I would say, overall, as we look at -- we have had the visibility into PMPM and we have talked about the $10 to $12 for a while. We came into that range in the second quarter here. As you know, we added over 500,000 lives in the first quarter and saw some of the impact of that in the second quarter.

In terms of steady state, I would say, we expect to be in this zone for the remainder of this year. I think we will have to revisit that. When we look at 2017 and think about the addition of Valence, I think we will have to relook at that.

But I would say the $10 to $12 feels like a good outlook for the rest of this year, and so that's -- I'd leave it at that I would say..

Got it. And then I guess just a bigger picture question, as we think about CMS and they continue to implement new value based models, like CJR and the two new cardiac bundle programs; I mean, has this accelerated the conversations that you are having with clients? And I guess maybe -- potential clients, I should say.

And then I guess, of existing clients, how are they approaching these new initiatives?.

Yeah I would say, the level of government activity has definitely pushed the market.

We are seeing a number of systems stepping forward for a lots of different reasons; some interested in bundle programs, some interested in Track 3 or next generation ACO programs; some are beginning to look at the new macro legislation and trying to figure out how do we actually help our physicians achieve their performance targets, and we really need to build those as a core competency.

So I would say the good news is, there are a variety of factors, and what I love about that, is it means, there is a different angle into every conversation. We might find an organization that is really interested, specifically a next generation ACO, we might find another organization that again has a big Medicaid opportunity in their state.

And so it gives us a lot to talk about, a lot to engage new organizations with, and then if you look at our growth across this year, we have seen a lot of it come from our existing clients that are selectively adding many of these programs and wanting to build scale in their core value based business.

So all in all, it's good news for us, gives us a lot to talk about, and that's driving both new business but also same store growth..

Got it. Okay. Thanks so much..

Thanks..

The next question will come from Lisa Gill of JP Morgan. Please go ahead..

Great, thank you very much. As we think about St.

Luke's and the 150,000 lives, how do we think about that Nicky, as to how it will come on to the platform?.

We wouldn't expect to see anything this year Lisa, in terms of lives on the platform..

Okay. So that's more of 2017.

And then secondly, the recent shelves that you filed, can you just give us some color around what your thoughts are there?.

Yeah Lisa, this is Frank. I think this is normal course year post IPO. I think as you are aware, our major shareholders haven't sold any shares up to this point, and naturally are going to be looking for some liquidity across time. They remain highly committed to our business and to the vision of what [indiscernible].

But this is a step in the process, and again, I would imagine, that they would be getting some liquidity over time..

Okay. That makes sense. And then I guess my last question just would be, you know, you each kind of commented around leveraging some of the opportunities that you are in with multiple different EMRs.

Can you maybe just give us some indication as to how we start to think about how you leverage that knowledge base and start to leverage those costs?.

Sure. If you think about one of the most difficult things in healthcare clinical work, it is really aggregating data from multiple sources. It takes a lot of work to work with the new EMR system, whether its Turner, Epic, or MEDITECH or a number of different providers.

You are also going to have that spread across a number of different physician organizations. So you can imagine, in our first implementation, we were building those connection points for the first time. So its new work, getting familiar with the systems, how do we pull data, how do we clean the data.

Now that we have done that for several EMR systems, it makes it incredibly efficient, as we work with the new client, again that has similar EMR systems that they are working with.

So it allows us to one, implement much faster; two, do it more rapidly, and three, know that the quality of data that we are working with is going to have a lot of integrity, and therefore, can have an impact on our clinical programs almost immediately..

And so, as we think about it, just from our side, at this point, you are working, I would assume with, all the major vendors and probably even some of the smaller vendors.

So you would have to assume that almost every implementation now you have worked with that vendor in the past, am I thinking about that correctly?.

It's probably not quite that extensive. But I think you are correct that most of the major vendors we have experience with, it is making our, sort of the quality, speed of our implementations much better. There is still work to be done. We obviously have to work with individual practices, we have to map the data elements.

Some organizations have data in different fields, etcetera. But you are absolutely right, that most of the time now we have seen the system, we have worked with it, and it makes it a lot easier in terms of generating quality data..

Okay, great. Thank you..

Our next question will come from Ryan Daniels of William Blair. Please go ahead..

Thanks for taking the questions. Maybe two quick ones for Nicky; you mentioned first, the transformation revenue was a little bit greater in the quarter, some projects completed.

Should we therefore expect a bit of a sequential drop in that revenue stream in the back half of the year, or is there kind of outstanding demand that you can keep your capacity high, and keep that level pretty consistent?.

I would say Ryan, we think about this more on an annual basis than quarterly. So a project that we thought we are going to spread out over the back half of the year completed earlier, I think there is some chance that you can see a bit of a sequential downdraft in the second half of the year.

But we generally think about this as a -- as we have talked about, sort of a flat year-over-year business..

Okay. That's helpful. And then, given the PMPM expectations you have laid out. You know doing some quick math, it looks like there is another 150,000-175,000 lives yet to come on the platform.

So we should think about year end, maybe 1.5 million or a little bit above that, is that a fair assumption?.

Well remember Ryan, there is two elements. We could have an organization take on additional services on lives they were already serving, so that is a way to grow. It doesn't necessarily correlate with increase in lives. As you suggest and we will also probably see some additional contracts come on in expansion.

So we are not setting a specific target around lives, but feel very comfortable with the new guidance range that we laid out..

Okay. That's very fair.

And then, Frank, maybe a bigger picture, one for you; I am curious, although it's still fairly nascent, what the market response has been to the Valence announcement? Meaning, have you had the opportunity to talk to your customers about some of the capabilities that will afford you as a combined organization and vice versa, and what has been the initial response, if so?.

Yeah. I mean, obviously we took the time to communicate with our current customers and a number of the prospects that we have in the pipeline. Valence has a great reputation.

We were able to explain the rationale for coming together with them pretty clearly, and I think everyone we talked to, felt, it was a great decision, that it would enhance our service offering that it continues to support our position as an organization with a leading platform that can deliver results for our customer.

So I would say, universally, it was well received, because of the reputation they have in the market, and having heard from them and the discussions they had with their customers, I think it was well received on that end as well, and we made it clear that, we are in the market for the long haul, we are continuing to invest and build out the platform that we feel we are in a very strong position together, and I think most -- everyone we talk to, agreed with that conclusion..

Okay, perfect. Thanks for the color and congrats on the strong first half of the year..

Thank you..

The next question will come from Jamie Stockton of Wells Fargo. Please go ahead..

Yeah, good evening. Thanks for taking my questions.

I guess, maybe the first one to follow-up on something that Bob was asking about earlier; the bundled payment initiatives, Frank, can you tell us whether you are actually having these lives where you are getting paid to manage those today, or is this more just a -- [indiscernible]?.

We have obviously programs today that apply to patients in bundle payment arrangement. So obviously, you need to manage the continuum with care. There are a lot of transitions involved in those type of procedure areas and our clinical model clearly applies to those. We also have the ability to support the administration of aspects of bundled payments.

We do see it as an area of growth, although I would say, if you look at our current customer base, the main focus has been on more delegated capitation or accessing lives through provider sponsored health plans or participation of specific government programs.

So I wouldn't say bundles today are a big portion of our revenue base, but we do provide clinical support to those types of patients.

And then if you look to the future, what we have really promoted is one, integrated platform to handle all of systems value based business, because if you want to get to scale on efficiency, you don't want to have certain set of things for bundled payments and other thing for Medicare and other thing for Medicaid, because it will be inefficient and very difficult to manage.

I think that integrated message has resonated really well in the market, and obviously, we are building out our platform, not only to accommodate things like bundled payments, but Medicaid-Medicare, next generation ACO programs, delegated risk arrangements with different quality metrics across different payers.

A centralized system to truly manage all of that efficiently, and that's really what we are trying to promote in the market..

Okay. That's great. Maybe just one for you, it's obvious that CMS seems to be pushing the ball down the field when it comes to value based care.

I would be curious to hear what your thoughts on kind of what the commercial carriers are doing with their kind of non-Medicare advantage lives? Given all of the distraction that are occurring right now as a result of [indiscernible]? Have we seen the real inflection from them yet and focus on value based care, or do you feel like more of a -- one or two years from now, when the M&A environment cools down?.

I would say, the government really has been the leader in the market. If you look at their level of aggressiveness or the amount of business and payments that they want to move under value based contracts, the mechanisms they are providing to support that, the willingness to share economically, in a way that really incents providers to participate.

I think if you look in both Medicare and even in Medicaid, that has really been the largest catalyst in the marketplace. In terms of commercial payers, I think you have seen a lot of activity. So definitely, promotion of Narrow Networks, you have seen ACO shared savings arrangements.

But in most cases, I don't think we have seen aggressive delegation of risk and delegation of clinical functions to providers.

So I would say, yes, there is activity there, and the market is continuing to head in that direction, as employers are asking for higher value alternatives, as employers are willing to trade-off larger networks for lower costs, narrower network offerings, that will continue to take hold.

But I would agree, that it's still in its nascent stages, so that's going to be another area of growth.

Again, with cost pressure, the catalog tax again, which may be delayed, but still has helped employers to begin rethinking their benefit structures and to be more aggressively in managing costs, I think will see the commercial side pick up, as the government continues to push very aggressively with the number of things that they are doing..

Okay. And maybe just a quick one, Nicky, I think your guidance implies that maybe the EBITDA losses were a little higher sequentially, maybe that's what Ryan asked earlier with the transformation line coming down.

Is there any color on [indiscernible]?.

I would say, it sort of implies a pretty flat back half of the year on an EBITDA basis overall. The only thing I would say is, yeah, I mean, I think you touched on the transformation piece. And then, we do generally see some hiring ahead of revenue in 2017.

So starting in the third quarter and into the fourth quarter, we are start of bringing some folks on ahead of that revenue, so you will see some of that impact, that's probably the bigger thing in the back half of the year..

Okay. Thank you..

The next question will come from Charles Rhyee of Cowen and Company. Please go ahead..

Yeah thanks.

As we look out to next year and we bring on Valence here, can you talk about what are the main kind of guideposts we should be thinking about? And I am not really talking about guidance per se, I am thinking about, what are the key sort of opportunities you are looking to go after as a combined entity, that you think are sort of the nearest sort of opportunities for you?.

Well I think as we have said from the very beginning, we have an aspiration to be the market leader in what we think is a very-very large emerging market. You can size it different ways, but we believe it’s a $40 billion to $50 billion market. We believe that combination with Valence will strengthen our service offering.

So I think one of the first things we want to do is take advantage of that, make sure our teams are working together collaboratively, that we are best of breed in terms of our approach to analytics and clinical programs.

That we are bringing that fresh offering out to the marketplace, and demonstrating the results that both organizations have generated thus far.

I think in doing that, as we have talked about, we see big opportunities in Medicare, where the government is being very aggressive in introducing a number of value based programs, that have a lot of interest in the market today.

So we'd like to continue to work with organizations that want to be on the leading edge, when it comes to population health with Medicare populations.

Same thing with Medicaid, there are a number of states that we feel are under budget pressure, that are looking for better solutions and that want provider-oriented solutions, that are very integrated into the community. So Medicaid would be a second area you would see us focus.

And then third, as we just talked about, we are seeing examples of employers stepping forward with local health systems, that want creative Narrow Network solutions. We believe we have combined a very strong offering there.

So what's nice is, I think it’s a continuation of the current strategy, which really is to provide extreme value for our clients, continue building out the platform to add a number of new health systems and continue to grow our existing relationships to see strong top line growth and the bottom line growth that will come with that, and position ourselves at the end of 2017 as a very clear market leader, and one that is based on the level of results that we are generating for our clients..

Great. That's helpful.

And then, one question I have about like BTCI [ph] for example, and then, my understanding of some of these programs, it's really about post acute discharge -- proper post acute discharge planning, and how are you there to help people, because my understanding is that -- the issue is not -- everybody kind of recognizes that's where the savings are, but there is not a lot of good data, where the best nips are and who they are really discharged to.

Can you talk about what needs to be done to actually improve that, and what kind of capabilities that you might have to really -- to help your health system partners? Thanks..

Sure. I mean, I think we would attack that from multiple dimensions. I mean, first of all, through our analytics, there are certain patients that are at high risks for very poor post-acute experiences and frankly very high costs. We have a lot of experience looking at the data elements, and then concentrating our clinical resources on those patients.

So not just sending them off into the post acute wilderness, but tracking them very carefully to make sure that they are getting the right interventions when they need the interventions.

The fact that we are involving mental health, we are involving pharmacy, and taking an integrated care approach to those patients, also makes a big difference, because those factors can lead to higher costs and very poor quality.

In terms of network development, we absolutely spend time upfront with our provider partners, finding the most efficient providers, and then using financial mechanism, network contracting to make sure that we are sending patients ultimately to the right places. And then, the Identifi platform really tracks a patient through that entire episode.

We are able to manage workflow. We are able to make sure the home health visit happens. We are able to make sure that someone has a discharge coordinator and the instructions that exist for the primary care physician that all of those things happen.

A lot of this is ultimately blocking and tackling and the system we have developed, enables you to manage that very effectively. So one being smart about where you put resources, but then making sure you execute successfully. So all of those things will make a big difference in managing the post acute world..

And is that a function that, I guess in the past, right, the discharge nurse or whoever, the hospitals just used to resend patients down to the administrators -- sorry, to the nursing home down the street, but now it's really to the data and information that we are collecting to identify the service that we can kind of understand, who needs to go the nursing home versus maybe, who can go home, is that fair?.

Absolutely. And this applies to all of our clinical program areas, which one, is presenting good comprehensive clinical and financial data to all of the providers that are involved in the care process.

When you do that, and a provider sees, that maybe they are sending people to a place that is high cost and low quality, where certain follow-up steps aren't happening, they will shift their behavior to other organizations, and that's part of the process that is constantly going on is, how do you look at that data, how do you act on and how do you hone it and improve it over time, and that's absolutely what we would do..

Great, thanks a lot..

The next question will come from Sean Dodge of Jefferies. Please go ahead..

Hi, good afternoon.

So going back to some of the earlier questions, about the mix of opportunity in government lives versus commercial, from an Evolent standpoint, does it make much difference, once the lives are on the platform; is there much difference in contribution margin between a commercial life versus -- MA life versus Medicaid?.

You know, there is really not.

We might see some slight benefits in contribution to pair delegated lives, but I think to your point, you will see differences in PMPM, right, if we are doing a full health plan, Medicare, that's a very high PMPM obviously, because of the overall PMPMs in Medicare, very profitable and same thing with the lower PMPM, you will generally have more lives, but very strong contribution margins from those as well..

Okay. So you continue to drive some nice leverage on SG&A. Nicky, you said you expect this to continue for some time.

What's the right way to think about the level of investment needed here going forward? Can you carry this momentum or pace ahead or should we expect to see some tapering over the next year or two, if we think about SG&A as a percentage of revenue?.

Certainly, we have got a core financial target of EBITDA breakeven next year, into the fourth quarter of next year, and so, in order to achieve that, there is an implied further leveraging of SG&A across that next year. So yeah, we do expect to see continued leverage in SG&A. Our strong growth at the top line and leveraging SG&A.

So yeah, we do expect to see that continuing..

All right. Thanks again..

And our next question will come from Richard Close of Canaccord Genuity. Please go ahead..

Great. Thank you for slipping me in here and congratulations. If you can talk a little bit about the St.

Luke win that you just announced, was that competitive, were you bidding against anyone on that business and was there any existing relationship that you had with them previously?.

St. Luke's, I think is an example of how our relationships unfold over time. It's an organization that we have known, just from our experience working in the industry and always admired them, as a leader in that part of the country. We had talked to them early on. They were quite interested in what we are doing. They weren't quite ready to move forward.

We continued to build the relationship. And then, as -- there are lives and ambitions and value based care began to grow, they felt that they could use some support in executing and realizing their growth strategy.

And so, we began interacting with them, we began sort of looking at their market and strategic planning process, what their needs were operationally, and that's really how the relationship ultimately unfolded. I think it’s a great opportunity to large system. A great footprint throughout the state of Idaho.

About 150,000 lives and delegated risk arrangements that we will move into in 2017. And then beyond that, a real opportunity to grow and expand that across multiple patient populations and we are incredibly excited about the relationship..

A question on pipeline; in the past Frank, I think at the Analyst Meeting back in May and exiting the first quarter call, you talked about the pipeline being extremely strong, bigger than ever.

I was wondering if you could just give us an update there, and then, has the Valence transaction meaningfully changed that at all?.

Yeah. I would say, we are off to a good start this year. It feels good to have added three great organizations to our long term operating partner list, and so we are very happy about that.

I would say, the overall activity level remains strong, because of all the factors that we talked about, so the government's continued push, it's very hard for a provider to sort of avoid the need to really begin gaining experience and moving in this direction. So we are in a number of very high quality conversations right now.

I feel very good about where we are, relative to our objectives for the year, and in setting up 2017, we still got a lot of work to do, but the overall market environment feels very good. And I think the teams are doing a great job.

My hope is that we will have some great new systems to welcome across the coming months, but I feel like we are in a very good position, consistent with where we were, when we spoke a few months ago..

Okay. Thank you..

And our next question will come from David Larsen of Leerink. Please go ahead..

Hi. Congratulations on a great quarter. Could you maybe talk a bit about your relationship with Passport, how is that progressing, and what sort of incremental investments are being made into your Medicaid capabilities coming from that relationship? Thanks..

Sure. What's really nice is, when you begin working with an organization and you see a lot of consistency in terms of mission, values, orientation; and I would say to start, teams have been working really together. So it doesn't feel like two teams, it feels like one team working very closely together.

There has obviously been a lot of focus on driving improvements in cost and quality, enhancing some of the clinical programs, where we have had some knowledge and knowhow there. We are wanting to make sure that, we performed well on overall medical costs, which are under a lot of pressure across multiple populations.

So a lot of work right now, identifying areas of opportunity and then working through the many steps that you need to do, to actually realize that.

And I would say, we are feeling very good about the relationship, our ability to expand some of our work there, and we are finding additional areas where we can provide value, and they have just been a fabulous partner up to this point. So very-very good start.

In terms of Medicaid; obviously the relationship with Valence is going to enhance our work in Medicaid and in pediatrics. Passport as well, as we mentioned from the outset, has a very strong set of capabilities, some very unique things that they do in managing, particularly across disparate geographies.

We have a Medicaid Center of Excellence in Louisville, which we put an initial investment into, and we have already hosted a number of health systems and state governments that are interested in applying some of those lessons in their markets.

So I would say, off to a really good start from a business development perspective and a number of things we are quite excited about, as we head into 2017..

Great. Thank you very much..

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Frank Williams for his closing thoughts.

Well we appreciate everyone participating in the call and great questions and look forward to seeing many of you on the road across the coming weeks and at various healthcare conferences. And again, we appreciate you participating on the call. Thank you..

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..