Frank Williams - Chief Executive Officer, Director Nicky McGrane - Chief Financial Officer.

Robert Jones - Goldman Sachs Ryan Daniels - William Blair Stephanie Davis - JPMorgan Jamie Stockton - Wells Fargo Charles Rhyee - Cowen Richard Close - Canaccord Genuity.

Good day and welcome to Evolent Health's earnings conference call for the quarter ending September 30, 2016. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will an opportunity to ask questions. [Operator Instructions]. As a reminder, this conference is being recorded.

Your host for today's call 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. 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 periodic filings. For additional information on the company's results and outlook, please refer to its third quarter news release.

As a reminder, the financial statements of Evolent Health Inc. for the nine months ended September 30, 2015 do not reflect a complete view of the operational results for that period 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.

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 on this call, reflect the reorganization as if it had occurred on January 1, 2015.

The adjusted results include the operation of Evolent Health LLC for the period from January 1, 2015 through June 3, 2015 as well as for the period from June 4, 2015 through September 30, 2015 when the results were consolidated and also include 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..

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 financial performance for the quarter and our overall perspective on our pipeline and view of the market.

I will then hand it over to Nicky to take us through a detailed review of our third quarter results before closing with an update on the overall market environment and our organization. As always, we will be happy to take questions after our prepared remarks.

From a financial perspective, our total adjusted revenue for the quarter ended September 30, 2016, increased 39.1% to $60.2 million compared to adjusted revenue of $43.3 million for the quarter ended September 30, 2015.

Adjusted EBITDA for the quarter ended September 30, 2016 was negative $3.1 million, compared to adjusted EBITDA of negative $0.67 million for the quarter ended September 30, 2015. We now have approximately 1.5 million total lives on the platform as of September 30, 2016, up 104.3% year-over-year, prior to our close of the Valence transaction.

We are pleased with our results for the quarter having exceeded our commitment for revenue and EBITDA as well as our expectations for lives on the platform.

Moreover, for several quarters running, we have seen consistent increases in covered lives across our current clients demonstrating the significant organic growth opportunity in front of us as well as driving increased scale towards our objective of moving past breakeven by December 2017.

In terms of the overall market environment, we continue to see high levels of interest in value-based care across all market segments including governmental payers in Medicare and Medicaid as well as employers looking for solutions to stem rising premium costs, which are growing much faster than the overall economic growth rate.

Accordingly, we continue to see a strong pipeline across the board with a number of organizations in late stage evaluations who are exploring payer delegated risk arrangements or potentially launching their own branded health plans.

Taking a macro view for just a moment, Evolent was founded on a belief that healthcare costs could not sustain double-digit increases year-over-year while the federal budget and overall economic growth hovered in the low single digits.

Our thesis wasn't based on theoretical discussions with policymakers, but rather a systematic process involving in-depth discussions with providers across the country.

They were describing in detail what they were experiencing in terms of overall pricing pressure, discussions with regional, payers and employers and significant growth in Medicare and Medicaid patient volumes.

What we heard and continue to hear with increasing fervor is that the organizations that are paying for healthcare will not tolerate increasing premium costs and will take radical measures to get higher value for their spending.

At current growth rates on the government side in Medicare and Medicaid, for example, expenditures are projected to almost double as a percent of GDP across the next 20 to 25 years, largely driven by increases in cost per beneficiary dramatically outpacing the growth in the federal budget.

For employers, there is simply no more room to increase already skyrocketing increases in health benefit costs and remain competitive. Simply stated an unchecked healthcare budget for both the government and for employers would break the bank of unchecked across the medium-term.

The alternatives, of course, are to simply cut fee-for-service reimbursement, which is extraordinarily difficult to do politically or to move to payment models which set the budget for healthcare expenses such as in Medicare Advantage in order to ensure greater efficiency and visibility into substantially reduced growth in healthcare costs.

As a result, regardless of how one reads the tea leaves from a governmental perspective, providers through their own economic analysis have concluded that they have to deliver high-quality lower-cost healthcare given the consistent demands across every major purchaser or risk substantial decreases in market share and margins.

That's an extremely important aspect of the underlying thesis that serves as the foundation for Evolent's mission and allows us to deliver value under any payment model oriented at lowering per capita healthcare spending. In terms of the impact of the election, as we have said repeatedly, spiraling health care costs are a bipartisan issue, period.

In our conversations with Republican health policymakers, it's clear that while some elements such as the exchanges, premium subsidies and individual mandates may be impacted, the pay-for-value value movement is likely to continue unabated and we may even see increased focus on Medicare Advantage and federal block grants, which would serve as significant market catalyst.

In Medicaid, we will likely see less expansion into new states, but with 73 million Medicaid and CHIP members in existing states experiencing extreme budget pressure and a growing $500 billion total Medicaid budget, there will be more than enough opportunity for provider oriented solutions.

On the employer side, we anticipate that Republicans will be attuned to the importance of reining in healthcare expenditures.

Given the overall bias towards market-based reforms and a heightened commitment to respond to the demands of the emerging healthcare consumer, we believe that to fund the movement away from fee-for-service to performance-based payment models and providers needs around supporting expertise and infrastructure will continue.

As we look at our current network of partners, the new organizations we have recently added and aligned by in-line analysis of each perspective partner in our pipeline, we remain very comfortable around sustaining our high topline growth rate.

Across the past several months, we have seen the power of having multiple sustainable growth channels in driving consistent and high growth revenue performance and to that end our holistic growth strategy has been oriented around four avenues. The first is adding lives to the platform from our existing partners.

The second is existing partners that add substantial new Evolent services to support their operations. The third is adding new long-term partners to the Evolent network. And lastly, making selective investments through M&A.

Given that we have penetrated a small portion of the total revenue base of our current partners, we have a substantial opportunity to grow with our clients as a higher portion of their patient populations come under value-based arrangements.

As at the end of the third quarter, we have seen an increase of approximately 300,000 lives on our platform from our existing partners across the last 12 months.

This has contributed to scale economies on both the top and bottom line and several of our partners have already committed to adding new discrete populations to their portfolio of risk arrangements with Evolent as we head into 2017.

Furthermore, as the complexity of our partners' value business grows and the pressure to perform increases, many are accessing additional services from the Evolent value-based platform. For example, five of our existing partners have recently added entirely new Evolent service offerings, which will come online across the coming months.

This includes a multiyear agreement with Passport Health Plan for pharmacy benefit management services as well as physician resources and tools for coding and documentation support which will have a significant impact on 2017, given there's several hundred thousand lives under management.

Outside of Passport, we are seeing strong interest in our pharmacy benefits platform, risk adjustment solutions and expanded clinical support for delegated risk arrangements.

Recognizing that we can enjoy significant revenue growth solely by tapping into our existing partner network, we have intentionally invested in developing broad and deep relationships in our partner organizations so that we understand emerging needs and potential pain points.

By prioritizing customer relationship management in this way, we have been able to maintain a focus on driving results and delivering consistent outcomes ensuring we are on track to build viable high-growth value-based care business opportunities for our partners.

Additionally, we have had a goal to generate four to six new partner relationships across the year in 2016, which is an important source of long-term growth. As you are aware, we have already added Passport, GPAC and St.

Luke's in 2016 and we are pleased to announce two additional partnerships with Banner Health in Phoenix and Hill Physicians Medical Group in Northern California. Both of these opportunities are extremely exciting with more than 50,000 lives coming on to the platform initially and significant expansion potential in the future.

Banner Health is a 15 hospital system with $7 billion in revenue and a network of nearly 5,000 participating physicians. The system has been very progressive from a value-based care perspective and is viewed as a leader nationally with tremendous growth potential in the Phoenix market and beyond.

Turning to Hill Physicians Medical Group, Hill is a formidable market leader comprised of a provider network of 4,000 primary care physicians, specialists and consultants that serve hundreds of thousands of patients in the very advanced Northern California market.

In addition to being one of the largest independent physician associations in the country, Hill is our second addition this year of a nationally recognized independent physician group, which represents a new segment of the market and an exciting long-term growth opportunity for Evolent.

Given the extensive experience of both Banner and Hill in risk arrangements, we are heartened by the recognition that together with Evolent, we can work collaboratively to build on their early success to deliver enhanced clinical outcomes and higher value care for the Medicare segment in particular.

Overall, we are excited that we have reached our target of five new partner agreements at this point in the year and based on the current pipeline we are hopeful that we will solidify additional long-term partnerships as we close out 2016.

Our last source of growth to discuss is related to our highly selective and focused M&A activity oriented at enhancing our platform and presence in the overall market.

With the close of the Valence Health acquisition in October, we are excited add several Tier 1 institutions to our partner network, many of whom have had relationships with Valence for more than a decade.

Additionally, Valence will have an immediate contribution to our growth through its recently announced partnership with MDWise, the predominant Medicaid plan in Indiana.

As a Medicaid market leader across the state with approximately 400,000 lives, MDWise has the potential to be an incredibly exciting long-term partner with substantial revenue impact out of the gates as we bring them on the platform across 2017.

The MDWise partnership is a microcosm of the future value of integrating our platform with Valence's well-developed infrastructure to ultimately provide a truly best-in-class uniquely full solution to the market.

Thus far, we are working through the initial integration process and the early returns confirm the strong leadership alignment, energized employee base and strong market reaction to the combination.

Based on all the market activity in 2016, including growth in our current client base, the addition of five new long-term partners and the addition of 400,000 lives through MDWise, we are a strong position as we head into next year.

Overall, we are pleased that we exceeded our expectations this past quarter and based on our high visibility at this point in the year, we remain confident in our previously stated minimum 30% growth rate for 2017 and our commitment to EBITDA breakeven towards the midpoint of next year.

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

Thanks Frank and good evening everyone. Today, I will cover our financial results for the third quarter and our outlook for the remainder of 2016. We maintained our first half momentum with strong results in the third quarter and continue to leverage the investments we have made to capitalizing the long-term opportunities we see ahead.

Overall, our third quarter adjusted results exceeded our expectations. Adjusted revenue increased 39.1% to $60.2 million, up from $43.3 million in the same period of the prior year. Adjusted EBITDA for the quarter was negative $3.1 million, up from negative $6.7 million in the prior year.

Adjusted loss available for Class A and Class B common shareholders was negative $6.6 million or negative $0.11 per share for the quarter, compared to negative $9.6 million negative $0.16 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 operations services.

Adjusted transformation revenue accounted for $7.8 million or 12.9% of our total adjusted revenue for the third quarter, representing an increase of $0.2 million or 2.5% compared to the same quarter last year.

As we have noted in the past, transformation revenue can fluctuate from quarter-to-quarter based in the timing of when contracts are executed with new and existing partners, the scope of delivery and the timing of work being performed.

Adjusted platform and operations revenue accounted for $52.5 million or 87.1% of our total adjusted revenue for the third quarter, representing an increase of $16.7 million or 46.9% compared to the same quarter last year.

The increase was driven primarily by a 104.3% increase in the number of lives on our platform, from approximately 700,000 as of September 30, 2015 to approximately 1.5 million as of September 30, 2016 resulting from our increased partner account as well as growth in our existing markets.

Our average PMPM fee for the quarter was $12.22 compared to $18.15 in the same period of the prior year. As we enter the fourth quarter, we now have 13 revenue producing partners and three additional partners under long-term contracts that are not yet revenue producing.

Furthermore, with the close of Valence acquisition on October 3, we now have more than 25 long-term partners. Adjusted cost of revenue increased to $33.7 million or 56% of adjusted revenue for the third quarter, compared to $24.4 million or 56.3% of adjusted revenue in the same quarter the prior year.

The increase in expense year-over-year was related primarily to additional personnel costs and third-party support services. Adjusted SG&A expense increased to $29.6 million or 49.2% of adjusted revenue for the third quarter, compared to $25.6 million or 59.1% of adjusted revenue in the same quarter the prior year.

Additional expenses incurred within SG&A have been focused on the areas we expect will ultimately drive our long-term growth, specifically in our business development and marketing efforts, as well as our Identifi platform. On a percentage basis, adjusted SG&A for the quarter grew 15.8% over the same quarter of last year.

This is the fourth consecutive quarter where we have seen a decline in the growth rate in SG&A versus the prior period and reflects the fact that a majority of our investments are in place. We continue to expect total adjusted SG&A expenses to decrease as a percentage of our 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 105.2% in the third quarter of 2016 compared to 115.4% in the same quarter the prior year.

Adjusted depreciation and amortization expense in the quarter was $3.7 million or 6.2% of adjusted revenue compared to $3.1 million or 7.1% of adjusted revenue in the same quarter the prior year.

The increase was due primarily to the capitalization of internal use software and the amortization of intangible assets recorded as a result of transactions closed in 2016.

We expect adjusted depreciation and amortization expense to increase in future periods as additional software assets are placed in service and additional intangible assets recorded as a result of our acquisitions closed in the fourth quarter of 2016.

As of November 7, there were 52.6 million shares of our Class A common stock outstanding and 15.3 million of our Class B common stock outstanding. We completed a secondary offering in September 2016 selling approximately 8.6 million shares including the exercise the greenshoe option.

Our balance sheet remains strong with $159.5 million of cash, cash equivalents and investments as of September 30, 2016. For the quarter, cash provided by operations was $7.9 million and cash used in investing activities was $4.4 million. On October 3, the company completed its previously announced acquisition of Valence Health.

The closing merger consideration, net of certain closing adjustments, was approximately $219.4 million based on the closing price of Evolent's Class A common stock on the New York Stock Exchange on October 3, 2016 and consisted of seven million shares of Evolent's Class A common stock and $50.3 million in cash.

On November 1, 2016 the company completed the acquisition of Aldera Holdings, Inc. Aldera is the primary software provider for the Valence Health TPA platform. We negotiated the option to purchase Aldera as part of the overall Valence negotiations given its strategic value to Valence.

The financial results of Aldera are not expected to be material to our overall results.

The closing merger consideration, net of certain closing adjustments, was $34.4 million based on the closing price of Evolent's Class A common stock on the New York Stock Exchange on November 1, 2016 and consisted of approximately 0.5 million shares of the company's Class A common stock and approximately $24.5 million in cash.

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. The fourth quarter will be the first time that we will include the results of Valence and Aldera.

Our results will reflect a full quarter of Valence operations and Aldera operations, subsequent to November 1. For the fourth quarter, we are forecasting adjusted revenue to be in the range of approximately $84 million to $86 million and adjusted EBITDA to be in the range of approximately negative $9.5 million to negative $7.5 million.

Now let us break that down for you.

For the core Evolent business, we are maintaining our previously provided adjusted revenue guidance for the fourth quarter of approximately $60 million to $61 million and we are modestly revising our adjusted EBITDA forecast from a range of negative $5.5 million to $4.5 million to a range of negative $5 million to negative $4 million.

The combined results of Valence and Aldera are forecasted to produce adjusted revenue in the range of approximately $24 million to$25 million, which includes revenue associated with certain state cooperative contracts that we do not expect to retain in 2017 as well as approximately $1 million from Aldera.

Adjusted EBITDA for the combined results of Valence and Aldera is forecasted to be in the range of negative $4.5 million to negative $3.5 million. Aldera is not expected to impact adjusted EBITDA in the quarter.

The adjusted EBITDA forecast for Valence includes approximately $2 million of expenses without corresponding incremental revenue associated with new clients that go live at the beginning of 2017. Our fourth quarter guidance, combined with the year-to-date September results, translates to the following full-year guidance.

Adjusted revenue in the range of $250 million to $252 million and adjusted EBITDA in the range of approximately negative $23 million to negative $21 million. Finally, we thought it might be helpful to provide a sense of the pro forma 2016 adjusted revenue assuming that Valence and Aldera transaction to close at the beginning of the year.

For the core Evolent business, our fourth quarter guidance, combined with our year-to-date results, would give us adjusted revenue in the range of approximately $226 million to $227 million.

Taking our guidance for adjusted revenue for the fourth quarter for Valence Health and Aldera combined and including year-to-date results, assuming we had closed those transactions at the beginning of the year, would yield full-year adjusted revenue in the in the range of approximately $89 million to $90 million excluding revenue associated with certain state cooperatives that we do not expect to retain as customers in 2017.

In total, this would give us full year 2016 pro forma adjusted revenue in the range of $315 to $317 million. In summary, we enter the final quarter of the year intent on closing out a successful year with continued focus on driving long term profitable growth in 2017.

With the addition of our new partners at Valence Health, we continue to build on our capabilities and product offerings further solidifying our position in the market. This concludes the financial summary. I will now turn things back over to Frank..

Thanks Nicky. I want to close with a few updates on the market and our overall organization and then I will be happy to take questions. Some of you are probably aware that we host a semiannual partner summit to take a real pulse of the market and deepen our relationships.

We just held our fall event at the end of October and had more than 150 healthcare executives from across the country in attendance to share insights about their transition to value-based care. At Evolent, one of our core values that we talk about internally is to start by listing and the summit event provides an opportunity to do exactly that.

It's a chance for us to hear from not only our existing partners, but also those in early-stage engagements, prospective health system partners and others from across the industry who have lessons learned to share about running value-based businesses on the frontlines.

What's also notable is the presence of participants across every major sector of the healthcare landscape from large established health systems to physician organizations, governmental representatives and national payers.

The biggest take away from the event was the universal acceptance that providers need to move aggressively to value-based care given the overall cost pressures in the marketplace.

Our health policy panel which was composed of Democrats and Republicans alike had similar conclusions given the overall federal budget pressure and the need for immediate relief given the rapidly changing demographics of the population.

It was also clear, based on the number CXOs in attendance, that this is the number one strategic priority for organizations considering the threats they are facing from fee-for-service reimbursement cuts as well as competitive activity from other provider groups.

We have a number of follow-up conversations occurring as we speak coming out of deep discussion around local market strategy and we hope that we will be welcoming a number of these progressive organizations into our network as new participants across 2017.

In terms of an update on our organization, with the addition of Valence we now stand at over 2,100 employees companywide. I can truly say that we have assembled an amazingly broad and diverse pool of highly talented individuals that are second to none in the industry.

At the same time, given our extraordinary growth and the need to continue to attract and retain top talent we are increasing our vigilance in investing in career development programs, active career pathing, enhancing communication throughout the organization and ensuring their culture and values are supported and demonstrated at all levels of the firm.

It's been our belief that talent is a true strategic differentiator and competitive advantage in the market and we are committed to making the appropriate investments in holding ourselves accountable to the highest standard to ensure that we maintain talent as a core differentiator.

In closing, we are pleased with our results for the third quarter and where we are relative to our objectives for 2016 and then setting up a strong 2017. Thank you again for participating in tonight's call and now we will be happy to take your questions..

[Operator Instructions]. Our first question comes from Robert Jones from Goldman Sachs. Please go ahead..

Thanks for the questions. I just wanted to start with a big picture question in light of the election results and perceived negative implications on the provider side. Frank, you touched on this a bit in the prepared remarks.

But, if we think about the Republican call to repeal the Affordable Care Act, how should we think about the financial health of your clients and more importantly their interests in launching health plans in this environment? And then I guess just specifically around that, how do you think about the repeal or potential repeal of Medicaid expansion and how that might impact demand for providers who are thinking about getting more involved in the Medicaid markets?.

Yes. I think those are really good questions, obviously coming off the election results from last night.

What I would say is, if you think about the macro picture which is, we have had and this is even pre- Obamacare, we had double-digit premium increases and not an associated increase in either employer growth or federal budget growth to justify the increases.

If that were to continue unabated, you would absolutely break the federal budget and many of you have done the analysis and it would also put incredible pressure on the competitiveness of employers. So we of a massive healthcare cost problem. I don't think I have heard any policymaker talk about moving back to fee-for-service as a solution.

It simply would not address the cost problem in any way whatsoever. So what we really have then is a desire, I would say, on the side of Republicans and if you look at Paul Ryan's plan and a lot of interest in Medicare Advantage, as an example or you look on the Democrat side, I believe that ultimately we have to have payment reform.

We have to have accountability in terms of how we are paying for healthcare. We need more predictability.

So the idea of prebudgeted healthcare or whether it's through delegated capitation arrangements, whether it's through full health plan launches, all of those things in our mind will still need to be a big part of any policy prescription going forward and frankly that's been confirmed in our discussion with Republican policymakers.

On the provider side, in some ways we have been talking about these pressures on providers for some time that there would be increasing pressure on fee-for-service. If you think of some of the areas that might be reformed from a repeal perspective, it might take away or add to bad debt, you might again have increasing unreimbursed patients.

That's going to put financial pressure, which will accelerate the need for those organizations to move to value-based reimbursement. If you step back strategically and do the analysis trying to cut costs and you respond in a fee-for-service environment, it will not get you out of the economic decline that you are in.

So I would argue that those pressures will force organizations to look strategically at where can I move to potentially continue to increase our growth rate.

We have to got to add market share and then to stave off the fee-for-service cuts and the only way to do that is really to look at value-based care reimbursement, which we know employers are interested in.

We know the federal government, regardless of the things that are repealed, are still going to look to places like MA, block grants, the types of things that really move risk to providers. So I would argue, we are pretty well positioned and this is what we anticipated originally in terms of pressure on provider economics.

It's obviously our job to respond and make sure that they are successful in building their value-based businesses. On the Medicaid side, what I would say is, the reality is we spend in a close to $0.5 trillion on Medicaid today. We have a number of states where expansion has already occurred.

We have state budgets under tremendous pressure to manage the increased cost. And yes, it surely doesn't help if you do not have expansion into new states. But I think $500 trillion is spend is surely enough to work with and in many states you shall see provider driven solutions.

It makes a lot of sense in Medicaid, because they tend to be locally based, they tend to network with community-based organizations, which is important with those populations in terms of access and driving value for chronic patients.

So even if you cut estimates, it's still such a large dollar amount and if we get a portion of that through provider oriented networks, it will still be a very large business for us. So again we have to see what happens. Surely we don't have a perfect crystal ball.

But we know some of the fundamentals point exactly in our direction and our original thesis and we feel very well positioned..

I think that all makes a lot of sense. And just if I could ask one specific follow-up around the Banner Health announcement.

Could you maybe just share a little bit more about the scope of that contract? Is that more of a software product relationship versus a health plan risk based contracting relationship? And then just how should we think about the potential, from a pricing of lives perspective, around the contribution from a win like Banner?.

Yes. I mean Banner represents a significant revenue opportunity for us on an annual basis. So several million dollars.

Banner, as I mentioned, is one of the premium institutions in the United States in terms of the reputation for quality, in terms of how they have pursued population health in value-based arrangements .They have got 4,000 providers in their network. They have expanded more broadly across the state.

Initially, we are starting out really focused on clinical quality and risk adjustment. So we will focus on that service provision. We will obviously be leveraging the technology platform. It's also an interesting area where we have been able to collaborate with the advisory board, which is exciting and I think has future potential.

But out of the gates, we believe we can add tens of millions of dollars of value to our initial work and the hope is over time that as they take on more value-based lives, that they have needs in other segments that we will continue to expand. But the right out of the gates, it will be a substantial revenue contributor in 2017..

Got it. I appreciate the comments..

Thanks..

Our next question comes from Ryan Daniels from William Blair. Please go ahead..

Yes. Good evening guys. Thanks for taking the questions. Let me start with a follow-up regarding Banner and Hills, both. I think both of them have pretty successful and long-standing value-based operations in their markets.

So I am curious, if you can into a little bit more detail on what specifically drove them to Evolent? If they certain gaps in their initiatives or certain products that you are offering that they just did not have or didn't do as well? Any color there would be helpful..

Yes. A great question, I would say, for both organizations, there is a similar theme, which is even though they have been in the value business for a while, they have taken on pretty significant complexity and if you look at their plans in 2017 and beyond, they are taking on additional complexities.

So if you think about all the operations they need to manage across the nuances of the Medicare population across compliance, across integrating the physicians, across performing on a variety of value-based contracts, on doing it in a more automated and scalable way, so many times you start out and some things you are able to do a little bit more with pen and paper and then you ultimately need scalability, you need deeper clinical content.

So I would say in both, we are focused on specific areas where they felt like partnering with Evolent would help them perform in some areas where they have significant risk and where we could significantly improve financial performance.

And we think you that theme is going to repeat across the country as organizations again need to get to scale, are launching fairly complex operations from a standing start and surely can't be experts in Medicare, in serving innovative employers, in engaging with physicians and deploying clinical programs that are consistent with all those populations.

And so in both cases, I think they look to what we had and you are right, they kick the tires pretty heavily and concluded that they would be much better and that we could potentially improve performance, again in a very collaborative way because they are their excellent organizations, but improved performance in 2017 and beyond..

Okay. And then it seems like, well let's take Banner for example, you mentioned risk adjustments. I assume a lot of that business might be Medicare Advantage, but they also have a lot of commercial shared savings models and other models that would probably take them and Hills combined well above the 50,000 lives you mentioned.

So I am curious if there is a certain trigger point in the future or in the blueprint you develop to take their existing at-risk lives and shift more and more that over time? Or is that something you just can earn with operational excellence in those pieces that you do do upfront?.

Yes. We have obviously looked at their value-based business in total. As you suggest, there is a ton of opportunity there, based on what both organizations are doing. I think where you ended is the right place to answer the question, which is we have defined a pretty robust initial relationship. That's our focus. We plan to deliver strong results there.

And I think if we do, we will see other opportunities along the way and those could pop up in 2017, just depending on where we are and it could be in 2018 and beyond..

Okay. That's helpful. And then o one final one ad I will hop off. This one's for Nicky. In looking at Valence and Aldera, you mentioned the co-op revenue that will impact Q4, but probably won't continue in 2017. So two questions there.

Can you talk about number one, how sizable a contribution that is to the Q4 revenue? And then number two, is that kind of a one in 2017, it disappears or gradual wind down through the year? Thanks..

No problem. It's a relatively small number. You are talking in the plus or minus $1 million, Ryan in the fourth quarter. And with respect to the second part of when it rolls up, I would say the majority of it will roll off year-end, some of it might trickle over into the New Year. But it's just a tail on claims and so it's a little bit hard to predict.

But it will not be meaningful in any shape or form next year..

Okay. Thanks and congrats on all the momentum..

Thanks..

Thanks..

The next question comes from Stephanie Davis from JPMorgan. Please go ahead..

Hi guys. Congrats on the quarter..

Thank you..

Just a follow-up on, just on the election results.

To the extent that folks become more worried about the health provider spend and wallet share, do you have any products that they would favor or maybe favor less as a good more targeted spend?.

I missed what you said, as they favored what? I missed what you said?.

Just asking if there are any certain offerings you have that maybe you can see an uptick from some of this versus maybe any offerings you could see as maybe would be a turn away from it?.

Sure. What I would -- yes, very helpful, thanks. What I would say is, again if I look at all of our discussions with Republican policymakers as well as looking at Paul Ryan's plan and everything we can read into those discussions and then where we see the overall federal budget, as an example, you might see more of a movement to Medicare Advantage.

A feeling that why not, let's us not let 1,000 flowers bloom across 20 different payment models. Let's move towards something that is full premium in its orientation and the great news is, again the platform is very well aligned in terms of its breadth and depth to help providers move towards Medicare Advantage.

That could be in delegated capital arrangement with existing payers. It can also be through a launch of their own health plans. It's possible you might see some of the early track programs that were light in shared savings, things like that might not continue.

Our belief is the more mature advance payment models where more is at risk would likely continue. And again, we are very well-suited to help providers perform under those arrangements, given the sophistication of our technology, infrastructure and clinical programs.

Otherwise, again, if you look at employers which we have talked about where if you talk to anyone on the payer side, they will talk about increasing pressure around premium increases, wanting to move to lower cost alternatives which include high-performance in their own networks, which include potentially different ways of putting dollars in the hands of consumers where they essentially have to vote with their feet and make more value oriented choices.

Everything that we are doing is well positioned for that and supporting that in our providers' business plans and where they are headed from a value perspective. So as I said, I think we might see some trades out and some trades in to different areas, but the financial pressure is still there.

I think some of the ongoing current hospital specific pressure, if anything, will push those organizations to realize they can't stand pat in fee-for-service and they have really got to explore more aggressive alternatives from a payment perspective, which we are very well suited to help them in that journey..

Thank you. And just one quick follow-up on that one.

I know this is probably a who knows kind of answer, but any idea on how this impacts timeline?.

In terms of how it impacts timeline?.

Yes..

Look, I would say, the budget pressure is what is. Most of the plans for providers and payers have been set for 2017, in some cases into 2018 and beyond. So I would say, it's not going to impact the current environment, surely our revenue environment in the near-term. And then, some of the stuff takes time, as you know.

When does the new administration get started? How do they work through some of the changes? When do those actually take effect? And again, what we have heard on both sides is, if you want to have a more balanced budget and you want increased expenses in other areas and you see increasing healthcare expenses that you are going to aggressively and really the only solution is some form of prebudgeted payment models, ones that are putting performance at risk and again all of those impacting the provider organizations that we serve.

So possible, an increase in what I would say is an increase potentially given some of the financial pressure. But either way, we are happy if the environment stays at its current level and we are fine as the things phase in. I think will be well-positioned..

All right. Thank you so much..

Thanks..

Our next question comes from Jamie Stockton from Wells Fargo. Please go ahead..

Hi. Good evening. Thanks for taking my questions. I guess maybe just a housekeeping one. I can't remember who it was, you Frank or Nicky, but on Banner and Hills, you drew out a 50,000 lives number.

Was that for both of them combined or each?.

That's for both of them combined out of the gates. So that's what we would expect. I think that's a reasonable number to use just looking at 2017 based on the visibility that we have..

Okay. That's great.

And then on Adera, can you just walk us through what the thought process was there? Is it as simple as, hey, we plan to use this Valence platform materially more than they have in the past and therefore we don't want to pay an escalating cost for the TPA software, so we just decided to bring it in-house?.

Yes. I would say, there is two reasons. One, from a financial perspective, we would have had an ongoing license payment that would have gone out across several years. This was an opportunity to essentially take that away and bring the organization in-house. So it had a clear financial benefit.

It also, you could argue, was a defensive move in the sense that it was just a pretty core operating system for Valence and so we wanted to make sure that we ultimately had control over the asset.

And then lastly, when you think about a vision of really integrating the TPA platform with the Identifi platform, being able to have clinical and financial information seamlessly flow so you can look at and understand benefit design and claims payment, at the same time you are delivering service, a much more consumer-oriented offering long-term, we felt it would really help from a long-term differentiation perspective and is exactly where we went ahead in terms of offering a unique provider oriented product in the market.

So I think for all three reasons, the nice thing is financially alone, it made sense. But if you also look at the strategic benefits, it then made it a very easy decision and again it's a relatively small transaction..

Sure. And then just Nicky, on the revenue. It sounds like that it's going to kick in $1 million for the last two months of the fourth quarter, then that's $6 million a year. Maybe there's some purchase accounting adjustments in there.

Can you just give us some clarity around what that looks like?.

That's pretty accurate representation, Jamie. It's relatively small, the third party revenue obviously that they generate. So yes, I think that's a pretty accurate representation. We are working through the purchase price accounting and the valuation work right now. So we will see where that shakes out.

But I think from a dollars and cents point of view, that's about the scope of it..

Okay. Thank you..

Our next question comes from Charles Rhyee from Cowen. Please go ahead..

Yes. Hi. Thanks guys and congrats on the quarter. I had a question going back to Banner real quick. If I recall, they are on a Cerner environment. I think they are pretty much moving all on to Cerner. And if I remember correctly, they were using Healthe Intent.

And so, just curious as to see how are they using the Identifi platform? Is that in combination with Healthe Intent? Or would you replacing Healthe Intent there?.

It's in combination with Healthe Intent. Again, I think we wanted to make it clear that we are not in the business of trying to replace existing systems if that decision has been made.

Usually what we find is organizations that are looking for higher performance in an area like risk adjustment who want more sophisticated integration of clinical content and decision making, who want robust clinical programs that really are specific to patient populations and can be embedded in work flow that there is ways for us to supplement their existing investment.

And as you can imagine, if you have already made the investment, you want to see a very clear value proposition as to how we are going to add value.

And as Banner went through that process and a fairly long diligence process, in some areas that made a significant difference to them economically in 2017 and beyond, they felt like our solution, which isn't just technology but is also bringing expertise and depth and again increased automation in certain areas that are really important on a day-to-day basis that it made sense to go with them wanted to leverage some of the power of the Identifi platform.

So that's where we are today. And as I mentioned, as we rollup our sleeves and begin working with them and hopefully are generating positive results, we may see other opportunities to support what they are doing. But initially our focus is on driving results around the initial engagement..

Great.

As a follow-up, Frank, I know a couple of people are just asking about the impact of the elections and what might happen to ACA, but isn't it fair to also think that the pressures to providers in particular now that some of the benefits that they were getting from ACA could go way .They are going to be under even greater pressure and would need to really do more to figure out how to either supplement what they are doing and find ways to be more efficient and generate better outcomes in a higher pressure environment?.

Yes. I would agree wholeheartedly. The reality is and we focused from the very beginning, it is financial pressure increased on providers. The realization that continuing to stand pat and solely rely on fee-for-service reimbursement to fuel growth to fund their missions would be untenable.

I think any accelerations to those pressures will force organization strategically facing the financial pressure to say we have to do things differently.

Would we rather be on the receiving end of declining fee-for-service rates and try to cut cost to be the low-cost leader or what would be better looking for arrangements where we can actually access a much higher proportion of the premium dollar and then manage the episode of care with our integrated assets and physician organizations, which way would you rather go? And almost all the leading providers we have talked to understand the fact that they are going to be much better off in a full premium world than they would be trying to make hay out of profitability with dramatic fee-for-service cuts, which will be what the solution would be.

So yes, I would agree that I think it will help us as we head into 2017. We are already seeing, I would say, really strong demand across this year. It you saw the content of the discussions at the summit, it was very different than even a year ago in terms of providers' realization of the impending economics.

We had a open discussion about the election possibilities with people realizing that either way that it went, these pressures were continuing and organizations needed to act now if they were going to be in a strong position going forward. So in general, I would agree with your statement..

Great. Thanks a lot and congrats again..

Thanks..

Thanks Charles..

[Operator Instructions]. Next question comes from Richard Close from Canaccord Genuity. Please go ahead..

Great. Thank you. Congratulations on the third quarter. Just to hit this again in terms of maybe the pipeline and I guess the timeline question before and I appreciate the comments on the summit and the conversations there in terms of the election and it didn't necessarily matter which way it went.

But as we saw with the stimulus when it was passed in 2008 and electronic health records incentives, there was this big pus, but there was still a lot of uncertainty there.

So as you look at your pipeline today, do you think there is any risk to it in terms of people taking a step back here over the next several months to see how the dust settles and maybe the timeline in terms of signing new customers potentially gets delayed a little?.

Well, if you think about the sources of growth that I outlined, first of all, our current partner base is quite committed to the strategy. They have used it as a way to potentially grow market share. They are starting to see the business cases work. Many of them have committed to full risk.

And so I think you will see a continuation there given the platforms that they have built and the opportunity in front of them. So one, I don't think we will see any change there.

I think if you look across our pipeline, remember we are looking with the addition of Valence for somewhere between five and seven organizations to come on across a given year. That's not a huge number.

If you look at the pipeline, we have a very large number of organizations and if you dive into a line-by-line and we actually done those, what you will see is yes, there might be some organizations in that pipeline that were committed to a specific governmental program, it could be impacted and you might see some delay around that specific program.

But looking at the overall pipeline, the competitive situations in those local markets, pressures they are facing both from payers and computing providers and what they have committed to from a strategic perspective in terms of what they need to do, I don't think you will see any change in those areas at all and there is more than enough of those to fuel the growth that we need running into 2017 and 2018.

I don't have visibility beyond 2018 at this point, but I would say we feel really comfortable given where we stand and given the breadth and depth in the pipeline.

And again, if you think about adding 400,000 MDwise lives that launch in 2017, you think about expanding the Passport relationship, you think about being five partners, we are very well set up for 2017 and even if you imagine, there was a several month delay in the early part of the year, which again I don't see happening, but if you think it will, we are still well positioned for 2017 and obviously the cost pressures will continue as people are trying to set up 2018.

But right now again we feel pretty good about where we are..

Okay. Thanks for that. And then with respect to, you talked about new services and you mentioned, I believe, a couple pharmacy benefit, I think was won earlier.

Can you talk a little bit about any additional new services or where you see the most opportunity from new services going forward here?.

A couple of areas I highlighted, one was pharmacy benefit management and having a more provider oriented transparent solution. For those of you that are covering healthcare, this is an increasing area of cost. There is a lot of pressure on specialty pharmacy. It's critical in managing risk and health plans to have innovative solutions.

So I think that's an area where we are seeing a tremendous amount of interest. The risk adjustment area in general, that's both clinical quality oriented one, are we getting the diagnosis right, are we getting the coding right, are we ultimately reimbursing for that correctly? That's a very important area.

And if you look at managing, particularly Medicare risk arrangements or Medicaid, that's an important component. And again, a lot of complexity there, hard to do it in an automated way. Most organizations struggle to pull in clinical data. So they are tending to do more manual processes and there we see very strong growth.

And then the last area I would say is for organizations that are trying to manage the needs of unique populations. That could be duals. It could be populations in Medicare. It could be certain aspects of Medicaid. They really need clinical program depth. They need to be able to identify patients really.

So you need very sophisticated stratification because you have limited places that you can invest resources. You need to have the right intervention, the right workflow, the right culture built throughout the organization.

So I would say, in any area where someone has a pair delegated risk arrangements around a discrete populations, whether it's from a national payer or the government, those are all areas where we believe we will see a lot of demand going into 2017..

And my final question for Nicky would be, in the business outlook you guys talked about, $2 million in expenses associated with new clients. I assume some of that's MDWise as you begin to prepare for that ramp.

Is there any additional startup expenses that maybe we should think about at the beginning of the year from new clients?.

I mean generally speaking, traditionally their model has been that you get clients ready but we don't begin to recognize any revenue until the actual long-term contract begins. So their business is more 01/01/17 start than ours. Ours is going to happen over the course of business. Theirs tends to be more of a 01/01/17 start.

So I think we will have this from time-to-time as we go forward. We called it out because in the specific quarter here, it's meaningful. We will make that determination going forward but it makes sense to call it out. But it's just the nature of their businesses. It's how they have operated historically and it's more typical in that segment..

Okay. Thank you..

This concludes our question-and-answer session. I would like to turn conference back over to Mr. Frank Williams for any closing remarks..

Great. Well, we appreciate everyone participating in the call and imagine we will see many of you at some of the up-and-coming healthcare conferences and out on the road and we look forward to continuing the discussion. Thanks for participating..

Ladies and gentlemen, thank you for attending today's presentation. The conference is now concluded. You may now disconnect your lines..