Frank Williams - CEO Nicky McGrane - CFO.

Ryan Daniels - William Blair & Company Jamie Stockton - Wells Fargo Securities Robert Jones - Goldman Sachs Sandy Draper - SunTrust Robinson Humphrey Stephanie David - JPMorgan David Larsen - Leerink Partners Charles Rhyee - Cowen and Company Sean Dodge - Jefferies & Co. Richard Close - Canaccord Genuity.

Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended December 31, 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 later this evening and for the next week 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 and periodic filings. For additional information on the Company's results and outlook, please refer to its fourth quarter news release.

As a reminder, the financial statements of Evolent Health, Inc. for the year ended December 31, 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. for the year ended December 31, 2015, 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 operations 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 December 31, 2015, when results were consolidated and also include certain other adjustments.

Reconciliations of adjusted results to GAAP results are available in our press release issued today and posted on the Investor Relations section of our website, ir.evolenthealth.com 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. .

Thank you and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health and I'm joined by Nicky McGrane, our Chief Financial Officer.

I'll open the call this evening with a summary of our financial performance for the quarter and the calendar year and provide some perspective on our view of the overall market, then I'll hand it to Nicky to take us through a detailed review of our fourth quarter and full-year 2016 results.

I will then close us out with an update on our product and solution development and the organization overall. As always, we're happy to take questions at the end of the call.

In terms of our results for the quarter, total adjusted revenue for the quarter ended December 31, 2016 increased 92.6%, to $90 million, from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended December 31, 2015 was negative $7.7 million, compared to negative $5.9 million for the quarter ended December 31, 2015.

Adjusted revenue increased 56.7%, to $256.3 million for the year ended December 31, 2016, compared to $163.5 million for the prior year. Adjusted EBITDA for the quarter ended December 31, 2016 was negative $21.4 million, compared to negative $31.7 million for the year ended December 31, 2015.

As of December 31, 2016, we had approximately 2 million total lives on the platform, an increase of 181.5% year-over-year and have approximately 2.6 million total lives as of January, 2017. In terms of the overall market environment and our performance, we're pleased with our financial results for the quarter and the calendar year.

We achieved our key strategic operational and financial objectives and advanced our position as the premier partner for providers in their movement to value-based care.

Our strong revenue performance this past year and set up for 2017 has come from three primary sources of growth, existing partners which add either additional lives and discrete populations or additional services, such as our PBM and risk adjustment platforms; adding new partners to our national network and highly selective M&A activity.

In terms of some of our highlights on the year, we added 1.3 million lives in 2016. Approximately 800,000 of those lives came from new partner additions and strong same-store sales growth from existing clients, with the balance coming in through the addition of the Valence Health client base.

We increased adjusted revenue by 56.7% and improved adjusted EBITDA by 32.5%. We came in at the high end of our range for anticipated new partnerships, having welcomed Passport, Hill Physicians, GPAC, St. Luke's, MDwise and Banner Health.

Together with Passport, we launched the Medicaid Center of Excellence and established ourselves as a national leader in working with providers and state governments to build managed solutions. Towards the end of the calendar year, we enhanced our position in Medicaid with the acquisition of Valence Health.

Through this acquisition, we added 10 new operating partners and significant breadth and experience in health plan operations, clinical depth in Medicaid and pediatrics and additional actuarial and risk management infrastructure.

In 2016, we also expanded to new geographies, working with new patient populations in Arizona, California, Idaho, Illinois, Texas and throughout the states of Kentucky and Georgia.

And finally, on the product development front, we released four upgrades to identify throughout the year, including initial launches of our provider facing application, enhanced reporting capabilities and the addition of several in-depth clinical programs.

With momentum continuing into 2017, we're also pleased to welcome two additional partners to our national network, Carilion Clinic in Virginia and Orlando Health in Florida. Carilion Clinic is a seven-hospital system based in Roanoke, Virginia that provides care for nearly 1 million people throughout the state.

In addition to supporting their NextGen efforts, we'll be focused on developing and delivering a best-in-class clinical model, including the technology platform, care management programs and quality and network improvement initiatives.

We're also thrilled to welcome Orlando Health, a $2.6 billion health system with a network of 2,500 physicians and a base of nearly 3 million patients throughout central Florida. In the past four years Orlando Health has become a nationally ranked leader in quality and cost performance with both government and commercial payers.

We will be working together throughout the year to manage a portion of Orlando's sizable commercial and Medicare risk businesses.

In recent weeks, we also launched our 2017 next-generation ACO cohort which is a group of provider partners participating in a highly advanced risk payment model from CMS in which providers have significant upside and downside exposure based on performance.

This coming year, we have several first-time entrants into the cohort, including Carilion Clinic, IU Health, St. Luke's, Hill Physicians and Premier Health ACO of Ohio, as well as Deaconess which opted to participate for a second year after achieving strong clinical and financial results in the program in 2016.

Accordingly, we're off to a strong start this year with a number of exciting new partnerships that will add to the strength and value of our rapidly expanding national network. Overall, our performance in 2016 has set us up for strong top line growth in 2017, as we have over 90% visibility into our revenue for the coming year.

Turning to the macro environment, there have been a lot of questions regarding the new administration and the potential impact of repealing and replacing Obamacare.

We're obviously tracking all of the discussions with our health policy team; and based on our current read, it will likely be several months before we have a comprehensive understanding of the legislative implications.

While we don't know the implications for specific programs for some time, it's clear from our macro financial analysis, conversations with legislators and policymakers and research with the provider community that the primary drivers of our business and areas of focus will remain.

First of all, the immense pressure on federal and state budgets will continue to increase as more of the population moves into Medicare and Medicaid and as costs per beneficiary continues to rise dramatically.

Policymakers will need to either slash fee-for-service rates across the board which is incredibly difficult to accomplish politically or they will move even more aggressively towards value-based reimbursement to avoid massive deficit spending.

Providers will also experience a negative impact on margins, as patient mix moves towards governmental programs, putting additional pressure on fee-for-service margins. As a result, a high proportion will move towards value-based arrangements in order to drive sustainable long term financial performance.

Employers will push more financial exposure to consumers and the commercial segment overall will increasingly be looking for high-value alternatives.

There will be changes in a number of areas, including the exchanges, premium support and Medicaid expansion, but the underlying drivers towards value and high-performance networks will continue unabated.

Since the election, we have met with several dozen prospects and current partners and all of them have reiterated their commitment to value in the face of future financial pressure and fee-for-service reimbursement.

From our conversations across the country, most healthcare leaders believe they have stripped as much cost out of the system as they can at this point and they're now turning their attention to strategies for capturing more of the premium dollar.

When we look at how the new administration might impact this pressure on providers and the resulting momentum in our pipeline, it's helpful to look at what's going on by market segment. On the Medicaid front, we know that Medicaid and CHIP enrolment is around 73 million individuals today and constitutes a huge portion of overall healthcare spending.

Changes are inevitable and while Medicaid expansion may be rolled back, it will still be the largest health insurance program in the country. Managed Medicaid will clearly be a very important tool for budget management in the face of potential block grants, as states search for proven value-based programs and infrastructure to drive down costs.

As we head into 2017, we continue to focus on developing sophisticated clinical interventions, coupled with high-performance physician networks that can deliver vastly improved outcomes on what has been an under managed segment of the market.

On the Medicare front, CMS projects to both Medicare Advantage enrolment, as well as the cost per Medicare beneficiary will double across the coming years. The immense pressure on Medicare budgets will make Medicare Advantage an ever more attractive option for payers and providers to manage costs and clinical performance.

For large health systems and organized physician groups, the benefits of Medicare Advantage are quite clear, one, greater control over the network and benefit design; two, the opportunity to tailor risk contracts to include varying levels of provider incentives; three, immediate access to claims and clinical data to identify at risk patients and deploy tailored interventions; and lastly, control of the full premium dollar to catalyze management of the total cost of care across the continuum.

We've also seen that consumers have a great deal of trust in their doctors over traditional payer brands and many providers are seeing the advantages of leveraging this trust and their local reputation to grow market share.

Overall, we're prepared for a market that can move even more aggressively towards Medicare Advantage under Republican administration, with providers needing support to manage a highly complex infrastructure. In the Commercial segment, employer and consumer trends vary by region.

Across the country, we see more small and medium-sized employers starting to move to self-funded plans and employers of all sizes putting more spending accountability into consumers' hands with high deductible plans.

Private exchange enrolment continues to trend upward and as consumers bear more of the upfront cost of care, more than half are now searching for price information before seeking care and creating demand for high-value alternatives.

We also see large national employers investing in value-based care best practices to control employee utilization, including managing costs through ACO-like network structures, directing members to PCPs with proven quality results and leveraging third-party care managers to assist patients with referrals to high-value providers.

What we don't expect the entire market to move, we do see the top quartile increasingly open to channeling employees into their own network alternatives which plays directly into our partner strategies for building high-performance capitated networks.

Over time, we're likely to see a shift of millions of lives through para delegated or direct contracting arrangements in the Commercial segment which will serve as another important market catalyst. At this point, we see the most uncertainty surrounding the public health exchanges.

Though enrolment was high again this past December, there are many aspects of the health exchanges that are going to require a different approach to be sustainable for payers. State exchanges have recently opened to large employers as a marketplace in some cases, but the approach is still new and the regulations are subject to change.

Regardless of what happens in this segment, we support a small number of lives from health exchanges and we do not expect any meaningful impact from a dismantling or decline in enrolment. As we look at our current pipeline which remains broad and deep, we see these market segment dynamics playing out in real time.

Several of our prospective partners are orienting their strategies towards the macro environment and have greater interest in Medicare Advantage and health plan launches.

Overall, we see the market moving forward at a similar pace to 2016, with a wide range of value-based strategies represented, including several potential Medicaid partnerships, a number of potential Medicare Advantage lunches and several provider deals with aggressive regional employers.

All in all, with high visibility into the coming year, we're feeling quite good about the depth and breadth of the pipeline and have not seen any measurable change as a direct result of the new administration.

We continue to believe that providers are looking for an experienced partner that can bring the level of expertise, clinical knowledge and proven results that enable them to perform against a complex array of operational, financial and regulatory requirements.

It's been heartening to see that our investments in technology, risk management infrastructure and clinical analytics have established us as the market leader and have contributed to our successful performance for the quarter and the year.

With that overview, I'll now turn it over to Nicky to speak about our financial performance on the quarter and the year. .

Thanks, Frank and good evening, everyone. We finished the year with another quarter of strong results, including the successful integration of our previously announced acquisitions of Valence Health and Aldera Holdings. Today I will cover our financial results for the fourth quarter and full year ended December 31, 2016.

This is also the time of the year in which we have the highest visibility into our growth for the coming 12 months and I look forward to sharing our outlook for 2017. Overall, I am pleased with our results for the fourth quarter and full year.

We ended the year with approximately 2 million lives on our platform; and for the year, we had adjusted revenue of $256.3 million, representing 56.7% growth from $163.5 million in 2015. In 2016, we grew the lives on our platform by approximately 182% and, as a result, we saw our adjusted gross margins expand from 39% to 41.6%.

This reflects the scalability of our service model, as we were able to leverage local market infrastructure over growing membership at our existing clients. Our adjusted SG&A expenses as a percentage of adjusted revenue declined from 58.4% to 49.9%, due to continued efficiencies in sales, marketing and G&A.

Adjusted EBITDA for the year was negative $21.4 million, compared to negative $31.7 million in 2015. Turning to our adjusted results for the quarter, our adjusted revenue increased 92.6%, to $90 million, up from $46.7 million in the same period of the prior year.

Adjusted EBITDA for the quarter was negative $7.7 million, down from negative $5.9 million in the prior year. Adjusted loss available for Class A and Class B common shareholders was negative $12 million or negative $0.18 per share for the quarter, compared to negative $3.1 million or negative $0.05 per share in the same period of the prior year.

The fourth quarter includes the results for Valence from October 3 and Aldera from November 1. In the fourth quarter, we began to integrate the entities; and so beginning with our fourth quarter results, we will not be breaking out results by entity.

As a reminder, we derive our revenue from two sources, Transformation and Platform and Operations Services. Adjusted Transformation revenue accounted for $12.1 million or 13.4% of our total adjusted revenue for the fourth quarter, representing an increase of $1.3 million or 12%, compared to the same quarter last year.

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 delivery and the timing of work being performed.

Adjusted Platform and Operations revenue accounted for $77.9 million or 86.6% of our total adjusted revenue for the fourth quarter, representing an increase of $41.9 million or 116.8%, compared to the same quarter last year.

This increase was driven by an approximately 182% increase in the number of lives on our platform, from approximately 720,000 as of December 31, 2015 to approximately 2 million as of December 31, 2016.

The growth in lives on our platform was a result of increased partner count, including the lives assumed from the acquisition of Valence Health, as well as growth in our existing markets. Our average PMPM fee for the quarter was $12.87, compared to $16.70 in the same period of the prior year.

We now have more than 25 long term partners across the consolidated organization. Adjusted cost of revenue increased to $55.7 million or 61.9% of adjusted revenue for the fourth quarter, compared to $24.4 million or 52.2% of adjusted revenue, in the same quarter of the prior year.

This increase in expense year-over-year was primarily related to additional personnel costs and third-party support services, as well as the costs assumed from the acquisitions of Valence and Aldera.

With the acquisition of Valence, we anticipated a decline in gross margins on a sequential basis in the third quarter of 2016, reflecting the lower margin nature of the Valence business.

In addition, our results for Valence in the fourth quarter included approximately $2 million of expenses without corresponding incremental revenue associated with the new client launch at the beginning of 2017.

Adjusted SG&A expenses increased to $42 million or 46.7% of adjusted revenue for the fourth quarter, compared to $28.3 million or 60.5% of adjusted revenue, in the same quarter of the prior year. This increase in expense year-over-year was primarily related to the costs we assumed from the acquisitions of Valence and Aldera.

This is the fourth consecutive quarter where we've seen a decline in adjusted SG&A as a percentage of adjusted revenue. 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 108.6% in the fourth quarter of 2016, compared to 112.7% in the same quarter of the prior year.

Adjusted depreciation and amortization expenses in the quarter were $4.2 million or 4.7% of adjusted revenue, compared to $3.1 million or 6.7 % of adjusted revenue in the same quarter of the prior year. The increase was due primarily to the depreciation and amortization we assumed from the acquisitions of Valence and Aldera.

We expect adjusted depreciation and amortization expense to increase in future periods, as additional software assets are placed in service. As of February 24, 2017, there were 52.6 million shares of our Class A common stock outstanding and 15.3 million shares of our Class B common stock outstanding.

Our balance sheet remains strong, with $178.9 million of combined cash, cash equivalents and investments as of December 31, 2016.

For the quarter, cash used in operations was $21.5 million; cash used in investing activities was $75 million, driven primarily by our acquisitions of Valence and Aldera; cash provided by financing activities was $121.3 million and was primarily related to the convertible offering we completed in November.

As a reminder, we issued $125 million 2% convertible senior notes due in 2021, with semi-annual interest payments beginning on June 1, 2017. Now let me turn 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. We're initiating our guidance as follows.

For the full year 2017, we're forecasting revenue to be in the range of approximately $415 million to $425 million and adjusted EBITDA to be in the range of approximately negative $8 million to zero or breakeven. We remain committed to our goal of adjusted EBITDA breakeven by the third quarter of the year.

Our revenue guidance for 2017 is based on a combination of same-store sales growth and the impact of our new partners who will be ramping up over the course of 2017.

In terms of how we expect revenue to flow over the course of the year, we expect revenue to be relatively flat for the first three quarters, followed by a lift in the fourth quarter, based on current expectations of the ramp in services we will provide to our current partner base.

Looking ahead to the first quarter of 2017, we're forecasting revenues to be in the range of approximately $103 million to $106 million and adjusted EBITDA to be in the range of approximately negative $6 million to negative $4 million. In summary, 2016 was a year of measurable progress that positioned us well for continued success in 2017.

With the acquisitions of Valence and Aldera, we believe we have established one of the most comprehensive platforms in the market, with increased scale, a solid growth profile and a clear path to adjusted EBITDA breakeven. 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 business and the overall organization. Speaking for a moment about what sets us apart in the marketplace. We feel we're highly differentiated by our true commitment to long term partnership with our clients.

We continue to see that results are possible when our partners are able to build and manage a value-based business with a financial model that's intertwined with best-in-class clinical care delivery.

This requires a sophisticated clinical rules engine and patient stratification, engaged and financially aligned physician networks and a clinical model with analytics that support the care team at all stages of the care continuum.

When these components are fully integrated, we see strong results, such as a health system in the Midwest realizing several million dollars in clinical expense reductions inside of a 12-month period on a new population, a projected $65 million in pharmacy savings for provider sponsored health plans, double-digit reductions in hospital readmissions within 30 days for managed Medicare populations across several markets and a health system moving over $1.2 billion of its revenue base into value-based arrangements across the last several years, enabling them to move towards scale economies and power their future growth strategy.

As you can see, these outcomes run the gamut from pharmacy to population health management to network and financial alignment.

We will continue to focus across the coming year on serving as a full solution partner for providers at all degrees of risk readiness, from those in the early stages of setting their value strategy to those now operating a successful provider sponsored plan with a multi-state footprint.

Turning now to the organization as a whole, we have recently welcomed Valence and Aldera teams in the fall and we're excited about the strategic potential of the combined organizations. In terms of an update on integration, we've started the integration process for several core functions and are pleased with how the organizations are coming together.

We've been thoughtful about the integration approach thus far and continue to monitor progress and culture closely.

In the last quarter, we conducted our biannual employee survey and were excited to see that there was strong engagement across the new employee populations and an appreciation for the Evolent values and culture that we've worked hard to build over the years.

We continue to look closely at where we can build scale and gain efficiencies and feel good about the product enhancements that we'll be able to take to market as a result of bringing our capabilities together. Lastly, touching on the related subject of our organization, we continue to focus on being a destination for premier talent in the industry.

Now that we're more than 2,400 employees strong and have built a reputation as a market leader that emphasizes core values and a high performance culture, we continue to garner accolades that keep us top of mind as a world-class employer.

All of this has contributed to an astounding 40,000 resumes received from Evolent and Valence across 2016 and we anticipate continued momentum for our employer brand in 2017 as we aggressively pursue best-in-class talent retention and acquisition strategies to build a workforce of healthcare's finest.

Overall, we're pleased with our results for the fourth quarter and for the calendar year. We're excited about being at the forefront of the transformation that is occurring in healthcare and remain focused on meeting our strategic and operational objectives with solid visibility into our sources of revenue for 2017.

Thank you again for participating in this evening's call and we're happy now to take your questions. .

[Operator Instructions]. Our first question comes from Ryan Daniels of William Blair. Please go ahead..

Frank, one for you.

You gave us a lot of detail on the end market response to the new administration, but I'm curious if you can go on a little more depth in the pipeline as you enter 2017, maybe contrasting it to 2016 in regards to what clients are turning to Evolent for, perhaps the overall size of the pipeline, and then just any noticeable differences in what peer categories are generating the most interest today?.

Thanks, Ryan. I think in terms of the pipeline and conversations we've been having with providers, I do think we've heard a pretty consistent theme.

There continues to be financial pressure on the fee-for-service side of the business, a belief that if you're taking a long-term view, you need to ultimately move to value as a way to preserve margins, and that there are a variety of ways to get there, depending on your local market circumstances.

I would say the pipeline, frankly, feels pretty consistent with where it was last year. So we see it spread across geography and across product mix, if you look across Medicare, Medicaid, et cetera.

I would say the one area where maybe we see increasing demand is in Medicaid, where we've made some substantive investments across the year with Medicaid Center of Excellence, obviously bringing Valence capabilities onto the platform.

I do think a lot of organizations have taken notice, and we've been in conversations in multiple states, and again, with multiple provider systems. So right now, I think we feel quite good about the pipeline, and I don't think we've seen any major change.

Occasionally, areas like the exchanges, obviously, people are looking at differently and potentially know that those may be dismantled as you get into the latter part of this year and next year, depending on what happens from a legislation perspective.

But overall, interestingly enough, it feels like a very consistent environment, with the financial pressure portion, I would say, heated up a bit, which creates a little more urgency for organizations to move. .

And then Nicky, one for you, just on the revenue guidance, obviously, a stronger outlook than we were looking for, but a little surprised to hear you comment that the revenue should be consistent for the first three quarters, at that 104, 105 range, using the midpoint, before popping up, as we have historically seen growth through the years, lives ramp and you cross sell solutions or add partners during the year that have existing lives.

So any color on that? Is that Transformation revenue being more skewed, or any nuance there that would start you out of the box so strong but then flat line for a few quarters?.

No, Ryan, it's just the way lives are coming on this year. There was a big bolus of lives coming on on a 1-1-17 basis. We've talked publicly about MDwise. And so there's just, unlike other years where the lives tend to come on more spread out over the course of the year, this year we're just seeing a bigger start out of the gate, 1-1-17.

We will add some lives over the course of the year, but I would just say it's disproportionately front loaded this year versus other years. .

Okay. And is that a new norm with Valence? I assume a lot of the TPA services are more of a January 1 start versus something that's going to layer in through the year.

Is that fair?.

In general, yes. It's not an absolute. But if you look at their business over the last couple of years, there is a preponderance of 1-1. But it's not an absolute. .

Okay. And then final question and I'll hop off. Any color on some of the key goals for reworking the Aldera software and maybe some of the key milestones or when you can achieve that integrated vision of claims and financial systems together for the organization? Thanks. .

I would just say on that, we're already underway. We have our tech team very engaged with the Aldera team. We've worked a lot on enhancements to the current platform and a broader vision that we think will highly differentiate us in the market. That work is underway.

I think we'll start seeing the results of that towards the middle of the year, with some of the broader futures and functionality coming on next year.

It's obviously a multiple year vision that we've developed and that we believe will be quite exciting to a number of the organizations that we're working with, and I would say good progress so far, but obviously we're still early. .

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

Maybe first, on the two new customers that you announced, can you give us any color on the number of lives that you'll be working there? It sounds like maybe they'll be mostly Medicare, based on your comments up to this point, but maybe also if you could confirm that. .

Yes. With Carilion, very well regarded system in Southwest Virginia, great clinical reputation. We're working with them initially in the next generation ACO program and it would be somewhere around 45,000 lives, roughly. With Orlando, that's a roughly $2.5 billion system in central Florida. Again, great national reputation.

We'll actually be working with them across commercial and also MSSP Track One, and it's around 105,000 lives for that population. Both organizations see value as a key component to their growth strategy, so we do anticipate adding lives over time, given their market positions, their brand, and again, growth aspirations.

And so you will see us expand over time, but that's where we're initially starting in the first part of this year. .

Okay. That's great. And then I think you guys called out 600,000 lives or somewhere thereabouts that went live on January 1. Obviously, MDwise is a huge chunk of that. Can you give us some color on are we also seeing St.

Luke's, Banner, and Hills in that number, and maybe even some of this new business that you've announced today, or is there a very healthy mix of expansions with the rest of your customer base that's in the maybe 200,000 or so lives that are not coming from MDwise?.

Yes. I think if you look at it holistically, if you go back to the beginning of last year and the customers that we had in January, we probably doubled our lives across the year with existing customers. So a lot of those additions happened ratably across the year.

I would say with a January 1 start, we obviously had the MDwise contract, which was for several hundred thousand lives.

The next generation ACO cohort that I talked about, which has six customers participating in that program, those lives come online at that time, with the balance being some additional lives that we picked up in open enrolment across existing customers.

So coming from a diverse group of sources, some in government programs, some in commercial, but that's really what makes up the 600,000 lives. .

Our next question comes from Robert Jones with Goldman Sachs. Please go ahead..

Just wanted to go back and ask on Aldera, what, if anything, is reflected in the guidance from shifting existing customers to the Aldera TPA? And this might be a little bit longer term in nature, but could you maybe just walk us through what kind of incremental revenue and EBITDA dollars we should expect from a client as they do make that move to the Aldera TPA?.

Remember, Aldera is not a TPA itself. It's actually a software provider that we use in the Valence TPA. So really, I would think of Aldera as fairly nominal in terms of revenues. Obviously, when people add Valence as their TPA, that will be powered by the Aldera platform.

And so the bulk of that would come through Valence, but the Aldera contribution is quite nominal on a revenue basis. .

And you guys have historically talked about adding roughly five to seven new clients per year.

Given the Valence acquisition and integration, I'm curious, is that still the right number for 2017 and then is there a different target you have as you move past the integration and we look out beyond this year?.

I would say five to seven feels about right. We added six this past year. We're obviously happy to have started this year adding two new partners across the last month. And so we're off to a good start. But I think that's a reasonable range. Obviously, the size of the client matters.

Are we starting with a large number of lives? Are we starting with a de novo plan and bringing those on over time? But if you look at how we've modeled things with same-store growth, where usually the bulk of our revenue comes from growing existing clients and then the remainder coming from new partners, I think five to seven is a safe range.

As we get larger over time, yes, you're correct, that number will likely come up. .

Our next question comes from Sandy Draper with SunTrust. Please go ahead..

Just first, initially a modeling question, Nicky, when you think about the revenue being fairly flat in the first three quarters and then up, should we think about, thinking about your comments about SG&A and spending and the target for third quarter EBITDA, if the revenue is not increasing a lot, is the cost actually coming down? I'm trying to think how it could be conceptualized in the EBITDA.

Certainly, if revenue is growing throughout the year, then the loss would come down. But if it's flat, I'm just trying to think about how to think about the cost. That's the first question. Thanks. .

Yes, no problem, Sandy, makes sense. It's relatively flat. Just as modest sequential improvement is step one. And then step two is it's more on the gross margin side. You'll see sequential improvements in gross margin.

We've always talked about, as we bring on new customers, the initial starting point is a lower margin and then as they scale up and as we bring all the lives on and everything else, you move up in margins over time. So it's really more a margin piece across the year.

So two things are going on, slight improvement in gross margins over the year and then we are bringing together two organizations and driving through efficiencies through that. So that's also a part of the puzzle, too. So those two combined get us to the improvements in EBITDA you will expect to see over the quarters. .

And this may be fine-tuning it too much, but when I think about the EBITDA guidance, if I think the low end, I believe the loss of $8 million, and if you came in at that level, is it still reasonable to think about a third quarter breakeven or is that really likely, if you're at the low end, pushes out to fourth quarter breakeven?.

No, we're sticking to where we are, Bob. I think the guidance was, those two things are not inconsistent. .

And then the final question, this comes back still for you, Nicky.

When you think about local end market costs versus corporate costs, is it reasonable to think that pretty much all the local market costs that you're putting out there are going to be in the cost of goods line, and so as you said, there's some upfront spending, but long term there will be consistent SG&A leverage at the DC level?.

You're right to say, the majority of costs associated with the customer are at the local level. Centralized services tend to move more in a step function basis. So as you add large numbers of lives, the central infrastructure has to grow, but not as proportional to lives, but just as a step up across the different functions.

But it is, the majority of expenses are at the local market level. .

Okay. I'll jump back in the queue and congrats on ending another strong year. .

Our next question comes from Stephanie Davis with JPMorgan. Please go ahead..

Could you talk to your client base and any reason they might be more likely to take on a value-based care transition project in the near term versus some of your peer estimates as pop sell ramping two or three years out?.

I think in terms of what we're hearing, most organizations that we interacted with, I'd say, post election, which is probably what you're focused on, are seeing increased financial pressure and it could be the result of a variety of factors.

First, declines in fee-for-service rates, heavy pressure from payers on both the governmental side and on the commercial side, volume coming out of the hospital into other settings, other competitive alternatives, getting narrow networked out.

There are various things going on that aren't leading to a current financial crisis, but I would say put the writing on the wall that there are going to be significant financial pressures across the next couple of years.

So I think if you're a CEO of a health system and you want to preserve your margin and be able to continue to invest in the things you want to invest in, the feeling is that you need to move now and that you need to build a set of capabilities and you're not going to do it in one quarter or in one particular year.

So I think what we've seen is health systems evaluating what's in front of them. Seeing six systems make the decision to move into NextGen is a great example of organizations that see the market moving towards Medicare Advantage and want to get that experience and they want to get it this year.

The fact that we have been able to add close to 600,000 lives off of our existing client base and bring on six new partners, I think is really a result of what you're seeing in the marketplace, which is a realization that fundamental financials are changing and that the only way, again, really to preserve margins is going to be to grab a higher proportion of the premium dollar and manage that more effectively.

So I think that's what we're seeing, and again, haven't seen anyone really say, look, we're going to pause our evaluation or our long-term plan based on what we're seeing in the short term. Everyone really is moving forward fairly consistently. .

And one quick follow-up on the transaction cost side.

Could you just provide some further color about that and how would you think about the integrations of the balanced assets over the year?.

Yes, I mean obviously, the two acquisitions came in the fourth quarter. So I would say the bulk of the transaction-related costs are behind us, between Q3 and Q4. There was an accounting piece in there, as well, with a lease abandonment piece. So I would say, Stephanie, most of the big costs on the transaction-related side are behind us.

The integration is now more around -- it won't be a lot of below the line stuff. It's just wringing out efficiencies, bringing groups together, doing all that hard work. But I would say the big transaction-related expenses with the third-party professionals, et cetera, and also this one piece on the lease is generally behind us. .

Our next question comes from David Larsen with Leerink. Please go ahead..

Can you talk about Medicaid reform and if we migrate towards block grants, how is Evolent positioned to basically assist their clients in benefiting and prospering from this transition? And then, what experience do you have with Indiana Medicaid? I think that this is where Price and Verma come from. They had a waiver.

They've got a bit of a unique program there that, in my view, it's possible the rest of the country might mirror. Thanks. .

Yes, David, I think a couple things on Medicaid. First of all, about $550 billion in spend comes within the Medicaid program. A lot of that, particularly the moms and babies part of that, is in managed Medicaid. However, if you look at 35% of Medicaid participants that are generating about 66% of the costs, these are chronic condition patients.

They generally have been under managed in today's health care system.

So if you take the pressure to care for that population and you imagine the world moving to block grants, that means that states are getting a fixed amount of dollars, they've got to figure out, how do we leverage a fixed budget to take care of the population in our state that qualifies for Medicaid.

They're going to need solutions which deliver higher value.

So what's interesting is with everything going on from a policy perspective, we're in several conversations across multiple states, some at the provider level, some at the state level, where organizations, again, are looking for solutions where they can better manage this population with higher quality care and lower dollars invested.

So in our minds, if we have the capabilities, the clinical programs, the infrastructure to manage the population, if we can approaches a state and help them design a solution, given the new budget reality, and help bridge that with provider organizations across the state, we think we serve a great role there and will continue to see strong growth in Medicaid.

That's even in a block grant situation. The Indiana situation you mentioned, again, we just started really working there at the beginning of the year. But in that case, beneficiaries need to make some contribution in order to qualify.

So obviously, from a Republican administration perspective, it feels like less of an entitlement if people are making some contribution. They also have to continue to contribute on a regular basis or they could lose coverage for several months if they miss two months in a row.

So there's some things that have been added really on the coverage side, and again, that could be a model that they decide to go with. We're obviously very focused on the clinical side and delivering higher value.

And I would say if you look across the Medicaid lives that we're managing today, we feel really good about the comprehensiveness of our clinical programs, our analytics, our ability to engage providers and community organizations, and ultimately to deliver value, which will be very important in an environment where there are less dollars to go around.

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And then just one more, I think you mentioned six different providers that are entering into an advanced NextGen ACO model for CMS.

Does that mean there are incremental lives on your platform from those six clients? And can you maybe just touch on what the differences between the NextGen ACO versus the original ACO? Then I think you mentioned that Deaconess actually prospered and had a good earnings profile in the ACO model.

Can you touch on what that evolution looks like? Thanks. .

Sure. If you think about some of the early ACO programs that came out of CMS, Pioneer would be an example. Those programs had a lot of issues and as a result, a number of providers exited the program. They had poor attributions, so you didn't know which patients you were managing. There wasn't great data sharing.

The upside opportunity didn't match the downside exposure, and there were some significant flaws in the program.

I think to CMS's credit, they listened to feedback from providers, they worked hard on coming up with a model where you would have strong attribution, meaning you know exactly which patients you're managing, where there'd be a significant upside opportunity, now that we're matching that with increasing downside, but a provider could say, look, if we invest and we do this well, we have the opportunity to earn substantial dollars, we're not going to rebase in the first year, we won't do that, which gives us a greater chance for success over a 24-month period.

So by putting in all those features, we really felt it was one of the most attractive payer deals of any payer, commercial or governmental, in the country, and we worked with a number of providers on how to approach it, how to design clinical programs, how to get the network pieces right, right care management support.

And that's actually what we're putting in play. So it is for six partners. It's, as of this year, probably in the range of 150,000 lives, something in that range.

And if you look at Deaconess, what's exciting is they were one of the early pioneers to jump in to NextGen and they had great success across last year, both clinically and financially, and as a result, decided to continue with the program. So we're hoping to build on that experience, again with a cohort of six very high quality providers.

We also believe that a lot of the attributes of NextGen are great for Medicare Advantage, where we do see the new administration placing more emphasis and we could see evolving these relationships into Medicare Advantage over time, as well.

So really exciting, great group of participants, and we're looking forward to adding a lot of value for a number of Medicare beneficiaries. .

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

Just following up that, if we think about then the timeline of the agenda for the administration this year in terms of getting ACA replaced and then maybe we think about next year or maybe a little bit after that, Medicaid reform, can you give us your sense on how you think that timing works out and then maybe what are the key things we should be looking for or that your clients are going to be looking at in terms of making decisions, if it causes them to either pause or maybe accelerate their decisions on any of these programs that we've been talking about so far?.

Sure. Obviously, we don't have a perfect crystal ball. We've tried to talk to health policymakers, legislators, our provider partners and prospects. We do have our ear to the ground in Washington. And what I would say is it's very complex to go through the repeal and replace process. I think it's going to take time.

I don't think we'll have a clear program and plan that's been approved by the House and Senate for some time. And again, we could be wrong, but that would be our guess. There are some natural processes in place, for instance, pricing cycles. You've got to put in to price for certain books of business in the April timeframe.

There are applications for the NextGen that continue into 2018. There are states confronting significant budget problems that need to move in Medicaid and are moving on an aggressive timeline. So I think we're going to see that activity.

And unless we see some major announcements in the next week or two or three, a lot of that, frankly, is going to move forward in the first half of this year and it will be a continuation largely of business as usual.

I would say the things to look for from our perspective are one, do you see any movement back to fee-for-service? So are we hearing that we're going to move away from value-based reimbursement toward fee-for-service? Again, everything we've heard is support for things like Medicare Advantage, which really is full premium, capitation.

We've obviously heard about block grants or potentially the Indiana plan in Medicaid. Both of those environments, we feel would be good signals that there's going to be a need for managed Medicaid provider driven solutions. And again, we believe there will be continued emphasis there.

On the employer side, I would say we've seen strong movement towards self-funding and high deductible plans.

We're starting to see more employers, again I'd say the top quartile of the market, moving to narrow networks in geographies where they have large bolus of employees, as we've seen more of that activity, again, that will be a sign that the market is continuing to move. I do think some of the payment mechanisms are likely to change.

I think as you know, premium subsidies, are they giving tax breaks, vouchers, those kind of things. So I think we need to look at those and see how those ultimately create opportunities for our clients.

But the biggest thing, in our mind, is there's tremendous pressure on both governmental budgets and commercial payers, employers, and everything we're doing is setting up networks to perform under those arrangements, and we believe those will continue.

Again, maybe with different payment mechanisms, but ultimately we'll have to deliver higher value outcomes to various populations. .

And can you remind us how much of your business, what pieces of business they have in the exchanges.

Do you have any clients that are actually offering plans in the exchanges, the ACA, first? And then how much are bidding within Medicaid? And then particularly with ACA, I apologize, I think you might've touched on it earlier, what's your sense on how this might look shaping up in 2018 and maybe give us a sense on any kind of exposure you might have? Thanks.

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Yes. Our exchange participation is nominal. It's a very small number of lives, so it would have little to no impact on our revenues. On the Medicaid side, we don't see a change in Obamacare affecting the existing lives that we have. In general, those plans would continue.

If you think about an Indiana and Kentucky, there may be some variants to certain aspects of those programs, but those would largely continue. We do have a number of organizations in the pipeline that are feeling the budget pressure and are going to pile ahead. I don't think anything that the federal government does is going to radically change that.

We know that expansion is unlikely to happen, but the overall budget pressure on existing populations is still there and we see a lot of these plans are moving forward, and that's been true into this year. We have not seeing any hesitancy in our existing pipeline on that basis.

So for 2018, again, we see Medicare, maybe some changes but still a big opportunity, same with Medicaid, probably a little more commercial opportunity in certain markets and obviously, less exchange opportunity, which is immaterial for us, given for the low number of lives we have on the exchanges. .

Our next question comes from Richard Close with Canaccord. Please go ahead..

I'll keep this really quick.

Frank, as you think about the pipeline, and thanks for all the quantitative comments there, do you think the time from an initial lead or a discussion that you have to actually contract signing is staying the same? Is it getting shorter or maybe longer?.

It's interesting, if you go back historically when we launched the business, I would say in most situations where we walked into a board room, the organization was at a very early evolution of their process.

And so in some ways, you really needed to take them through a longer term evaluation process, just to understand the various markets and to make decisions about what their overall plan was going to be.

Now, I would say the market has matured and in a lot of situations that we walk into, they're evaluating a very specific opportunity, which tends to be on a tighter timeline.

Again, I wouldn't say it is a huge shift, but directionally I would say evaluations are taking less time because we're not boiling the ocean, we're actually looking at a specific opportunity. And I would say that's probably reflected in the pace of conversations in our existing pipeline. .

And just a quick follow-up on Orlando. In that press release, I think it highlights employer relationships. Can you talk a little bit, will you be working with some of their employer relationships and how you think about that type of business going forward? I know you've mentioned employers here several times. .

Yes, again, for providers with great brands, like Orlando, that have a fabulous quality reputation and a very strong cost position, there is obviously an opportunity to interest commercial, local commercial employers in potentially moving their employers into narrower networks. I would say we're involved in the commercial segment with them.

Nothing specific to announce in terms of employers, but we do see that as a substantial opportunity over time with Orlando, just given their strong market position and given how the employer market is structured locally in central Florida. .

Our next question comes from Sean Dodge with Jefferies. Please go ahead..

Going back to the NextGen ACO program, Frank, aside from the extra lives, is anything about your financial relationship with those clients change as a result of their participation? Are there any payments to Evolent that are based on the success of those clients in the program or is it still a PMPM model and we should think about it is simply as an extension of the work you're already doing with them?.

Yes, we did approach this putting some of our fees at risk across the cohort. I think we did that because we had substantial experience with Medicare populations over multiple years. We know the benchmarks well and we know where we can perform. So we structured the arrangement with a base fee, which we receive for the services we provide.

We're generally providing the tech platform, comprehensive clinical programs, care management support, analytics et cetera. And based on how each organization performs according to the benchmark, we have upside and downside based on that. So if they over perform ahead of the benchmarks, we share in the upside.

And again, we get lower fees if they're actually below the benchmark. If you look at it on an actuarial basis, it's a small portion of our total revenues, so we do feel that we've structured it well and feel confident we can perform, but we do have a performance basis in some of these arrangements. .

Okay.

And the comment you made on the 90% visibility into your 2017 revenue target, when we think about the 10% or so that's needed, given the longer term ramps usually with new contracts, I'd imagine most of this is expected to come from existing clients or is there anything there tied to new adds over the course of the year?.

Again, having over 90% visibility gives us a lot of predictability in terms of managing to results. And so again, I think it's a pretty strong number. Every year we're going to have new clients that we bring on during the year. So every year, we've had a small portion of our revenue that comes on and new implementations.

We'll have some new contracts that come on. And so just by definition, if you look at the historical pattern in this business, it's reasonable to assume that roughly 10% of our revenue base will come from new things that happen across the year. .

And the nature of implementation is such that the Transformation business line items, by nature of it, that's things you win and execute in the year. So there's always a portion of the Transformation which is in the 10% to 15% of revenue. There's some rollover, but a portion of that is typically go get, just given the nature of that revenue stream. .

But I think to be clear, when we say 90%, we mean 90% contracted, very clear visibility into the revenue for the coming year. .

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

Thank you. We appreciate everyone participating in the call. We look forward to seeing many of you at up-and-coming conferences and in some of our one-on-one visits across the next couple of months. And again, appreciate you participating in the call. Thanks. .

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..