Frank Williams - Chief Executive Officer Nicholas McGrane - Chief Financial Officer.

Ryan Daniels - William Blair Robert Jones - Goldman Sachs Sandy Draper - SunTrust Jamie Stockton - Wells Fargo David Larsen - Leerink Stephanie Davis - JPMorgan Mohan Naidu - Oppenheimer Steven Halper - Cantor Fitzgerald Charles Rhyee - Cowen and Co Brian Hofmann - Canaccord Genuity Sean Dodge - Jefferies.

Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended March 31, 2017. 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 Company's 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, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the Company's press release issued today and posted on the Investor Relations Section of Company website ir.evolenthealth.com and the 8-K filed by the Company with the SEC 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'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 share perspective on our view of the overall market.

Then I'll hand it to Nicky to take us through a detailed review of our first quarter 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 ended March 31, 2017, total adjusted revenue increased 115.5%, to $106.8 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended March 31, 2017 was negative $4.8 million compared to negative $6.6 million from the comparable quarter of the prior year.

As of March 31, 2017, we had approximately 2.8 million total lives on the platform, an increase of 124% year-over-year.

Overall, we are pleased with our results having met our strategic and financial objectives for the quarter as well as continuing to solidify our position as a leader in a market with growth momentum as providers see can experienced operating partner to accelerate success in value-based care.

In terms of the overall market environment, we're continuing to see strong demand for the Evolent platform, as providers respond to increased pricing pressure from governmental and commercial payers and as consumers take a more active role in purchasing decisions.

These forces continue to create margin pressure on tradition fee-for-service reimbursement and are driving providers into risk based arrangements.

As whole systems face downsize risk and the need to master a new set of clinical and risk management capabilities in population health, they are increasingly turning to Evolent to provide the necessary technology and infrastructure to drive performance.

This momentum is reflected in the steady demand we've seen in the pipeline throughout 2017, despite some of the political uncertainty in Washington.

What we've heard time and time again from partners and prospects is whether it's Obama Care or repeal and replace, the market is pointing in one direction, which is demand for lower cost higher value healthcare.

As a result, our current pipeline continuous to be very strong in terms of breadth and depth with a number later stage discussions moving with pace.

One of the compelling aspects of a revenue model is that we have multiple sources of organic growth between expanding solutions and cover lives that our existing partners as well adding new providers to the Evolent network. To that end, I am pleased to comment on few of our accomplishments worth noting across the last quarter.

In terms of new additions to the Evolent network, I am excited to announce a new partnership with a provider-led organization in the Boston area Community Care Cooperative, also known as C3, this is a newly formed accountable care organization made up of 13 federally qualified health centers across Massachusetts.

It aims to deliver high quality and low cost healthcare for adults and children with a particular focus on building out infrastructure and clinical programs that could serve a portion of the Commonwealth Medicaid Beneficiary.

Together, we aim to build a model of care an associated delivery system that integrate social determinants of health and behavioral services with primary care and optimize outcomes for patients.

All of our collective work will be supported through a centralized technology that unifies data, clinical madding [ph] and coding workflows across C3's 13 centers which are all on different EMRs and yet have a need for integrated clinical and financial data.

While there are still details in approval process to be worked out at the state level, we anticipate over a 100,000 lives coming on to the platform across the coming years for this arrangement.

We are extremely excited about working with such an innovated delivery system and the potential to impact a vastly underserved population across the Commonwealth of Massachusetts. Our second new addition is up and running in Texas with Houston Methodist.

Houston Methodist is an 8 hospital, $3 billion system consistently ranked as a top health in the country with a sterling reputation as a medical pioneer.

We're initially focused on implementing high impact clinical programs and our identify technology platform as well as collaborating with the physician-led ASO to proactively manage Medicare beneficiaries across the continuum of care.

Our partnership with Houston Methodist began with an extensive strategic planning engagement which resulted in the approval of a long term growth strategy that looks to advance Houston Methodist as a value-based care leader in the region, adding to the already stiller reputation as a true market innovator.

In terms of growth to our existing partners, I am also excited about our work across the last year at Passport Health Plan in Kentucky.

Passport is a nationally recognized organization in Medicaid and we've been able to leverage its experience and strong provider network in combination with the Evolent platform to drive greater efficiency and to improve quality of care across the large and diverse population.

As a result of our early success, the leadership team at Passport spent a last several month's evaluation Evolent Health's capabilities and recently made the decision to move all TPA services to our platform later this year.

The migration decision was driven of a belief in our vision of bringing together claims, clinical and financial information in an integrated platform to drive greater flexibility and clinical value in serving providers and patients.

In terms of the broader response to our offering in the market, we are pleased to see a number of large opportunities moving through the pipeline as well as several new conversations as providers feel increasing urgency to respond rapidly evolving market.

Overall, we feel good about our strong revenue visibility for 2017, as well as the breadth of our current pipeline for setting up next year. When we examine the key drivers of our success in the market, we continue to believe that our focus on driving clinical value is a critical differentiator in the market.

Clinical value is essentially driven by focusing of proven treatment pathways, eliminating unnecessary variances and engaging care givers and patients to improve outcomes. There are few key elements that drive our unique approach in the market.

First, we have a direct connection to the point of care through our provider partners which creates a more collaborative relationship with community physicians than traditional payers.

Second, we have a clinical heritage from our routes with UPMC and our focus from the outset on leveraging deep analytics and proven care pathways to elevate clinical care remains central to our value proposition. Third, we bring strong operational leadership and organizational discipline to regress monitoring of program performance.

Fourth, we leverage our integrated technology platform to improve real time decision making and to ultimately establish a high performance network. And finally, we bring in innovative resource and development approach to identifying best practice in managing high cost patient populations.

Armed with these distinct clinical levers, we've learn that a successful clinical value strategy accounts for cost drivers on two fronts, high cost, high need patients that are 7% to 10% of the population that drive a majority of cost and provider network performance which aims to impact 20% to 30% of the population that is being unnecessarily over treated.

We deliver a turnkey population health infrastructure impact the first group through care management coordination and bring solutions for impacting care delivery and network performance which is a longer term evolution of physician behavior that requires clinical decision support at the point of care.

We find that a verity of tactics can be used to maximize value in both these areas and we've achieved real results when all initiatives are working harmoniously, including reductions in total in-patient admissions, avoidable admissions, and readmissions within 30 days and achieving substantial savings in total cost for patients with complex chronic conditions, those in transition care and other high acuity populations.

Our solid performance on the quarter and continued momentum in the pipeline reflect our clinical focus and the distinct benefits that bring to providers for working to deliver higher value care. With that overview, I will now turn it over to Nicky to speak about our financial performance on the quarter and the year..

Thanks Frank, and good evening, everyone. Today, I will cover our financial results for the first quarter 2017 and provide guidance on our outlook for the second quarter and reminder of the year. Q1 was a strong quarter for Evolent, which results right on track with our plan and expectations for the year.

For the quarter, adjusted revenue was 106.8 million and adjusted EBITDA was negative 4.8 million. Adjusted revenue for the quarter represented a 115.5% growth from the same period of the prior year, while adjusted EBITDA increased 1.9 million from the prior year.

Adjusted loss available for Class A and Class B common shareholders was negative 9.8 million, a negative $0.14 per share for the quarter compared to negative 9.7 million, a negative $0.16 per share for the same period of the prior year.

Finally, we ended the quarter with approximately 2.8 million lives in our platform at March 31st, 2017, an increase of 124% over the prior year, and an increase of almost 800,000 from Q4. Now let's turn to a detailed review of our adjusted results for the quarter.

As a reminder, we drive our revenue from two sources, transformation and platform and operation services. Adjusted transformation revenue accounted for 10.2 million or 9.6% of our total adjusted revenue for the first quarter, representing an increase of 2 million or 24.8% 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 time of work being performed.

Adjusted platform and operations revenue accounted for 96.5 million or 90.4% of a total adjusted revenue for the first quarter, representing an increase of 55.2 million or 133.5% compared to the same quarter last year.

This increase was driven primarily by 124% increase in the number of lives in our platform from approximately 1.2 million as of March 31st, 2016 to approximately 2.8 million as of March 31st, 2017.

The growth in lives in our platform was a result of increased partner account with more than 25 long term partners across our consolidated organization as well as growth in our existing markets. Our average PMPM fee for the quarter was $13.37 compared to $14.03 in the same period of the prior year.

Adjusted cost of revenue increased to 66.5 million or 62.3% of adjusted revenue for the first quarter compared to 28.2 million or 56.8% of adjusted revenue in the same quarter of the prior year.

This increase in expense year-over-year was due primarily to the cost assumed from the acquisitions of Valence Health and Aldera, as well as additional personal cost and third party support services across the organization.

As previously discussed, we expected gross margins in the first half of 2017 to be in line with our fourth quarter of 2016, reflecting the impact of the Valence acquisition and the ramping new customers over this time.

Adjusted SG&A expense increased to 45 million or 42.2% of adjusted revenue for the first quarter compared to 28 million or 56.5% of adjusted revenue in the same quarter the prior year. This increase in expense year-over-year was primarily related to the cost we assume from the acquisition of Valence Health and Aldera.

This is the fifth consecutive quarter where we have seen a decline in adjusted SG&A as a percent of adjusted revenue. We continue to expect total adjusted SG&A expenses to decrease as a percentage of total adjusted revenue overtime.

Combined our total adjusted cost of revenue and adjusted SG&A expenses as a percentage of total adjusted revenue declined to 104.5% in the first quarter of 2017 compared to 113.3% in the same quarter of the prior year.

Adjusted depreciation and amortization expenses in the quarter were 4.3 million or 4% of adjusted revenue compared to 3.4 million or 6.8% of adjusted revenue in the same quarter the prior year. The increase was due primarily to the D&A assumed as part of the acquisitions we completed in 2016.

We expect adjusted depreciation and amortization expense to increase in future periods as additional software assets are placed in service. As of May 5th, 2017, there were 57.7 million shares of our Class A common stock outstanding and 10.3 million shares of our Class B common stock outstanding.

Our balance sheet remains strong with 138.0 million of combined cash, cash equivalents and investments as of March 31, 2017. For the quarter, cash used in operations was 34.8 million, cash provided by investing activities was 4.6 million, and cash used in financing activities was 100,000. 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 overtime.

For the second quarter we are forecasting revenue to be in the range of approximately 103 million to 105 million and adjusted EBITDA to be in the range of approximately negative 5 million to negative 3 million.

For the full year, we are holding our guidance at the previously announced levels with revenue of 415 million to 425 million and adjusted EBITDA in the range of negative 8 million to zero. In summary, the first quarter of 2017 was a good start to the year which puts us on track towards our goals for 2017.

This concludes the financial summary and I'll now turn things back over to Frank..

Thanks, Nicky. I want to close with a few updates on our operations and our organization. From an operational perspective, we're off to a strong start in 2017 as we expanded a number of our existing partner relationships and brought on the largest number of new customers and lives on the platform in one quarter in our history.

To that end, the 2017 Next Generation ACO cohort is up and running across six systems and approximately 175,000 Medicare beneficiaries. We've been able to rapidly implement identify and integrate CMS and patients specific clinical data in order to drive focus in our care management programs.

The cohort is beginning to leverage high powered data from our analytics team to identify in-depth opportunities for performance improvement and we're leveraging the network to drive successful approaches to improving quality and lowering costs.

We feel quite good about the cohorts really progress and look to continue adding value beyond our initial clinical focus areas as the group comes together for shared learning throughout the year.

As for new solution roll outs, our work with several health systems on risk adjustment is already garnering high levels of position engagement as a result of our deep clinical focus.

At one system, we completed a retrospective review and coding of thousands of patient medical charge and trained more than 1,100 physician practice users to incorporate sound diagnosis and coding best practices into their everyday work leveraging the identified platform.

Regarding our provider sponsored health plan partners, this time a year is focused on preparing for important annual milestones around plan design and state filings, so we can enter the follow-up and enrollment periods with a strong marketing plan and comparing offerings in each community.

At the same time, we've remained laser focused on delivering value to these plans and their members for the current year through effective clinical programming and customer service.

Overall, we remained excited to be part of the transformation that is occurring in healthcare today and some of the leading provider organizations of all types around the country. Turning now to the organization as a whole, we continue to focus on building a destination for top talent in the industry with a mission and values driven culture.

As we enter 2017 with approximately 2,400 employees across more than a dozen offices, we're continually focused on creating opportunities for feedback across the organization.

In March, senior executives across the firm conducted nearly 30 town hall sessions in 14 different regions to update staff on the new breadth and depth of our offering and to talk openly about our collective strengths and areas to push ourselves to improve.

It is the spirit of transparency, connectedness and constant improvement that continues to build our culture and orient the organization towards driving success for our partners. Overall, one of our greatest strengths continues to be a highly engaged workforce that cares deeply about our mission and pushes to get better at everything that we do.

In closing, we're pleased with our results for the first quarter and remained focused on achieving our strategic and financial objectives in 2017. We've remained highly motivated by the transformation that is occurring in healthcare and the ability to continue advancing our position as a market leader for provider driven value-based care.

Thank you again for participating in the evenings call. We're happy to take your questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ryan Daniels of William Blair. Please go ahead..

Hey, guys, thanks for taking the questions and congrats on the strong start to the year. Frank, one for you on the Next Gen ACO program, I know you indicated that's off to a good start and I also believe that the letters of intent for the next year are due shortly or were just completed.

So can you talk about maybe momentum you're seeing in the client base to continue that and more importantly new clients or partners looking to enter the Next Gen program?.

Sure. I think as we've talked about, the Next Gen ACO program has a number of characteristics that we really like when it comes to payout risk. We think it's a very attractive program, it's well organized, the upside risk is balanced with the downside risk.

I think as we mentioned before, we had very strong results with our first partner and Next Gen last year and generated several million dollars in savings. So we have that experience. We now have a group of very strong health systems off to a very good start and a number of health systems highly interested in participating going into 2018.

So as you can imagine we've built off the strong start. We've reached out to several house systems we've had really engaging conversations. We feel really good about where we are in terms of establishing another cohort for the coming year.

Obviously, we need to get through the application process and approval processes with CMS, but I would say demand feels very strong in the market around Next Gen ACO..

Okay. Great. And then two more, first on Passport, obviously great announcement, they are moving lives over the Valence platform, can you talk a little bit about is that going to be all 300,000 lives and then obviously if so pretty big revenue opportunity guidance was reiterated.

So is that more of 2018 event where it will start flowing through the income statement?.

Yeah, I think you're absolutely right. It is for the 300,000 lives. Passport obviously very experienced, really kick the tires and looking at Valence.

I think they saw the integrated vision that we had when we made the investment in Valence and Aldera and the ability to integrate those elements and create frankly a lot more flexibility in the way that you can organize benefit design and share both clinical and claims information.

And so for that reason, they did select our TPA platform, we're really excited about it. It will be well over a $20 million contract when it's fully up and running. There is some variance in terms of timing and exactly when lives would come on but I would think we'd see most of the impact of that in 2018..

Okay. Perfect. And then final want to hump off, with C3, it seems interesting that you're able to take social determinants of health into risk, and I know that's been something that's a popular conversation topic and made plans in other areas where you risk adjust patients.

And I'm curious never want if your view of the social determinants of health could be more broadly applied to risk in the future. And if so this will give you kind of a leading edge in that program given that Massachusetts is unique and allowing that? Thanks..

Yeah. Look I think we're really excited about this arrangement. Massachusetts is a leading edge state. The FQHCs have really been at the forefront of population health for some time now when you think about the gap and primary care with under-served populations, their ability to engage those patients effectively to do it around primary care.

For those of us that have been in the population health area for some time, we know that social determinants of health can be major factors in cost, in access, in quality and the ability to include those in our work, in our stratification to integrate other services like mental health, like transportation, nutrition into a whole view of the patient is massive in terms of its implications for our ability to manage cost and really make a difference in people's lives.

So I absolutely think it's a great opportunity for us.

We are working with a leading hedge organization, a number of people who've been doing this for years and then the ability to bring the technology platform, our abilities in scarification and integrated care model really exciting not only in terms of our work in Massachusetts but far beyond in Medicaid and Medicare.

So we do think that could really help us be on the cutting edge in terms of the things we're doing even towards the end of this year and going into next year, so very exciting..

Okay. Great. Thank you for all the color..

Thanks.

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

Great and thanks for the questions. I guess just a follow-up on the two announced new clients this evening, it looks like C3 as you guys just talked about a bit is primary care led ACO focused on Medicaid. I guess maybe Frank just curious maybe how you identified this prospect maybe how the deal came together.

And then importantly, how the economics of client like this might vary from those of a more typical of any client and I believe you mentioned 100,000 lives I guess just over on the Houston Methodist announcement, anything you'd be willing to share there as far as expected lives eventually on the platform would be helpful?.

Sure. In terms of general economic structure with a physician led ACO organization, I don't think there's anything structurally that necessarily would be different in working with a physician organization versus a health system.

What really determines our economic arrangement is the number of lives the type of population that we're serving, the extent of the support that we're providing.

I think in this case if you think about starting with 100,000 lives and putting in the identified platform and working in an integrated way, on the clinical side, across the region, again this can be a very attractive substantial revenue arrangement for us and one that can grow over time.

So obviously if it's Medicaid patients, it will be a lower PMPM, but a higher number of lives, so therefore still scale in terms of revenue and still very profitable for us but at a lower PMPM. In terms of the Houston Methodist arrangement, initially we're starting with a Medicare population, a smaller population out of the gates.

I don't have the exact number in front of me and there is ability to expand that over time. We're obviously putting in place the technology and basic infrastructure working with our ACO.

So I would say this is more of a standard bread and butter de novo launch for us very similar to other launches we've done, we're not starting with a large base of lives..

That's really helpful. And I guess Nicky, if I could on the full year revenue guidance. I think you guys had talked previously about seeing a little bit of a lift in the fourth quarter of 2017, I don't you guys just guided to 2Q being a little bit down relative to what you put up in 1Q.

So I'm just trying to get a better sense of the revenue dynamics that we should be thinking about as we move through the year and what would potentially prevent you from sequentially growing a top line throughout the year?.

I mean just stepping back Rob, thinking about sort of going to take it quarter-by-quarter, as I look at Q2, there's just a few things, we talked about the MDwise ABD contract going away. So there's a couple of things in Q2 that add up. There's the TSA contract which is the co-ops and then just the timing of transformation.

So there's a few specific things, some puts and takes in Q2 the net of it maybe a modest down from Q1. Q3 will be I think we talked about this at the start of the year.

When you look back to January, which when the Next Gen cohort MDwise and a lot of the other contracts started one-one, in prior years, we've had things come on across the course of the year. So this year, we expect revenue to be relatively flat across the first three quarters.

There's some service adds more than life adds in the fourth quarter that will add give us some revenue boosts toward the back half of the year. But it's essentially the same arc as we talked about the last Bob, pretty plus or minus flattish the first three quarters, an uptick in the fourth.

And again as I say some puts and takes in Q2, the net of it's not significant but just trying to be as accurate as we can in giving an outlook..

Great. Appreciate that. Thank you..

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

Thanks very much. So first question maybe Frank, if you can just remind me when you think about what you brought on this quarter and then what you think for the year.

How much is coming from new names that - really signed - sorry, can you hear me now?.

We hear you, Sandy..

Okay. Sorry.

So just trying to get a sense of the new members are bringing on mix between new logo you sign maybe last year that are coming on versus existing customers that are expanding just maybe for this quarter and maybe more importantly for the year, just trying to get understanding of what's driving that?.

Yeah, I think as we've talked about previously, in an average year we would expect roughly 60% of our growth that come from our existing client base. So we have relatively low penetration in terms of total revenues into those clients and now that we have over 25 partners, there's an ability to grow within those.

If you look across the last year, our new clients started with substantial scale, if you look at Passport and MDwise as an example, they started out of the gates in Passports case with about 300,000 lives and with MDwise about 400,000 lives.

So I think that slipped a little bit in terms of starting with fairly large contracts from new clients and that's driven some of our growth coming into this year.

I think on an ongoing basis and again, we're going to have some clients that are more de novo or building the population even as we talk about with Houston, here we are going to start with 15,000. 20,000 lives out of the gates, with C3, 120,000 lives, if we had a big Medicaid contract, it could be larger.

But I would say on average, we would expect about 60% of our growth to come from existing clients and 40% from new..

Okay. That's really helpful. And then maybe Nicky, a quick follow-up.

When you think about the expense ramp and your ability to plan, how early do you have to start bringing on expenses ahead of bringing lives on board and - in terms that matching and just trying to think about longer term, what your ability to control expense is near term versus having to spend early and then if somebody potentially delayed that you had the expenses and you were sort of stuck with his expenses waiting a quarter or two for someone to bring on lives?.

I mean I would say generally speaking Sandy, that part of the business is by and large the transformation part of the business. So we're generally matching revenues and expenses in the implementation phase.

I would say on some of these bigger contracts, there's a benefit to watch that potentially sort of over staffing because they are just - you've got to get a lot of things right.

But by and large the mismatch is not that material, it can bounce around as I say on a quarter-to-quarter basis, transformation revenue is inherently - there's difficulty in forecasting it just because you've got to get the works if percentage completion.

So - but by and large, there's not an inherent mismatch in the business between ramping and revenue just because we've got the implementation is generally paid for activity..

Okay. Appreciate it. Thanks taking the questions..

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

Yeah. Thanks for taking my questions. And I apologize this has been asked, I got cut off by the call for a minute. I guess maybe Frank I know Ryan asked earlier about level of interest in the Next Gen ACO platform.

If you turn around and you look at the Trump administration and any kind of commentary coming out of them around their commitment to value-based care for multiple years in the future, is there anything that as far as Medicare specifically is concerned you guys have heard them say lately that you felt like it's really notable?.

Look, I would say a few things. I mean, one, we still see a very consistent commitment to MARCA and MIPS, which is a major piece of moving physicians into risk based arrangements and therefore moving provided organizations into risk based arrangements. So everything that we see is full steam ahead on that.

I would say on the Medicare side same thing, we don't see anything, obviously we don't know what legislation will ultimately will be passed, but even in this first round, the materially impacts Medicare in any way except we believe there's a strong commitment to Medicare Advantage.

There's going to be a strong commitment to these types of innovative programs like Next Gen do you put providers more at performance on a performance basis in terms of reimbursement. So everything that we have heard suggests full steam ahead on the Medicare side..

Okay. And then….

And I would add Jamie that CMMI wasn't impacted in what we saw last week. So CMMI has sent to Medicaid Innovation Center which is generating a lot of new programs and that remained intact in that what we saw last week..

Okay. And maybe just a couple other quick ones, Nicky, when I look at the PMPM, you quoted versus what I calculate if I just use the lives number that you got ended the quarter with it's kind of a four quarter number. It kind of implies that there was a decent chunk of lives that came on mid or later in the quarter.

Could you just talk about the cadence of lives how they came on during the quarter and it is some of the MDwise contract going away kind of offset what might be a boost for the second quarter? And then secondly, the follow-up to Bob's question on kind of the revenue cadence for the year, could you just give us any color on cost cadence as we move through the rest of the year that will be great?.

Okay. On the PMPM, Jamie, you and I can probably talk offline, but we just use average lives of the quarter, revenue divided by average lives. If you use ending lives, obviously you come out with a different number. But in terms of the cadence now I mean if you think about there's about 800,000 lives came on in the quarter.

MDwise is plus or minus 400,000 of those, the Next Gen cohort which was a one-one start with about 200. So there is about 25% of the lives came on over the course of the quarter versus the beginning, but it was it was pretty front end waited on that basis. Again glad to talk offline on the PMPM.

I know a little confusing going up in Q1 given the broader trend, but I think that is just a math of that's just a consequence of getting a full quarter of revenue and average lives when you get a big ramp. In terms of the cost cadence, again I mean I think this is a very narrow band here if we're talking about relatively flat revenue Q2, Q3.

We're talking about - we talked about a breakeven target. So it's a combination of gross margin expansion, a couple of points of margin, SG&A could cost control, to get us to where we want to be in Q3. And then again the same margin enhancement into Q4 and cost management. But it's pretty narrow band, it's not a difficult calculation to do.

But we're obviously just try to match things out. As I said adding 800,000, we doubled the life count from Q3 of last year to Q1 of this year from 14 to 28.

So just that period the first half of the year a great deal going on, bringing on an unusually large number of clients and so we get the clients up and ramp, you'll see margin improvement in the client level and cost management. So that's the arc of the year, it's sort of bring EBITDA in where we want to be as well..

Okay. Thank you..

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

Hey, congratulations on a very good quarter. Could you talk about the competitive process for the Massachusetts consortium win as well as Houston win? Like who else was included in sort of that the bid process, do you have any sense for which EMR vendor these providers were on within Turner and Epic, why did you win those deals over Turner on Epic.

Any color there would be very helpful?.

Yeah. I would say as we've talked about in general a lot of times we'll be in a situation where we've built a relationship. We have a reputation in the market just from what we've done the fact we now are in 30 markets. And a lot of times we'll be in a sole source situation.

We'll really have built a relationship, we'll be seen as advisors to the senior team, I will be working collaboratively on the app for their market and helping them think through the various ways they can realize the opportunity and then that will naturally lead to a conversation about how we can support the organization.

I would say with Houston not that characterizes the nature of the evolution of our relationship.

In terms of EMR vendors and things like that you know most of our clients tend to be on Epic or Turner, but if they're working with a large network of positions, you're going to have dozens of EMRs that will be part of the infrastructure in terms of supporting community based position. So you're going to see that normally in almost every situation.

And I wouldn't say we're going up against those vendors because we're not really selling a technology, only solution, we're offering a much broader operational and proposition and long term infrastructure to support their value base business. So we don't really view the EMRs in anyway competitively.

For C3, I do think in this case, they've decided to think through what sort of support they needed and definitely wanted to kick the tires and see what was out there. I think what we saw is that our provider focus, the investment we've made in Medicaid, the comprehensiveness of our clinical programs won the day very quickly in that conversation.

I think we showed very well based on our experience, the number of lives we support, the launch of the Medicaid Center of excellence, and I think it ended up being a focus process very quickly once we're able to really sit down and talk about our philosophies.

So again each pursued different, some will involve some other alternatives, but I would say and in almost all the cases, we don't see common competition in our pursuits..

Okay, that's great. And then with the American Health Care Act which obviously passed the GOP some amendments.

Any thoughts on your ability to deliver Medicaid expertise and with the changing in the funding environment along Medicaid, how you position basically potentially benefit from that and help your client deal a prosper in this new area? Thanks..

Yeah. I would say relative to the new legislation, I think the first thing is what ultimately going to pass in the Senate. We don't know at this point and there's going to be probably some changes on the Medicaid side based on what we've heard at this point, but we don't know.

I would say if you look at Medicaid today, there is roughly 550 billion in spend. There is a lot of pressure on increasing costs and a need to cover an underserved population.

I would say if the legislation were to go through as it is, it means States will come in we have less money to fund the care of these populations and therefore they're going to need cost effective, value driven solutions to help make the dollars they are investing go as far as they can possibly go.

So as you know, we're working in a number of states with Republican governors that are quite happy with their experience in Medicaid and feel there's a potential to continue to invest and to really push on managed solutions. That's what I think we're going to see either way where the legislation goes through or not.

And again with 550 billion in spend and that's having a very small portion of that, we do see an ability to grow in Medicaid for several years to come and hence why we've made the investments that we may..

Okay. Thanks a lot. Congrats on a good quarter..

Thank you..

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

Hey, guys. Thank you for taking my question, and congrats on the quarter.

So given your only in 1Q when you guys already have a number of new wins for the year, this is still make sense to target the annual 4 of 6 new client add or is that potential that this number increases as your platform has scaled?.

Yeah. I would say we've tried to provide a directional guide in terms of new partner additions just to give you a sense of where we are in terms of process.

Obviously, if we brought on two new clients and they were very, very large in terms of number of lives out of the gate that might support the growth we need for the long term targets that we've set. It's possible we could launch 10 new clients and they could be smaller in size and that's how we ultimately get to the number we need to set up for 2018.

What I would say is we took up our number this year from 4 to 6 to 5to 7 just in terms of a general range. We've closed four thus far in the year. We feel very much on track. We've got a great pipeline and feel very good about where we are. We've got to work through the details in terms of getting those closed.

So I don't think we're at a position right now where we go beyond our current range. I would just say we feel very good about where we are at this point in the year. We're continuing to work really hard across a number of really interesting prospects that are in the pipeline and obviously hope to have more announcements as we move through the year..

And then taking about this kind of outsized rate of growth that you guys have maintained, how much is that limited by the count for or did hiring in any way when the ability to grow faster? And as a follow-up to that, what gives you confidence in your ability to recruit talent side to itself getting into factor?.

Yeah. I mean it's a great question. I mean I think one other things when we launched the business and realized that we have such a large market opportunity is that, we needed to be distinctive on the talent side.

So we made a number of investments upfront in terms of how we built our talent organization, our recruiting capability which I think is absolutely world class, how on boarding, how we're training and developing, how we're developing leaders and managers, how we're thinking through, how we move people throughout the organization, so that they can have long term career paths at Evolent.

So we've placed a huge emphasis on not since the very beginning and continue to double down on that as we evolve as an organization. I think all of our metrics in terms of engagement, in terms of leader development and retention feel very, very good relative to historical even despite all the growth that we've had.

I think last quarter, we receive somewhere on the order of 12,000 resumes. If you think about attracting that level of talent that gives us an opportunity to look through hundreds of resumes in terms of targeting the people that we want to bring on, some of those uniquely skilled to do what we're trying to do in value based care.

So I think we've built a pretty incredible reputation on the talent front. I think that's why the interest in Evolent and then it's our job to make sure that we've got an interview process, ability to work through pipelines and manage them almost as we manage the sales pipeline to ensure that we're staffed up for new client launches.

And right now I think it all feels very good in terms of how we're managing that? Great question..

Hi. Thank you. It's very helpful. Thank you for taking my questions..

Our next question comes from Mohan Naidu of Oppenheimer. Please go ahead..

Thanks for taking my questions.

Frank, I mean going back to the providers understanding of how strong the commitment is to this value-based program, do you still see any providers who are on sidelines waiting for more clarity from the new administration or is it just that more most of them already understand it and they are going through the motions of figuring out how to handle it?.

Yeah, that's a great question. You know what's interesting is without question; there are providers that are still leaning towards the world of fee-for-service medicine.

So there's a lot of trepidation about moving away from the traditional model, obviously, if you could hold on to your traditional economic model that's a lot easier than going through a massive transformation and putting your reimbursement risk.

So without question, I still think we're at the early stages of the market in terms of providers that are really moving aggressively on the risk side. I don't think the current administration has really influenced many organizations in terms of changing their pacing or their views of the market.

What I would say is that starting in the middle half of last year, we were seeing more financial pressure on the average provider as a result of pricing pressure both from the government and commercial payers, volume of going into other signings, getting cured out of networks.

And that margin pressure helps organizations to realize that God, we can't continue to do what we're doing and preserve our financial strength. And therefore, we really are going to have to figure out how to be successful in a world where we're taking performance based reimbursement.

I would say that that pressure has, I would say increased interest in spite of the administration change and election all of those things that financial reality is forcing organizations to recognize with demographics of the population moving into Medicare and Medicaid, reimbursement being under pressure in those areas, same on commercial payers that they really are going to have to move in this direction.

I think that's what we're seeing. So again just to repeat, I don't think we've seen a change in pacing at all since the election in terms of pipeline and demand. Pipeline feels very strong. I still think we're at the forefront of the movement and so we're working with the top third of the market.

And I think we're going to see more acceleration in that and continues to include a lot more providers that are moving in this direction, which will expand the market for what we do..

That's great, thank you. And Nicky, maybe a couple of questions that on the partners as you noted about 25 long partners here.

How many of them are in the platform on operation stage and can you give us clarity on how many of these 25 will convert to this stage throughout the year?.

Mohan, we only talk about partners in the - so they would all be in the long term PNO stage. We already breakout number of folks in transformation, historically, we had a 50% conversion from transformation to PNO. But when we talk about long term partners by definition in our world, they are already in platform and operations..

That's great. Thank you very much for taking my questions..

Thank you..

Our next question comes from Steven Halper of Cantor Fitzgerald. Please go ahead..

Just a house keeping question, I might have missed it.

Do you reiterate you view that you'll reach adjusted EBITDA breakeven in Q3?.

Yes..

Great, thanks..

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

Yeah. Hey, thanks for taking the question.

If I just want to talk about sort of the Medicaid market here a little bit and particular a number of states are going through some procurement processes now, just curious of one, can you give us a sense on where your - how you looking in internal of these states and some of the opportunities as you're seeing them? And then secondly, as we think about the initial round of Medicaid expansion, how long - I mean were those certain set number of years in terms of your initial extension in terms of how the procurement is set and with those automatically come up for rebid at some point in the future and with that trigger the time when provided would say will come into this second go around or something like that?.

Yeah, I would say if you look at the Medicaid market right now relative to our pipeline, it feels broad across multiple provider organizations and multiple states. It is very state specific.

So what Massachusetts is doing versus Kentucky versus Indiana versus Florida, very, very different? In some of those states, you really are working directly with the state on behalf of a group of providers, in some, you're orienting around a provider organization and there's a more clear process in terms of how Medicaid is ultimately awarded.

And I would just say that we sort of have all kinds in the pipeline right now. I'd say some that as we've mentioned are large at are at the later stages that we feel quite good about and that we hope will resolve themselves across the coming months.

We have some that are at earlier stages where we'll begin a process of working with a provider group and working with state legislatures and really trying to end up in the right situation for the state in that population. But I would say overall, lots of different flavors feels very good and pretty robust.

And again full steam ahead because the budget pressure that the states are facing doesn't really change, if anything it gets worse with the new legislation that came through not better.

In terms of win state contracts come up for bid and what the implications are, what the implications are going to be over waivers and how states will impact for the federal government. It's again very dependent on the state.

In places where we have an existing contract with the state, we do believe that will well position given that we're affiliated with a large provider network throughout the state.

Those are the highest employers in the state in terms of high skilled jobs, they're locally based generally state governments know they're not going to leave town and that they're responsible for those populations. So we feel very well positioned with our approach in terms of maintaining those contracts.

And again it depends on the state but they might decide to go from four providers down to three or to expand the number of providers and it would be dependent on what their approach is as to whether we'd be increasing lives in those cases or maybe decreasing lives.

Overall though, I would say the Medicaid market, our approach, its reception in the market feels very good right now..

That's helpful. And just a follow-up on Houston Methodist, you're talking about 15,000 to 20,000 lives sort of in the ACO program, is Houston nothing have a Medicaid program that you serve and would that be potential down the road for your guys? Thanks..

Yeah, I would say right now we're starting with Medicare are working with there are ACO. Medicaid surely over time will be a potential population we could expand into and that could take a variety of forms. There is also a potential on the commercial side over time. Right now we're focused initially on Medicare. It's a great place for us to start.

And then we'll expand over time based on the specific opportunities in that market..

Great, thanks a lot and congrats..

Thank you..

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

Hi. This is Brian Hofmann in for Richard.

First on C3, as I believe I heard you correctly, it sounded like you said 100,000 or 120,000 lives coming over the coming years, does that imply that the initial ramp will be smaller than that and also when is that contract expected to begin?.

Yeah, again rough numbers, we'd expect about 100,000 lives, most likely those wouldn't come fully on the platform until the beginning of next year, so in January 2018 likely we have implementation work obviously to get ready for that that all, that will occur across the back half of this year.

And that's the general structure and now obviously we can have lives over time depending on what region that contracts covers, number of physicians et cetera..

Great, thank you.

And then on the Passport announcement, I just want to clarify, with Passport shifting their TPA services to your platform, how should we think about that impacting the lives on your platform or since you already have those Passport lives, should inside think about this in terms of increasing the PMPM?.

Yeah, you should think about it as an increase in PMPM. We don't double count the lives. If we're already covering those 280,000, we add an additional service; we don't increase the life counts. So life count would stay roughly the same and then obviously our total PMPM given that we're expanding services would increase..

Great, thank you. And then last one for me. Last quarter, I think in the February you said, you talked about having over 90% visibility for 2017.

Any update on that given that we're now halfway through 2Q?.

Obviously, our visibility increases as we get farther into the year. We still have very strong visibility that's our reason for reiterating our guidance. I don't have the exact percentage, but it will be over 90% at this point probably in the mid-90s based on where we said today..

Great, thank you..

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

Hi. Good afternoon.

So maybe staying with Passport for just a moment, Frank, is that a transition you expect most of the legacy Evolent base to make at some point? And then the number you gave for the Passport imply something like up $5 to $6 incremental bump to PMPMs for them, is there pretty good rule of thumb that to users are think about as they are going right for TPA services?.

Yeah, I'd say look, we try not to for all sorts of reasons to breakout specific PMPMs by client. I think I gave a directional number that said, it's well over $20 million a year on an annualized basis. So I think the PMPMs if you go well over would be higher than - I haven't run the math, but higher than what you're throwing out.

And again for obvious reasons, we don't discuss specific PMPMs for client. But it will be very large contract add for us and largely impact 2018.

In terms of opportunities to bring other clients onto the platform, I think that's one of the reasons we made the investment that we did is we felt that there were real benefit to integrating the TPA into the clinical platform and having all of that in one infrastructure that could applied across multiple populations.

So we have done a lot of work with the market with understanding what the leading edge potential was with the platform.

And yes, we do feel that overtime, clients will want to take advantage of that integration because of the long term benefit that gives them in terms of customization and flexibility, in terms of benefit design and around certain populations, in terms of more consumer driven plans over time on the commercial side.

So again, that's a little bit of a longer term vision, but yes, over time, we do feel this will be a great opportunity for us to grow within our existing client base..

Okay.

And then you had mentioned before a chance to go back through some of the blueprint type work that Valence had done for clients before the acquisition, and now with the added capabilities of Evolent, maybe enticing some of them onto the platform, is there been any progress there?.

I would say we're in the early stages of that at this point. If you think about closing the deal in October and bringing on a new 400,000 life arrangements on Jan 1 and integrating with the new company, I think we want to make sure that we got all of that right.

The one we have the right organization in place that we're prepared for a very large new contract that we're delivering at a high standard.

And so you can imagine in the fourth quarter early part of this year, there was a lot of scrambling just to make sure that the integration went well that we're thinking through the technology strategy and that we have the organizations working together very collaboratively. I think that is going incredibly well.

Always it has hiccups but I think it's gone really, really well relative to other integration that I've been a part of historically.

I would say now, we're at a point having worked through that feeling greater stability in operations like we have the ability to scale, if you think about bringing on Passport, that's going to be another 300,000 lives on the platform and our commitment was to get that absolutely right in terms of serving clients at a high standard from the outset.

So first order of business was around integration and operations and preparing for scale and now we're at a point as we get into the middle half of this year where we can more effectively do what you're suggesting and really look across our broad client base and think about across sell opportunities, how do we integrate the vision of Valence in Evolent in the minds of formal Valence customers and our Evolent partners and that will be something that will be an opportunity for us as we head into 2018..

Okay, great, thanks again..

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

Well, we appreciate everyone participating in the call. I know we'll see many of you at our Investor Day later this week in New York and look forward to interaction and seeing many of you in person and we appreciate everyone participating in the call. Thank you..

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