Frank Williams - CEO Nicky McGrane - CFO.

Adam Noble - Goldman Sachs Stephanie Davis - JPMorgan Jamie Stockton - Wells Fargo Ryan Daniels - William Blair Matthew Gillmor - Robert Baird David Larsen - Leerink Partners Steve Halper - Cantor Fitzgerald Mohan Naidu - Oppenheimer Charles Rhyee - Cowen and Company Sean Dodge - Jefferies Richard Close - Canaccord Genuity.

Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended June 30, 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 the first 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 the 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. 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. Before I begin with my customer remarks, I want to note that tonight; we filed a press release detailing a proposed public offering of 175 million in primary shares.

In addition to the press release, we also filed an S3 registration statement. On the advice of our counsel, we'll not be addressing the details of the press release or taking any questions about it on tonight's conference call.

I will 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 over to Nicky to take us through a detailed review of our second quarter results. I will then close this out with an update on our product development.

As always, we're happy to take questions at the end of the call. Beginning with our financial results for the quarter ended, June 30, 2017, total adjusted revenue increased 89.9% to $107.3 million from the comparable quarter of the prior year.

Adjusted EBITDA for the quarter ended June 30, 2017, was negative $3.6 million compared to negative $3.9 million from the comparable quarter of the prior year. As of June 30, 2017, we had approximately 2.8 million total lives on the platform, an increase of 98% year-over-year.

Overall, we are pleased with our results having met our strategic, operational, and financial objectives for the quarter.

Coming into this year, one of our primary objectives has been to demonstrate continued operational consistencies as well as the scalability of our infrastructure and clinical model to power provider driven healthcare in multiple markets.

In policy circles, particularly around the repeal and replace discussion, there has been a lot of focus on provider driven models and their ability to deliver high quality, lower cost healthcare, particularly in the phase of anticipated spending growth in Medicare and Medicaid.

The good news based on the results we've seen for our partners is that providers can consistently deliver higher value care with engage their physicians, leverage sophisticated predictive analytics to focus on the right patients, and deploy proven and effective clinical programs.

One of the benefits of the investments we've made in our infrastructure is the ability to manage populations in a variety of delegated risk arrangements from a central foundation. This enables us to support partners with very different local market dynamics and yet produce consistent results through the deployment of our integrated platform.

I'll speak to a few examples of how we see this model providing value for our partners and action today across commercial payer partnerships, governmental programs, and pharmacy management that ultimately touch a multitude of populations and geographies.

In terms of the commercial segment, for example, we've been working with the partner system in the south to manage care for a population in a delegated risk arrangement from a national payer.

We've worked to build a high value network of primary and specialty care providers, optimize the network referral process to ensure members were routed to the highest value care, and deploy our technology and clinical programs to identify and engage members that were at highest risk.

After many months of continual physician engagement efforts, payer relationship management, data and reporting work, our partners help to radically reduce spending on the population, while also hitting aggressive goals for improved quality of care.

As a result, the payer has generated substantial savings and is now returning between $10 million and $15 million in provider bonuses and has a strong interest in expanding the relationship. On the governmental payer side in Medicare, we have a Midwest partner that was an early adopter in CMS's innovative Next Generation ACO program.

NextGen enables providers to benefit from the upside of shared savings and puts dollars at risk if cost increased for managing a designated group of Medicare beneficiaries compared to benchmark.

With this partner, we developed a strategy to expand physician participation in the ACO from employee physicians to include regional affiliates and independents that cover a much wider geography.

With a collaborative group of participating physicians, the system was able to deploy our care management resources to effectively coordinate care for high risk complex patients those with chronic conditions and those in need of hospital transition care.

This partner system was one of the highest performing ACOs in the 2016 Next Generation program and has continued to serve as a demonstration site for partners in the current performance year as well as those considering NextGen in 2018.

A great example of provider driven care delivering substantial improvements in population health and ultimately influencing CMS in its development of innovative programs in Medicare. In Medicaid, we're able to provide value to our Medicaid plan partners on the clinical side in all other cost categories of planned administration.

For one partner we've been able to transition hundreds of thousands of Medicaid beneficiary lives on to our platform and customize our predictive models to support the unique needs of this population.

By bringing clinical resources into a proven and more measurable methodology for care management, integrating social determinants of health into the care model, and bringing networks of community health organizations into the patient engagement and care coordination efforts alongside the health plan, we've been able to turnaround the MLR performance of the plan in the phase of state rate cut pressures and stabilized ALR in the phase of fluctuating premiums.

The ability to systematically address every cost category from in-patient and outpatient spending and high cost specialties while at the same time supporting an integrated model care is what ultimately has the ability to improve the health of the population and truly bend the cost curve.

Finally, one cost category that cuts across many populations and lines of business for our partners and which impacts performance is pharmacy. Across multiple markets where pharmacy spend and clinically impact need to be optimized, we work to engage physicians in better prescribing decisions.

For example, we deploy pharmacists as part of the integrated care team, actively manage the formulary to promote use of lower cost and equally effective medications, implement step therapy when appropriate and provide access to top national, retail, and mail order pharmacy options, and lower total costs for our health plan partners.

In multiple markets, we're realizing tens of millions of dollars of pharmacy savings while driving medication adherence, improved safety, and having greater impact on health outcomes.

That value to our partners in these and many other ways has given us confidence that engage align providers supported by an integrated infrastructure can deliver higher value healthcare.

This effort requires regular course corrections, data driven insights, and innovation to extend our impact into new clinical areas and new frontiers and population management.

It's this continuous investment in enhancing our value-based care platform has helped us to build the market leading brand and attracted several new partners to join the Evolent network this year. To that end, I'm pleased to announce the addition of Crystal Run Healthcare in New York.

Crystal Run is a multispecialty group medical practice with nearly 50 medical specialties represented across 20 practice locations in the lower Catskill region of New York and New Jersey.

A few years ago Crystal Run was among the initial class of 27 organizations to participate as an Accountable Care Organization in a medical shared savings program and then transitioned into taking full risk through its provider sponsored helpline.

Evolent will be providing third-party administration services and population health management for Crystal Run's Medicaid and commercial lines of business including a plan for lower income residents who do not qualify for Medicaid, but need the same essential benefits as other health plans at a lower cost.

This focus on providing access, high quality care, and coverage for the under-served, aligns directly with our mission and our investment in establishing a Medicaid Center of Excellence nationally.

In terms of a brief commentary on our overall pipeline and the macro environment, first we feel good about our five new partner additions in 2017 and are hopeful we can end the year at the high end of our anticipated range of five to seven.

There continues to be interest in the market in Medicaid, the Next Generation ACO program, in providing an integrated infrastructure for health plan operations. We still have work to do in closing out the pipeline and setting up 2018 and we're working diligently to move several new market opportunities forward by the end of the year.

Second, we're hopeful that the recent defeat of Repeal and Replace in the Senate will lead to some relative policy stability for the remainder of the year and into 2018.

While we continue to see a broad market movement of value, the legislative environment has had a high degree of uncertainty over the last nine months particularly around the exchanges, the future of CMMI, and potential contraction in Medicaid. We remain bullish on the macro factors driving fundamental changes towards value.

However it's important that HHS and CMS begin to issue positioning statements on the continuation of current programs, stabilization of certain market segments, and greater clarity on state-by-state flexibility in Medicaid so that providers can adequately develop clear growth plans for 2018 and 2019.

It appears that Secretary Price and the broader team within HHS recognize the importance of settling in and providing clear directives to providers on a number of key issues which should help to move the market forward with greater certainty and focus.

Third and finally, we're seeing growth in the pipeline with existing provider own plans that are looking for scale and enhanced performance as well as position ACOs that are looking for advanced capabilities and a financially aligned partner to enter in the delegated risk arrangements.

In both of these segments, there is interest in Evolent not only providing the clinical platform and infrastructure but also being aligned partner financially with skin in the game as these providers move towards risk.

It's exciting to see our investment in an integrated infrastructure and depth and programs like Medicaid and duals opening up new segments and expanding what is already a large and growing market opportunity. With that overview, I'll turn it over to our Chief Financial Officer, Nicky McGrane, to speak about our financial performance for the quarter..

Thanks, Frank, and good evening everyone. Today I'll cover our financial results for the second quarter of 2017 and provide guidance on our outlook for the third quarter and remainder of the year. Echoing Frank's comments, Q2 was another strong quarter for Evolent.

For the quarter adjusted revenue was $107.3 million and adjusted EBITDA was negative $3.6 million. Adjusted revenue for the quarter represented an 89.9% growth in the same period of the prior year while adjusted EBITDA increased $0.3 million from the prior year.

Adjusted loss available for Class A and Class B common shareholders was negative $8.8 million or negative $0.13 per share for the quarter compared to negative $7.2 million or negative $0.12 per share for the same period of the prior year.

Finally, we ended the quarter with approximately 2.8 million lives on our platform as of June 30, an increase of 98% over the prior year. Now let's turn to a detailed review of our adjusted results for the quarter. As a reminder, we derive our revenue from two sources, transformation and platform and operations services.

Adjusted transformation revenue accounted for $5.3 million or 5% of total adjusted revenue for the quarter representing a decrease of $5 million compared to the same quarter last year.

As we've noted in the past, transformation revenue can fluctuate from quarter-to-quarter based on the timing of when contracts are executed, new and existing partners, the scope of delivery, and the timing of work being performed. I would also add that we are seeing some changes in our transformation business.

As we increased the level of product, we are offering in the marketplace, the average transformation revenue per newly added partner is coming down modestly. As a result, we would expect our quarterly transformation revenues to range between $6 million and $8 million in the back half of the year.

Adjusted platform and operations revenue accounted for $102 million or 95% of our total adjusted revenue for the second quarter, representing an increase of $55.8 million or 121% compared to the same quarter last year.

The increase was driven primarily by a 98% increase in the number of lives on our platform from approximately 1.4 million as of June 30, 2016 to approximately 2.8 million as of June 30, 2017.

The increase of lives on our platform was due primarily to the acquisitions of Valence Health and Aldera as well as the addition of new partners and growth in existing markets. Our average PMPM fee for the quarter was $12.23 compared to $11.64 in the same period of the prior year.

Adjusted cost of revenue increased to $66.2 million or 61.6% of adjusted revenue for the second quarter compared to $32.1 million or 56.9% of adjusted revenue in the same quarter of the prior year.

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

Adjusted SG&A expenses increased to $44.7 million or 41.7% of adjusted revenue for the second quarter compared to $28.3 million or 50% 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 acquisitions of Valence Health and Aldera.

This is the sixth consecutive quarter where we've seen a decline in adjusted SG&A as a percent of adjusted revenue and 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 revenues declined to 103.3% in the second quarter of 2017 compared to 106.9% in the same quarter the prior year.

Adjusted depreciation and amortization expense in the quarter were $4.5 million or 4.2% of adjusted revenue compared to $3.6 million or 6.4% of adjusted revenue in the same quarter the prior year. The increase was due primarily to the depreciation and amortization assumed as part of the acquisitions we completed in 2016.

We expect adjusted depreciation and amortization expense to increase in future period as additional software assets are placed in service. As of August 6, 2017, there were 65.8 million shares of Class A common stock outstanding and 2.7 million shares of Class B common stock outstanding.

Our balance sheet remained strong with $124 million of combined cash, cash equivalents and investments as of June 30, 2017. For the quarter, cash used in operations was $10.1 million, cash provided by investing activities was $3.3 million, and cash provided by financing activities was $2.5 million. Now onto 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 third quarter, we are forecasting adjusted revenue to be in the range of $103 million to $105 million and adjusted EBITDA to be approximately breakeven.

For the full-year we expect adjusted revenue to be in the range of $424 million to $428 million and adjusted EBITDA to be in the range of approximately negative $8 million to negative $4 million. In summary, the first half of 2017 was a strong period for Evolent that have kept us on track for our goals for the remainder and entirety of the year.

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 product development and then we will take your questions. As I mentioned earlier today a key differentiator at our stage of operations is having a single infrastructure that can impact a wide range of diverse populations.

One insight that we've developed over time is that retroactively trying to manage the highest cost spenders of this year is not necessarily the key to creating clinical and financial performance in the future.

The predictive model and clinical rules engine of identifying is built to assist with workflow for patients who are obviously in need of care and also of those whose cost and quality we can impact next year.

Having cutting edge predictive modeling of this kind helps our partners identify and target patients that might not even seem sick today but who have left without intervention, would result in millions of avoidable medical spend in the coming year.

In our retrospective analysis of a leading health system using our technology to stratify complex patients, we looked at about 100 cases that met our criteria but were closed by the system staff because they were deemed inappropriate for care management.

Within six months, 90 of those 100 patients were admitted to the hospital unexpectedly resulting in more than $1 million in costs and demonstrating the predicted value of identifying.

As the industry learns across new data and leverage the power of best-in-class technology alongside clinicians' intuition, we will be able to create meaningful savings in avoidable medical expense and unnecessary hospitalization.

A provider led environment can be even more impactful because of the availability of robust status sets to enhance predictive accuracy as well as an engaged provider community to intervene effectively with patients.

In closing, we're pleased with our results for the second quarter and we remain focused on achieving our strategic and financial objectives in 2017.

We remain focused on delivering operationally and clinically for our current partners moving past breakeven in Q3 and continuing to scale the business financially and working to closeout some important pursuits in the remaining months of this year to expand the Evolent network and set up 2018 and beyond.

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

We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Robert Jones of Goldman Sachs. Please go ahead..

Great, thanks for the question. This is Adam Noble in for Bob. I just wanted to talk a little bit about the revenue guidance for this year.

You guys are guiding towards a sequential drop in revenue next quarter versus this quarter, just wanted to get a sense is that's more from some lives maybe coming off the platform or decline in PMPM rates, just want to get a little more clarity on how we should be thinking about the back half from a top-line standpoint?.

Yes Adam, I'll take that one and Nicky can obviously add. I think as we mentioned earlier and as you're probably aware we do have some one-time payments that come in across the year, so we have a number of game-sharing arrangements, different fees that might come in during implementation periods and things like that.

So you’ll see some mild fluctuations from quarter-to quarter but it's really what we expected at the beginning of the year when we set our guidance.

Nicky feel free to add?.

Yes, Adam. I would just say I mean, I think the way we think about the world is we guided $103 million to $105 million for Q2; we came in at $107 million.

I think in any given quarter there's a million or two dollars that can come in over the course of the quarter we try to guide to the revenue we feel the strongest about and then we if you look at Q1 and Q2 we've come in a very consistent fashion.

The full-year guidance $424 million to $428 million implies what we've said all along relatively flat first three quarters is a tick up in Q4.

So it's very similar Adam, I think it's just Frank there's some pass-through and other revenue in Q2 but I think within range, we still see this as sequentially flat sequential Q1 to Q3 which is what we said at the outset of the year and the guidance just make sure that we deliver what we say..

Got it. I think that makes a lot of sense and just wanted to ask around your comments around transformation revenue.

I was just hoping you go into little bit more detail on the comment you made about the lower transformation revenues moving forward because of the product -- because of different types of products, is that simply that that you seem some clients start with smaller footprints or basically have you guys done a lot of work on the product side, so implementations themselves are a lot quicker and therefore less costly to the client?.

There's a couple of different pieces to add on.

I would say what we're referring to specifically is when we look at the mix, you look at last year and into this year and some of the bigger pieces, Passport or MDWise, some of the big pieces of business we brought on because they're more mature products that the transformation revenues are a little bit lower and so you look at some of this the NextGen, RAF some of these products, it's a more defined implementation.

I think historically if you go back to the transformation revenue, there was blueprints in long duration implementations as we've got more product offerings and the mix what we're trying to say is the average revenue per added partners is lower and you sort of saying in the back half of this year based on what we're seeing it's in the range of 6 to 8 obviously that could change based on what comes in next year but it was really within I think we're fundamentally trying to get people on the platform.

And so we don't see this is a negative development, we're trying to move these folks through implementation and get them into the P&L phase. And so one of the advantages in a way of the productization is that we can do that more rapidly bring someone on at this point and beyond in the year and still have them up and running 1.1.18.

So again I think it's just an observation of what we're seeing and I think as we've looked at consistently folks have had slightly higher transformation revenues in a quarterly basis and just sort of at least for the next two quarters just resetting to a slightly lower level. But I think from our respective it's not bad issue, it’s not bad movement..

Yes absolutely. Thanks for the questions..

Thanks, Adam..

Thanks..

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

Hey guys, thanks for taking my questions.

How much of the 2017 EBITDA guidance was driven by your expectations for a higher number of new wins this year than the recent trend and how should we think about the ramp up cost associated with each new win depending on the kind of win it is?.

I'll just answer quickly and again Nicky can comment. But we did not assume really if you think about the new organizations we bring on and timing for when they start very little impact on 2017. And again even if we were at the higher end of the range, it really wouldn't have much of an impact on 2017 in most cases.

So I would say again if you look at our numbers we're on plan, we forget about where we are.

In terms of cost basis same thing, again we are staffing up particularly as we get towards the tail end of the year to serve new clients particularly in the fourth quarter, we'll always have that balance of staffing up and so you'll see some increased costs at that time but not a lot of cost at this point in the year..

Okay thank you.

And just a follow-up on that just the EBITDA breakeven on the horizon, could you provide any guidance on how to think about the ramp following the breakeven period?.

I think Stephanie, this is Nicky.

If you look at what's implied when we give the full-year guidance there's we go from a breakeven point of view in Q3 to kind of a modest EBITDA mid-single-digit EBITDA, low-to-mid-single-digit EBITDA in Q4, some of that to do with what Frank talked about in terms of just Q4 setting up to next year and but I think we just wanted to be thoughtful about Q4 guidance and then obviously as we move towards next year with the growth implied to next year, that's where you will start to see the ramp more than in Q4 specifically..

All right, thank you for the clarification. I appreciate it..

Thanks..

Thanks..

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

Hey good evening, thanks for taking my questions.

I guess Frank maybe the first one there's been a lot of commentary about the NextGen Medicare APO program and kind of the 2018 class and how it's driven a lot of conversations, when do health systems really have to make a decision, if they're going to -- if they're going to participate in that?.

Yes, with NextGen, it is a phased decision process, so there's an early application that happens at the beginning part of the year. They then receive indication, were they accepted in the program.

There's been a preparatory period where more data is shared and where lot of the organizations we work frankly make a commitment which is really in the fourth quarter, so whether they're going to participate.

There is a point at the beginning of next year where organizations can decide to not participate once the final data and information comes through. I believe if you look at all the organizations for instance we have in this year's class in all of them continued once they had committed in the fourth quarter.

So I think we'll have very good visibility in the fourth quarter. There is the possibility that an organization could decide at the beginning of next year for some reason the benchmark data that they don't want to move forward but we should have good visibility about the fourth quarter..

Okay, that's great.

And then Nicky, just sequentially as we think about getting to the breakeven level for EBITDA, I'm assuming that that the real leverage is going to come from lower cost of revenue but I would just love to hear your thoughts sequentially on how expenses should flow?.

Yes, Jamie, it's a bit of both.

I mean I would say as we looked at -- as we look at Q3 and I would say we think about it as relatively flat revenue versus Q2 and I know we talked about this at the outset of the year, we went from 2 million lives at the end of 2016 by the end of Q1 2.8 million and sort of flattish year in Q2 but that was obviously a significant ramp for the large number of clients.

So as we look with those new clients up and running and stabilize, there's some contract revenue that we can take out of the system that we had put in place to ensure that we were meeting our deliverables.

So, to your point a portion of it is on the cost of revenue side, I would say there is just operating discipline on the SG&A side, some continued integration of the acquisition, so it's balanced I think your instinct is right slightly more of it it's on the cost of revenue than SG&A but both factors are contributing to the breakeven drive here in Q3..

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

Yes, guys thanks for taking the questions.

Frank, let me address this one to you, if we think about your same client growth expectations for 2018, the five new accounts that you've already signed and planned there and then the cross-selling of Passport TPA services, what kind of visibility do you have at this point into your 2018 goal of at least 30% organic sales growth?.

Yes, I would say at this time of the year, we still got a lot of work to do in setting up 2018. If you think about it for a lot of our current clients, they're still making decisions in terms of new populations that they might pursue.

We're still in discussions around delegated risk arrangements, in some cases we're having broader discussions in our initial partners at the renewal point and obviously we're talking broadly about the relationship and how we want to structure it going forward.

On the new business side, there's depends on the client but there are always timing aspects, when are we actually going to get through the early implementation period are we going to be on cycle if there's a payer involved or a state government on the Medicaid side. So I would say right now we feel good about the fact that we acquired new partners.

We feel like we're adding a lot of value across our existing client base. We're having very positive discussions in the market in terms of the new pipeline but we've still got a lot of work to do in setting up 2018.

And traditionally in the August time period I would say we probably have the least amount of visibility going into a New Year just given all of those factors..

Okay, that's helpful color and then I know you can't talk about the secondary offering but maybe more broadly with cash on the balance sheet, is that typically in your view going to be allocated towards more M&A activity or with you partnering with MDs they want to see a little bit more skin in the game is it kind of a credibility issue to increase your cash on the balance sheet whether you spend that or not just any broader color not related to the deal?.

Ryan obviously we would love to talk about it just more detail but I worry a little about getting on a slippery slope and starting to talk about it. So my preference on the call as I said upfront is for us not to discuss it more imply what the uses of capital might be but obviously we'll discuss it in more detail at the appropriate time..

Okay. And then Nicky maybe one for you, you follow-up on the last transaction revenue in the second half of the year obviously that's a good thing because it's one-time versus the recurring revenue.

I'm curious though what the impact of that specific revenue mix shift would be on margins is that somewhat augmentative to margins given that I know a lot of the development activity is kind of a breakeven to drive business development?.

No, I mean we put that piece of the business has always been relatively consistent with margin on the core business. So, no, I mean I think as you can see in the numbers we gave we're not moving off anything even as we talk about slightly lower transformation revenue.

So it's not a negative margin mix to us in the back half of the year pretty consistent..

Okay, great. And then final one, I will hop off. I think Crystal Health is the first initial client you signed with both the TPA Services and Population Health in a bundle I know you've done cross-sells like Passport.

But one is that the case and number two are you seeing more interest in the pipeline for these aggregated services versus simply one or the other? Thanks..

Yes Ryan, I think you're correct.

The Crystal Run is the first upfront where we've combined the Valence TPA along with their Population Health services, part of the reason we made the investment is because we thought there was going to be an opportunity to have an integrated offering and to be able to talk about the benefits of TPA identify clinical all working together in an integrated fashion.

So we do have more of those in the pipeline currently and I think we'll see more as we get into 2018 given some of the trends we're seeing in the market..

Our next question comes from Matthew Gillmor of Robert Baird. Please go ahead..

Hey thanks for the questions.

Just had a couple of follow-ups here, so on the Crystal Run announcement, can you maybe give us a sense for how many members are in the Medicaid and commercial health plans that are be supported in the TPA versus the ACO members that I think were mention in the press release, so if there is any difference there, I'd be curious.

And then as a follow-up to that, are the scope of services on the TPA side, are those similar to what's planned for Passport or is there any sort of difference in how we think about the services you'll be providing to Crystal Run?.

I mean I think there would be some slight differences Passport is obviously a very large health plan. A large number of lives large geographic area that it's covering very large number of providers and been in the market for a long time. So there is a slightly different service mix.

You're correct with Crystal Run, we're doing both the TPA piece as well as the early implementation phases of our clinical programs, Population Health more broadly and as well deploying identify. In terms of lives initially we're starting somewhere between 10,000 and 15,000 lives. So it's actually reasonably small out of the gates.

If you look at population area that the practice has set in it's probably close to a million lives in that geographic area and if we look at the broader plans of Crystal Run and what they're trying to accomplish we see a lot of potential growth both in Medicaid and commercial and potentially some other product lines down the road.

So really excited about it. They have a great reputation we’re one of the early ACO participants and very highly regarded and pretty aggressive in terms of what they openly want to do in Medicaid and beyond. So a great win for us and we're excited to begin working with them..

Okay, thanks. And then Frank this is probably for you too, I wanted to ask about the pipeline again and I appreciate the comments you've made about where you're seeing the activity.

I was curious if there's also any observations you had about the mix between established organizations like a Passport which are obviously a little bit more chunky from a revenue standpoint compared to organizations that are a little bit more organic and provide for a longer tale of growth.

So I was curious if there was any trend in the pipeline around that mix?.

Yes, good question. I would say relative to historical, our pipeline is probably more of a barbell than it has been traditionally not dramatically but slightly so. And what I mean by that is we have some very large potential opportunities in the pipeline that represent a lot of lives and fairly significant revenues potentially right out of the gates.

And I'd say we have several that we're working on at this very moment that we're quite excited about.

And then on the other end, if you think about our NextGen cohort, we're starting with as an example a very specific group of lives in one program and again believe we can cross-sell and build on that early population but we have a number of those types of opportunities which are sub, usually sub-$10 million on an annual basis.

So really good chunks of revenue for us and again incredible expansion potential over time but I would say right now the pipeline is probably bifurcated in that way.

I can't really say why but that's where it sits today still broad and deep and a lot out there for us but that's probably a little bit of a difference versus maybe a year ago at this time..

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

Hi can you talk a bit about the Valence integration, how is that progressing and any thoughts around potentially transferring lives from the UPMC platform over to Valence and could that ultimately improve your overall cost structure and margins? Thanks a lot..

Yes, I would say the Valence integration has gone extremely well. Early on in the process Steve Wigginton who is one of our Senior Executives here essentially moved to Chicago not quite but has been there Monday through Friday since the day we closed the transaction, there's a very strong team in Chicago.

I think we worked very hard out of the gates just to understand where the business was, where scenarios we could make some improvements, make sure we're showing up all the client relationships. They had a tremendous amount of growth, if you look at Cook County, MDWise potentially bringing on Passport towards the tail end of this year.

So incredible growth and I would say the team has done an excellent job and I feel culturally there's a lot of alignment.

As Nicky said, I don't think in the early period we took advantage of all of the efficiencies and cost synergies simply because we had so much growth that we needed to manage and we obviously wanted to start those off on a -- on a very strong track.

But I would say right now we feel very good about where Valence said its ability to accommodate our growth the ability to cross-sell as we've talked about earlier so it feels like a very good investment. In terms of your UPMC as all of you are aware UPMC has been a great partner for us. They've served our clients at a very high standard.

We did look at the TPA aspect of what they were doing and we recognize the long-term we could potentially get better margins if we were insourcing that function that's obviously true with the new business that we brought on and will be true going forward.

Some of our legacy clients that are on the Medicare side were still going to leave on the UPMC platform for the time being. We well over time build out that capability with Valence and eventually move those lives over but UPMC has done a great job.

We've got happy partners there and for now we're continuing on that platform in Medicare until we feel comfortable moving those lives over..

Great, thanks. Congrats on a good quarter..

Thank you..

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

Yes, hi just relative to the legislative comment. Do you feel like there's a pause in the marketplace then that might prevent you from hitting some of the objectives for the rest of the year and into 2018 or is it sort of the same sort of aspect as what we've been looking at for the last year or so in terms of the legislative uncertainty..

Yes, I think in terms of my broad feelings about current environment pipeline et cetera as we mentioned I feel great about the fact we brought on five partners this year. I think we've got a very good pipeline. The broader market need that we've articulated feels robust.

I mean this is a very large market it is moving forward and we're in a great position. I think my commentary is specific to uncertainty in any business and let me give you an example I mean one thing we've had a lot of excitement around is NextGen.

And given our success this year, our success with the provider last year, we've got a lot of market interest right now from several whole systems.

At the same time there really hasn't been a comment from CMS on whether that program is going to continue beyond next year and there's not a great amount of visibility as to that program going to be altered in some way is it going to be continued where does it stand vis-à-vis Medicare Advantage.

And same goes with some of the discussion at the national level on Medicaid.

So, I think my broader point is we're fine wherever CMS comes out on a lot of these topics I just think for planning purposes for a lot of health systems we've seen a lot of frustration in their ability to make sound investment decisions when they don't know exactly where the government is coming out on these issues.

So again feel good about where we are, feel very good about the pipeline I'm hopeful there will be some clear statements that's what we've heard from HHS and CMS as some guidance as to some of these programs particularly in Medicare and Medicaid and there's obviously the individual market and stabilization there.

So, for now my hope is that we'll get that clarity and I think things would continue as normal if we have prolonged uncertainty around some of those programs and again makes it difficult for providers to make decisions then I think it might impact our business in some way.

Again hard to speculate and right now I feel very good about the pipeline but it's definitely possible..

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

Thanks for taking my questions. Frank around the same lines you commented earlier that relative stability in the regulatory environment might be good for you. I mean is that I guess the post ACA repeal defeat, I guess is that creating more conversations with your prospects or do you expect to see acceleration in decision making from your pipeline..

That's I mean I think it's a very good question and that's what I'm hopeful about.

I'm hoping that, there's a vote in the Senate and hopefully some finality at least for the short to medium term begins to allow us to say look here's what we know for the next six to 12 months or next 12 to 18 months we don't have to have perfect clarity but at least some stakes we can put in the ground on what's likely to happen.

So, yes, I think if things stand in this direction if the Secretary puts out some basic statements around their views around some of the topics that I mentioned and just give some guidance to providers about where we're headed across the next six to 12 months, I think incredibly helpful to our conversations obviously to boards of directors that are making pretty significant investment decisions that they have some clarity there.

Right now that's where we think things are headed if for some reason again you see a lot of legislative tug of war or statements that are sort of shedding doubt on some of the program areas then in certain places and you might see providers saying God we're not sure should we jump into NextGen or should we make those particular investment on the Medicaid side.

And so again what we're hoping for and what we've heard is that we'll hear some substantial commentary in the coming 30 to 60 days and I think that would be quite helpful..

That’s great. That is really helpful. Nicky one classification, on the transformation revenue the $68 million I guess the guidance that you talked about that's only for the next couple of quarter's right..

Correct..

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

Hey, thanks for taking the questions. Frank just a kind of follow-up on that last, I think last comments there.

Do you think that -- do you think the Senate needs to first make a decision? Does the CMS busy out there or the Congress have to make a decision first around stabilizing the insurance market before they can move on to guidance around payment models? Or can they be done sort of concurrently or are they not linked?.

I think they can be done concurrently, I really think there are -- I mean of course all of this is interrelated but for practical purposes I think there really are separate set of decisions. CMS has a number of programs which they currently have in place.

Right there are a number of states that have Medicaid programs in place or plans to move in certain directions.

I think just clarity around certain decisions relative to those programs would be helpful and again these don't have to be precise declarative statements but general guidance on yes we're supporting CMMI and in general we're bullish on some form of NextGen going forward I mean those kinds of comments would be -- would be very helpful but I don't think they have to be done in a particular order..

Okay, that's helpful. And you made a earlier comments in your prepared comments around, you look into seeing more skin in the game would that reference to you taking more risk or in terms of more gain-sharing in terms of the types of contracts that you're looking at..

Yes, I think what we've seen is that providers really prefer when we have some skin in the game and we feel truly aligned. I think it changes the nature of the relationship and frankly when we do that, we can be more directive about what we require of the partner to drive performance.

And I think increasingly in our business we're looking for situations where we can participate as an aligned partner and drive very specific actions in terms of how there are ultimately operating their risk business, how they’re thinking about a number of decisions relative to it.

Because we think in doing that one it changes the nature of the relationship it makes it feel longer-term in nature in some cases perpetual. And then enables us to drive performance because we're able to control many more levers than if we're just in a pure service relationship.

And we do feel that's really important because as many of you know this is hard stuff and you've got to get all the decisions right how you price products, what the benefit design is, how you think about position compensation and network composition, how you think about side of service all of those issues and increasingly we believe if our customers are going to be successful, and we're going to be successful long-term, we want to be at the table participating in those decisions and structuring our relationships in a way that allows us to do that..

And just to clarify when you're talking about providers in this case are you also including sort of health system or this is distinct from health systems or if it's combined is that, can you talk about how the contracting is starting to shape up in terms of taking a little more risk in terms of larger health systems or health plans. Thanks..

Yes, I would say honestly across the board and I mean I just think we've learned a lot in our first six years on the market. And we really feel that we want to be in relationships as I said that are aligned and that's with health systems, that's with physician organizations, that's with provider owned health plans.

If you think about our relationship with Passport as an example we made an upfront investments in a Medicaid center of excellence in sort of jointly doing something nationally with them which demonstrated we were committed to their markets and we were committed frankly it's a investments in Medicaid.

And as a result we have a very aligned relationship with them one it's a long-term arrangement so their initial term was 10-years in length. We do have some of our fees at risk in that relationship and they really look at us in some ways while we are separate entities, they look at as a co-owner.

And I just think in places where we can create alignment through direct investment, through putting fees at risk, through then able to sit down at a table and say okay, now that we are "co-owners together" here's how we want to operate and what we need to do to be successful and get that commitment upfront.

And again get away to work together where we really have joint governance and we're able to drive the decisions we think are important for performance.

So, I think you'll see that orientation that’s not the say we wouldn't have some traditional deals that we might do that are more service heavy but strategically I think we're working to move in that direction..

Great. Thanks. Nicky, just one last thing, I don't if you mentioned it can you just give us at this time sort of total number of P&L clients that you have contracted either live or in the backlog versus how many are currently live? Thanks..

At this point just given that -- given the number Charles we -- what we say probably is, more than 25 customers but we don't break it out in terms of exact number that were live versus in the old days that was a very small number but we did that but today we just talk about it more than 25 customers active on the P&L platform today.

And then obviously with some of the ones we signed are not active that gives you some sense of it but we don't break it out specifically..

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

Hi, good afternoon. Thanks for taking the questions. Maybe just one for me. Frank, on your existing client agreement I know in the past you've gotten the request to renegotiate the terms of some of those.

Can you maybe talk a little about what is precipitated lead up to those historically and then maybe what the typical outcomes have been?.

Sure. What I would say is if you imagine you've been working with someone for several years their business has changed over that time so they may be in multiple populations. There's lots of things that have happened across that period. Usually what we're doing is we're stepping back and evaluating the totality of the relationship.

What can be enhanced so what can we improve, what can they improve on their end in terms of coordination, in terms of efficiency, what's the appropriate service mix given their growth plan, so are they heavily investing in the value business or are they standing path.

In every situation I think the good news is we've added substantial value and we've put a lot of work into documenting and demonstrating that. So I think we come into those discussions from a position of strength.

If you look at Valence as an example they tend to have shorter-term agreements in general have been very successful at renewing very high proportion of their relationships and keeping them largely intact. So, I think they've had very strong history there.

On our end because our agreements were pretty long in length we haven't had a lot of history on renewal.

We have had periods where based on things that happen across our relationship where we might add lives or services as we have a Passport many other clients and we might have situations, if you think of WakeMed, a client that was under some financial pressure because of the nature of their shared savings agreements where we restructured the relationship.

The good news is we've added a tremendous amount of value and they've been very successful across the last year in there -- in their delegated risk arrangements and so I think we're in a really good place.

But what we try to do is be a good partner and understand how we can support the client with their objectives we're obviously trying to balance everything from the clients; how this fits strategically with what we're doing, we're very profitability focused.

So, that's something that's very important given our commitment to get past breakeven and to continue to ramp and demonstrate financial scalability in the business, we've got to be very disciplined about how we price, what we can do, and what we can't.

And so I do think you're going to see some situations where, we increased relationship we're doing more services we're expanding and you can see that in with a number of our clients and frankly we'll have some situations where they're taking some services backend and we're actually at a lower position of revenues but potentially higher profitability based on how we set up the arrangement.

And it's going to be client by client and we obviously are trying to balance multiple factors but that's really how the process goes..

Okay.

On the renewals or renegotiations are those kind of your best opportunity to get in front of the client and cross-sell more stuff or is that something that I'd imagine maybe you’re doing every day?.

Yes, I would say much better that we're doing that across our service term first of all that we've got regular communication process, we're doing quarterly value meetings with the board and CEO, we're really thinking through ways that we can enhance what we're doing under the current contract, ways that we can support them, and then we're also looking for opportunities where we know we can add additional value.

When you're given the renewal conversation as you suggest that could be a great opportunity to do that.

But you also don't want to be overselling during a renewal period I mean you want to make sure it feels very service oriented so that you're being responsive and so we're careful during that phase that we're doing a lot of listening and appropriate responding and not overselling in those moments and yet as you suggest sometimes additional service opportunities come out of those conversations..

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

Great, thanks for taking the question and congratulations. I wanted to circle back on the EBITDA guidance, Nicky on the top end of guidance moving from breakeven for the year now to the negative $4 million, I guess, I'm not -- I don't fully understand what changed from exiting the first quarter to the second quarter.

So if you could give any details there is it a ramp up expectation of one of these large deals that are in the pipeline that Frank mentioned or anything specific would be helpful?.

Great question, Richard. I would just say I take the math as we looked across the back couple of quarters that some point you've got a runway specific to get all the way down to full year break even, it was ambitious I would say in some regards.

But coming out of the first half of the year and just little over negative $8 million in EBITDA we're talking about Q3 being breakeven, so it would have implied very significant number in the back half of the year, it's not like Q4, there's something softer about Q4, it's just we have a couple of shots on goal across the back half of the year and we said as we look at where we're setting up now it just didn't make sense that people thinking there was an $8 million EBITDA fourth quarter out there.

So we said in the fourth quarter and so again I think just as I say trimming the estimates more than some big move in our mind I understand how you're looking at it but it was more just it's not like there was some to Frank’s earlier comments of the question of how much does new business impact this year, it's not like some big deal we're going to win, it's really going to be a big 2017 contributor.

So it's more about just couple of million bucks either way until we just trim to make sure that we did -- people didn't get out ahead of unrealistic expectations for the fourth quarter..

Okay, that's helpful and then Frank when you were talking about the five to seven new customers in the pipeline discussion, you said something along the lines of new market initiatives.

I believe and if you -- I'm just curious does that mean new product areas, new service areas or is there something that you see developing over the next couple of years that from a new product or service offering?.

Yes, I mean obviously we're constantly scanning the market for services that we can be hooking on to our platform that can add value for clients that we can potentially sell across what is now a large growing network that will help our partners deliver in their value-based businesses. So that's one category.

The addition of our PBM risk adjustment are examples where we saw an opportunity to add something that we think it's quite important and has a tremendous market opportunity.

Also in new segments I mentioned if you go back several years ago, we started working with health systems and we hadn't worked with that many physician organizations directly, we're now seeing that as a very important part of the market, we want to serve and we're also seeing tremendous number of opportunities potentially to expand our work in certain segments.

And then lastly, I mentioned that we are looking for situations where we can be aligned with our partners where we can feel as if it is through the way we've structured fees in some sort of upfront investment and working with our clients that we are in a co-ownership position at least in form, we think that's important and we see a lot of opportunities for that in the market where providers actually want that type of support as they're considering making some pretty significant moves in their value-based businesses.

So I think that's really what I was referring to and it really is that full gamut of strategic choices that continue to position us as market leader, continue to allow us to add value maximum way for our clients and obviously contribute to growth long-term..

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

Thank you for everyone participating in the call. We look forward to seeing a number of you on the conference circuit across the fall and again we appreciate everyone participated. Thank you..

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