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

Robert Jones - Goldman Sachs Anne Samuel - JPMorgan Jamie Stockton - Wells Fargo Sandy Draper - SunTrust Matthew Gillmor - Robert Baird Mohan Naidu - Oppenheimer Stephanie Davis - Citi David Larsen - Leerink Partners Sean Dodge - Jefferies Richard Close - Canaccord Genuity Donald Hooker - KeyBanc Capital Markets.

Welcome to Evolent Health Earnings Conference Call for the quarter and year end December 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 rest of the 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 the Company’s 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 am Frank Williams, Chief Executive Officer of Evolent Health and I am joined today by Nicky McGrane, our Chief Financial Officer. I will open the call this evening with a summary of our recent financial results as well as an update on the market, our current pipeline and overall performance across the Evolent network.

I will then hand it to Nicky to take us through a more detailed financial review of the fourth quarter and full year 2017 results. I will close with a few highlights from our recent product development activity and an update on our organization. As always, we will be happy to take questions at the end of the call.

In terms of our results for the quarter, total adjusted revenue for the quarter ended December 31, 2017 increased 26.6% to $114 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended December 31, 2017 was $3.5 million compared to negative $7.7 million for the quarter ended December 31, 2016.

Adjusted revenue increased 70.3% to $436.4 million for the year ended December 31, 2017 compared to $256.3 million for the prior year. Adjusted EBITDA for the year ended December 31, 2017 was negative $2.2 million compared to negative $21.4 million for the year ended December 31, 2016.

As of December 31, 2017, we had approximately $2.7 million total lives on the platform, an increase of 34.8% year-over-year. In terms of the overall market environment and our performance, we are pleased with our financial results for the quarter and the calendar year.

We achieved a number of important operational and clinical milestones exceeding our financial objectives on both the top and bottom line and advanced our position as a leading partner for providers and their movement to value-based care.

Our strong revenue performance this past year and continued growth in 2018 has come from three primary sources, existing partners, which outlives our services, expansion of our national network through the addition of new partners and highly selective M&A activity.

In terms of some highlights on the year, we added approximately 700,000 lives in 2017 across Medicaid, Medicare and commercial populations, which is reflective of the investment we have made in a fully integrated platform to serve providers across their entire value business.

We increased adjusted revenue by 70.3% and improved adjusted EBITDA from negative $21.4 million to negative $2.2 million across the year and met our goal of positive adjusted EBITDA in the third quarter and fourth quarter.

We came in at the high end of our range for anticipated new partnerships having welcome six new partners including Beacon Health, Carilion Clinic, Community Care Cooperative, Crystal Run Healthcare, Houston Methodist and Orlando Health. Across the year, we saw the payoff from our investment in the Medicaid center of excellence.

As we strengthened our platform in depth of our clinical programs and out of 700,000 lives we are establishing ourselves as a national leader in working with providers to build managed Medicaid solution.

With our partner base, we experienced strong and consistent operational performance and gained increased confidence in the effectiveness of our clinical programs in improving quality and reducing medical costs.

Across the year, we estimate that our clinical interventions potentially kept people out of the hospital over 33,000 knights across the year, which is obviously better for the patient and better from our progress from a value based care perspective.

The past year was also important in terms of integrating Valence into our broader health plan services offering and successfully scaling the organization with several large clients coming in across the year.

While we still have work to do in fulfilling our long-term vision, the integration is going incredibly well and the Valence platform has enhanced our differentiation significantly in the marketplace.

For the end of the calendar year, we acquired the commercial health plan businesses from New Mexico Health Connections to take advantage of what we believe is an attractive growth opportunity in the state.

Coming out of the busy open enrollment period, the plan is off to a good start as it grew its membership base for also implementing a significant price increase to be at parity with the market.

This is the unique investment for us as we don’t anticipate any additional health plan acquisitions for the foreseeable future, but we do believe that the plan represents a significant growth opportunity to serve providers with our core platform across the state and ultimately across multiple populations.

In 2017, we also expanded to new geographies working with new populations in Florida, Maine, Massachusetts, New York and New Mexico and expanded our footprint in Illinois and Texas.

And finally on the product development front, we released several upgrades to identify platform throughout the year including initial launches of our patient facing mobile application, enhance reporting capabilities and significant functionality additions to identify care and identify practice.

All of this was accomplished with two notable headwinds in the market. First, the legislative environment was challenging with the new administration repeal and replace, replace and repeal and limited communication from the new administrators at HHS and CMS across the bulk of the year.

The lack of the clear direction has had some impact on both our current partners and their aggressiveness in expanding in value as well as new partners who on average were more conservative in their initial value based care launches.

Coming into the year, we remain encouraged by our recent conversations with CMS and several state governments on this front and believe that value based reimbursement continues to be the policy centerpiece of both governmental and commercial payers.

Increasing clarity and communication to the market particularly related to specific program preferences across the first half of the year would surely be a positive catalyst heading into 2019. Second, we did see softness in our provider health plan segment particularly where a single health system is the owner of the health plan.

A few of our partners in this segment experienced financial pressure as a result of sub-optimal pricing and benefit design dynamics as well as less aggressive approaches to network management.

While this segment represents less than 10% of our total revenue base, we do believe we are addressing this on a go forward basis and requiring product configuration and transfer pricing in line with market norms and more aggressive medical management approaches upfront to ensure strong financial discipline in overall management of the health plan.

In terms of 2018, we are off to a very strong start on multiple fronts. First, we are pleased to welcome four additional partners to our national network. CoxHealth in Springfield, Missouri, St. Joseph’s Health in New Jersey, FMOLHS health leaders network in Louisiana and South Shore Health System in Massachusetts.

Cumulatively, these systems have a combined 16 hospitals, well over $12 billion in revenue and are viewed as leading innovators in their local markets.

All four partners are joining our 2018 next-generation ACO cohort, which is a group of provider partners participating in a CMS advanced risk payment model in which providers have significant upside and downside exposure based on performance.

This coming year, we expect to have more than 200,000 covered lives to our NextGen network, one of the largest cohorts of its kind in the country.

Now, in our third year, supporting health systems in NextGen, we have developed targeted analytics, focused clinical programs and tools for engaging network physicians and patients in more effective management of care.

We are also leveraging our experience base in making policy recommendations to CMS regarding program design and evolution, opportunities to improve provider participation and effective ways to enhance outcomes.

With four additions towards our goal of 7 to 9 new partners for 2018 along with the recent expansion of our Passport and Cook County relationships, we feel well positioned for solid top line growth, with over 90% visibility into our revenue for the coming year and strong bottom line growth given the inherent scalability of our business model.

In terms of the macro environment, we are now well over a year under the new administration and while there is still some uncertainty with the new Secretary at HSS, we would say that the recent signs are quite encouraging on the value-based care front.

Both at the federal and state level, it’s been pretty clear in our direct conversations with providers and key government officials that policymakers are committed to performance-based reimbursement as a key lever to significantly reduce cost and improve quality.

While there maybe some evolutionary adjustments to current programs and while the new administration may want to have their own brand and approach to health reform all signs point to a strong emphasis on pushing providers into value-based care arrangements to address an ever increasing healthcare budget problem.

With total healthcare expenditures crossing $3.5 trillion and with competing priorities in the broader budget, we anticipate considerable action this year from CMS and state governments in particular in evolving current programs and introducing more aggressive value-based approaches to stem the tide of healthcare spending growth.

In terms of our current pipeline, we entered the year with both a broad and deep pipeline across a number of key segments. Starting with Medicare adding four partners to our NextGen cohort is a great way to start the year in terms of providers moving aggressively into an advanced payment model with considerable upside and downside risk.

In the overall market, we are seeing increased interest in advanced payment models to qualify for MACRA and MIPS and in delegated risk in Medicare Advantage given the impending age and of the baby-boomers across the next several years.

Also, we see signs of CMS potentially rationing up downside risk requirements for APM qualification, which would serve as a significant catalyst to encourage providers to move aggressively to value.

On the Medicaid fund, our investment in the Medicaid Center of Excellence and recent wins in several markets have increased our national prominence in this segment with providers.

With more than 73 million people enrolled in Medicaid and CHIP and increased budget pressure, we are seeing significant movements in individual states to move to provider driven solutions that can help to manage spiraling costs.

We are in advanced discussions in several states and are confident we will enter a few new markets in the first half of this year. We are also doing early advisory work with several states that could lead to some significant opportunities in 2019 and beyond.

Overall, a large and high-growth market for what we do and our growing sophistication in asset base positions us well for expansion into several states with our provider partners. The third area to note in our pipeline is increasing interest from the physician ACO segment.

With our recent engagement with a number of physician-driven networks and delegated risk arrangements, we are working with a number of physician organizations that want to take on broader risk across multiple populations.

This is an exciting area of development for us given that a number of these organizations have great track records historically at managing costs and outcomes in shared savings arrangements and now we want our broader share of the economic value they are creating.

While there is some customization of our platform to this segment, we are well positioned to help these organizations scale their capabilities across broader geographies and new populations given the depth of our clinical programs and network management tools.

Lastly, with the integration of Valence and Aldera into our health plan services platform, we are seeing strong success providing services to existing and larger scale provider on health plans.

The integration of the back office claims and network management system with our clinical platform and identify it’s highly differentiated in the market and these organizations get to a higher level of performance in a more demanding market.

We have a number of interesting opportunities in the current pipeline and are hoping to continue to build on some of our past wins with partners like Passport, Cook County, MedLife and C3.

All-in-all, with high visibility into the coming year, we are feeling quite good about the depth and breadth of the pipeline and are in late stage discussions in several markets.

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

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. We finished 2017 with strong results and the progress we made against our strategic plan provides a solid foundation for 2018. Today, I will cover our financial results for the fourth quarter and full year ended December 31, 2017.

This is also the time of year in which we have the highest visibility into our growth for the coming 12 months. And I look forward to sharing our outlook for 2018. Overall, we are pleased with our results for full year 2017. We ended the year with approximately 2.7 million lives in our platform.

We exceeded our initial guidance on the top line with adjusted revenue of $436.4 million, representing 70.3% growth from $256.3 million of adjusted revenue in ‘16. We achieved positive adjusted EBITDA for the first time in the company’s history in Q3 and continue to expand our adjusted EBITDA margins through year end.

Adjusted EBITDA for the year was negative $2.2 million, compared to negative $21.4 million in 2016. Operationally, we fully integrated the Valence and Aldera acquisitions that closed in late 2016 and we have organized the business for continued scale in 2018.

Finally, we believe that the investments we have made in solution development, automation and client focus will continue to deliver measurable value to our partners in the coming years..

adjusted service revenues forecasted the approximately $122 million to $124 million, True Health premium revenues forecasted to be approximately $22 million to $24 million and inter-company eliminations are forecasted to be approximately negative $5 million.

Adjusted EBITDA in the first quarter is forecasted to be in the range of approximately $3 million to $5 million. So in closing, in 2017, we laid the foundation for continued healthy growth. We remain focused on execution, working cross functionally across the organization to drive performance across 2018.

This concludes our financial summary and I will now turn things back over to Frank..

Thanks Nicky. I want to close with a few updates on our business and the overall organization and then we will be happy to take your questions. One element that sets us apart in the marketplace is our singular focus on building an integrated value based care platform that can drive strong financial and clinical outcomes for our partners.

Across 2017, we experienced strong operational performance across the Evolent network as well as consistent and meaningful impact from our clinical programs and interventions.

Our work starts with data integration, rules development, stratification and predictive algorithms which help our partner organizations to focus their care management efforts on the most impactable patients.

Our ability to predict the specific patients that will incur significant medical expenses without a focused intervention is gaining increasing precision and helping to drive higher returns from our care management interventions.

Further more, it’s our ability to embed our patient communication approach within the clinical organization that radically increases engagement rates one should identify the appropriate clinical program for an at risk patient.

Now that we are several years into the effort, we have expanded far beyond complex care, hospital transition care, post-acute management and palliative care into several emerging clinical areas that are demonstrating improvements in quality along with significant reductions in medical cost.

Creating early wins with partner organizations that deliver double digit reductions in hospitalizations, readmissions and associated medical costs helps build the confidence to engage the entire clinical organization in a population health model.

It’s this confidence that then encourages organizations to leverage the clinical value they are creating for increasing participation in well constructed performance based arrangements.

With more than 2.7 million lives on the platform at the end of 2017, there is an opportunity to generate enormous clinical and financial value across the network and we are excited to continue to be on the forefront of clinical innovation and service to our partners.

Lastly, touching on the related subject of our organization, we continue to focus on creating a world-class destination to restore talent in the industry.

For us, that means building the values and mission-driven culture, developing an industry leading recruiting organization, investing in career-pathing and employee development and focusing on communication and employee engagement to create a highly motivated workforce.

Now there were more than 3,000 employees strong and with over 60,000 resumes received last year, we anticipate continued momentum for our brand in the healthcare talent market. With great talent we are increasing confidence that we can achieve an ambitious growth agenda that continues to build on our position as the market leader in value based care.

One of our focus areas in 2017 was ensuring the successful integration of the teams at Valence and Aldera to support extensive growth in our health plan services operations.

I think the integration team did an amazing job bringing the organizations together and we are on our way to having our health plan services platform that is well positioned for scale and continued innovation.

Finally, I am inspired every day by our employees’ commitment to improving the health of the nation with their work at Evolent and in the broader community.

This past year Evolent employees lived over 14,000 community service hours and donated clothing, food and much needed support over the holiday season to more than 40 charities as part of our first ever season of giving program.

It’s this focus on building a uniquely mission focused organization that’s ultimately our greatest competitive advantage in executing on what is a bold and ambitious vision. Thank you for participating in tonight’s call. Overall, we are pleased with our results for the fourth quarter and for the calendar year.

Coming into 2018, we are excited about being at the forefront of the transformation that’s occurring in the healthcare marketplace and we remain focused on meeting our strategic and financial objectives for the year. With that we will end our formal remarks and we are happy to take your questions..

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

Great. Thanks for the questions. Frank, you mentioned previously having a few large Medicaid RFPs in the pipeline. Tonight’s comments sounds like you are even further along into discussions with those several states with an expectation for some first half win.

So, I guess first maybe could you share anymore on the number and size of these opportunities that you have pretty good line of sight on at this point? And then I guess importantly given your expectation for some first half wins, is there anything assumed in the guidance from these potential wins?.

Yes, great question. I would say on the Medicaid side as I suggested there are several markets where we are in fairly advanced conversations and where we have a provider partner.

We obviously need to work through the last stages of the negotiations that happen in finalizing those arrangements, but based on what I note today, I would think we will hopefully win a few of those. In terms of size, it really depends on the state and the market.

I think as you know historically, the nice thing about Medicaid is it generally starts with a large full of supplies, so if you think about our average contract being maybe in the $10 million to $15 million range, I think these would be on the higher end of that range on average and again some of them could potentially be large depending on when they phase in and again the size of the particular arrangement.

Lastly, on the impact in guidance, most of these will have some implementation, but relatively light and back-weighted and most would start on January 1 of ‘19.

So I think you would see the revenue impact in our growth in ‘19, but obviously a little implementation our revenue across this year, which normally we have a plug for and would sort of fill in that line.

So I don’t think if we win a couple of these, I don’t think you would see any shift in our ‘18 guidance, but obviously it would be very good for setting up 2019..

Got it. That makes sense. And then I guess just on the renewals I know I think you said you were trying to target or expected to renew over 90% of your large customers from last year into 2018.

Just curious how that ended up playing out for you and then anything you can share on the size of the renewal cohort as we think about 2019 would be helpful?.

Yes, I would say overall, we felt pretty good about our renewal performance. Again, I mean, you look across the year and with a network of about 30 and now with our recent additions, 35 partners. As I mentioned, I thought we executed very well operationally both in terms of financial performance for our providers, but also clinical performance.

I think we hit our target – when you talked about the unit renewal rate in the 90% range, we did hit that. We did have softness in the one segment that I mentioned, which was the provider health plan segment, where we saw some reduction in revenue there. But I would say overall we were quite pleased with where things came out on renewals.

In terms of this year, if you just think about having a rolling cycle of contracts that are on average 4 to 5 years in length, we will have a few contracts this year that come up for renewal. There is nothing major that we are concerned about in the first half of the year.

Again, we entered the year in a very good position and we are going to do everything we can to serve all of our partners at a high standard and hopefully we will see similar performance to what we saw this past year at least on the renewal side..

Great. Thanks for that..

Thanks..

The next question comes from Anne Samuel with JPMorgan. Please go ahead..

Great, thanks for taking my question.

You touched on some of the moving pieces in the macro environment, what timeframe do you expect to perhaps start to see some change in terms of willingness of healthcare provider to start spending again and what if any improvement in the legislative environment is included within your guidance ranges here?.

Yes. I mean, again, I think we have to keep in mind that we came off a very strong growth year. So, we have continued to see providers increasing their participation in value based care arrangements, we are well within our range of new additions and we are starting the year with four new partners, which was very good in the first quarter.

I would say in terms of our guidance, we are assuming the continuation of the environment as we see it today. We generally want to give guidance that we feel confidence and we feel we can head and I think that’s what we have tried to do.

I would say on the legislative side, what would be helpful to us is the government particularly in CMS or if you think about state governments and Medicaid just stepping forward with clear policy pronouncements, one about our commitment to value, which we believe released in the conversations that we have had, that we will hear from CMS and another organizations and then also beginning to put some of their own mark from a program perspective.

So if you take a program like NextGen or you take Medicare advantage, there is an opportunity for the new administration to come out with a renewal of those programs and evolution of those programs with maybe a new brand on them, but clear encouragement to providers to be moving towards value and again innovations to these programs that make them more attractive for providers to participate.

The programs get tied to advanced payment models, which impact MACRA and MIPS that would be a pretty major thing in terms of a catalyst for the market. So I think all of those things would be helpful to the macro environment. The good news is I think in the current environment, we feel very good about our ability to continue to grow.

There is increasing financial pressure on providers and as I mentioned, the breadth and depth of our pipeline looks very good, right now. But again in terms of a real catalyst, I think we would want to see some new program introductions and frankly just some clear pronouncements from some of the key policymakers in both Medicare and Medicaid..

Great. Thanks. That’s very helpful. And then just switching the margins, you crossed the breakeven mark last quarter, can you walk us through the drivers to double digit EBITDA margins over the next couple of years and how to think about the cadence of expansion and then within that how should we think about the split between growth and SG&A? Thanks..

This is Nicky. I mean I think the path to double digit is around these two elements to it, you saw this year, I think in the guidance for next year with continued gross margin expansion just to scale inherent in the business.

And so we are driving gross margins and then in this coming year, this past year and this coming year continued to revenue growth in excess of SG&A and so those two elements alone is kind of a balance of those two elements to drive double digit growth.

And in terms of – as I said I mean in terms of SG&A growth relative to revenue growth in ‘17 over ‘16 was very strong performance in that regard and continued to the same vein in ‘18 and beyond and we continue to set those things – two elements at well in ‘18 and we will continue to do so going forward..

Great. Thanks very much, guys..

Thanks..

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

Hi, good evening. Thanks for taking for my questions.

I guess maybe the first one is just around the lives picture, just so maybe people have regional expectations for 2018, is there any color you can give us on how many lives you think you will add kind of what the cadence might look like 2017 which is pretty frontloaded, anything there will be great?.

Yes. Jamie, it’s Nicky. In my commentary, I said that we expect lives and revenue to be in the same vein. So top line revenue growth implying sort of flat PMPM and I think so lives will grow in line with revenue growth.

In terms of art of the year, yes, I mean what we said was pretty similar last year, more front end weighted, some modest sequential revenue improvement across Q1 to Q3, slightly big or less than Q4 as certain specific programs get launched, but similar in veins of last year..

Okay, that’s great.

And then on a separate topic, I think when you guys bought Valence, it was very adept with Medicaid, but not so much with Medicare and I think you have been making a lot of investments and being able to support Medicare advantage plans without platform, can you talk about where you are there, is that an opportunity in 2018 to bring some of your MA plans on to that platform or is that more of the 2019 event?.

Yes, good question. I think you are correct, but in general when we purchased Valence they had a very strong platform in Medicaid and also have some commercial accounts.

We have been able to scale the Medicaid platform tremendously and brought on some very large our relationships as you know and the good news is the infrastructure has scaled well, is performing well and we feel we can continue to grow off that Medicaid base.

On the Medicaid front, we do feel that there is a significant opportunity there and that is something we are investing in across this year, it’s not a three months development cycle but more on the order of the 9 months to 12 months cycle and so we wouldn’t see the impact from that investment really until 2019 in our ability to support Medicare advantage.

If you think about NextGen, again there we are not providing the TPA service, so it still allows us to participate in advanced payment model programs and traditional UPMC has provided support on the Medicare advantage side, but across this year and going into 2019 that investment should pay-off and we should be able to service that business directly through the Valence platform..

Okay. Thanks..

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

Hey, guys. This is Rob on for Ryan. Congratulations on the quarter.

Could you talk a little bit about your thoughts on Medicaid work requirements and then maybe how it might impact your clients?.

Sure, I think as many of you are aware the new administration has been pretty focused on at least in certain states that makes the request having work requirements to continue to qualify for Medicaid.

And again that doesn’t apply to the entire population, but it applies to the segment of the population that could actually work and would therefore be employable. It’s hard to calculate the exact impact of work acquirements and we have done a lot of work on it.

We would guess that in states where it’s deployed it might have 5% to 10% impact on enrollments, very – a little of that would really happen this year. So most of it would really apply to 2019, because there will be some time before those programs are implemented.

I think some of those reductions would be counter balance but other things going on in those states that might offer increasing revenues for our provider partners particularly in Kentucky and Indiana. So I think the overall impact is fairly muted for us surely in ‘18 and even going into ‘19.

But if you were to just answer your question purely based on very specific analysis we have done on the populations associated with those providers it would be about 5% to 10% impact in loss..

Okay, great. Thank you very much. And then switching gears a little bit, when you announced the capital raise you guys mentioned M&A as a kind of a priority for capital, we haven’t really heard too much there yet, so I was just curious if you guys have anything on the horizon and then maybe what your priorities are there? Thanks..

Yes. I think we have been pretty active historically as you know in M&A. I would say again largely tuck-in acquisitions that Valence was a more significant merger for us.

If you think about our priorities, which I think we talked about is one can we add a new capability that significantly allows us to cross sell a larger network, can we in-source something which may allow for margin improvements, is there something that really enhances our competitive position or platform that might help with an existing relationship with a partner etcetera.

So I would say historically, if you think about Valence, Aldera, Accordion, these have been very high return investments well over 20%, 25% IRRs in terms of creating value.

And so as we think about this year, we are trying to look for similar either small tuck-ins which reflect the current priorities I just talked about or occasionally you will see something more meaningful again that can advance our position in the marketplace.

I think we did that capital raise because we saw a lot of live opportunities, I think as you know deal cadence, you can never predict and we want to be very disciplined in terms of the deals that we do in the financial returns.

So, if we don’t see the financial return in the negotiation, then we are going to step away and again be quite disciplined in terms of what we do and what we don’t do. I would say right now, we have got a very good pipeline. We are active.

We are in a number of conversations, several that we feel good about in terms of value that they could add as part of the Evolent portfolio and it’s a matter of seeing if we can get through the negotiation process in the right terms and something that we are going to feel good about that meets our return hurdles, which are high, because we have a very strong organic track record as well.

So active a lot going on, hard to say if we will have an announcement in the next couple of months, we very well could, but a lot of it’s going to depend on the deal terms and the attractiveness of the potential target that we are looking at..

Alright. Great. Thank you very much..

Thanks..

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

Thanks so much.

Maybe a couple of quick questions and then a broader one, maybe on the revenue side, I just want to make sure understand, Nicky, the adjusted service revenue, are you still going to be breaking out transformation in P&L within that or does that put into one as you will?.

Okay, great. Thanks..

And then I don’t know, Nicky, if you can talk to just directionally when you think about that 2018 versus 2017 in terms of just sort of how much of the growth is being driven by expansion from existing customers versus net new customers, I know you don’t break that out.

But would you generally say is there a market difference where ‘18 is more new customer-driven versus expansions versus last year, any color that you can give us on that, just so we think about that?.

Yes. Sandy, I would say, ‘18 is shaping up sort of in the similar vein to the past 2 years in the range of 65%, 70% from new versus existing. So, it feels similar to prior years..

Okay, great. And then from a high level and I am not sure Nicky or Frank who takes this one. When I think about the guidance this year, look at what you guys have done prior. It looks like to me as I just make a very simple observation.

It looks like the business is shaking out to be sort of a when I am talking service revenue here a mid-teens grower and then if you have really big new wins or like do you do something like the Valence transaction, obviously, you can do so and numbers can get bigger, but with smaller expansions, smaller new wins in any normalized churn, we should sort to be thinking about this mid-teens baseline growth and then longer term if you can get big new wins or something substantial that changes in growth profile, is that do you think a reasonable way to be thinking about Evolent today?.

Yes. I mean, I guess what I would say, Sandy, if you step back and think about the market size that we occupy what we believe is a strong leadership position. I mean, this is a market growing over the next several years to $40 billion plus in terms of the services market supporting provider organizations and they are moving to value.

So it continues to be a very large market. We have just come off a period of growth of north of 30% in revenue growth. I would agree with you that based on what we see today and all we can really see us forward with clear visibility across the next 12 months, mid-teens, mid to high-teens feels like the right range for the business this year.

I think you are correct that we are a large size today. I mean, we will be in total on organization in the $500 million – high $500 million in terms of revenue. So, definitionally you are going to need some large wins in the mix, if you think about getting into the mid 20s in terms of growth just on that large base.

So, those large wins are out there and some of the Medicaid opportunities that we look out, we are planning for the future have those characteristics. There are other paths forward like organizations and med wise, it’s out there and we hope to have some of those in our portfolio.

We also think that with the government and more direction in terms of programs and really trying to push as providers have more financial pressure that you will see more tailwinds in the market versus what we saw last year.

So I think it’s a fair characterization to say surely across the next 12 months of mid to high teens is what we feel comfortable about. You can argue that unless you see some big catalyst of that probably carried at least into the beginning of ‘19.

But I do believe there are a number of things that can happen in the market large wins, some policy directives from CMS and states and Medicaid some opportunities with existing provider owned plans that really need to scale that we bring or we could add in some larger wins and see a growth rate beyond that range.

But at least for the foreseeable 12 months, we have obviously are comfortable with a mid to high teens growth rate..

Great, that’s really helpful. I appreciate the comments Frank..

Thanks..

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

Hi, thanks for the question.

Frank talk about some of the clinical capabilities and the success you are having there, something you could kind of characterize the penetration rate of those capabilities within your client base and is there an upsell opportunity to the existing clients either getting them to go deeper in some of their contract arrangements or are there capabilities more about marketing to new clients and giving some confidence to converting your revenue?.

Yes, great question. I would say its very partner dependent. We have a few partners are just getting their toe in the water. They start relatively conservatively.

There we tend to start with a few programs that we believe are very high impact maybe even provider groups within their network that are very large volumes and the idea is you with sort of 80-20 approach you go out to the most impact on the patients in a very focused way, you demonstrate confidence.

And then to your point you have tremendous up-sell opportunities both in rolling out additional clinical programs and getting new lives and new populations on to the platform. And so I do think the clinical capabilities were developing, I have out significant up-sell opportunities.

And I think we saw some of that with several partners across last year.

In other situations you might have a visionary CEO who really sees us as a linchpin to evolving our clinical organization and in those cases we might start out very involved in care management, really covering the broader network and most of the growth there is going to come through new populations and increases in lives rather than deeper penetration of service.

But as a cross-sell opportunity for us I think it’s significant and again something as we continue to demonstrate results as people see the power of the platform don’t want to apply to all of their value based arrangements and frankly more broadly to their clinical organization..

Okay, that’s helpful.

And then one more on the you called out some softness with certain provider sponsored health plans and they hadn’t adopted I think a clear set of requirements that you thought would lead to success, but can you maybe give us the flavor of what some of those requirements are and then to the 10% of revenue that would fall within that bucket, how many have converted or how much is converted to a more stringent set of requirements versus what’s on sort of a looser terms?.

Yes. I would say from our experience not surprisingly you can do a number of things clinically to have an impact as we discussed. But you also have to get the financing elements of the health plan right to ultimately drive financial performance. So things like transfer pricing for hospital days and how those get charge back to the health plan.

What parts of the network are being included, are you including higher price settings that in a normal health plan setting you might remove from the network, because there are higher costs and other choices you might have in the market.

How you think about the mix of product and benefit design relative to the patients you are going to attract in the network, pricing from an actual world perspective, all of those things your aggressiveness in medical management so if you are really willing to be aggressive with a provider that may be a real outlier from a cost and quality perspective.

So I think our learning of course is that all of those elements matter.

I think we have been working very aggressively with our provider partners to address each one of those issues and to push for the right product and benefit design, the right transfer pricing and network inclusion relative to the market and we feel pretty good about where we are headed.

Some of these are political third rail issues, so they don’t happen overnight, but I feel like we have made a lot of progress on these topics and I think what we have made very clear is when we enter into new arrangements, we are going to be very deliberate about saying that these 5, 6, 7 elements need to be present for us to really be able to sign up and work with these organizations, because ultimately we want to have successful plans financially, we want those to be growing and scaling and we want to apply the learning to help our partners get there.

So, I think we are in a very different place than we were 18 months ago. We have made a lot of progress. Of course, we have continued work to do there, but I feel good about where we are..

Okay, thanks very much..

Thanks..

The next question comes from Mohan Naidu with Oppenheimer. Please go ahead..

Thanks for taking my questions. So, Frank, it looks like the macro environment could really become much more attractive this year given some stability in the government and what they talked about in the value-based models.

Do you expect to see more providers take aggressive approach this year than the last couple of years and your pipeline could be much better?.

I think we still need to see. What I would say is we have been in a number of very direct discussions with providers and with key policymakers at CMS in state governments and I feel good about what we are hearing.

And there is a clear understanding that if we are really going to address the growth in spending and we really want providers to ultimately change behavior and when we want better quality care and we want less variation in costs, particularly unnecessary variation that if anything we need to ratchet up the performance basis of these programs.

One of the big things out there that really has moved the market is the introduction of a set of physician incentive payments.

And if you think about physicians being at the core of delivering care or driving referrals, the ability for physicians to qualify is critical for other players that are trying to advance in a local market and therefore if the government sees that to drive performance, they ultimately need to ratchet up requirements for qualification for advanced payment models, that would be a huge catalyst in the market.

So, I would say very encouraged by what we have heard. I do see with a year under their belt and more experience and frankly a lot of work that’s been done across the last year, I would hope that we will hear more directly in terms of some of the things they want to do relative to its advanced payment models, programs like next-gen.

I think those types of statements would be a major catalyst, but we still need to see those things happen in the first part of this year. So, encouraged, still waiting and seeing and hoping that we will see some very positive developments coming out of CMS and some of the organizations that influence the providers that we work with..

That sounds great.

Maybe one quick one on competitive landscape has it changed – and I think in the recent quarters in 2017, any new competitor is coming in beyond the niche product vendors in this market?.

No, I would say, we haven’t seen a significant change at all in the competitive environment.

We do not see common competition occasionally if you are working with a provider organization, they may have another alternative like a local plan and we are a more focused point solutions vendor that they are working with, but we have not seen any significant change in the competitive landscape..

Alright. Thanks a lot, Frank..

Thanks..

The next question comes from Stephanie Davis with Citi. Please go ahead..

Hey, thank you, Nicky. Thank you for taking my questions.

Given the increasing number but the smaller size of recent wins and then taking into account the growing momentum for value-based care, is there any opportunity to scale up your annual client targets beyond the historical 5 to 7 wins per year?.

Yes, I think so. I mean, that’s one of the reasons why we have increased our target to 7 to 9 this year, I think starting out with 4 wins in the first quarter, if we look at our historical pacing, we feel very good about the 7 to 9 possibility of going outside that range if some things happened in the early part of this year.

So yes, I think that’s possible right now. We feel comfortable with the 7 to 9 range, but could see that increasing based on some of the things we are working on today moving across the finish line..

Okay, good. Good to hear.

And a bit unrelated follow-up, how should we think about the addition of the True Health businesses impacts your IPO guidance, for example, the 20% operating margin target, is that still achievable?.

Yes. I mean, I think it’s a breakeven business this year. I think it’s inherently – there could be some drag. I mean, it’s inherently a lower margin business if you look at the health plan business overall. As we continue to grow, there will be a smaller part of the business overall.

So, I mean, it could be a couple of points dragged on the longer term target, Stephanie, just given the inherent nature of it, but I think we continue to drive margins in the services business as best we can and we also continue moving that business into profitability as well, but just given that segment, it is a slightly lower margin business, but in the aggregate, it could be a few points of drag just given the math..

And I don’t think it impacts our original target in anyway, we still feel comfortable with that range, but obviously, it will take little bit of an investment period in that business to continue to grow and scale it.

I think New Mexico is a very attractive market for us long-term and overall if you think about the combination of what we are doing from the service perspective and the health plan side, it would be a very profitable market, but I don’t think it would impact our long-term target as you asked..

Okay, understood. Thank you for clarifying guys. Appreciate it..

Thanks..

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

Hi, congrats on a good quarter.

So for the 4 new customers that you are adding, how many lives in total, are they all starting 1/1/18?.

Yes. So, those would start 1/1, because they fit with the NextGen performance year, which begins on January 1. I think across the 4 at least initially it represents about 60,000 lives out of the gates. I think the good news is if you look at the aggregate revenue across these systems, it’s probably approaching $12 billion, $13 billion in revenue.

So, we see NextGen as a great starting point into some other populations and other things we want to do with each of those systems, but out of the gate, it’s probably about 60,000 NextGen lives and then hopefully moving to some other populations and potentially growth in NextGen as we head into ‘19..

Great.

And then just a little bit unclear Nicky, with the 70:30 split between new and existing clients, is that 70% lives growth from new clients and 30% from the base?.

Yes..

And then should we expect to see sequential growth in lives on platform as we progressed through the year in 2018?.

Yes, I think what I would say David is last year if you look at last year, it all came in – largely came in Q1 with modest across the year. I could see this year being a little bit more spread out between Q1 and Q2, but beyond Q2, it will be relatively flat across the year.

The uptick in revenue in Q4 is more to do with services than life growth, so little bit more spread out Q1, Q2 than last year, but fundamentally most of the life growth will be in place by midyear..

Okay.

And then from an SG&A perspective or an investing like into a business perspective, client-facing individuals and considering the Valence integration, how are you thinking about the cost structure of the business, are you taking cost out of the business and does that include FTEs generally speaking or are you putting FTEs into the business to support all of this top line growth that we are seeing? Thanks..

Well obviously David to support the level of growth we are adding personnel to the business.

Each new client that comes with a certain level of staffing and so with these big new contracts, we are adding staffing on the front line of the business continuously and that’s reflected in the headcount Q4, Q1 as we are supporting and driving those contracts.

I would say, if you look at 2017 with the Valence and Aldera integration, we made a significant effort to drive synergies through those acquisitions and that did result in some FTE savings just on the – within the business. SG&A growth Q4 ‘17 versus Q4 ‘16 was high single-digits compared to almost 30% top line growth.

So you sort of saw that playing out in Q4, which is the most comparable quarter of the year. So there is a mix of both going on. We are personnel on the top line to support revenue, but obviously driving efficiencies throughout the organization wherever we can, particularly last….

And I will just add to that, if you think about it, we added 700,000 lives across the year, we grew revenues at roughly 34% on the year, that’s pretty significant growth. But in every aspect of the business, we are looking for efficiencies for ways to scale, for ways to create greater repeatability in what we do.

I mean one nice thing if you think about a program like NextGen. Once we have developed the program and infrastructure to support one partner that now applies broadly across almost 9 partners or 10 partners.

So that the good news is I think we are getting a lot more repeatability, a lot more leverage out of SG&A and we are seeing scale in the business. But in certain places you do need to add personnel just based on a new contract or feet on the street in a new market and those kinds of things..

Sure. And then just one more quick one, in terms of like Valence, it’s my understanding that you can migrate some lives like legacy UPMC platform over to Valence platform, is that the case and if so how far along are you like 50% converted, 20% converted, what’s the incremental opportunity there? Thanks..

Yes. I would say that’s not been a big focus area for us, it will be conversions of some complexity to them. We don’t have a huge number of lives on the UPMC platform today and they’re being reasonably well served.

There obviously is an opportunity in ‘19 particularly if there are supporting organizations in MA and the platforms ready for MA to move those lives over. And again we would probably pickup some additional margin there and again something we want to do, but I wouldn’t say it’s a significant impact..

Okay, congrats on a good quarter. Thank you..

Thank you..

Thanks David..

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

Thanks.

Maybe just one question for me, Frank on your existing client base and in along the lines of what you touched on in the last part of your prepared remarks, how much visibility your real-time understanding, do you have into how your clients are performing in all of the value based programs, you are helping to administer them on a day-to-day basis.

And then I guess can you can give us a sense for what proportion of those are running on or ahead of the budgets or plans you all initially contemplated when you started down in those paths?.

Sure. It really depends on the program, but I would say we have made a really significant investment in our analytics and actuarial team in applying, learning to all of our experience program by program.

So we get very good at incorporating data as quickly as we can and then making accurate projections about performance against these value based arrangements. There are some programs NextGen being an example, where you are at the mercy of CMS as to when you are able to access data, when you have a clear sense of performance.

There are some changes that happen in rules across the year, which were out of your control. So that would be an example of a program where we had a lot of experience. We have done a lot of work. We do our best of forecast, but you do suffer from time lag on information and potential shifts in some of the ways things are being calculated.

In other areas, where we have more control, as an example we are processing the claims, we can generate the reporting right away and we can have timely information and complete information.

In those cases we are going to have a much better sense of the real-time forecast and again do a lot of work to have the right estimates and have a sense of where the plan is. And then obviously you want to take there is always opportunities for action somewhere in the value based performance.

And so it’s really trying to align your programs immediately to have an impact. I would say if you look across our network of North of 30 partners, I would say you will probably see above curve, we have some that are outperforming the original targets and are doing quite well financially.

We have some that are generally in the zone, some that are still question marks as an example, because you are still waiting for data from CMS in certain areas. And then I referenced a couple that were behind plan particularly in our health plan segment. So, I really view it as a bell curve.

I would say overall we feel pretty good about where we are in seeing more consistent operational performance, more consistent clinical impact of our programs and providers stepping forward and expanding into other areas, which obviously helps get to scale, but that’s probably how I see the cohort today..

Alright. Very helpful. Thank you..

Thanks..

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

Great. Appreciate you flipping me in and congratulations.

Just really quick question, Frank, encouraging commentary on the pipeline, what are your thoughts in terms of how quickly we need to hear something maybe out of CMS or the administration in terms of value before it potentially impacts the pipeline or triggers decisions?.

Well, I would say, if you look at where we sit today and our guidance for the year, right now, we feel very good about mid to high-teens growth for this coming year.

If you were to say that the environment stay largely the same and there really weren’t any catalysts, we didn’t get any of the larger wins, then my hope would be we would be in this range going into ‘19.

So I do think we performed well relative to some of the headwinds that we had in the market is a very unusual year from a legislative perspective just given all what happened across the year and the immense uncertainty in the market.

My hope is that, that improves and that obviously would allow us to hopefully bring a few more organizations across the finish line to have some of the larger Medicaid things we are working on come through and then we would potentially see higher a growth rate going into ‘19 but I don’t feel like we need big changes in the environment to hit our current range of guidance.

We obviously have very high visibility into this year. In setting up ‘19 as I said feel roughly comfortable in the current range although we don’t have perfect visibility there. And then if we have good news we could be on the high end of that range or outside of it..

Okay, thank you..

The next question comes from Donald Hooker with KeyBanc Capital Markets. Please go ahead..

Great. Good afternoon.

Did you guys mentioned free cash obviously you guys it’s great you are adjusted EBITDA positive and that’s trending well, how do we think about free cash reaching through free cash flow breakeven, have you talked about CapEx or working capital?.

Yes, we didn’t talk about specifically this evening I would say in 2017. We had EBITDA is a negative EBITDA for the year end negative $2 million and CapEx is about $30 million and working capital, the use of funds in the $5 million to $7 million range.

Going into next year, those same statistics, I think working capital will be similar, I would see CapEx will be in the mid 30s next year with some increased investment in the integration of the platform that Frank has talked about and so mid-range of EBITDA would be sort of call it $20 million on mid-range of the EBITDA, so EBITDA minus CapEx would be a use of funds of about $15 million next year before working capital bringing you up to about negative $20 million for ‘18..

Okay, that’s helpful.

And then just one last question if you don’t mind if I can indulge you, the NextGen ACO, the members there as that grows do I think about that having much higher profit margin, I assume you can industrialize your work there, but I assume the ACOs are very similar, am I thinking about that right?.

I think that’s a fair statement. We obviously want to deliver very high levels of service and we want to make the right investments in clinical programs and in performance of those programs because of the downside exposure.

I would say now having work with several organizations few that have been some of the best performers in the country, I do think we are getting an experienced phase and repeatability to what we are doing that surely creates more efficiency as you think about potentially getting the 10, 15, 20 partners surely would have more leverage in terms of the applicability of all of that investment across a larger base.

So, I do think that’s a fair way to think about it..

Thank you..

Thanks..

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 and look forward to seeing a number of you out in the market and a number of conferences coming up and thanks again for participating in the call tonight. We appreciate it..

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