Welcome to Evolent Health Earnings Conference Call for the quarter ended March 31, 2019. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Frank Williams, Chief Executive Officer of Evolent Health.

This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations. Here is some important introductory information. This call contains forward-looking statements under the U.S. federal securities laws.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.

A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to its first quarter news release.

As a reminder, reconciliations of non-GAAP measures discussed during today's call for 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..

Thank you, and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health, and I'm joined by Nicky McGrane, our Chief Financial Officer. I'll open the call this evening with a summary of our recent financial results as well as an update on the market, our current pipeline and overall performance across the Evolent network.

I'll then hand it to Nicky to take us through a more detailed financial review of the first quarter. I'll close with a summary of our progress on Evolent's key strategic priorities for the year, and as always, we'll be happy to take questions at the end of the call.

In terms of our results, total adjusted revenue for the quarter ended March 31, 2019, increased 37.3% to $198.4 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended March 31, 2019, was negative $14.8 million compared to $7.9 million for the quarter ended March 31, 2018.

As of March 31, 2019, we had approximately $3.4 million total lives on the platform, and with 1 partner addition this quarter, we welcomed 3 new partners to the Evolent national network already this year.

Overall, we're pleased with our top line results for the first quarter and the steady progress we're making on our strategic and operational objectives for 2019. We enter the spring with a number of opportunities emerging in our new business pipeline, including several late-stage opportunities with existing and prospective partners.

We're also very encouraged by the progress we've made in recent months to continue building momentum in our pipeline and driving operational performance across our organization and with our partners.

We believe with - this will help to set us up for a strong back half of 2019 and that we are well positioned to support both providers and payers seeking an operational partner that can deliver significant clinical and administrative value.

In terms of the macro environment, we're pleased to see increased confidence and action from CMS in moving the market towards value-based care reimbursement. Based on several recent announcements, CMS is using several tools and leverage to encourage a pretty significant transformation.

First, on the Medicare Advantage front, if you look at the strong policy support, program improvements and annual rate increases, it's clear that MA continues to be a major area of emphasis for CMS.

Total MA enrollment is projected to double over the next decade and MA continues to benefit from bipartisan support as well as favorable reimbursement and demographic dynamics.

Second, the revamp Medicare Shared Savings Program Pathways to Success offers an intriguing path forward for providers that are interested in risk-based reimbursement for their Medicare patient population. We're working closely with our teams and provider partners to evaluate next steps as we look ahead for the January 1 start date for the program.

Third, CMS recently announced its new primary care's initiative, which provides 2 new pathways for primary care practices and other organization seeking to assume financial risk for their patients' health outcomes and utilization.

One of these pathways is the direct contracting model, which provides 2 options for providers taking risk up to 100% for a population of patients. Designed for larger and more sophisticated organizations that care for at least 5,000 Medicare beneficiaries, the program will provide capitated risk-adjusted monthly payments to providers.

We anticipate CMS will share details about direct contracting eligibility, benchmarking, risk adjustment parameters and other critical details sometime this summer as part of its recent request for applications.

We're actively weighing in with CMS in areas where the agency has sought stakeholder input, such as the regional option within direct contracting. Overall, we're pleased to see the administration provide more options for primary care practices to take on risk and we'll evaluate next step as we learn more about this new CMMI model.

Looking more broadly from a policy perspective, on one end of the political spectrum, we're seeing significant emphasis on Medicare Advantage and payment reform. On the other end, there's been a lot of discussion around Medicare for All with the government serving as the primary payer.

In either direction, policymakers will need to address affordability through the use of innovative payment models, predictive analytics, proactive clinical programs and effective ways to engage providers in managing health outcomes.

The fundamental financial pressure on health care payers translate to Evolent's market and pipeline opportunities in a number of important ways. First, we believe we're well positioned in the market, given our proven track record and ability to support both providers and payers across multiple lines of business.

Second, on the Medicare front, we're encouraged to see continued interest from IPAs and other provider groups, exploring their next step in the value-based care journey. We have a targeted set of solutions to engage ACOs with clinical support infrastructure to help them succeed in value-based reimbursement arrangements.

Increasingly, we're focused on align partnership models and careful market selection. The goal is to find the right partners and situations, where we can add a significant number of lives and leverage our clinical capabilities with a high-performance physician network to deliver improved clinical and financial results.

One critical source of value we provide to our Medicare partners in this process is an in-depth economic and clinical analysis to help determine the best path forward with these new types of value-based payment programs.

We're able to build solid 3- to 5-year business cases for our partners based on our health plan experience, actuarial expertise as well as market membership and other key data.

Depending on the situation and partner, these options may include launching an MA plan, participating in delegated risk arrangements, entering the MSSP Pathways to Success Program or exploring the new direct contracting model.

The typical process with these CMS programs involves application submission and approval followed by preparation for upcoming launch dates in 2020 and beyond. There are number of prospective partners in our current pipeline, and most importantly, we're excited about the larger signal these recent policy directives are sending to the market at large.

Our second opportunity is working with health plans that already have lives, but are looking for higher levels of clinical and financial performance. The combination of our proven value-based care approach and health plan services platform offers payers the flexibility they need to generate cost savings and deliver high-quality services at scale.

In addition, we offer in-depth clinical programs, technology and other support for providers working under various delegated risk arrangements with payers. A newer approach for us in this segment is targeting specialty care specifically, which addresses the pressing need for both payers and providers.

Over 15 years, New Century Health has served both providers and payers in managing cardiovascular and oncology care to specialties that represent over 25% of the total spent in Medicare.

Given the broader economic pressure on payers and providers, NCH's value proposition is quite attractive given the complexity involved in these areas, including a dynamic drug development pipeline and the difficulty for the average clinician to stay on the leading edge given the pace of clinical innovation.

Our third opportunity in Medicare is within the Medicare Advantage segment. We recently announced a partnership in the MA marketplace with GlobalHealth, an Oklahoma-based health maintenance organization.

The goal is to partner with provider organizations to launch and scale MA health plans under the True Health brand with Evolent as the minority owner. Market selection is key here. True Health will target high-performing provider organizations in very specific markets with scale and favorable demographic and reimbursement dynamics.

True Health offers the necessary infrastructure, capital base and partnership model to attract provider groups that want to take on risks for MA population without owning the plan outright. Overall, exciting progress in the Medicare market that continues to offer a number of intriguing partnership opportunities for Evolent.

At the state level, the same themes of margin pressure and the need for innovation has led to a number of opportunities for us in the Medicaid segment as well and are reflected in our first 2 partner announcements this year.

I'm pleased to report that we're off to a strong start with our new partners in Empower Healthcare Solutions in Arkansas and River City Medical Group in California. We began supporting Empower's Medicaid members last month and look forward to serving River City's patient population later this year.

We're also seeing opportunities in our pipeline to provide clinical and administrative support services to payers.

Increasingly, we're seeing a wide range of health plan, including large and regional carriers continue to show interest in the combination of our proven value-based care approach, integrated clinical capabilities and differentiated health plan solutions.

In part, this is a result of some of our recent work and activity with New Century Health, which has helped payers meaningfully engage providers and improved outcomes.

To that end, I'm excited to announce a new partnership with Premera Blue Cross, a not-for-profit independent licensee of the Blue Cross Blue Shield Association that serves 2 million customers.

Evolent will provide Premera Blue Cross with a wide range of health plan services, including claims adjudication, utilization management and care and disease management services to approximately 70,000 Premera Blue Cross members. This includes approximately 45,000 Washington State exchange and 25,000 Alaska federal exchange lives.

Evolent will also provide Premera with the Identifi value-based technology platform to support health care operations, utilization management, reporting, analytics and other critical workflows.

For Evolent, this partnership represents an exciting growth opportunity in the Pacific Northwest and another example of how the integration of our clinical and health plan services platform has created differentiated solution.

Looking ahead, we're encouraged to see continued interest from both providers and payers looking to pursue or enhance value-based care initiatives and performance. In particular, we continue to make progress on several late-stage opportunities in our pipeline, including a number of potential cross-sell and new partnership opportunities.

All in all, the combination of the policy environment and our focus on performance-based relationships has created a broad pipeline with a number of late-stage opportunities that we hope to close across the coming months. Lastly, one of our other important focus areas is helping to stabilize Passport Health Plan.

As many of you are aware, Passport, a provider on Medicaid plan based in Louisville, has experienced significant financial pressure based on the decrease in retroactive bridge Medicaid reimbursement rates announced by the Commonwealth of Kentucky last September.

We feel that the recent rate increase from the Commonwealth of Kentucky effective as at April 1, better reflects trend and represents the step in the right direction.

At the same time, we continue to partner with Passport to drive performance improvement in all aspects of operations in an effort to insulate the health plan as much as possible from potential rate volatility in the future.

These improvements are needed in addition to the recent rate increase and will take some time to implement given provider notice period and approvals required. Currently, we're pursuing several major initiatives in close collaboration with the Passport leadership team.

First, we're working with Passport to evaluate and take steps to streamline its administrative cost to gain efficiencies. Second, we've taken a close look at clinical program areas of opportunity where we can leverage analytics, clinical pathways and multiple engagement modalities to support cost and quality improvements.

As a result, we're launching several new clinical initiatives to proactively manage patients with chronic conditions, streamline care transitions and address unnecessary variation and outcomes.

Third, we're also looking at potential improvements in specialty care, which represents a significant portion of medical spend in this particular Medicaid population.

Fourth, we're working to maximize performance across the provider network based on outcomes analytics, which, we believe, has the potential to drive improvements in both cost and quality of care.

Based on these initiatives and given the strength of its clinical model, we believe that Passport is making solid progress towards improving its financial performance, while continuing to provide market-leading care to its members.

Overall, we remain hopeful that the combination of the new reimbursement rates, administrative and clinical improvements and efforts to strengthen the balance sheet will provide a path for Passport to be successful long-term in the Kentucky Medicaid market.

Taking a step back and looking across our partner network, we continue to see strong clinical performance and examples of how our integrated platform is assisting our partners in managing multiple populations and complex reimbursement arrangements.

All in all, we came into this year with a clear set of priorities and we feel good about our initial progress, the growth in our pipeline and the overall market. The leadership team is highly engaged in driving strong execution operationally and financially with a focus on setting up a strong second half '19 and beyond.

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

Thanks, Frank, and good evening, everyone. Today, I will cover our financial results for the first quarter of 2019 and will finish with an overview of our 2019 outlook. The first quarter tracked according to our expectations and sets up well for hitting our full year goal.

Beginning with our consolidated first quarter results, adjusted revenue increased 37.3% year-over-year to $198.4 million, mostly to the impact of the New Century acquisition as well as growth within our True Health segment from the previously-announced reinsurance agreement with New Mexico Health Connections.

Adjusted EBITDA decreased to $22.7 million year-over-year to negative $14.8 million. Adjusted loss available for Class A and Class B common shareholders was negative $25.3 million or negative $0.31 per share for the quarter compared with adjusted earnings of $1.2 million or $0.02 per share in the same period of the prior year.

As of May 7, 2019, there are 82 million shares of our Class A common stock outstanding and 0.7 million shares of our Class B common stock outstanding.

Within consolidated adjusted EBITDA, adjusted cost of revenue and claims expense increased to $153.6 million or 77.4% of adjusted revenue for the first quarter compared to $87.1 million or 60.3% of adjusted revenue in the same quarter of the prior year.

Adjusted SG&A expenses increased to $59.5 million or 30% of adjusted revenue for the first quarter compared to $49.4 million or 34.2% of adjusted revenue in the same quarter of the prior year.

The increase in both adjusted cost of revenue and adjusted SG&A expenses year-over-year was due primarily to the cost assumed from the assets acquired as part of the New Century transaction as well as additional personnel costs and third-party support services across the organization.

Combined, our total adjusted cost of revenue and adjusted SG&A expenses as a percentage of total adjusted revenue increased to 107.5% in the first quarter of 2019 compared to 94.5% in the same quarter of the prior year. Now I'll take you through the first quarter results by segment.

In our services segment, first quarter adjusted services revenue increased 23.6% to $154.3 million, up from $124.8 million in the same period of the prior year and above our previously provided guidance range of $149 million to $153 million.

Sequentially, adjusted services revenue decreased $17.2 million versus the fourth quarter of 2018 in line with our guidance expectations and based on lower same-store and new client revenue.

Adjusted transformation revenue in the first quarter accounted to $3.4 million or 2.2% of our total adjusted services revenue for the quarter compared to $10.2 million or 8.4% of our total adjusted services revenue in the same quarter last year.

Adjusted platform and operations revenue accounted for $150.9 million or 97.8% of our total adjusted services revenue for the first quarter compared to $114.7 million or 91.6% of our total adjusted services revenue in the same quarter last year.

On a year-over-year basis, the increase in adjusted services revenue was primarily driven by the impacts of the acquisition of New Century. As of March 31, 2018, we had approximately $3.4 million lives in our services platform. Our average PMPM fee for the quarter was $14.34 compared to $13.76 in the same period of the prior year.

Adjusted EBITDA from our services segment for the quarter was negative $15.5 million versus $7 million in the prior year. This is consistent with our annual guidance for the first half of the year, which assumed overall profitability would be directly impacted by the sequential reduction in our revenues.

As a result, our performance in the quarter was on track relative to our expectations, and with the combined effect of revenue growth and anticipated expense reductions, we continue to expect to return to profitability in the second half of the year. Turning to our True Health segment.

We had premium revenue of $47.4 million in the quarter, up $23.8 million from the same quarter last year and largely due to the amount of the reinsurance agreement with New Mexico Health Connections entered into during the fourth quarter that under GAAP requires us to consolidate the revenue and expenses associated with the revised contract.

Our owned health plan, True Health New Mexico serves an average of approximately 17,500 large and small group members in New Mexico in the quarter, generating approximately $22 million of the total $47.4 million of premium revenue in the quarter. Adjusted EBITDA from True Health for the quarter was $0.7 million.

Our combined medical cost ratio was 79.8% in the first quarter and in line with our expectations. Turning to the balance sheet. We finished the quarter with $184.6 million in cash and cash equivalents and investments, a decrease of $53.7 million relative to the end of the fourth quarter of 2018.

Long-term debt at quarter end consisted of $223 million, net carrying value of our 2021 and 2025 convertible senior notes. Claims reserves at quarter end totaled $30 million, an increase of $2.4 million versus the fourth quarter and due to some minimal timing issues around the payment of claims that should sort out by the end of the second quarter.

For the first quarter, cash used by operations was $25.7 million, cash used in investing activities during the quarter was $25.5 million and largely attributable to $9.5 million of capitalized software development expenses and purchases of PP&E., $3.8 million of purchases of investments and $11.7 million of acquisitions and partners support activity.

Cash used by financing activities during the quarter was $109.7 million and predominantly due to decreases to restricted cash accounts held on behalf of our partners for claims processing purposes. Finally, let me say that's the 2019 guidance where we are reiterating our 2019 top line guidance range we provided on our prior quarter call.

Overall, we expect to be at the middle of our previously announced range on total revenues of $805 million to $880 million. With respect to adjusted EBITDA, we expect to be at the middle to low end of the range on EBITDA of breakeven to $50 million.

In terms of guidance for the second quarter of 2019, we are forecasting total revenue of $187 million to $195 million. The components of revenue are as follows. For the second quarter of 2019, we are forecasting services revenues of $149 million to $153 million.

For the second quarter, we are forecasting True Health segment revenues of $42 million to $46 million and we are forecasting intercompany eliminations of negative $4 million. We are forecasting adjusted EBITDA in the range of negative $8 million to negative $5 million for the quarter.

In summary, we're pleased that we met our financial targets for the first quarter and we look forward to updating you further as the year progresses. With that, I will turn it back over to Frank..

Thanks, Nicky. I want to close with a few updates on our organization as well as our progress against our key strategic focus areas for the year. First, in terms of our overall organization, we continue to emphasize building a high-performance organization and strengthening our position as a leading destination for talent.

The integral components of these efforts is our emphasis on employee development. As one of many examples, I'm excited to announce that our team recently delivered over 1,000 management development sessions over the last 12 months.

It's these types of investments that empower our employees to improve their skill sets and to work nimbly across functions and lines of business in collaboration with our partners. I'm also excited to announce the recent release of our first annual diversity and inclusion report.

This is an extremely important area of emphasis for us and signifies our commitment to accountability in cultivating an open and supportive workplace for all of our employees as well as driving true competitive advantage in leveraging the full potential of our talent base. I also have a few exciting leadership updates to announce.

Nicky McGrane has been promoted to Executive Vice President of Corporate Performance to enhance his operational impact on the business.

In his new role, Nicky will focus on driving key corporate performance initiatives, managing discrete operational areas and taking responsibility for post-merger integration as well as continuing to play an active role in investor relations.

He's been an invaluable member of our management team for the past several years and I'm looking forward to working with him in his new role as we work to drive integration, efficiency and improved performance across the business. I'm also pleased to announce that John Johnson will be succeeding Nicky as CFO.

John has worked closely with Nicky and me over the past few years as a member of our finance team and as Chief of Staff in the office of the CEO. Most recently, he's been the acting CFO of New Century Health post-merger and previously served as our SVP of Corporate Performance.

Across the board, John is a proven performer who's been instrumental in driving our growth strategy and performance as a public company. And I'm certain he will have a tremendous impact in his new role as CFO. These organizational changes are effective as of July 1, 2019. Switching gears to our key areas of focus for the remainder of the year.

We have five key priorities to set up the business for a consistent profitable growth. First, we want to ensure we operate within a lean and high-performing cost structure.

This is something we've been emphasizing since 2018, and we believe we've made substantial progress on this front in how we're rationalizing certain service areas, increasing scalability and efficiency and driving accountability and performance across the organization. Nicky will play an instrumental role in these efforts.

Second, we continue to work diligently with our Medicaid partners in Florida to explore paths for sustainable long-term plan growth and profitability.

This is a work in progress as we're looking at revenue improvement opportunities and viable options for enhancing membership growth as well as options to streamline operations and improve overall performance across five regions.

Third, as I referenced earlier, we have a growing pipeline and are working to bring several late-stage opportunities across the finish line over the next few months.

We believe the combination of three new partner wins to start the year, the depth of the late-stage pipeline and the overall market environment position us well as we look to the second half of 2019.

Fourth, as we discussed across the past several months, it's critically important for us to establish and nurture performance-based partnerships to drive alignment, results and longevity in our long-term partner relationships.

Our recent partnerships with SOMOS, Empower Healthcare Solutions and River City Medical Group are recent examples of these types of arrangements in which we're aligned from a strategic, financial and mission standpoint.

Overall, our pipeline is oriented towards aligned, committed partnerships in attractive market segment, which we feel will ultimately enhance performance, long-term margins and the longevity of our relationships.

Lastly, throughout this year, we brought tremendous resources to bear at Passport to ensure we're executing on high-impact initiatives that can drive improved operating and financial performance.

This effort supports our shared goal to help Passport maintain its strong reputation for clinical innovation, connectivity with the provider community and demonstrable improvement in health outcomes for Medicaid beneficiaries. Thank you, again, for participating in tonight's call.

With that, we'll end our formal remarks and we're happy to take questions..

[Operator Instructions]. And our first question will come from Ryan Daniels of William Blair..

Frank, one for you. You talked a little bit about on the clinical and administrative services side how you're seeing more growth there.

And I'm curious if that's due to the integration of that platform with your Identifi platform? Or what's really driving the interest more in the - that EPA type services across the potential client base?.

Yes, I think, you're dead on in terms of your assumption.

I mean what we tend to see in a lot of the traditional health plan services market is very little integration on the clinical side and when you have a lot of health plans today that are trying to be more competitive, they're trying to really impact the medical loss ratio, they really want to engage providers and yet they don't have the tools to do that, the fact that we've been able to integrate Identifi with the clinical platform that you can get real benefit from both claims and clinical information that over time you can integrate a lot of the administrative functions and the more creative benefit design, more flexibility in terms of payment models.

I think all of those elements have driven a lot of interest across the market.

And that's with both provider owned plan but also, as you can see with the recent announcement with Premera, they see specific benefits with the particular population that they want to manage more effectively, where they want to have greater clinical connectivity to the claims side.

And I think we'll see more and more of that as the market unfolds across this year and into next year..

Okay. That's very helpful. And then, I guess, a follow-up there. Obviously, they have 2 million members not all of those are in risk-based agreements.

But is that the type of partnership that you could see expanding or is there anything unique about those two markets, maybe those are the only two claims markets they are in initially, but just what's the longer-term opportunity there?.

Yes. I think traditionally we have viewed cross-sell as a real opportunity for us. And hence, the reason for an integrated platform and a wide range of service offerings.

I think simply by beginning to work with them, our teams are working together well and you start to demonstrate the benefit of an integrated platform, the benefit of the knowledge we bring around that particular population. We actually have a lot of knowledge from our work with True Health in New Mexico.

So a great example of how that relationship has helped to spawn this one. And then when you think about the other things that we do, there are obviously other discrete populations we could engage with a lot that we do with payers and other markets around delegated risk.

We also have the New Century offering, which could apply to both Medicare and Medicaid populations. So the idea is to deliver strong service, high impact, build a broader relationship and then look for strategic ways we can impact their business in a positive direction, and that's what we're trying to do.

It, obviously, takes a little bit of time to get pass the initial implementation. So right now we're focused on that, getting those lives launched. But then as we get into 2020, we'll mutually look for additional opportunities. And as you said, they do have 2 million members, so lots of ways to grow and expand within that relationship..

Our next question comes from Robert Jones of Goldman Sachs..

Congratulations to Nicky and John on their new roles. Yes. I guess just starting with the guidance revenue tracking seemingly pretty much as expected. EBITDA in the quarter was pretty much in the middle of the 1Q range you guys had provided.

And yet for the full year, Nicky as you pointed in your prepared remarks, thinking about EBITDA kind of in the lower half of the original guidance range, I know there were big uncertainties when you gave that guidance like not the least of which was Passport that seem to have a better ending than it could have.

So just curious, what changed the thinking on the full year EBITDA? And then you were good enough last quarter to kind of give us a way to think about the run rate in the back half, just wondering if that's still the same way we should think about EBITDA leaving 2019?.

Yes. Bob, thanks for that opening comment. I think when I look at EBITDA, I view this more as a clarification, Bob.

I mean if you take Q1 actual, the midpoint in Q2, and to come to your point that - and our outlook of $50 million plus run rate in the second half of the year, you do that math and you come out to sort of the mid to lower end of the range on EBITDA. So we're still very focused on that $50 million run rate.

So I think, as I say, when I stack it up and just look across the year, it just seems more realistic, tighter range on EBITDA than some pronouncement on overall profitability of run rate looking at the back half of the year..

Yes. Just add to that, nothing noticeably - noticeable or structural as we work to sort of go through some of the wind downs and to get some of the costs out of the business that we referred to. Sometimes you have timing issues related to that.

And so we have a little of that showing up in the second quarter, but we feel very good about our path to getting the run rate as we get into the second half and into the fourth quarter and then turning that into 2020. So nothing has changed there..

Got it. I appreciate that. And I guess, Frank, just on the win announced tonight, the Premera Blue Cross win.

Anything you can share, just as far as how the economics would look at the deal like that with a payer customer versus the more traditional provider payer client? And then along those lines, as far as the pipeline goes, are there other more payer type of clients or targets that are in the pipeline?.

Yes. Again, our PMPM is going to be based on the particular population. Is it commercial exchange Medicaid and Medicare and what range of services are we providing? We don't see any particular difference if it's a provider payer versus a traditional payer.

Sometimes if we're doing a simple delegated risk arrangements that we're not doing in the claims side, so you'd have a lower PMPM on that basis. But if you take a similar service mix, it really is the same on the payer side as it would be on the provider side.

As the payers as a channel, I think what we found since we launched Evolent that there is a sort of a beautiful place for us to sit in between payers and providers and to help drive alignment, both on the clinical side, both in the way network is managed, in the development of medical policy.

And so in some of our initial provider relationship, we really served as a conduit with our local players to enable that. And I'd say we're building on that.

And yes, we do see a lot of opportunity in the current pipeline that are more with traditional regional payers where we feel we can bring them together and still a clinically driven, provider-driven model, but where the payer is the ultimate customer and we're again working in between and directly with providers.

The second piece of that is New Century. Most of New Century's traditional business has been directly with payers, that's opened up a lot of relationships and pipeline for us and ability to cross-sell some of our more traditional services into their relationships. And so in general, if you look in our pipeline, you will see a lot more payer activity.

I think that's good news. It obviously expands our market and that's where a lot of lives sit outside of the some of the Medicare and Medicaid opportunities that we're working on. So we do see it as a medium-term market expansion opportunity..

Our next question comes from Jamie Stockton of Wells Fargo..

I guess maybe just one more on Premera.

Timing-wise, is this - should we expect this to be part of what seems to be maybe an inflection in the business in Q3?.

Right now the implementation is scheduled in the Q3, Q4 time line. So little bit will be dependent on some of our early work and how fast we get through a lot of the data exchange and a lot of the basic infrastructure that we need to put in place.

So it is the second half of the year launch and timing a little bit dependent on how fast we progress this summer..

Okay. And then it seems like you've had multiple comments about how the late-stage pipeline looks pretty good.

I guess - and I know you've already touched on Medicare for All a little bit, but I'd been curious just your take on whether or not it's been a notable distraction for any health systems at this point or they kind of do the political calculus and figure that the chances of this actually happening are extremely low and therefore it's not something that gets you concerned about?.

Yes. I would say in most of the forums that I participate in, where health systems are listening to various policy advisors and people are handicapping Medicare for All and you run through all the math, I would say the average provider CEO that I talked to thinks that it's a very low odds that we would see something meaningful out of that vector.

I think - let's imagine that we did, then you would have the government as the primary payer, given that a lot of the business today is in Medicare and Medicaid government-based reimbursement, they're going to still have the same desire for the government as payer to move as much as they can into performance-based program.

So - and if anything, you'd see expansion of some of the programs that I discussed today, there is a real effort really on both sides to try to deal with the cost issue, not simply through massively slashing rates, but trying to use the right reimbursement tools to increase health outcomes, to lower cost in the right places.

And I just think you would see more and more of that activity. So we think it's low odds. If it did happen, surely the government would continue to do all the innovation that they're currently doing and probably more.

And if anything, they've been one of the most innovative payers of all the commercial of anyone out there, so I don't view it necessarily as a negative. But again through our customer lense, I would say they view it as relatively low odds. We don't see anyone changing their current planning as a result.

They still need to be efficient in their Medicare business and they need to get cost in line if they're going to be successful, given the shift in demographics and that also applies to Medicaid, so all of that activity [indiscernible]..

Our next question comes from Sean Wieland of Piper Jaffray..

I have one also on Premera.

Is there something unique to the 70,000 lives that makes outsourcing the services for that population make sense or should we view that more as a Evolent starter set?.

Yes. I think specifically it is an exchange population. So that's a unique population and it's one where we have specific expertise and flexibility in our systems.

So I think for those of you that track the payer world and if you look in the Blues in particular and many of the large payers, it's difficult for them to shift the way that they pay, the way they administer on the dime because they have relatively old legacy system.

So that is an opportunity that comes out of the investment we've made in Valence and Aldera and the integration of Identifi. And I think, again, we'll see more and more of that. Specific to Premera, the opportunity really started around exchange lives and the specific opportunity that they saw, where we could really help them with that population.

I don't think it's limited to exchange lives. I think there's many other areas in working with those types of payers, in more provider-oriented reimbursement models, where both the clinical piece that we've built as well as the back office health plan support and the way those things integrate can be of real benefit.

And so I do think you'll see, again, more payer opportunity for us. I think they'd see it in the Blues and with other regional players. And again, we're only going to work in situations where we feel there is a real effort to collaborate with providers, with the clinically-driven model where we feel we can add unique value to the relationship.

But based on what we're hearing, what we're seeing in our pipeline, we think there'll be a lot of opportunity there across the next several months..

Okay. And then you said that regarding Florida Medicaid, you're looking for viable solutions - options to enhance member growth.

What are some of the levers that you've got to pull there to drive member growth in those plans?.

Yes. I think, for a new plan, and if you think about the 3 plans in the 5 regions, they are new branded plans in the market. So one of the first things you want to do obviously is get the word out about the new plan, start building brand recognition with the target population that you're going after.

One of the big areas and sources of potential getting the word out and ultimately driving recruitment is directly with physicians in the community.

So if you're providing great service to physicians, if they see this is a plan that really benefits patients, they're not going to sell to patients, but when asked going to mention that "Hey, this is a plan that I work with directly, they're very provider-driven, they're doing a number of interesting things clinically," and that can really help to drive enrollment.

And so we obviously have a lot of people out in the field detailing those practices, obviously engaging physicians in the clinical work that we're doing, showing that this is a different kind of health plan in terms of the way that we'd ultimately interact.

And then lastly, you just think about being in a community, the nice thing is we have the brands of the local providers that have been in those communities for several years. They participate in a number of community events in normal course.

They have a number of services that those populations can access and those become good conduits for communicating and mentioning the benefits of the plan. And so it's all of those activities in combination, which ultimately - hopefully drives word of mouth and where you see enrollment growth.

Again, most of that would come into next year, just given the enrollment cycle. Obviously, we want to provide strong service to members. And again, if someone really likes the plan and has good experience, that's another way.

And then just making sure operationally we're performing well in working with both providers and members because that's ultimately, again, going to drive referral.

So it's all of that activity really trying to build on the current membership base, and our hope and it's obviously been proven in other provider-oriented plans that you can drive membership growth over time and really build brand around that local provider brand, which in many cases, can be stronger than a traditional payer brand..

Our next question comes from Anne Samuel of JPMorgan..

I was hoping maybe you could speak to the integration of how New Century Health is going? Anything surprising you positive or negative there?.

Yes. I would say it's going really well out of the gates. I think one of the things we felt in our diligence process was that there was real alignment on value and mission that when our employee bases interacted it almost felt like they've been part of the team for some time.

I think I had mentioned before that our customer diligence is probably the best that we've done on any acquisition, both here and other companies I've been involved with. So they have a very strong reputation in the market. I think the integration has gone well in some ways.

There are certain aspects of what they do that we'd left alone and we want them to be able to run and continue to do what they do.

On another level, we see real benefits with integrating certain aspects of our platforms, sales, function at areas where we feel like we can add value jointly together, and I think we're right on track for our schedule there and what we wanted to achieve.

And then if you see that in our early operating metrics, they've generally been performing above plan. And then you look at our pipeline, and we see strong new opportunities.

We're also seeing, and maybe a bit of a surprise to us, but really strong cross-sell opportunity and the ability to apply what they do in Medicaid and have a meaningful impact on the Medicaid population in both cardiology - cardiovascular services and oncology.

And that's obviously great for us because we've got 1.7 million lives there plus our Medicare lives, so that opens up a significant cross-sell opportunity for us across the coming year. So overall, off to a really good start. Great leadership team there, really happy with how it's going..

That's great to hear. And then just one more for me, for Nicky. Claims expenses as a percentage of premiums picked up about 500 basis point this quarter versus the 2018 trend.

Is that due to the incremental portion of the plan that you took on and should we think about this is as being a run rate?.

Yes. Anne, I think the increase in claims expenses is related to the reinsurance contract. So if I look at medical - cost ratio across the plans that's right on track with - right around 80% where we'd like to see it, but the actual dollars is tied to the - so you see higher top line and higher claims expense.

So there is - that's related to the reinsurance contract. We consolidate both revenues and claims expense..

Our next question comes from Richard Close of Canaccord Genuity..

Just pivoting back to the Florida Medicaid. I guess the last time you alluded to being below 50,000 there and the original goal was something like 120-plus thousand. And so it sounds like in your answer to Sean, it's not like guidance here in the second half is predicated on significant growth in Florida.

Is that correct? And then how are you feeling about rightsizing the expenses there and will the plans be profitable this year?.

Yes. Great question. I would say, number one, our guidance is not predicated on an increasing lives in Florida.

I think we did anticipate at the beginning of the year that we would be able to remove implementation staff, that we'd be able to streamline the cost structure and rationalize it just looking at the book of business and how we could effectively manage it. I would say that's a work in progress.

So I think we are hoping for some greater efficiency as we go into the second half of the year. Given where we sit, I don't think you'll see those plans in aggregate profitable on an annual basis. We're obviously hoping to get to a run rate sort of economics in the - particularly in the fourth quarter and going into next year.

So there is a focus in all aspects of our business to make sure we've got high degree of efficiency that we're taking out any unnecessary cost that we're investing in the right areas to drive scale.

Florida is significant part of that, and I would say we're mid-process, and obviously working hard to achieve that as we get in the second half of next year. Growth, which would come in 2020, would potentially be a big part of that.

So we're really trying to assess the potential membership growth, what we think we can generate, how that would ultimately contribute to the P&L because you get immense scale as you add lives to this existing plan.

So a lot of the work has been - let's - almost put together a business plan for Florida, put in place, move very aggressively and see what we can achieve and obviously factor that in. But it is a real focus on getting that to be a significant contributor, to be lean and mean and how we're operating it.

And hopefully, to make sure it's a viable strategic asset for us..

And Frank, where do the marketing and brand expenses for Florida sit, is that in SG&A or is that cost of revenue?.

SG&A..

Our next question comes from Matthew Gillmor of Robert Baird..

For Passport Health, I appreciate the comments you provided.

Should we think about Passport as being on stable financial footing or are there some hurdles that they still need to overcome before they're on a sort of stable trajectory?.

Well, I think, as I said, we've obviously had some good news across the last month with improvement in rates. We're seeing the impact of a number of the initiatives we put in place at the beginning of the year and the teams are working incredibly hard on both the clinical and the admin side. So I think we feel very, very good about progress.

We need to make sure we see multiple months of stronger performance that we feel good about the trajectory in medical spend that we're actually realizing the gains, that we expect the gain on the admin side, that we feel solid about the balance sheet. So as I said on - in my prepared remarks, I think, positive progress.

I think we should definitely be encouraged by it. We believe that it can be a viable plan if we put these initiatives in place successfully, and obviously with rates that reflect trend, but I would not declare victory at this point until we see several months of strong performance. But we've got our best team on it.

They've had an incredible impact already. There is a lot of assets in this plan that we feel are very valuable in terms of what it can deliver in the market and to beneficiary. So we're doing everything we can to get it to a place where we feel very solid about ongoing performance and the ability to grow the plan over time..

Got it. And then as we think about the EBITDA run rate targets you've provided around $50 million run rate for the back half of the year.

Is that a - I know it's early to talk about 2020, but assuming you all execute to plan, is the $50 million a good jumping-off point? And then we'd obviously have EBITDA growth above and beyond that in 2020 or will it be some cost that we should be considering as we're modeling out?.

No. That's the plan and intent. So we obviously set a marker on the second half of the year and really on - in Q4, in particular, because we did want to be that to be reflective of the base we were going into 2020 with.

We're also hoping to see strong top line growth in the fourth quarter and then going into 2020 and then that's sort of consistent with our remarks at the beginning of the year. And with that growth, we would expect to have growth on the bottom line as well. So that is our intent, yes..

Our next question comes from Mohan Naidu of Oppenheimer..

Frank, on the pipeline comment you made.

Can you give us some color on the type of deals that are gaining momentum or moving along faster to the finish line versus that are taking longer?.

Sure. I would say, one, I did talk about the fact that we see a number of cross-sell opportunities in the current pipeline. If you think about cross-sell, we already have the relationship, we already have very good data about the opportunity at hand. It's easy to move forward those discussions, a lot of times we have an existing agreement in place.

So you're getting an addendum. So the fact that we have a number of what I - we traditionally call same-store growth opportunities is a real positive in terms of potential closure. So that's one category. Second, I mentioned NCH. NCH had a nice pipeline when we close the deal, we have put a lot of resources against the sales efforts there.

I mean the one thing we like about it is it delivers immediate cost savings, very documented cost savings based on their experience in a market where there's a lot of cost pressure, we like that tangible value proposition.

We think it's a good entry sale into the customer bases that we're focused on, also applies to cross sell, and so that would be a second area where again there is a little bit more of a pace because of the direct economic benefit associated with implementing New Century.

Health plan services, really, which is the legacy Valence business, where we've enhanced it through investment in core technology. And obviously what we do with our clinical stack, but we have a number of opportunities there, that, technically have been in the pipeline for a while.

Those deals usually do take a little bit longer to execute, but given that they've been in the pipeline for a while, I would call them late-stage opportunities with a chance for near-term closure.

The last area is we mentioned relative to the True business that we announced earlier in the quarter, that we were actually pretty late stage in a couple of markets and those are continuing to move along and we hope will have some announcements relative to Medicare opportunities once that transaction actually closes, which, we believe, will be sometime in the near term here.

So those are a few of the highlighted areas. And again, we do everything we can to create urgency, to try to create some leverage around the decision, that sort of what we do for a living. So we try to do that with everything, but are some of the areas that maybe moving along a bit faster..

Nicky, did you give the contribution from New Century in the quarter?.

No. Sort of effective going into 2020, we're not breaking it out. It just becomes sort of part of the overall mix. So it's within the services business, so the $154 million includes New Century..

Our next question comes from Donald Hooker of KeyBanc..

Great. So just a quick question on dynamics on the income statement. So the transformation and services revenue, obviously, keeps going down.

It sounded like, I guess, Frank, in your prepared remarks, seems like you're doing a lot of work with health systems to repair for new ACO contracts and potentially the direct contracting and other things like that.

It would seem like maybe that revenue line might become more relevant or maybe move the other direction, how do I think about that revenue line, it's very small right now?.

I would just say, it's almost a legacy of a different approach to our business going back several years ago. It's not a place we put a lot of emphasis. You are correct that in some of our traditional health system relationships around ACOs that there is some early transformation work.

But if you think about the pipeline I just talked about and where we're starting with existing lives, some of the cross-sell opportunity that we're seeing, et cetera, we just expect that to continue to be a smaller portion of total revenue over time. Nicky, you're welcome to add to that.

But it's just a bit of the evolution we've been talking about for several years and we're seeing that play out, just in terms of how things are categorized, what we're focusing on in the way we're structuring our new business arrangements sort of just emphasis on the things that would fall into transformation..

Yes. Nothing to add to that....

Okay. And then maybe the guidance for the full 2019. Obviously, big, big ramp sequentially through the year as we go through the year.

How do we think about, like, sort of lives in the platform? If you ended at 3.4 million, what are you contemplating there in terms of that dovetailing with this revenue growth we're expecting to see?.

I would say based on what we see - I was just going to say and Nicky, you can add. I would say based on what we're seeing this year, there is a lot of cross-sell opportunity in the existing pipeline, which, I think, it's a good - we've obviously got to bring those across the finish line.

But if that were the case, we'd see a lot of growth from our existing life base and what you would see is an increase then in PMPM.

So my guess is you'll see more waiting towards that, but maybe what you saw last year or in years prior, we can't perfectly predict the mix of business that would come in, but that's how I would guestimate on the current pipeline.

Obviously, that shifted the other way and if there's new clients or new populations, then you'd tend to see more growth in lives, driving total growth and less growth on the PMPM side. But based on, again, how the pipeline breaks down, I think, we may see more PMPM growth and a little less growth on the lives side. But Nicky, please add..

No. That's exactly right. I mean when we talked at the outset of the year, we did talk about lives stepping down in Q1 being relatively flat across the year. Frank said, there's always puts and takes on that, but the emphasis and expectation is towards PMPM versus lives..

Our next question comes from David Larsen of Leerink..

With regards to lives on platform now 3.4 million, is MDWise and all of those Medicare provider-sponsored plans, are those fully excluded from 1Q lives on platform or did they sort of roll of partly through the quarter, so there's still going to be an unfavorable impact in 2Q or are we pretty much through that?.

David, specifically MDWise, we're continuing to service that contract in run out and so that still in the live count. I think there's different things going across the year. We've obviously got some contracts that will roll in. RCMG, Premera, Empower are coming onstream. And then we got a few going to rolling off.

So I think, net-net, as I said, I would expect life count to be relatively flat across the - from here on in the year. The exact number will sort of fluctuate more on what Frank talked about the mix of new business.

But specifically that is in Q1 - that is in the life count at the end of Q1 because we're still servicing that actively as an existing contract..

Okay. And then PMPM rate of $14.34. I mean it's up, I think, around 4% year-over-year, which is good. But I think it's down a little bit sequentially and it's not quite as high as we had been modeling.

Just do you have any thoughts around that, like, any reason why that might be or is it in line with what your expectations were and I guess, we can expect that to ramp over the course of the year?.

Yes. I would say, you're observations are spot on. Yes, it's down sequentially and up year-over-year. I would just say that on the provider-sponsored health plan lives, they were high PMPM lives. And so again, that was a full suite of outsourced service to the most expensive premiums population.

So - it was in line with our own internal expectations that we would have seen a step down versus Q4, just given the change in mix and that population rolling off..

Our next question comes from Sean Dodge of Jefferies..

Maybe going back to the EBITDA ramp.

If I think about the cost you're talking about dropping out, is it just Florida and then the infrastructure you're using the support the provider MA businesses that are unwinding in McLaren contract or are there also efficiencies do you see elsewhere in the organization you can tackle? I guess maybe how broad-based are these cost actions you're expecting to drive the ramp up over the course of the year?.

I would just say, all of the above.

I mean I think when you get into a place where you have lower revenue growth than you anticipate, you begin looking at everything that you're doing and making sure that the investments you're making are consistent with the strategy that you don't have redundancies in certain areas that you are as streamlined as you possibly can be in terms of how you're operating.

I mean you obviously try to do that all the time, but this puts an additional focus on it. I also think we are really looking for strong margin expansion as we increase the top line. We're just at that place in our corporate history.

So that does, of course, want to step back and say, look, how can we really drives that, now that we have what would be over an $800 million business, lots of different functional areas that we support, different business units.

Are there ways to sort of rethinking how we organize given how the strategy is unfolded, given how we work with our customer base? So part of the shout out to Nicky in terms of new role is a realization that as we get to the scale, these actually become really meaningful, strategic and operational areas that we need to take on and significant opportunity to make sure we're getting the most out of our investment, again efficient in terms of what we're delivering that also helps us price effectively in the market.

And then ultimately, when we're bringing on new lives and we're growing businesses like New Century, which, we think, is off to a good start, we should see that scalability in terms of margins.

We also - we did highlight Florida as an example of something where you put in place some significant infrastructure and you end up with less lives than you anticipate, you've got fix that.

You've either got to fix the cost side or you got to fix the live side, so you get that to be a steady contributor rather than something that might have losses on an ongoing basis. So I think all of those things have come into focus. We've been working pretty diligently across the last several months.

And again, this is an organization that doesn't operate with a lot of fad from a budget perspective, but where you have the complexity that we have, you can find opportunities to do work in different ways.

And we mentioned the investment we've had in Pune, that's been a fabulous investment for us with very high-quality work and productivity coming out of that group, and yet it can drive efficiencies in certain areas of our business.

So it's looking at all of those things to build what we think is the sustainable and hopefully, a high-growth business on both the top and bottom line going forward..

Our next question comes from Charles Rhyee of Cowen..

I'll just make it quick. Just a follow-up maybe on that, Frank. When we think about either when your providers are talking about the lien cost structure and you're saying that this is what we're seeing as we think of the back half.

How - when we think about the timing or the length of time you think it'll take to kind of get to what you think maybe a good run rate in terms of the - an efficient cost structure, is this something that you expect to carry through to the end of this year or is this something that will continue to carry maybe another year before we get maybe a real good steady state, I guess?.

Now, look, our focus is on trying to make it happen as quickly as we can. I mean you have to take into account different aspects of these types of decisions.

Is there something you're stopping doing? Does that have an impact on a customer? How do you address that and make sure you have an agreement so you can invest in other priority areas? Do you have something that's mid-process? How do you really work through all of those decisions to balance driving the costs out, making sure you don't have a negative impact on other parts of the business of your existing partner relationships and trying to get sort of best decisions that we can? So I would say we've been doing this work for a while.

We've already seen a yield that will continue to come through as we get through the second quarter and into the back half of the year. A lot of focus on it, a lot of focus on trying to do it quickly, but carefully. And again, our hope is that it will have an impact on the second half, and that, that will carry into 2020.

Occasionally, we'll have something and you see that a little bit in Q2, where we got a little more cost in there than maybe we would've hoped at the beginning of the year and it has to do with, again, incremental decisions on maybe there is a client we're winding down where we feel like, hey, we've got to put some additional effort against what we're doing here.

We want to end our relationships in a positive way. And although we put on the calendar that it was going to end on this specific date, the right decision is to carry that forward for another 30 days, and again that can have an impact on cost.

But a lot of our focus has been trying to get to a very strong exit run rate and to carry that into 2020 and we're going to be pretty hard on the decisions that it takes to do that and, obviously, trying to balance that with customers and employees and partners and all of those things, but that's our objective..

Your next question comes from Stephanie Demko of Citi..

Nicky, congrats on the new role.

So Frank, going back to your prepared remarks on Passport, can you give us more detail on some of these new initiatives like specialty care management and the clinical initiatives? And as a follow-up to that, how should we think about Passport revenue growth for the year, just given the puts and takes of the new offerings and the rate concession?.

Yes. I mean I would say, I try to break it down on the call. But if you go over the categories that I mentioned, the first, in running a health plan, is making sure you're efficient from an administrative cost perspective.

So we literally have looked at every contract, every item on the administrative side to see are their efficiencies that we can generate? Is there a long-term relationship there where we potentially could get improvements in our contracted rates for a particular service? So literally line item by line item, contract by contract, you go through that.

Again, you look for places where you might be able to drive better performance. And I would say anything and everything has been on the table when it comes to those things.

On the clinical side, what we tend to do is do a pretty extensive analysis of the population relative to our benchmarks, and again where do we see particular variation, either on the quality side or on the cost side that we can improve upon.

A few of the areas that we've emphasized traditionally and where we're really strengthening those programs are just complex patients with multiple comorbidities, they tend to go to the emergency department and other high-cost facilities several times a year and we engage those people and their health effectively, transitions care, so someone gets admitted into the hospital and then discharged and yet no one follows up in the care process.

And then they end of going back in, either in readmission or very poor follow-up, so how do we strengthen that program. We're incorporating social determinants of health into our stratification, so that we can more effectively identify at-risk patients.

And then actually using analytics to identify the engagement modality that's going to be most effective getting at that patient involved in our program and ultimately graduating.

Looking at areas like high-risk pregnancy, behavioral health, some of the opioid use and other areas where we can partner with community providers, but we're taking each of those areas and it really is a broad effort across the clinical teams to say how can we expand what we're doing and where can we see direct impact.

We obviously have a lot of knowledge and capability on the New Century side and in other specialty areas. Those can be high-cost areas. So looking - are there productive opportunities there where you can reduce cost. But it is line item by line item and you don't want to take on too many initiatives and then end up underdelivering on all of them.

So we're trying to stay very focused on ones that we can - that, we think, can have desired impact on MLR. So those are the main areas of network performance, just looking at where our people going across the network, out of network, how can we get out in front of that and make sure we're getting people to high quality most efficient providers.

If we see issues where certain part of the network isn't performing up to standard can we actually detail that group, show them the clinical pathway that we think could be followed to actually improved quality and cost. And so it is rigorously going through and making sure we got an efficient network in terms of how we're delivering care.

So all of those things, I would say, are what we're doing to really run it at every cost item on both the administrative and clinical side..

All right. Understood. Very helpful.

And just one quick follow-up on the guide, just given the handy ones [indiscernible] could you just kind of walk us through the balance of puts and takes that got you to your 2Q guide being a little bit of a step down?.

Yes. Stephanie, this is Nicky. I mean I would say overall, when I think about the first half of the year, it's right in line with the full - our full year outlook. And so stepping back to sort of the midpoint of the range and the breakout of the year we talked about. So Q2 is right in line with that. Specifically, there was 2 things.

Within True, there's a small step - we expect to see a small step down there. In the commercial - in the individual population in New Mexico, you do tend to see some sequential attrition in individual population, so there is a couple of million bucks there.

And then in the services business, there was one contract we had thought perhaps would start in the second quarter that's not going to start. So therefore, services revenue sort of flat to Q1 and slight tick down in - we expect in True. But other than that it's - but again, all in the context of very much in line with the full year..

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

We appreciate everyone participating in the call. Obviously, we'll see many of you on the road and in the conference circuit across the coming months and look forward to it and thanks again..

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