Welcome to Evolent Health's Earnings Conference Call for the Quarter and Year Ended December 31st, 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 second quarter news press release issued earlier today.

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 at ir.evolenthealth.com, again that's 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 Seth Blackley, our President; and John Johnson, 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 John to take us through a more detailed financial review of the fourth quarter and full year 2019 results.

I'll close with a summary of our strategic focus and primary sources of differentiation as we head into 2020. And as always, we'll 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 31st, 2019 increased 22.9% to $237.5 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended December 31st, 2019 was $8.2 million compared to $5.6 million for the quarter ended December 31st, 2018.

Adjusted revenue increased 34.1% to $848.3 million for the year ended December 31st, 2019 compared to $632.4 million for the year ended December 31st, 2018. Adjusted EBITDA for the year ended December 31st, 2019 was negative $11 million compared to $23.2 million for the prior year period.

As of December 31st, 2019, we had approximately 3.7 million total lives on the platform. Overall, we're pleased that we met our key strategic objectives for the year and we delivered strong operational and clinical performance for our partner organizations.

We also achieved our primary financial objectives, returning to strong topline growth and margin expansion over the course of the year. Overall, we come into 2020 with substantial strategic momentum and high visibility in the 20%-plus organic growth in our service business, with continued margin expansion anticipated across the year.

Before touching on 2019 financial performance and our 2020 outlook in more detail, I'd like to provide an update on the macro market environment and how the continued push for value-based payments and risk transfer is translating into pipeline opportunities across our key solution areas.

Overall, we continue to see significant spending pressure on federal and state budgets related to increased enrollment and cost trends in Medicare and Medicaid. The trend estimates across the next several years are projected to be substantial, while not necessarily translating into better outcomes for patients.

As we've observed in our ongoing meetings with CMS, HHS, and on Capitol Hill, they're strong by support for counteracting unsustainable health care spending and key drivers such as out of control pharmacy costs and inpatient utilization.

For providers and payers alike, these market pressures are driving an increased focus on managing costs and quality effectively, particularly for patients and chronic conditions.

On the Medicaid side, in particular, providers and payers are struggling to care for emerging complex patient populations facing substance abuse, behavioral health, and many other factors complicated further by social determinants of health factors.

Payment models oriented towards population health are critical in driving a more proactive and integrated care model that engages members at home, in the community, and with a whole person approach to health and well-being. Managed care payers face similar challenges as barriers of risk in Medicare and Medicaid.

The particular needs of discrete populations, such as oncology and cardiology have become quite complex and will require incredible and expertise.

Given the number of specialties and conditions that impact outcomes and financial performance, a number of national and regional payers are carving out specific areas and delegating payment and clinical management to providers and expert partners that can more effectively manage both cost trend and quality of care.

All of this increased focus and effort towards payment reform and improvements in cost and quality, however, requires payers and providers to work collaboratively.

Well, this sounds easy to do, decades of which has been built up around fee schedule disputes, utilization care management rules and perceptions around an equitable distribution of profits have created massive friction in driving meaningful reform.

This intensifying market need to drive improved performance and collaboration across the continuum of both the financing and delivery at health care actually served as the basis for Evolent's formation in 2011.

We see our role as serving as a bridge between payer and provider with a strong focus on clinical depth, aligned reimbursement models, and a level of transparency that fosters a trust-based relationship with both providers and patients.

We believe we're unique in the market and our ability to play this role while offering an integrated platform, tying together our clinical and administrative capabilities and understanding of what both payers and providers need to be successful.

Given the prevalent issues in Medicare and Medicaid, including persistent cost pressure, increased administrative and clinical complexity, and the challenge organizations space and effectively engaging providers and patients, Evolent has honed its strategic focus around three solution offerings for payers and providers.

First, our total cost of care management solution is focused on a provider-driven clinically based population health approach that involves engaging positions and leveraging in-depth clinical data and highly sophisticated interventions to proactively manage patient populations and drive significantly improved quality and lower costs.

Because of our substantive experience across populations and regions, we can support the full gamut of CMS's ACO programs as well as delegated risk arrangements between traditional payers and providers.

Second, our specialty care management solution through new Century Health is focused on managing the cost and quality of cardiac and cancer care, two specialties that account for about 25% of Medicare spending. An important distinction here is that this is not a traditional utilization management model, which can be abrasive for providers.

Our comprehensive programs are based on an in-depth and ongoing review of clinical literature and incorporate evidence-based clinical pathways, a proprietary formulary, financially aligned payment models and peer-to-peer engagement.

Lastly, our comprehensive health plan administrative services solution is uniquely positioned to help payers streamline operations and provide an outstanding service experience to members and participating providers.

The simplification of the administrative side of health care is enabled by the high level of integration across clinical, administrative and operational functions in our core platform.

The breadth of these solutions has expanded our total addressable market to over $130 billion and have successfully diversified our end markets to include physician organizations, ACOs, hospitals and health systems, and regional and national payers.

These solutions are extremely relevant in the present market regardless of pace of the value movement because both payer and provider organizations manage large, complex patient populations across lines of business and urgently need help in moving the needle in terms of cost, service, and quality.

National and regional payers alone manage over 150 million lives under some form of underwriting risk. By serving as a bridge between providers and payers and providing an integrated set of technology-enabled clinically driven solutions, we serve as an aligned partner that can drive consistent performance.

Evolent's unique position in a rapidly expanding market helped to drive overall revenue performance in 2019 as well as a strong setup for 2020 and beyond. On the new business development side, we added seven new payer and provider partners in 2019.

The breadth of our new partner base across the three solution areas I outlined earlier is a testament to strong market demand and the robustness of our diversification strategy.

We also helped our new ACO partners enter the revamped Medicare shared savings program, pathways to success and are now managing total cost of care for more than 60,000 lives in the program.

Surely, the fact that we had two ACOs in the top five performing organizations nationally in 2018 helped to attract Tier 1 ACOs to join the Evolent network this past year.

In 2019, we also have the strongest cross-sell performance in our history, as many current partners increased the number of lives under risk arrangements and several expanded into new solution areas. In particular, we saw very strong cross-sell momentum with New Century Health.

Given New Century's ability to drive meaningful improvements in oncology and cardiology costs and quality, it becomes a fairly easy proposition to extend our current offering with several partners to include specialty care management.

Taken together, our new partner additions and cross-sell performance gives us high visibility into a minimum of 20% organic revenue growth in our service business for 2020, which is tremendous progress off of a base of over $689 million in services revenue in 2019.

Overall, this momentum is continuing in the early part of 2020, with a strong pipeline of new partner and same-store growth opportunities, driven by market demand and the differentiated solution strategy I referenced earlier.

On the New Century Health front, we're excited to announce a new partnership with the national payer organization that needed support in managing oncology costs and quality.

Given that oncology drug spending increased over 50% nationally across the last several years; it's not surprising that this area is getting a lot of attention from the national payer community.

This particular payer sees the relationship with New Century Health is a highly strategic and is initially deploying a light ASO version of the offering across five states.

Out of the gates, New Century Health will focus initially on leveraging its evidence-based precision pathways and peer based collaboration model to focus on improving cost and quality. Over time, we look forward to potentially expanding our service offering and geographic footprint with this partner in the future.

We're also excited to announce that New Century has expanded its existing partnership with Humana. New Century has provided Humana with comprehensive oncology management services in Medicare for some time and will now also provide clinical pathway review, provider engagement services in Medicaid in an initial pilot.

This expansion in Medicaid opens up the opportunity to add significant lives and more expansive performance-based services as Humana grows across time.

For our new partnership announcement and expansion of Humana will have a nominal impact on 2020 revenues, given the ramp across the year and ASO model, both are exciting growth opportunities in 2021 and beyond. In summary, we believe our strong recent pipeline activity is driven by two key factors.

First is our emphasis on driving demonstrable improvements in health outcomes, particularly in Medicare and Medicaid populations where we continue to see significant market pressure to dramatically lower cost and improve quality.

Second is our ability to deliver an integrated suite of solutions that addresses a comprehensive set of pain points for payers and providers.

Our solutions focus on better management of total cost of care, greater simplification of health plan operations and administration and significant improvements in specialty care outcomes, particularly in oncology and cardiology.

Our ability to create differentiated value came to life across 2019, as we delivered strong results across our national network of payer and provider partners. In terms of our clinical solutions, we help make a considerable impact on patients and members on behalf of our partners, engaging over 60,000 patients in our clinical programs.

Not only did these interventions improve their quality of life, but it also lowered inpatient admissions, reduce total cost of care, and improved key quality of care indicators.

We believe that our population health driven approach, including our analytics, clinical knowledge base, and patient engagement capabilities is critically important to successfully bending the cost curve and improving community health.

To that end, with our Medicare ACO work, as an example, we're proud that our next-generation cohort of partners generated more than $100 million in gross savings across the 2017 and 2018 performance years.

Along with CMS' announcement last month, two of our next-generation ACO partners were ranked in the top five nationally for 2018 in terms of total savings.

We're obviously proud of the financial results and even more heartened to see our vision of serving as a bridge connecting peers and providers come to life to elevate population health across multiple regions nationally.

True Health, our commercial plan in New Mexico also reflects the impact that a provider focused, clinically-driven approach can add on member engagement.

Across this past year, the plan demonstrated very strong MLR performance in the high 70s and continues to grow through an expansion into the individual line of business as well as the federal employee health benefit program.

Our ability to drive strong clinical results is based in large part on the rigor of our analytics and clinical program development.

In 2019, we became the first company in the nation to earn National Committee for Quality Assurance, Population Health Program Accreditation, which reflects our commitment to working with payers and providers to significantly improve care quality and the care experience.

In the same year, we also earned three-year NCQA accreditations for both utilization management and case management. This offers substantial benefit for our partners as they're able to leverage nationally accredited programs to collaboratively improve care and service for their members.

Looking at specialty care management outcomes, New Century consistently delivered 10% to 15% annual savings in oncology costs across its national network, driving high levels of compliance to its precision pathways.

It's the level of rigor and these types of demonstrable results that continue to drive strong interest from both national and regional payers. Lastly, in Medicaid, our experience with close to 2 million members across multiple regions has enhanced the breadth and depth of our offering.

For example, we're leveraging experience in both urban and largely rural environments to integrate social determinants of health data into our stratification process and develop strategies to address care access and issues related to housing, transportation and nutrition, to name a few.

We're also exploring and implementing multiple modalities to more effectively engage members with substance abuse and complex behavioral health issues in order to elevate health outcomes and reduce downstream medical and social costs.

We've seen our comprehensive investment in clinical innovation come to life across the year with our partner, Passport Health Plan in Kentucky, which is on solid operational and financial footing heading into 2020.

Across the last several quarters, we've worked closely with the Passport team to continue to drive strong operational performance, as evidenced in part by a 13.5-point turnaround in operating margin from the first quarter to the second half of 2019.

As many of you are aware, Passport formally submitted its response to the Kentucky Medicaid RFP on February 7th and anticipates an official decision from the Commonwealth in the spring time frame for the new contract commencing on 01/01/21.

In the meantime, we're continuing to focus on a number of important clinical and operational initiatives in the first half of this year, while also delivering an excellent service experience to providers and members.

Overall, we feel very well positioned strategically in today's health care environment, and we're pleased to enter the year with a strong topline growth outlook.

We're seeing a growing pipeline across our major solution areas and consistent clinical results, which, we believe, will ultimately drive strong partner retention and long-term margin expansion. With that overview, I'll turn it over to John to speak on our financial performance on the quarter and our outlook for the year..

Thanks Frank and good evening, everyone. Today, I will cover our financial results for the fourth quarter of 2019, and we'll finish with an overview of our 2020 outlook.

Overall, we're pleased with our progress against our financial goals in 2019, including our return to strong topline growth, greater efficiency in our cost structure, and positive adjusted EBITDA profitability in the back half of the year.

We anticipate this improvement in both the top and bottom-line in the second half of 2019 to continue into 2020 as we have high visibility to strong revenue growth as well as EBITDA expansion for the coming year.

Beginning with our consolidated fourth quarter results, adjusted revenue increased to 22.9% year-over-year to $237.5 million, mostly through the impact of new partner additions and cross-sell. Adjusted EBITDA grew to $8.2 million relative to $5.6 million in the same period of the prior year.

Adjusted loss available for Class A common shareholders was minus $5.8 million or minus $0.07 per common share for the quarter compared to minus $5.4 million or minus $0.07 per common share in the same period of the prior year. As of February 21st, 2020, there were 84.7 million shares of our Class A common stock outstanding.

For the full year of 2019, we had adjusted revenue of $848.3 million, representing 34.1% growth from $632.4 million of adjusted revenue in 2018.

Adjusted EBITDA for the full year was minus $11 million compared to $23.2 million in 2018 and we saw continued improvement on our bottom-line sequentially across the year as part of our overall profitability agenda. Now, let me provide some more details for the fourth quarter.

Within consolidated adjusted EBITDA, adjusted cost of revenue, which includes claims expenses, increased to $182.9 million, were 77% of adjusted revenue for the quarter compared to $130.6 million or 67.6% of adjusted revenue in the same quarter of the prior year.

Adjusted SG&A expenses decreased to $46.5 million or 19.6% of adjusted revenue for the fourth quarter compared to $57.1 million or 29.5% of adjusted revenue in the same quarter of the prior year. The increase in adjusted cost of revenue year-over-year was due primarily to incremental costs to serve new partner additions and cross-sell expansion.

The decrease in adjusted SG&A expenses was principally driven by our cost reduction efforts across 2019. Combined, total adjusted cost of revenue and adjusted SG&A expenses as a percentage of total adjusted revenue was 96.6% in the fourth quarter of 2019 compared to 97.1% in the same quarter of the prior year.

Now, I will take you through the fourth quarter results by segment. In our services segment, fourth quarter adjusted services revenue increased 19.5% to $205 million, up from $171.5 million in the same period of the prior year.

Adjusted transformation revenue in the fourth quarter accounted for $4.7 million or 2.3% of our total adjusted services revenue for the fourth quarter compared to $9 million in the same quarter last year.

Adjusted platform operations revenue accounted for $200.3 million or 97.7% of our total adjusted services revenue for the fourth quarter compared to $162.5 million in the same quarter last year.

On a year-over-year basis, the increase in adjusted services revenue was primarily driven by new partner additions and cross-sell expansions within our existing partner base. As of December 30th, 2019, we had approximately 3.7 million lives on our services platform.

Our average PMPM fee for the quarter was $18.19 compared to $14.99 in the same period of the prior year. This trend towards higher PMPMs is principally driven by a mix shift towards higher revenue services as well as the strategic move away from low PMPM subscale revenue partnerships.

As a result, in the first half of the coming year, we anticipate continued strong growth in PMPMs with lives in the low to mid 3 million range. Adjusted EBITDA from our services segment for the quarter was $6.5 million compared to $4.6 million in the prior year.

Our performance in the fourth quarter continued the profit expansion trend we drove across 2019, with adjusted EBITDA in the services segment increasing by $3.4 million sequentially versus the third quarter.

Turning to our True Health segment, we had premium revenue of $35.8 million in the fourth quarter, up $10.4 million from the same quarter last year largely due to the amended reinsurance agreement with New Mexico Health Connections entered into during the fourth quarter of 2018 and which terminated during the fourth quarter of 2019.

Our owned health plan, True Health, served an average of just over 70,000 large and small group members in New Mexico in the quarter, generating $24.2 million of the total $35.8 million of premium revenue in the quarter.

Claims expenses as a percentage of premium revenue was 75.7% in the fourth quarter, a few points better than our experience to the first nine months of the year. As a result, adjusted EBITDA from True Health for the quarter was $1.7 million. Turning to the balance sheet, during the quarter, we closed on a credit facility with Ares Capital Corporation.

Under the terms of the credit agreement, extended credit in two forms; first, an initial term loan in the aggregate principal amount of $75 million; and second, a delayed draw term loan facility in the aggregate principal amount of up to $50 million.

The proceeds of the initial term loan were used to replenish our balance sheet from the Passport transaction and fees and expenses occurred in connection therewith. The proceeds of the delayed draw facility may be used to finance the repayment or repurchase of our 2021 convertible notes or to fund permitted acquisitions.

Long-term debt at quarter end consisted of $293.7 million of our 2021 and 2025 convertible senior notes as well as our initial term loan with Ares. Regarding our cash position, we finished the fourth quarter with $119.6 million in cash and cash equivalents and investments, an increase of $4 million relative to the end of the third quarter of 2019.

During the quarter, cash provided by operations was $14 million. Cash used in investing activities was $79.2 million and largely attributable to the Passport transaction as well as $9.2 million of capitalized software development expenses and purchases of PP&E.

Cash used in financing activities during the quarter was $12 million and largely comprised $82.3 million of decreases to restricted cash accounts held on behalf of our partners for claims processing purposes as well as $70.3 million of net proceeds received from the initial term loan with Ares. The Passport transaction closed on December 30th, 2019.

We are accounting for our investment in Passport using the equity method. We continue to be encouraged by the performance of the plan with Passport generating a positive operating profit in both Q3 and Q4 of 2019. Finally, we have a non-cash goodwill impairment charge in the quarter.

With the lengthy extension around the RFP and continued uncertainty around the outcome, the impact on our share price triggered a quantitative analysis of our goodwill. This resulted in a charge of $199.8 million that did not impact cash or our forward financial projections.

Overall, the balance sheet feels strong relative to our cash needs and the availability of the delayed draw term loan gives us good visibility well into 2021 on our convertible notes. Overall, we are pleased with the progress we have made towards our long-term financial objectives.

Importantly, we expect the combination of our ramp in profitability and a reduction in our capitalized software development costs to allow us to generate positive free cash flow beginning by the fall of this year. Before I turn to guidance, I wanted to highlight a couple of themes that will inform our financial performance this year.

On the topline, we come into the year with full visibility to exceed 20% organic growth in our services segment. We are forecasting minimal revenue impact from signings in that number from the bottom end of our revenue range, for which we would expect revenues to be relatively even quarter-to-quarter after separate launches in Q1.

In terms of profitability, we anticipate modest expansion across 2020 from our run rate in the second half of 2019. Our EBITDA through the year will be more weighted to the back half as a result of three factors. First, we have additional costs associated with seven first quarter launches, given the aggregate implementation and launch costs.

Second, our new NCH Medicaid business as well as the new ACO partnerships will see a ramp in profitability in the second half as a result of the contract structure and the full impact of our clinical management platform.

Third, regarding Passport, given our focus on support strong performance, the submission of the RFP and clinical savings innovation, we are carrying additional costs, which we expect will come out in the middle of the second quarter. All-in-all, we anticipate roughly a 30/70 split in EBITDA between the first and second half of the year.

And by Q4, we anticipate an exit adjusted EBITDA run rate of $40 million to $50 million. For True Health, we exited the reinsurance arrangement as expected during Q4. The remaining core business is experiencing growth with an over 40% anticipated increase in enrollment as a result of expanding into the individual federal lines of business.

This expansion sets the segment up nicely for multiyear growth and required incremental infrastructure investment in 2020. In total, we expect True Health EBITDA to be breakeven to modestly negative in the year. With that background, let me turn to 2020 guidance.

We are forecasting total adjusted revenue of $935 million to $985 million for the calendar year 2020, with our topline relatively consistent across the quarters.

The components of full year 2020 adjusted revenue are as follows; we expect adjusted services revenue to be in the range of $820 million to $860 million; we are forecasting True Health segment revenues of $125 million to $135 million; we are forecasting intercompany eliminations of minus $10 million.

With respect to full year adjusted EBITDA, we are forecasting a range of $24 million to $32 million. For the first quarter, specifically, we are forecasting total adjusted revenue of $233.5 million to $245.5 million.

The components of adjusted revenue for the first quarter of 2020 are as follows; we expect adjusted services revenue of $205 million to $250 million; we are forecasting True Health segment revenues of $31 million to $33 million; we are forecasting intercompany eliminations of minus $2.5 million; and we are forecasting adjusted EBITDA of $2 million to $5 million.

With that, I will turn it back over to Frank..

Thanks John. In closing, we enter 2020 well on our way to achieving a number of the major company as we we've discussed with many of you across the last several quarters.

First of all, we've established a highly differentiated position in a large and rapidly expanding market, serving both payers and providers in driving demonstrable improvements in health outcomes.

Our suite of solutions-oriented and addressing total cost of care management, specialty care management, and administrative simplification address critical pain points in a $130 billion addressable market and offer a compelling growth opportunity for years to come.

Second, our heavy investment in analytics, clinical program development, integrated technology and effective strategies for engaging providers and members is paying off.

For decades, health care costs have been out of control, largely driven by the inability to manage medical trend and we're consistently working with payers and providers to bend the cost curve, particularly in Medicare and Medicaid populations that have complex clinical needs.

Third, we've made considerable progress at Passport, leveraging our full suite of capabilities and expertise this past year and are encouraged by the strong and consistent operational performance across the last several months.

We anticipate news on the RFP outcome later this spring, and I couldn't be prouder of the team and the work we're doing with 300,000 Medicaid beneficiaries with very complex clinical and social needs. Fourth, we've made considerable progress in ensuring that Evolent is on sound financial footing heading into 2020 and 2021.

We returned to profitability in the second half of 2019 and expect margins to continue to ramp across 2020. We successfully executed a $125 million credit facility that strengthens our balance sheet coming into the year, and we also anticipate becoming cash flow positive in the fall timeframe with a strong exit run rate heading into 2021.

Lastly, across the Board, our greatest differentiator has been our core talent base and an extraordinarily strong and diverse leadership team.

Despite the strong labor market, we received over 90,000 resumes this past year and continue to see strong progress in terms of diversity and inclusion initiatives, employee and management engagement, and internal talent going new and emerging leadership roles.

The benefit of Evolent's historical focus on talent reveals itself in a fast paced, emerging market where strategic discipline, extraordinary effort and an unwavering focus on execution are critical factors for long-term success. Thank you again for participating in tonight's call.

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

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

Hi good evening. This is Jared Haase in for Ryan.

Maybe just looking at the fourth quarter numbers, it looks like with adjusted EBITDA coming in kind of at the low end of guidance, while sales came in more towards the high end, should we think about that as maybe pulling forward some of the sort of organic investments that you guys have been making? Or how should we kind of think about kind of the balance between that versus maybe product mix driving some of that? Any additional color there would be great.

Thanks..

Yes, I'll start with that and then pass it to John. Thanks for the question.

In the fourth quarter, sometimes when we do have this number of launches starting at the beginning of this year, you tend to have some implementation expense come into the quarter, and you're obviously trying to staff up for what will then be those new organizations coming onto the platform.

So, I do think you see just some seasonality in the cost structure there. And then we will have some movement between quarters that will create some of those differences from, as an example, Q4 to Q1.

But John, if you want to provide any more color there?.

Yes. No, I think you hit it, Frank. The only thing that I'd add to that is that some of the revenue that we did pull into the quarter does take some time to ramp the full profitability. So, that's another piece of that dynamic, Jared..

Okay, got it. Thank you..

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

Great. Thanks for taking my questions. This is Jack Rogoff on for Bob.

For the Pathways to Success, ACOs, were these incremental customers? Were they incremental lives? Or were they previously in the MSSP or Next Gen programs for you guys on your platform?.

Yes, three of them are new ACOs that we're working with. The fourth is a piece of an existing partner that we work with that is really the physician organization. So in some ways, all 4 are new, but 1 of them really is conversion to the program. And I think where you see the excitement is -- there's been a lot of iterations.

If you go back to pioneer and Next Generation and now this program, there has been a lot of improvements to the way they're doing benchmarking, attribution. We really screened the partners that we selected for this in terms of their historical MLR performance.

There's a real commitment from the physician organizations to a lot of the things that we need to do to be successful. So, we're really encouraged by start, I think off to a very good start, well within the range of lives that we thought we would be in.

We also have some of our previous Next Gen partners that are jumping into these programs as well, but those would sort of qualify as evolution of existing relationships. But to your question specifically, three of them are new relationships..

Got it, that's helpful. And then thinking about the New Century Health win with the new national payer.

I guess, when thinking about the opportunity for expansion there, how large did you say it is on a lives basis proportional to what you're going to start with just as far as the overall opportunity?.

one will be in the form of moving from this sort of center model to more of a performance-based pricing model, and the other one would obviously be geographic. And there's -- I'll just say there's very significant upside without giving all the details of the individual payer, very significant upside beyond the five states geographically..

Makes sense..

Good..

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

Hi, good evening. Thanks for taking my questions. I guess maybe just a couple of follow-ups.

On the ACO activity that you guys have in Q1, can you help us understand what portion of kind of existing ACO or ACO-like relationship you guys have, I guess, specifically around Medicare that have kind of committed to the new model versus guys who are still trying to figure out what they're going to do?.

Yes, I would say we've had a couple that are committed and in. There are a few -- and we just hosted a summit of our partner base, and we had representatives from HHS and CMS just a couple of weeks ago. And I would say, one, across the whole cohort, high engagement in wanting to continue in the program.

I think some of the hesitation has been around direct contracting, where people see potentially an ability to move more towards -- it's almost a direct capitation -- a delegated capitation model. The issue is there's a lot of details still missing from the program that are quite important to figuring out your financial model.

So, that was one of the reasons we actually bought all of these organizations in the room with the government to give their feedback on elements of the program, which would really encourage their participation. So, I would say, specifically, a few organizations just continued right in and stayed in the program.

A few have decided that they really are interested in direct contracting and are thinking they're going to commit, but they need the ultimate details. So, that would be later in the year. And then a few that, at least for right now, are waiting and probably likely to come back in more towards the end of this coming year.

But again, overall, feel good about the fact that the cohort drove pretty significant savings. And then when we see the improvements to the existing program, we feel that not only will we drive savings, but we'll see expansion of lives with a lot of the ACOs that we're currently working with..

Okay, that's great. And then maybe just another follow-up on the -- on kind of the profitability profile as we move through the year. I think I've got it that you guys had some activity ramped up in Q4, not only around kind of business that showed up in Q4, but also some business that you expect in Q1.

And I guess, when I model out the year, it seems like costs definitely need to go down as we kind of move through the year. Just any color on, like, level of confidence in that.

Or is there some sort of a change in the composition of what you expect to flow into revenue that might be beneficial on the gross margin front, specifically? Just any color there would be great..

Yes, this is Frank. I'll take this. I mean, I think when you think about the arc of the year in terms of profitability. The good news is we have fairly strong visibility into how the year is going to lay out.

I think as John emphasized, high visibility on the revenue side, so we're not counting on any new partners coming on to meet the minimum revenue in the guidance. So, that's always a big piece of profitability. Second, when you think about the elements that are back -- sort of driving more back-weighted profitability and the things John mentioned.

One, just the ramp costs that go into a new launch and the ramping of revenues. So, that's largely known, and we know we'll see that pick up as we get into the middle of the year, second quarter and middle of the year.

Second, for NCH specifically in Medicaid, when you think about all the things that they do, there is some ramp to being able to implement all of those things and have full effectiveness of the model. And then there's also, in both of those elements, a structure to the contracts, which make the profitability a little more back weighted.

So, I'd argue on that pretty strong visibility and, again, to profitability improvement as we get into the year. And then the third is just some of the costs we're carrying on the Passport side pre-RFP, and obviously, those would go directly in the Passport post RFP.

So, you take all of those, and I'd say pretty strong visibility into revenue, into the cost side. We obviously have things we're always working on that will come quarter-over-quarter. But when we just look at the overall arc, I'd say we have pretty good visibility getting to where we want to get to by the second half..

Okay. Thank you..

Our next question comes from Matthew Gillmor with Robert Baird. Matthew, your line is open on our end, maybe mute--.

Hey, thanks. Sorry about that. Yes, I wanted to ask about some of the membership comments. I think John said the members would be in the low to mid-3 range, which implies a little bit of decline versus the 3.7 million at year-end.

And I think you had also mentioned some lower PMPM members were coming out and, obviously, not having a big impact on revenue.

But just wanted to get a sense for what those memberships will be rolling off so we can that metric as we go through the year?.

Yes, thanks Matt. I think, yes, just to hit on it. Revenue, sort of they're feeling very strong there. As we think about the composition of the lives, in PMPM, we do expect continued expansion on the PMPM side.

And in terms of some of the dynamics, let me give you an example of what we're seeing in the customer base that we've talked before about the SOMOS relationship, which is transitioning from relatively low PMPM but high member phase into a second phase, which is a higher PMPM but a lower initial membership count.

I think that sets it up nicely for profitability growth over time and could certainly grow membership from there. But that's the sort of dynamic that you're seeing that gets us to that sort of low to mid 3 million number..

Okay. And then maybe one follow-up on just the New Century wins. You obviously announced two important relationships on the Medicaid side, along with the Passport expansion last year.

What's driving the traction within Medicaid? Is that just your sales force getting out into the market? Or is there some other dynamic that's making the offering more attractive to those payers?.

Yes. Matt, this is Seth. I can take that one. I think the main dynamic is that when we acquired the business, the organization was focused on Medicare and hadn't pushed into the Medicaid market.

One of the things we've done since we have a number of Medicaid partners nationally, have a lot of experience there and an analytics team that can help us think about it, is sort of apply the precision pathways and the algorithms into that population and look at what the impact would have been.

And what I think we're seeing is sort of a proof case that the same approach works quite well in Medicaid as it has in Medicare. So, I don't think there's any giant silver bullet other than porting over what was working well into a new population. Very proud of the New Century team in being able to innovate in that direction.

They've done some nice work, but that is the main dynamic. I think there is a secondary factor, though, that is as true for Medicaid and Medicare. But I think in Medicaid populations, budgets are so tight. The oncology drug pipeline has created a challenge for the managed care community. And I'd say there's a lot of pain right now across the Board.

And in the Medicaid world, that just -- things are tighter in general. And so we've had a lot of traction just helping address a key pain point, particularly on the oncology side..

Great. Thanks very much..

Thanks..

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

Great. Thanks for the questions. Frank, specifically maybe on the pipeline, I'm just curious what you can say about the composition. Is that skewing more towards the New Century? Or is it other service areas as well? Just any comments there.

And as you think about the pipeline, do you think it supports a 20%, like, services growth for the next several years? Or does that moderate some back into the mid-teens?.

Yes, thanks for the question. I would say if you look across particularly our last seven wins, it came from a pretty diverse set of customer types and a solution types for us. So, I think the good news is we've not only seen depth in the pipeline, but we've seen breadth across those solutions.

I think what Seth mentioned on the New Century side is just a fact that when you can reduce cost and improve quality right out of the gates for a major payer, whether that's a regional payer or national payer, and it has that clearer than ROI, I do think we're seeing strong demand for that in the marketplace.

But the good news is we also see it in the total cost of care pop health side and on the administrative side as well. So, I do feel like the investment we've made across the last 24 months and just thinking through our end markets where we're focused, diversifying the customer base gives us a lot of confidence coming into this year.

And I think we'll see some wins across all of those solution areas. But it also gives us a lot of confidence going into next year and beyond as well. As we've talked about, we're getting a service business now approaching $1 billion in revenue. We've got a market size well over $100 billion. We think we're distinctive.

So, we do feel that we can drive very strong growth for the foreseeable future. At our size, I think mid-teens is probably an appropriate level. I mean, obviously we're coming off a year where we could be well north of 20%.

But I think if you're asking for a medium-term growth rate for a business of this size, I don't know too many $1 billion service companies that are seeing mid-teens organic growth rates. But I do think just with the market sizing and just the feel of the pipeline today, I do think mid-teens could be supported for the foreseeable future..

Okay, that's helpful. Thanks.

And John, maybe on True Health, what's the reason for the step-down in 2020 there in terms of revenue? Is that just the agreement going away -- or reinsurance agreement?.

Yes, you've got it, Richard. It's the termination of the reinsurance agreement, partially offset by some membership growth within the core business..

Okay, great. Thank you..

Our next question comes from Donald Hooker with KeyBanc..

Great. Good afternoon. Can you update us in terms of the service revenues that you generated from Passport this quarter? And maybe update us on your outlook for those services revenues in 2020..

Yes, this is Frank. I'll comment on it. I mean, I think the quarterly service revenues for Passport, if you think about how we're working with them, like, it's across all three solution areas that we talked about earlier. So, they're using the administrative platform. We're obviously working broadly on pop health and total cost of care.

And then also, they recently took on the specialty management side. If you take all of those three, we're roughly $50 million a quarter. We see that being relatively flat across this year. So, we don't -- it will depend a little bit on whether there's life growth. Lives appear to be relatively stable.

But if there was life growth, then you might see some variability, but we would think that would stay reasonably stable across this year..

Okay, got you. And it sounded like you had some nice adds to your client base.

Maybe on the flip side, have you seen any pressure in terms of -- besides business that you've walked away from, any pressure from any consolidation among your clients or any other events that might have caused some attrition? And how would you recommend we think about attrition? And what have you baked in your guidance to be safe?.

Yes, I would say we have really strong visibility on this year. So, we sort of have a sense of where our network stands, where they are in terms of their plans for the year. Again, we'll have some variability sometimes, lives quarter-to-quarter and things like that. But when we say visibility, we're very confident in revenues for the year.

I would say if you look at our overall renewal arc, we obviously had a very strong year last year. And when you look at overall cross-sell performance, just the base of revenue coming from the existing network, and it was the highest growth rate in our history.

I think what John mentioned is something we've been pretty directed about, which is we think about margin expansion and really driving a strong bottom line. We have been very careful in looking at some relationships we've had that have been reasonably low PMPM, reasonably low revenue base.

I mean, surely, relationships we care about, but we just don't see a long-term profitability arc. We don't see a lot of growth. And so in those cases, I think we've been pretty disciplined about pricing. And we're happy to walk away from those relationships and still feel comfortable we can deliver over 20% growth.

So I would say, probably some of the strongest renewal performance that we've had in our history and across the last several years. We will be fine if some relationships end. I'd been in renewal businesses for a long time. And some level, you will have some attrition.

We feel very comfortable with the level of attrition we have today and our ability to drive, again, the revenue we've talked about for this year, but also mid-teens on an ongoing basis..

Okay, super. That's helpful. And maybe just if I could squeeze one last in, dovetailing off of that.

Can you update us? How many specific clients are you serving at this point? Is it 30 or 40? Or where are you at in terms of a baseline?.

Yes, I don't have the exact number in front of me, but I'd just -- well over 40 clients..

Okay, super. Thanks so much..

Thanks..

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

Thanks. I think that, that was a mistake. I think it's Piper Sandler now. My bad. I just want to make sure I understand the Passport impact on 2020 revenue, what you're saying. Last quarter, you said the Passport wins, the RFP services growth in 2020 will be 20%.

Does your guidance today assume a full year of Passport or a half of a year?.

Sean, right now because the contract -- when the RFP was tossed out and a new RFP was issued, they clarified that the current contract, the one that we're serving today at Passport will continue through the remainder of this year. So, the new contract now begins on 1/1/20. So, we have full visibility into Passport revenue for the full calendar year. .

Okay. So, as I understand that then, that's largely consistent then. Your outlook for 2020 is largely consistent with what you were saying last quarter.

Am I understanding that right?.

Well, there's a difference because even if Passport now were to lose the RFP, we would still have the same revenues we projected for the year because the contract will continue.

Before, if you go back to last quarter, the contract would have ended in the June 30th timeframe, and so we would have had a delta in revenue with Passport relative to a win and loss. There's no delta right now because the contract continues for the full year..

Okay.

Can you give us any guidance on anything, either cash flow guidance, free cash flow guidance or anything below the EBITDA line?.

Sean, this is John. I think the -- on the free cash flow side, targeting -- crossing that milestone by the fall. As we think of cash arc through the year, usually Q1 is our highest use of cash quarter for working capital and then settling out after there, driving towards that free cash flow number..

Thanks.

And then one last one is, can you just talk about your thinking on what is a target -- an appropriate target EBITDA margin for this business and the time line to get there?.

Yes. So, we think about where we're expecting to end this year, adding a couple of points to where we exited 2019 to get to that sort of mid-single-digits range.

As we think about the growth opportunity that Frank has been talking about in terms of that mid-teens growth rate for the next couple, few years, we see an opportunity to continue to add a couple of points of sequential EBITDA margin each year, getting up above that 10% into the teens range..

Okay. Thank you very much..

Thanks..

Our next question comes from Stan Berenshteyn with SunTrust..

Hi guys. Thanks for squeezing me in. I'm asking on behalf of Sandy. Maybe an offshoot of Sean's question.

Just thinking more big picture, as you're selling higher PMPM services and exiting the -- some lower-margin businesses, does that mix shift change the longer-term gross margin profile for the company? And if so, would you be able to maybe frame or quantify what that could look like?.

Yes. So, I think -- certainly, as you look at the gross margin after the purchase of New Century, it certainly looks different than it did beforehand.

I think as we look at our aggregate opportunity to drive the kind of EBITDA margins that I was just talking about, that hasn't changed, largely driven by the scalability sort of across the platform, both New Century and in some of the core business..

Got it. Thank you..

Thanks..

Our next question comes from Charles Rhyee with Cowen..

Yes, thanks for taking the question. Just a question on the EBITDA ramp to the year, Frank. Just wanted to get a sense here.

Is there a difference in sort of the ramped-up cost when it comes to different types of clients? And in particularly, I guess, with the number of ACO clients getting ramped up, is that a higher cost that kind of comes off faster? Or maybe if you can give us a sense on the relative differences in ramp-up times versus recognizing the revenues, et cetera, and maybe some characteristics between different types of clients..

Sure. So, if you think about the four ACO launches we talked about in the CMS program, it's a new year, right? It's a launch of these four ACOs into the program. And some of what we do here is obviously performance based. So, we have that component to our relationship.

And when you're in the initial year, you don't begin to get sound measurement on performance until the second half of the year. So, again, relative to our total number of lives, this isn't a huge number of lives. But because of that, we have some back weighting.

As we staff up, as all the lives come on, as you're going to begin to get a sense of performance in the second half, then you tend to have a ramp with the EBITDA in the first calendar year. That will smooth as you get into the out-years, but it does apply to those four ACO relationships.

With NCH, specifically, and if you think about -- we had a couple of launches and four in Medicaid that were pretty rapid launches.

And if you think about all that NCH does, from deploying pathways, from educating the network, from analytics, from formulary compliance, peer-to-peer review, decision support, UM, reimbursement model design, some of that takes time to put in place. So you're not going to have all of those things in place out of the gates.

So, that again, because these have a performance basis, can back weight your profitability. And specifically, we also had some contract terms where we were giving greater savings in the first part of the year, and then contractually that flips and we have visibility into higher levels of profitability as we get into the second half.

So, I think you take all of those components that are a little unique to this year and sort of the rapid launches, but that's generally what you tend to see. And the health plan administration side, sometimes we'll have a long implementation ramp.

If you remember, Maryland, which we're implementing as we speak, it doesn't launch until the beginning of next year. So, you'll have a longer implementation cycle and then usually a large number of lives that hit right out of the gates. And so you'd be usually at your target level of profitability right when that rolls onto the platform.

So, it does depend a little bit on mix. And if you look at mix for this year, for the reasons that I mentioned, you see it more back weighted. I mean the good news is we have high visibility into it.

In most of it, there's a little bit of a performance component, but we have historical experience there and sort of consistent performance that we have a pretty good sense of. And so that's how it then creates the arc across this coming year. .

That's helpful. And just on the ACO ones. When you go into a new year with existing clients, does that change? Because I'd imagine you would be collecting performance-related bonuses even after the calendar year as you get the results in for the end of the year.

Is that the right way to think about it? So, all else equal next year, first half would be a little bit stronger, relatively speaking--.

I think that's the whole--.

On the existing book..

Yes, you're right. But yes, you're right that there is a delay in sort of true-up just when you get the data from CMS. So therefore, you don't -- your revenues can fall outside of the period where you're actually doing a lot of the work and driving performance.

And so you can then create the type of tail you're talking about where you get additional revenues in the forward period as a result of that timeline..

And just a follow-up there.

I mean is there a lot of additional work for existing ACO customers when the new plan year starts if there's a lot of changes in the program? Or is it because you've already ramped up, a lot of the initial work is just a little bit of incremental cost?.

If it's in the same program, then usually, there would not be a lot of incremental cost. As a matter of fact, you're probably getting more salable at that point. If they're moving into a completely new program, there may be different measurement things, different data feature, getting -- there may be a network that you're standing up.

So, if it's a new program, you're going to have some additional costs. But if they're continuing in an existing program, then you tend to have more scalability year-over-year..

Okay. And one last clarification.

With the new health plan partner, plus, I guess, the three new ACOS, would you -- is it right to say we have four new partner signings so far this year or is that the right way to count it?.

No, I think the right way to count it is we have one new signing, which is the payer across five states that we mentioned, which, again, we think, is quite significant in terms of the long-term growth potential. The ACOs that we launched on Jan 1 are the ones that we announced towards the tail end of last year.

So, I think we're just trying to let everyone know that we got to the launch of the program, successful launches. They're up and running. We're well within target for the lives that we expected and feel good about how it's going from the first few months of the program, but those would count towards last year..

Okay, great. Thank you..

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

Well, we appreciate everyone participating in the call. We'll obviously see a number of you out on the road in the coming weeks and look forward to continuing the dialogue, and thanks for participating in the call..

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