• Adjusted EBITDA: $31.8 million for Q3 2024, impacted by $42 million in higher than expected medical costs.
• Medical Costs Impact: $24 million increase due to higher claims from prior periods and $18 million increase due to acceleration in medical costs in Q3.
• Revenue Guidance: Updated to $2.55 billion to $2.575 billion for 2024.
• Adjusted EBITDA Guidance: Revised to $161 million to $175 million for 2024, with Q4 guidance of $22 million to $37 million.
• Cash from Operations: $18.7 million in Q3 2024; $67.2 million year-to-date.
• New Revenue Agreements: Six new agreements in Q3 2024, the largest number in a single quarter since the company's founding.
• Financing: Obtained $250 million in incremental committed financing, including a new $125 million term loan and a $75 million delayed draw term loan.

• Warning! GuruFocus has detected 3 Warning Signs with EVH.

Release Date: November 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Evolent Health Inc (NYSE:EVH) announced six new revenue agreements in the third quarter, marking the highest number of new agreements in a single quarter since the company's founding.
• The company is well-capitalized and cash flow positive, with a strong liquidity profile, generating $312 million in cash from operations over the last eight quarters.
• Evolent Health Inc (NYSE:EVH) has secured $250 million in incremental committed financing, providing a buffer for potential slower cash receipts and a proactive path for 2025 convertible note maturity.
• The company reaffirmed its long-term expectations for revenue growth of 15% and adjusted EBITDA growth of at least 20% on average annually.
• Evolent Health Inc (NYSE:EVH) continues to see strong demand for its specialty solutions, with significant new business signings and a robust sales pipeline going into 2025.

Negative Points

• Evolent Health Inc (NYSE:EVH) revised its 2024 adjusted EBITDA outlook downward due to higher than expected medical costs, particularly in its specialty performance suite.
• The company experienced a significant spike in oncology costs, driven by factors such as increased disease prevalence and rapid increases in unit costs.
• Evolent Health Inc (NYSE:EVH) is facing challenges with reimbursement rates, necessitating negotiations for an additional $100 million in annualized rate increases.
• The company's accounts receivable collections have slowed, prompting a draw on its revolving credit facility.
• Evolent Health Inc (NYSE:EVH) is dealing with a small number of partners driving high medical loss ratios, representing 40-50% of performance suite revenue, which may require exiting risk arrangements if terms cannot be aligned.

Q & A Highlights

Q: Can you provide more details on the claims audit process and the scope of expenses outside of the performance suite? A: John Johnson, CFO, explained that the claims audit process is a regular part of operations where claims files from customers are reviewed for discrepancies. This quarter, the volume of claims flagged for review increased significantly, over 10 times compared to last year. The review process is ongoing, and they have only completed about 10% of it so far. The small number of partners driving high medical loss ratios represent about 40-50% of performance revenues.

Q: Regarding the $100 million rate adjustments expected by January 1, 2025, how much is related to retroactive payments and how much is for future costs? A: John Johnson, CFO, clarified that the $100 million rate adjustments are prospective, based on changes in population and trends seen this year. Approximately $45 million of this is mechanical, based on contractual provisions that automatically adjust rates for the next year. The remaining $55 million will require negotiation with partners.

Q: How should we think about the margin performance from the mature cohort of performance suite contracts? A: John Johnson, CFO, stated that the recent spike in oncology costs has affected all cohorts, both old and new. Despite this, they believe the value creation opportunity supports their mid-teens margin target. They are evaluating whether to adjust the risk corridor to lower long-term margins while providing more downside protection.

Q: Can you explain the expected financial contributions from the new partnerships announced this quarter? A: John Johnson, CFO, mentioned that the six new agreements are expected to generate around $200 million in annualized revenue. The tech and services agreements account for about $10 million, with the rest from performance suite agreements. All are expected to go live in 2025.

Q: What is the impact of the Inflation Reduction Act on Evolent Health, particularly regarding Part B drug negotiations? A: John Johnson, CFO, indicated that they anticipate minimal impact from the Inflation Reduction Act on Evolent Health, as they generally do not take risk in Part D, which is more affected by the Act.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.