Frank Williams - Co-Founder, CEO & Chairman Nicholas McGrane - CFO

Robert Jones - Goldman Sachs Jamie Stockton - Wells Fargo Ryan Daniels - William Blair Charles Rhyee - Cowen Anne Samuel - JPMorgan Richard Close - Canaccord Genuity Donald Hooker - KeyBanc Mohan Naidu - Oppenheimer David Larsen - Leerink Steve Halper - Cantor Fitzgerald Stephanie Davis - Citi

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 financial performance for the quarter and share our perspective on the overall market environment.

I'll then hand it to Nicky to take us through a detailed review of our first quarter results, and I'll close with an update on our platform and the overall organization. As always, we're happy to take questions at the end of the call.

In terms of our results for the quarter ended March 31, 2018, total adjusted revenue increased 35.3% to $144.4 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended March 31, 2018, was $7.9 million compared to negative $4.8 million from the comparable quarter of the prior year.

As of March 31, 2018, we had approximately 2.8 million total lives on the platform. And with 2 partner additions, we've welcomed 6 new providers to the Evolent national network already this year.

Overall, we're pleased with our results having met our strategic and financial objectives for the quarter as well as continuing to solidify our position as a market leader as providers seek an experienced operating partner to accelerate success in value-based care. In terms of the macro environment, we continue to see positive movements and more explicit commitments from HHS, CMS and several states around the pressing need to transition to value-based care.

Across the last several months, incoming HHS Secretary Azar has repeatedly emphasized the importance of performance-based reimbursement as a critical lever for reducing growth and health care spending and improving quality of care. Just this week, Seema Verma, the head of CMS, emphasized the need to move providers into more advanced risk models because of the clear evidence that ACOs with meaningful upside and downside risks are delivering substantially better outcomes than pay-for-service models.

We're also heartened by the selection of Adam Boehler to head up the Center for Medicare and Medicaid Innovation, given his long track record in working in innovative, risk-based performance improvement models. Beyond the top administrators at both the federal and state level, it's been pretty clear in our direct conversations with providers and key government officials that policymakers are feeling urgency to improve health outcomes by leveraging performance-based reimbursement as a key lever to significantly reduce costs and improve quality.

In terms of our current pipeline, we entered the spring with both a broad and deep pipeline across a number of key segments. Our work in the Next Gen ACO program with 10 partners is generating a lot of interest in the broader provider community to explore advanced payment models and delegated risk arrangements with considerable potential upside and downside.

As a result, we brought both prospects and existing partners together to work with legislators on Capitol Hill and key policymakers on improvements to existing programs as well as new, innovative ideas to improve health outcomes. This opens up significant opportunity not only in ACO based programs, but also in broader delegated Medicare Advantage risk with regional and national payers.

On the Medicaid front, we're seeing significant innovation across several states to address social determinants of health, the rising costs associated with the ABD population, and the broader opiate crisis. Many of the difficult-to-manage areas are perfectly suited for provider-driven models, which effectively engage at-risk patients and are more integrated with community-based organizations, which are a critical linchpin to an integrated solution.

Our investment in the Medicaid Center of Excellence, a recent win in Florida, have increased our national prominence in this segment with providers and opens up considerable opportunity this year and beyond. Overall, Medicaid represents a large and high-growth market for what we do.

And our growing sophistication and asset base positions us well for expansion into several states with our provider partners. The last area of notable traction in our pipeline is a direct result of our investment in a fully integrated, flexible platform that can be applied to a wide variety of provider organizations and populations.

Whether it's federally qualified health centers, large multispecialty physician groups or independent physician associations, our clinical model and technology platform can help organizations scale and perform across a large geography and expanded network. As a result, we're seeing interest from a wide variety of organizations outside of traditional health systems that in many cases are well positioned to manage population health.

This opens up a broader market opportunity for us, given that a number of these organizations have strong historical medical cost management experience and now want a broader share of the economic value they're creating. Our investment in supporting infrastructure, high-powered analytics, clinical programs and network management tools serves as a catalyst to help these organizations scale their capabilities across broader geographies, new provider organizations and new populations.

To that end, I'm pleased to comment on a few accomplishments worth noting across the last quarter. In terms of new additions to the Evolent network, I'm excited to announce the new partnership with Lee Health, a six hospital health system with 1,500 physicians organized in a clinically integrated network.

One aspect of the partnership is in Medicaid based on notification by the Florida Agency for Health Care Administration, also known as AHCA, of its intent to award a contract to a Lee Health affiliate, Best Care Assurance, LLC, to provide physical and behavioral health care services through Florida's statewide Medicaid managed care program beginning sometime between October 1, 2018, and January 1, 2019. With over 200,000 eligible beneficiaries in the region, Lee Health has an opportunity to substantially improve the health of the local Medicaid population, while also establishing the building blocks for its value-based strategy.

For Evolent, it represents an entry into the Florida Medicaid market, which is one of the largest in the country, and an opportunity to leverage the investment in capabilities that we've established in our Medicaid Center of Excellence. Lee is also a participant in our 2018 Next Gen ACO cohort, which will allow them to round out their population health experience in Medicare, and they're already off to a strong start this year.

All in all, this represents an exciting opportunity to leverage Lee's strong clinical reputation and physician network along with Evolent's integrated platform to serve 2 distinct at-need populations and establish Lee as an innovative leader in value-based care. Our second addition to the Evolent national network is with SOMOS Community Care, a leading IPA with over 3,500 physicians in the New York metro area.

SOMOS is recognized as a leading physician organization in the region, particularly in terms of access, quality of care and effectively engaging patients and managing chronic disease. The partnership will focus initially on permanently supporting the performance goals of New York's Delivery System Reform Incentive Payment program for approximately 300,000 New York Medicaid beneficiaries, with plans to expand to other value-based care arrangements.

Evolent is supporting SOMOS' efforts by accelerating its population health infrastructure, enhancing clinical transformation and providing operational support across the SOMOS network. Evolent will implement its population health performance management platform, Identifi, to share critical analytics with network providers, facilitate efficient care coordination, fund community health workers and integrate clinical and other data across the network.

The fact that both Lee Health and SOMOS selected Evolent is a testament to the differentiated platform that we've built to manage distinct populations and the consistent outcomes we're generating with our network partners. Where we tend to be distinctive is in providing a cost-effective infrastructure that integrates clinical and administrative functions under one roof, and allows our provider partners to leverage the benefits of integration in driving performance.

A number of these design elements actually evolved from UPMC Health Plan, which is the second largest provider payer in the country with over 3 million lives under management. The Evolent technology team, now several hundred strong, worked with the initial version of Identifi starting in 2011 and added deeper clinical analytics, provider workflows, utilization management, risk-adjustment capabilities and many other payer provider functions into a single platform.

Most importantly, this platform can be leveraged across over 30 EMRs in a highly disparate network which represents the average profile of today's risk-bearing provider organizations. Lastly, while the platform is highly standardized in terms of the core applications, our agile development process allows for an essential level of customization based on the provider type, local market and specific populations served.

The other key element of differentiation has been through our deliberate strategy to establish the leading Medicaid Center of Excellence in the country for provider-driven care. When prospective partners see the level of investment, the distinctive clinical and administrative capabilities and leading organizations, such as Passport, committed to best practice in vital areas such as social determinants of health, it becomes an easy decision to become an integral part of the network.

Our development team is constantly getting feedback from network partners, prospects and policymakers to prioritize the next areas for investment to ensure that we stay on the cutting edge of what's possible in delivering world-class care to Medicaid beneficiaries. Exciting progress and heartening to see such a high return on the investment we initiated roughly 2 years ago with Passport.

In terms of the broader response to our offering in the market, we're pleased to see a number of larger opportunities moving through the pipeline as well as several new conversations as providers feel increasing urgency to respond to a rapidly evolving market. Overall, we feel good about our strong revenue visibility for 2018 as well as the emerging pipeline to begin setting up 2019.

Our strong performance this quarter and continued progress in delivering substantive value for our partners is working to establish us as the clear market leader in supporting providers in the movement to value-based care. With that overview, I'll turn it over now 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 2018.

Before I start, and consistent with what we laid out in February, we've made adjustments to our reporting starting this quarter incorporating True Health. Our financial statements now contain two reporting segments.

The first is our services segment and it's the traditional business we have reported on historically, incorporating transformation and platform and operations. True Health is our second segment, which contains the results of the commercial health plan assets we acquired from New Mexico Health Connections.

We have separated these 2 segments from a reporting perspective, given the different business models. Our services segment provides a range of services to True Health, and the revenues associated with these services is eliminated in intercompany eliminations -- intersegment eliminations.

Now onto the numbers. We have delivered strong, well-balanced performance in the quarter.

On a consolidated basis, first quarter adjusted revenue increased 35.3% to $144.4 million, up from $106.8 million in the same period of the prior year. Adjusted EBITDA for the quarter was $7.9 million, up $12.7 million from negative $4.8 million in the prior year.

Adjusted earnings available for class A and class B common shareholders was $1.2 million or $0.02 per share for the quarter compared to $9.8 million or negative $0.14 per share in the same period of the prior year. Adjusted cost of revenue increased to $87.1 million or 60.3% of adjusted revenue for the first quarter, compared to $66.5 million or 62.3% of adjusted revenue in the same quarter the prior year.

The adjusted cost of revenue in Q1 2018 includes $16.7 million of claims expense associated with True Health. Adjusted SG&A expenses increased to $49.4 million or 34.2% of adjusted revenue for the first quarter compared to $45 million or 42.2% 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 costs assumed from the assets acquired as part of the True Health 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 declined to 94.5% in the first quarter of 2018 compared to 104.5% in the same quarter of the prior year.

Now I will take you through the first quarter results by segment. We saw a strong start to the year across the business, with both segments exceeding our guidance expectations for all our key metrics.

In our services segment, first quarter adjusted services revenue increased 16.9% to $124.8 million, up from $106.8 million in the same period of the prior year. As a reminder, we derive our services revenue from 2 sources, transformation and platform and operations.

Adjusted transformation revenue accounted for $10.1 million, or 8.1% of our total adjusted revenue for the first quarter compared to $10.2 million in the same quarter last year. Adjusted platform and operations revenue accounted for $114.7 million, or 91.9% of our total adjusted services revenue for the first quarter, representing an increase of $18.2 million or 18.8% compared to the same quarter last year.

The increase was driven primarily by new partners that went live in the first quarter as well as growth in some of our existing partners, particularly Passport and Cook County. As of March 31, 2018, we had approximately 2.8 million lives on our platform.

Our average PMPM for the quarter was $13.77 compared to $13.37 in the same period of the prior year. Adjusted EBITDA from our services segment was $7 million, up $11.8 million from negative $4.8 million in the prior year.

This was favorable to our guidance of $3 million to $5 million of services adjusted EBITDA for the quarter. Some of this was a result of good execution on the expense side.

However, we also experienced positive trends in performance-related arrangements in Q1, which we had not anticipated until later in the year, representing a pull forward of profitability in Q1. Turning to our True Health segment.

First quarter premium revenue is $23.6 million in line with guidance. As of March 31, 2018, True Health is serving approximately 22,000 large and small group members in New Mexico.

Adjusted EBITDA from True Health was $0.9 million, which was ahead of our breakeven expectations. We're pleased with the results from what is our first quarter of operations within the True Health segment.

Despite an intense flu season in January and February, medical costs were well managed and ahead of plan as a result of favorable utilization trends and improvement in the risk mix in the plan versus 2017. We are maintaining a prudent outlook for medical costs considering some historical seasonality in the business.

As such, we expect that medical costs may slightly increase in sequential quarters, and we are not changing our full year guidance of breakeven contribution from the segment. Adjusted depreciation and amortization expenses in the quarter was $6.9 million or 4.7% of adjusted revenue compared to $4.3 million or 4% of adjusted revenue in the same quarter the prior year.

The increase was due primarily to additional software assets being placed in service. As of May 7, 2018, there were 77.1 million shares of our class A common stock outstanding and 0.9 million shares of our class B common stock outstanding.

Turning to the balance sheet. We finished the quarter with $200.3 million in cash and $36.8 million in restricted cash and restricted investments.

For the first quarter, cash used by operations was $24.7 million, cash used in investing activities was $12.7 million and cash used by financing activities was $21.6 million. Finally, with respect to guidance, we are reaffirming the full year 2018 guidance that we introduced in February.

For the full year, we continue to expect adjusted revenue to be within the range of $565 million to $585 million. The components of full year adjusted revenue are as follows, adjusted services revenue is forecasted to be within the range of $495 million to $510 million; and True Health premium revenue is forecasted to be within the range of $90 million to $95 million; and finally, intersegment eliminations are forecasted to be approximately negative $20 million.

We continue to expect full year adjusted EBITDA to be within the range of $18 million to $23 million. Specifically with the second quarter of 2018, we are forecasting adjusted revenue to be within the range of $139 million to $143 million.

The components of adjusted revenue in the second quarter are as follows: adjusted service revenue is forecasted to be within the range of $122 million to $124 million, True Health premium revenue is forecasted to be within the range of $22 million to $24 million; and intersegment eliminations are forecasted to be approximately negative $5 million. Adjusted EBITDA in the second quarter is forecasted to be within the range of $3 million to $5 million.

In summary, we're very pleased with how 2018 has started, 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 business and the overall organization.

One of our stated operational objectives for this year and beyond is to drive greater repeatability, scalability and efficiency in order to deliver higher-value for our clients. This focus year-over-year helps to ensure that we deliver better financial and clinical outcomes, all under a leaner cost structure, which openly enhances our partners' return on investment in Evolent.

One way we're driving these improvements is by codifying our operational knowledge, processes and best practices and building an in-depth clinical knowledge base that is laser-focused on delivering best-in-class outcomes. A recent example of scaling the platform and driving the network effect is with our 2018 Next Generation ACO cohort.

We kicked off the year by operationalizing 4 new and 10 total Next Gen cohort partners who collectively manage more than 200,000 lives. One of our returning Next Gen partners realized $5.7 million in savings and a 48% reduction in medical spend from a very intentional focus on patients that stratified into our complex care program.

Our product team analyzed the key drivers of best-in-class performance, codified and embedded the insights in our Identifi technology platform, and worked to disseminate the key insights across the cohort. As part of this effort, we've leveraged our analytics team and local market leaders to regularly convene the cohort participants to identify key opportunity areas and develop shared solutions to elevate performance and results.

The fact that we can leverage our insights and technology applications across a large number of users and apply those insights to our entire Medicare business helps to create immense value across the Evolent network and scale from our platform investment. We've also been driving efficiency and operational scale within our Medicaid business.

This quarter, we helped a partner in the northeast operationalize its approach to value-based care. The primary-care ACO, which consists of 15 federally qualified health centers, is responsible for the total cost of care for approximately 115,000 Medicaid members and, therefore, needs to scale a consistent clinical approach across a disparate geographic network of clinicians and caregivers.

Evolent's investment in establishing the Medicaid Center of Excellence enabled a comprehensive rollout of the technology backbone, clinical programs incorporating social determinants of health and the operational and clinical expertise to go live to engage providers and patients. It's an exciting opportunity to partner with an innovative leader in the Medicaid space, and we're already applying learnings from this market to our other Medicaid markets that currently support over 1.5 million beneficiaries.

The last area of note where we're driving scalability and efficiency is by broadening our talent pool to be able to offer cost-effective 24/7 operational support for our health plan services work. A full-service round-the-clock operation allows us to accomplish an immense amount of work to support our clients outside of U.S.

business hours to reduce cycle times and improve quality control processes. Accordingly, we've built a fabulous group of Evolenteers with health IT experience in our new office in Pune, India.

This talented team is already working in lockstep with our U.S. teams to deliver high-quality, 24/7 health plan support services in critical areas such as technology development.

This is a great example of enhancing the quality of our offering and accessing a high skilled talent base, while at the same time, taking advantage of attractive labor costs in the Pune market. Most importantly, as we've integrated the Pune office into our corporate infrastructure, I've been delighted to see our corporate values embraced and adopted by our international colleagues, which creates a collaborative environment based on our shared mission.

With our offices in Pune and across the United States, Evolent is now more than 3,000 employees strong. Our talent base continues to be one of our most significant competitive advantages.

We continue to invest in the core elements for building a high performance organization from hiring top talent, to employee development, to aggressive career pathing. This extraordinary environment for talent, combined with our focus on building an integrated value-based care platform, is driving considerable value for our partners.

We look forward to building on this unique asset base to serve our current network and to broaden our footprint in new markets and populations. In closing, we're pleased with our results for the first quarter and remain focused on achieving our strategic and financial objectives in 2018.

We remain highly motivated by the transformation that's occurring in health care and the ability to continue advancing our position as a market leader for provider-driven value-based care. Thank you for participating in this evening's call, and we're happy now to take your questions.

Great. Thanks, guys for the questions.

Just wanted to start on the platform lives in the quarter. I guess we were somewhat surprised that they didn't really see much of a sequential increase, especially considering the January enrollment season.

But yes, you still saw healthy jump in service revenue, so just hoping you could maybe square those two things for us. And then maybe within that, was there any customer churn worth calling out as you came from 4Q into 1Q?

Yes, good question. What I would say is if you look at P&O revenues, those are up 19% on a sequential basis, and so on an annualized basis.

So that's really the most important metric that we measure. When we do live counts, it is a point estimate, and you will see that impacted by contract timing.

So people will come in and out of contracts for various reasons. If you look at today, we're at 3.1 million lives, so you do see the sequential growth we would have expected at this time of year, and I wouldn't say there's anything to call out.

As I said, sometimes there'll be a discrete delegated arrangement which someone steps out of. We have pared some of our smaller revenue arrangements that were lower in profitability.

And you have things like the exchanges where people are taking on a lower number of lives relative to the exchanges, but nothing that's measurable to point out there.

All right, great. And then, I guess just quickly on the Lee announcement, congratulations on that win.

Could you maybe talk a little bit about how many lives, or if you're willing to share kind of ballpark, how many lives that contract will eventually cover? And then trying to understand the start date is not certain yet, but is there anything that you're including from Lee as we get towards the back half of 2018?

Well, I'll just say that I think it's a significant win for us. Florida is a very attractive overall market.

It's an attractive market in Medicaid. Region 8, where Lee is a leading provider, I think offers a great opportunity for us to make a big difference with that population, leveraging the platform we've built and Lee's physician network.

In terms of revenues, we don't have a specific estimate at this point. We obviously need to work through the details.

At this point, it continues to be a provisional award, but we see it as a substantial revenue contributor for 2019. Right now, I think we estimate it starting sometime in the fourth quarter.

But again, it's a little variable based on how the next phases of the process would work, so I would say, great win for us. It will be a substantial revenue contributor, and we'll have greater details as the process moves forward.

Fair enough. Thanks, Frank.

Thanks.

Hi, good evening. Thanks for taking my questions.

I guess maybe one more question on the SOMOS IPA deal. Can you talk about the timing of when you think it will go live?

I know -- it sounded like you threw out the 300,000 lives number there. Maybe it's already gone live, I don't know.

Any color on that would be great.

Yes, this is something we have pretty strong visibility in at the beginning of the year. We've actually begun work on this arrangement.

So we are live today and anticipated this relative to our guidance. As I talked about, it's the largest IPA in the New York area with really strong historical medical management experience.

So we believe this initial contract will serve as a great vehicle for us to integrate our platform and scale our offering. Just given the quality of the physicians in the network, how innovative they are, what I think we can bring to the table, we see a substantial opportunity to increase the number of lives on the platform.

So again, initially 300,000 through the disparate program, some of that, we're already working on today. Some of our services will expand across the year.

But most of that again was anticipated in our original estimates for the year.

Okay. That's great.

And then maybe just your commentary around the momentum that you see in the Medicare ACO space, the Next Gen ACO cohort and the attention that it's getting. I think there are 55 organizations or something in that ballpark total in the Next Gen program right now, but there is 500-plus in some type of ACO.

Have you seen anything? Or do you have any strong sense for how much the cohort could grow going into 2019?

Well, I think what we've seen at this point, if you look at Seema Verma's communications even from this week, making a clear statement that providers that had higher levels of risk in their performance-based arrangements were delivering much better outcomes. So that's obviously versus the fee-for-service model.

It's also versus some of the lighter shared savings programs. We've had a number of conversations with policymakers, with legislators on Capitol Hill.

We've been bringing our partners into those conversations and prospects into those conversations to try to guide policy based on the experience we've had in Next Gen and Track 3 and other programs. And I would say we're encouraged by what we're hearing back.

I would say that there is a recognition that performance-based payment is the way to go, that if you really want to reduce the increase in health care spending and improve quality, you have to have some amount of downside that providers exposed -- are exposed to, to ultimately get them to change behavior. So based on those conversations, I mentioned the new director at CMMI.

I think we're headed in the right direction. In terms of growth, I think those folks coming out with new policies and programs that again encourage participation, whether it's Track 3, whether it's Track plus 1.

But again pushing programs that have some more substantial downside and, therefore, really force providers to move towards population health, and ultimately, our infrastructure supports that. So we expect growth.

We'll know a lot more as we get through the next several months with Azar coming onboard and Seema now in seat now for a substantial amount of time. But again, encouraged at this point.

Okay. Thank you.

Yes, guys. Thanks for taking the questions.

Wanted to ask one about the Medicaid market. As you look forward with some of the partnerships there, I'm curious if those are more likely to be skewed towards both operational/care management as well as TPA agreements like you announced with Lee Health, number one?

And then number two, how do you view that then from a kind of a PMPM standpoint? I assume that would skew it up nicely from where it is on an average basis, if you're doing both of those for clients.

Thanks.

Yes, great question. I mean, I think that's what we like about that segment of the market.

A lot of the providers that we're talking to need a fully integrated solution, so they need the clinical piece, they need administrative infrastructure. It's actually the integration of those elements that can deliver substantive value.

If you look at the pipeline, I think you'll see a couple of different approaches that we take. As you mentioned with the Lee, that's operating a full plan, we're intending to do it all, both in terms of the claims payment piece and ultimately, the clinical piece.

We also have existing provider-owned plans. If you think about Cook County or MDWise that may initially have a TPA or health plan services need, where we can get into the account through that type of service offering, and then begin to upsell and embed our clinical offering, risk adjustment, PBM.

It just offers a really nice environment for us to bring the full power of our platform together. And again, we can lead with both, we can lead with clinical, or in some cases, people will be looking for back office.

But right now, it feels like the investment we've made in the Medicaid Center of Excellence is really paying off. And if you think about since we've made it, we've entered the Illinois market, the Indiana market, now in Florida and New York, several things in our pipeline that look very attractive.

So we feel very good about this as a market segment.

Okay, appreciate that color. And then obviously a nice win, too, on the large group physician front.

I think that's now 3 or 4 for you with some of the largest groups in big markets like Atlanta, New York and in California. I'm curious if that's an area, number one, that you're seeing a lot more activity in, and if so, why that's the case suddenly?

And then number two, I think you've talked about in the past some IT customization to support the physician ACO segment. So I'm curious what milestones you've achieved there, what investments you have for 2018 and beyond, specifically for that segment that are necessary.

Yes, great question, Ryan. I mean, I think if you look at the physicians segment, I think one of the reasons why we're seeing more activity there, one, I think reputationally, we've done good work in our first set of relationships at both through health systems but also through independent physician organization.

So reputationally, in the market, I think word has gotten around. Second, if you think about managing total population health costs, inpatient costs are a significant portion of that and physician organizations are completely aligned to try to reduce those costs through proactive management of chronic condition patients, transition scare, and those sorts of things.

So in terms of the purest model for managing costs, it's a very attractive segment. And I think there's a lot of interest from payers, both on the governmental side but also on the national payers side, to find physician organizations that are able to really take and ultimately manage risk.

Third, I think if you look at the level of customization that you talked about, what we found, obviously, is that physicians want to have everything that they do fit within their workflow. So we have not wanted to, in any way, replace the EMR.

We wanted to push alerts into the EMR into their -- keep people on their staff who actually work with patients and can make sure the right things are being done in practice settings and outside. So those are our investments.

If you look at our Identifi Practice application that we started making several months ago and then now I feel are pretty fully baked in a lot of our physician relationships. We will get feedback that says, "Look, these are things that could be improved," and that will be on our development road map.

But we feel, like, today, we have a very strong suite of services for the physician segment that can compete against anybody, and frankly, is highly differentiated. And so there's nothing there that we have to do this year to enhance the tool.

They're just normal improvements that we would do year-over-year.

Okay, perfect. Thanks.

Congrats on a strong start.

Thanks.

Thanks for taking the question. I just wanted to follow up on a couple of things.

First, with Lee Health, congrats on that. Is this the only award that we should be looking at in Florida, given they are -- the results were kind of represented?

Should we expect anything else in the state with you guys?

Yes, as we've talked about, we have several network development efforts going on in Florida, some Medicaid-related, some non-Medicaid-related. We had 2 efforts that were related to this Medicare bid that did not receive award -- an award in the first round.

There is an appeal process, possible that we may hear something to the appeal process. But for now, related to Medicaid, it's Lee Health.

And then as I said, we have a number of things going on in Florida that I do think will develop fairly shortly here that would be with other populations, but that's it for Medicaid in Florida.

Okay. Great.

And when we look at Lee Health in Region 8, I mean, I think in my -- from what I've seen, they have something like in the current region, the current structure they have, something like half of the market share. Is that something that we should think about them replicating over time?

Or is anything different in terms of the participants in Region 8 this time around, as you've looked at it, that might be a little bit different?

Again, we're going to have to see how this evolves. I mean, we're still working through a process with the state.

It's very early. Lee has a great reputation in the market and a very strong brand, a sizable, clinically integrated network of physicians, deep connectivity into the community.

A lot of things that I do think, from your point, would help us to really grow share in the Medicaid market as we begin to roll this out. So we think we have the right partner and a very strong proposition.

And I think we're going to have a very substantial business there, but it's hard to put precise estimates on it today.

Yes, certainly. That makes sense.

And then lastly, you made comments -- obviously, Seema Verma made comments about wanting to have more downside risk in the ACO programs. So I guess, is that specific to ACOs?

Because it seems like didn't they extend the Medicare shared savings program? Like, you can be in MSSP now for 6 years, so kind of gave providers more time to adapt to kind of these alternative pay models without the downside risk.

Is this sort of -- would you say her comments are kind of a reversal of that? And what would it take -- can she just -- can they just change the rules, I guess, is what I'm asking?

Yes -- no, that's a good question. I mean, from our observation, a number of the early shared savings programs had little to no downside risk.

And therefore, providers could earn bonuses. They really weren't threatened by downside risk.

You didn't see a lot of change in behavior. And to be honest, it's not a great segment for us because if they're not really aggressively going to move into population health, then they don't need a sophisticated platform to do that.

I think what we hear in her comments is a recognition that light shared savings programs don't really work in terms of improving quality and lowering costs. And if we have an impending cost crisis, then yes, to your point, we're going to have to put more teeth against these programs and move providers into substantial risk if we're really going to see changing behavior and the sort of movement we want on the cost side.

So what I would say is, you might not see them cancel a program, although that's obviously happened. We saw that happen with bundled payments, and then coming out with their own new program.

And that would be my guess, that they look at the current programs suite, they probably eliminate a few things that they don't like, and they either come out with a new set of programs or they put the right incentives in place and make certain programs really attractive for providers to really move people into risk. And frankly, if it moves in that direction, that would be a huge catalyst for our business.

Because when we've seen providers really facing a substantial downside risk and realizing that they need infrastructure and support to be successful, we believe Evolent is the best platform. We obviously have the most experience working in Next Gen and some of these other programs.

So I think it would open up a big market opportunity for us.

And I guess in terms of timing though, any kind of changes? Is that possible at this point of year for 2019?

Or is, really, 2020 the earliest we would -- we could probably see kind of meaningful changes to programs?

No, I would say it's possible in terms of impact on '19. Again, they have to move through a process, and how those things work.

But there's all sorts of things in terms of demonstration projects, in terms of things they could do to existing programs that, that could definitely impact '19.

Now that you've had True Health under your belt for a quarter, is there anything that you learned maybe that surprised you relative to your initial expectations? Or perhaps anything that you learned that might be useful for some of your other partnerships?

Well, I'd say the good news is we decided to make the acquisition of True Health last year. It was an attractive market.

We felt it had a very strong team. We felt there was a thesis where you could have a profitable and growing plan.

And I'd say the good news is, it's early, but the early parts of that thesis have played out. We ultimately increased price pretty substantially.

We played with benefit design and pricing in a way that we felt was attractive. We were able to maintain high retention rates.

We see growth opportunities in the market. The team has performed very well and managed utilization in, I think, what was a challenging period in the first quarter.

So I'd say the good news is I think there's an opportunity for us to really grow New Mexico, build it into other population areas. And as we talked about, when you think about sort of generating $50 million plus ultimately in service and technology revenues and really supporting the base business, we think it's off to a good start.

I would say, for now, we're very focused on execution, on making sure that performance continues in the subsequent quarters. As you said, we're trying to learn every week and every day with what we're doing from an operational perspective.

And then we'll pull up at the end of the year and see how we feel about growth, different areas we want to invest, but overall, a good start to the relationship.

Great. And then maybe circling back to some of the comments that you've spoken about, what's coming out of Washington.

How quickly could you scale to capture some of that accelerated growth?

Well, I think a lot of the investment we've made across the last several years has been so that we're prepared to scale pretty quickly. And I think we've done that.

If you look across the Next Gen cohort and how quickly we responded to that opportunity and have built up a substantive cohort, if you look at our health plan services business, we've tripled the number of lives on the platform in the last eight quarters, I believe. It's a lot of work, it's a lot of late hours.

But we've made the investments in terms of the way we've developed the technology to make it relatively flexible and deployable rapidly, and our hope is that we could respond quickly. We obviously don't want to get out over our ski tips and take on something which has great operational risk.

So we're going to be very careful in anything that we take on. But thus far, our track record has been very good on responding, and that's been reflected in our overall growth rate.

First, congratulations on Lee. What I'm interested in is you called out the 2 efforts that failed in Florida.

And then we have Mississippi that didn't go your way, and that was more political, I think. But is there anything that you can point to maybe on the 2 lost efforts in Mississippi on why the business is not necessarily coming the company's way?

Well, I'd say in my experience in what I would call a large deal environment, in any businesses that I'd been in, you win some and you lose some. And if you look at our track record and you look at winning Cook County, winning MDWise, winning Passport, winning New York in a major way, in what is a incredibly attractive market with 300,000 lives initially, and then winning Lee, in my mind, that's a pretty good track record if you consider that we really didn't have any Medicaid business going back over 2 years ago.

So today, over 1.5 million lives, soon to be over 2 million lives in Medicaid in a very short period of time. So overall, I feel very good about the investment, the win rate, the diversity of the situations we're working in.

There are several other such markets that I didn't even mention that we're in today, so that all feels very good to me. I think in terms of the types of bids you're talking about, one, if we are working with a provider organization, they're generally not the incumbent.

And sometimes in those processes, incumbents can have some advantage. So that definitely plays into those.

Second, the provider has to establish that they have the ability to take and accept risk, and that's a process to work through with the state. Some people are going to see the real advantages that they bring in terms of community connectivity, physician engagement, the ability to really bring in social determinants of health that you tend not to see in some of the incumbent national players as strongly.

But you are identifying situations where you don't win all of those bids. I do think we're trying to apply, as we always have, since we launched Evolent, every situation we're learning and getting better at what we do.

For us, New York and Lee are two huge wins that we feel very good about; and then frankly applied some of the lessons from Mississippi where, frankly, I think we could have been on the ground earlier. And also, what I've learned is we just need to have a lot of these in the pipeline because you're not going to win all of them.

Again, I feel very good about where we are, but those are some of the lessons from the process.

Yes, I wasn't meaning that you guys haven't had success. I was just curious if there was any one thing that stood out.

Frank, you did mention Florida and some other efforts outside of Medicaid. And I think you said it could be near term possibly.

Would those be contemplated in 2018 guidance? Or if you added some of that, would that be incremental to your current guidance?

Yes, what I would say, in general, and I think this from just looking at our business over the last couple of years, but we go into the year with over 90% visibility into our forward revenue. We do always have a go-get number.

So we estimate that we're going to win some new things that ends up being a plug in the model. The good news in this business model is it's a small number.

So some of what we win is going to fill that gap. Occasionally, with a lot of new implementations, we might be slightly over.

But I don't think you're going to generally see big leaps in our revenue, just based on our model and the fact that a lot of these contracts, even if we close them, take several months to implement and before they really come onto the platform and operations platform. So the good news with predictability is you have predictability.

And the downside is you're not going to have huge leaps in revenue in general. And hopefully, you won't have huge leaps down in revenue either in a forward year coming out of January.

So that's sort of how we think about it. So I mean, the general answer would be, for now, if we won a few of those things, I wouldn't see some radical move in our revenues for the year.

If we just happen to have way overperformance on new and really compressed implementation timelines that we're all into this year, then again, as you've seen historically, you might see us on the upper end of our revenue range, as we've been the last couple of years.

And Nicky, is there any way you could just parse out the 606 for us in terms of how much that either added in the quarter or impacted?

Yes. There's a onetime adjustment, that's about $4.5 million of revenue, where we have and continue to perform work at those clients that, as a result of the 606 transition, got hung up on the balance sheet at year-end and would never have been recognized on the income statement.

So we're taking that into -- we took that in Q1. Again, they're ongoing projects, were under 605, we would have booked that revenue over the course of -- in '18, and we took that.

So that's the impact of 606. There's a very modest impact outside of that just on an ongoing basis in Q1.

But the real focus is ensuring we reflect the economic realities of the $4.5 million that got hung up on the balance sheet at year-end.

So the -- back to the earlier question about the members, I realized it's a point in time, so it can create some lumpiness. Maybe just then help us, generally, as we look forward over the next couple of quarters, some of the puts and takes on members and PMPM as well, given some of the big Medicaid wins.

I assume there's some pressure on PMPM as well. What should we expect on those 2 lines going forward for the next couple of quarters?

When we came into the year, Don, we expect lives to mirror sort of revenue growth over the course of the year. If you look where we are today, 3.1 million lives, there'll be some modest puts and takes over the course of the year.

But we've got -- the large adds for the year are substantially in place. PMPM, generally speaking, Q1 is the highest PMPM, just based on the way it's calculated.

But I would say PMPM, to your point, we'll see some trail down over the course of the year. But it will stay in the same zone as we're seeing today.

I mean, we've been pretty consistent in the $13, $12 to $13 range if you look at the last couple of years. And we'll perform in the same ZIP code this year as well.

Got you. Can you also -- I'm not sure if you mentioned and I didn't hear, but comment a little bit around free cash flow.

You gave some basic information on the cash flow statement. But can you break out CapEx or working capital?

Could you give us a sense there in your move towards free cash flow, I assume, not too long in the future?

Yes, we talked about it at the start of the year in terms of -- first off, Q1 is our heaviest cash usage of the quarter of the year. You'll see accrued comp move down with the year-end payments, et cetera.

So Q1 is a cash usage quarter. We'll be running about $8 million to $10 million of CapEx per quarter on a go-forward basis.

And you'll see working capital after Q1, it will -- for a full year basis, working capital tends to be pretty neutral in use of cash in Q1. And thereafter, you're obviously going positive in subsequent quarters, neutralizing for the full year.

So EBITDA minus CapEx will still be a deficit this year, just based on the CapEx we're spending, but they're the key metrics we're staring at.

Frank, on that strong rhetoric we are seeing from CMS, what has been the feedback from the providers on this? And I guess, is there any rush from them to start acting on these potential new risk-based programs?

Yes. Look, for the providers that we're working with and engaged with, there is a real desire to get into risk and population health.

And again, as we've talked about, it's not the full market. But I think if you look at the top 1/3 of the market, where organizations recognize that there's going to be an incredible pressure on reimbursement both through government programs and commercial payers, that they really need to start building the infrastructure.

They need to get experience in population health. They need to get experience in Medicare and Medicaid, where you see a lot of spending going in health care towards chronic patient populations across the next several years.

And what they care about is that the programs are well set up and they reflect performance. So when they launch into a program and CMS doesn't quite get the design right, that can be really hard on a provider organization that feels like they address some of the clinical issues but they might have been hurt by a change in the way risk adjustment is performed as an example.

So a lot of our conversations have been sitting down with the cohort, with all the participants that we have, and bringing our experts in and saying, how can we improve these programs so that if providers actually deliver, they can get paid substantially for the value that they're creating? And we've been bringing those groups most recently in the fall and early this year to Washington and engaging those conversations, that I can say that the conversations have been really welcomed by the people we've been interacting with.

Because there's no one that has the experience base that we have and the expertise to help make slight adjustments, which, again, make the programs more attractive than they are today. So what we'd see is a very willing group of providers who just want to make sure that the programs are well structured and increasingly want downside risk because they believe they can deliver a lot of upside and then capture that value and that they need to gain that experience.

The nuance here is a lot of commercial payers have been less willing to do that in attractive arrangements, so that's why you see a lot of focus on the government programs.

That is very interesting. On the Next Gen ACO, you made some interesting comments about the net savings and cost reduction, medical spend reduction.

Can you give us a view into how the Next Gen ACOs that are not working with you, performing, I guess, that will lead to a performance?

Yes, that's a good question. I mean, what you'll tend to see is a bell curve.

You'll see a few organizations that are performing above expectations, some in the middle and then you have some that are struggling. The thing that we've learned from the program is the benchmarking methodology radically influence performance because it was taken from a prior year performance.

So it's possible you get it out of an organization that performed very well clinically, but because of the benchmark year and the nuances of that year in the past, it was very difficult for them to generate savings. That's a great example of something that's a great issue to take to CMS with a large group of providers and get that changed, so it really rewards clinical performance correctly in a given year.

Those are the types of things we're working with CMS on today. And again, we've had, I think, a very open dialogue and a real reception to some of the concepts that we're bringing.

And again, I think where we see improvements to these programs, you're going to see more and more providers move into downside risk-based programs for those reasons. But the last piece that would really move it as well is if we think about MACRA and MIPS, which are very important to physicians and important to the physician community, CMS starts to require more downside risk for qualification in those programs.

That also would be a very significant catalyst for us in the market and something we believe is right answer. So we're, again, trying to use our experience and expertise to have conversations with the right decision makers to influence policy in that direction.

Can you maybe just touch on the SG&A costs, Nicky? I mean, they actually came in slightly better than what we were expecting.

And then any updated thoughts on the integration of Valence and headcount?

Yes, David. We've talked about it for a while.

We have been very focused on delivering SG&A and bringing in SG&A at a growth rate, low single -- low to mid-single-digit growth in order to drive margins. And we continue to perform on that basis in Q1.

I would say the integration of Valence continues to be a significant ongoing effort for us, really moving to -- one company across technology, operations, et cetera. And that's an ongoing focus and has been since the -- we acquired the company October of '16.

In Frank's prepared remarks, we talked about 3,000. We just crossed headcount of about 3,000 people at the end of Q1.

Again, our headcount today is primarily growing in conjunction with new customers and new operational situations. Obviously, SG&A is being managed very tightly.

So growth there is tied to revenue. So there we go.

Yes, and I would just add, it's been a real focus of ours for several years, but also pretty acutely across the last 12 months as we really focused on hitting our goals to get past breakeven last year and then to see real scalability on the bottom line. So inside the halls here, a lot of work to look at: efficiency where we can scale, how we can leverage technology to drive a lot of the functions that are critical for clients; integrating an organization like Valence more aggressively, which I would say we're doing this year after accommodating pretty tremendous growth.

All of those things designed to be as efficient as we can, as cost effective as we can, both from a customer value perspective, but also from a margin perspective.

Great. And then for the 10 Next Gen ACOs, can you remind me, like, how many of those have downside risk to them?

Do they all have downside risk?

They all have downside risk to them, yes.

Okay. And for the one that experienced the $5 million in savings, which I think was ahead of expectations, I think you mentioned that you're deploying some of those processes and programs to the other ones that are participating in those programs?

That's correct, yes. And again, the idea of being that, if you see something that works, that's the advantage of having a cohort of 10 participants.

You begin to be able to scale that across several providers in multiple markets. It's not just in that particular program area, but in several program areas that we're really trying to drive across the network.

You obviously have some lag because you're going to take some actions with those patients. And then that ultimately needs to change behavior and needs to change utilization and improve quality.

So we're right in the middle of that process, but very encouraging results with a number of those programs.

Just a quick question. You mentioned a pull forward on performance arrangements that you were expecting later this year.

Can you disclose what the amount was?

Right around $2 million.

So this one is for Frank. You mentioned the Medicare Advantage business in the prepared remarks.

Is there anything that changed since last year aside some potential for regulatory shifts driving demand? And as a follow-up to that, how much growth is baked in the guidance from the provider-sponsored MA plans, just given the easy comps from last year and potential for maybe kind of a shift in demand in the market?

Yes, good question. I mean, obviously, we love the demographics of Medicare Advantage, right?

You've got doubling of enrollments across the next several years. You've got extreme cost pressure on the federal government.

You have provider-driven models that bring us some real advantages. And the real challenge of course is how do you get providers to significant scale?

Because when you're launching this from a standing start, it takes a while and it takes some investment over several years to get past breakeven. So I think what we like right now in the Medicare market is, first of all, ACO programs that have substantial risk associated with them.

That's attractive for us. Whether it's Track 3, whether it's Next Gen, whether it's some of the innovator programs, it gives us an opportunity to get an organization's sort of feet wet in rolling out this clinical programs and building their network and getting experience in gaining confidence.

So I'd say that's a tremendous area of focus for us, hence the 10 Next Gen cohort that we have today, and hence, a lot of our business development activity around some of these more advanced payment models that we hope will impact '19, '20 and beyond. So I would say that's a big part of our focus.

Second, you do have some existing Medicare Advantage plans out there that are already at scale, and yet are looking for more sophisticated infrastructure. So that's an area of investment for us in terms of building out our platform, just as we have in Medicaid, and being able to serve more mature plans that want to grow and scale in their markets.

That's also very attractive for us. Third would be provider-delegated risk.

We've had some conversations with large payers in MA who ultimately want to find providers who can accept risk and manage it successfully. They don't have the interfaces to engage providers.

The trust level isn't there. And Evolent can serve as a perfect integration go-between in terms of a payer and a delegated risk arrangement in MA.

So I would say those are the 3 most attractive segments. The last segment you mentioned, provider-sponsored de novo plans, I think we've placed less emphasis there because of some of the factors we talked about before: one, the difficulty of getting to scale; two, making poor financing decisions relative to the fee-for-service business that can weigh those down.

I still think that's an attractive market for us, but we're going to need to approach it with providers who are really willing to do the right things to set up those plans for success. You're going to see us be much more discerning in terms of which customers we take on there, the markets we get into, with a big focus on being able to get them to adequate scale.

Understood. It's still early days in the provider-sponsored side, just as mostly as they figure out that market, and then one quick follow-up on the True Health biz.

Just thinking about some of the opportunities you've identified in this first quarter, how much talent build-out would be needed to address these? So to put another way, is the biz going to be inherently less talent-dependent than your core business?

Well, I mean, running a plan takes strong talent. The good news is one of the attractive things about this opportunity was that they had a very experienced and talented team.

So we feel like we have the team there to be successful and to grow for several years. I don't think we need to bring in a number of new leaders or senior management.

I mean, it feels very, very good. And that was one of the big parts of the thesis of the investment in the first place.

So I would say it feels good, great team, continue to grow and scale off the existing business, which should offer substantial margin expansion in the future if we can manage the risk elements well. And again, happy that we're off to a good start.

With respect to the first quarter guidance on revenue, the $139 million to $143 million, I think that you had said in February, did that include the 606 and the pull forward, the $2 million that you referenced?

Yes on the 606, no on the pull forward.

We appreciate everyone participating in the call. We obviously have an extended investor session on Friday in New York, and we look forward to seeing many of you there and hope you can participate, and again, appreciate you participating on the call.

Thanks.