Evolent Health, Inc. Q4 FY2021 Earnings Call

Welcome to Evolent Health's Earnings Conference Call for the Fourth Quarter and Year ended December 31, 2021. As a reminder, this conference call is being recorded. Your hosts for the call today from Evolent Health are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. 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. I will now hand the call to Seth Frank, Evolent's Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon. This conference call will contain forward-looking statements within the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual Evolent Health 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 in our current and periodic filings. For additional information on the company's results and outlook, please refer to its fourth quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the company's Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations section of the company's website, ir.evolenthealth.com, and the Form 8-K filed by the company with the SEC earlier today. During management's presentation and discussion, we will reference certain GAAP and non-GAAP figures and metrics that can be found in our earnings release as well as a summary presentation available on the Events section of Evolent's IR website, ir.evolenthealth.com. And now I'll hand the call over to Evolent's CEO, Seth Blackley.

Good afternoon, everyone, and thank you for joining the call. Today, I'll summarize the results for the fourth quarter and full year 2021 as well as the outlook for 2022. Then I'll turn to an update of our three primary investment themes of strong organic growth, expanding margins, and optimal capital deployment. I'll wrap up with a macro industry environment update. John will provide a detailed dive on the Q4 numbers, our 2022 outlook, and medium-term revenue and margin targets. As always, we'll close by taking your questions. Turning to the key financial results for the fourth quarter of 2021, ending December 31, 2021, Evolent Health's total revenue was $248.4 million. Revenue, excluding divested assets, was $245.9 million, reflecting a 39.7% year-over-year revenue growth rate. Adjusted EBITDA for Q4 was $24.3 million compared to our Q4 outlook of a range of $14 million to $18 million. During the fourth quarter, we closed the acquisition of Vital Decisions, which contributed approximately $5 million of Q4 revenue and approximately $1 million of Q4 adjusted EBITDA, consistent with expectations. Underlying our strong performance is the year-over-year growth in lives under management, which is the key volume component of Evolent's revenue. As of December 31, 2021, Evolent's services covered 20 million lives, with 1.6 million managed within Evolent Health Services and 18.4 million lives in our Clinical Solutions segment. Lives in our Clinical Solutions segments are composed of 1.5 million lives managed under our risk-based performance suite through New Century Health and Evolent Care Partners. As of the end of December, we also supported an additional 16.9 million lives through New Century Health's Technology and Services platform, inclusive of the Vital Decisions acquisition. For perspective, Evolent's contracted solutions currently cover approximately 6% of the U.S. population. For the full year 2021, we ended the year with total revenue of $908 million and $890.6 million of revenue excluding divested assets, reflecting growth of 36.7%. Adjusted EBITDA for 2021 totaled $66.3 million, representing growth of 36.5% year-over-year. These results are ahead of our medium-term revenue targets and tracking to our 2024 adjusted EBITDA margin target. The results also exceed the high end of our initial guidance for 2021 of $830 million to $880 million of revenue, and adjusted EBITDA of between $40 million and $50 million. The fourth quarter of 2021 marks the capstone of a highly successful year for Evolent across key performance metrics, and we're pleased with the continued momentum driving our business as well as the impact Evolent is delivering for our employees, partners, patients, and our mission. John will provide our complete 2022 outlook later in the call, but I'm also pleased that we expect 2022 total revenue growth between 23% and 30% and adjusted EBITDA of between $80 million and $90 million. Across the top and bottom lines, we continue to be on a path to deliver on or exceed our medium-term revenue growth and adjusted EBITDA targets. On behalf of Evolent's leadership team and Board of Directors, I want to express my appreciation to all 3,500 Evolenteers worldwide. Their passion and commitment to improving health care through innovation continues to contribute to the quality and efficiency of health care delivery in the United States. I continue to be highly impressed with our team. I'm proud to report that, even through the pandemic and upheaval in the broader economy, our employee engagement score is at an all-time high, and Evolent remains a highly desired destination for a diverse and productive workforce. Now let's discuss our ongoing progress against Evolent's three core operating objectives: number one, strong organic growth; two, expanding margins; and three, optimal capital allocation. Touching on our first theme of strong organic growth, we're pleased to announce four new operating partners today. As a reminder, we consider new operating partners to include both new partner logos as well as significant geographic expansions with existing partners using our clinical performance suite. We're pleased to have added 10 new partners during 2021 versus our annual target of 6 to 8 partnerships, and we're off to a strong start in 2022 with today's announcements. Three of the four new partnerships announced are for New Century Health with Molina Healthcare, an important and growing partner. We have signed an agreement to bring our cardiology performance suite to Molina in Nevada. In addition, Molina Healthcare in Kentucky and Washington State have elected to migrate from our Technology and Services suite to our Cardiology Performance suite. With these three expansions, in addition to the previously announced Performance suite relationship with Molina in Ohio, we anticipate Molina will contribute more than $75 million of revenue in 2022, with the opportunity to continue to grow in future years. Furthermore, we feel that the conversion from New Century Technology and Services to our performance suite is further evidence of the value we provide to our partners and the expansion opportunity we see within our existing partner base.

Thanks, Seth, and good evening, everyone. Overall, we're very pleased with our achievements relative to our 2021 financial goals, exceeding the high end of our initial and updated ranges for both our revenue and adjusted EBITDA targets and consistently delivering on all three of our strategic goals: strong organic growth, expanding margins, and efficient capital allocation. We came into 2021 with strong visibility to exceeding our mid-teens organic growth target. After adding 10 new partnerships as well as driving strong same-store sales growth throughout the year, we further exceeded expectations, achieving 37% growth for $891 million of revenue, excluding divested assets, compared to $652 million in 2020. On the bottom line, we ended 2021 with total adjusted EBITDA of $66.3 million or 7.3% of revenue, 210 basis points ahead of the midpoint of our initial 2021 guidance. Our strong margin expansion across 2021, the result of accelerated cost-reduction efforts as well as the rapid maturation of some of our newer clinical partnerships, puts us ahead of schedule coming into 2022. This profitability expansion, combined with a continued disciplined approach to investment in capitalized software development, further allowed us to expand our operating cash flow during the year, delever our balance sheet, and continue to bolster our cash reserves for future strategic investments. We ended the year with $215.6 million of available cash and net leverage of 1.1 times our trailing 12-month adjusted EBITDA, down 2.1 turns from where we began the year.