Evolent Health, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial figures below are in millions unless noted. Evolent provides administrative, specialty-care management and total-cost-of-care services to health plans and healthcare providers through its Evolent Health Services (EHS) and Clinical Solutions segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $222.5 | $239.6 | $659.6 | $678.1 |
| Operating loss | $(6.6) | $(16.4) | $(30.2) | $(267.4) |
| Net loss attributable to common shareholders | $(13.0) | $(37.3) | $(32.0) | $(319.6) |
| Adjusted EBITDA | $13.8 | $13.8 | $42.0 | $28.2 |
| Operating cash flow | Not separately stated | Not separately stated | $(27.9) | $(3.4) |
Margins and mix: Cost of revenue was 73.3% of revenue in Q3, versus 75.9% a year earlier, implying gross margin of approximately 26.7% versus 24.1%. SG&A was 23.1% of revenue versus 21.9%; operating margin was approximately (3.0)% versus (6.9)%. For the first nine months, cost of revenue was 74.8% of revenue versus 76.9%, while SG&A was 23.1% versus 22.4%.
Balance sheet and liquidity: At September 30, cash and cash equivalents were $252.5 million, restricted cash and investments were $29.3 million, and current assets and current liabilities were $478.2 million and $367.2 million, respectively. Total debt carrying value was approximately $237.8 million, while aggregate convertible-note principal was $316.3 million. The $26.7 million principal balance of the 2021 Notes was due December 1, 2021. Management said available cash should fund working capital and capital expenditures for at least 12 months.
Changes versus prior periods
- Q3 revenue declined 7.1%; nine-month revenue declined 2.7%. EHS revenue fell $23.1 million in Q3 and $46.3 million year to date, chiefly from the Passport wind-down. Clinical Solutions revenue rose $6.0 million in Q3 and $27.8 million year to date, supported by new partners and expansion with existing partners.
- Q3 cost of revenue fell 10.3%, faster than revenue, reflecting lower capitation costs and headcount as Passport operations wound down, and a mix shift toward higher-margin services. Adjusted EBITDA was essentially flat year over year in Q3 and higher year to date.
- Operating and net losses improved substantially against 2020, which included a $215.1 million goodwill impairment, a $47.1 million equity-investment impairment and other unusual charges. The 2021 nine-month results included a $23.0 million Passport membership-transfer gain and a $19.2 million loss on repayment of debt.
- Operating cash outflow worsened to $27.9 million from $3.4 million. The company attributed the 2021 outflow in part to higher receivables and contract costs and reductions in accrued liabilities and compensation. Investing cash inflow was $38.6 million; financing cash outflow was $90.4 million, primarily reflecting repayment and termination of the Ares credit facility and settlement of related warrants.
Outlook, commentary and material risks
- No numerical revenue, earnings or cash-flow guidance is provided in the filing. Management expected 2021 platform and operations growth to benefit from new customer additions, partly offset by the Passport run-off. It expects longer-term cost of revenue and SG&A to decline as a share of revenue, subject to business mix and growth.
- The repositioning plan, including organizational and cost-efficiency actions, was expected to conclude in Q4 2021. Costs incurred through September 30 were $7.3 million; total expected costs were $8.1 million.
- Vital Decisions was acquired on October 1, 2021, after quarter-end, for $85 million plus potential earn-out consideration of up to $45 million. It is to join Clinical Solutions/New Century Health.
- Passport-related proceeds remain subject to regulatory approval: management expected a total return of capital of $130 million to $170 million. Evolent had received $23.0 million from Molina for membership transfer; the remaining 50% of the eligible payment was contingent and expected in Q1 2022.
- Partner and receivables concentration is material: Cook County represented 29.0% of revenue in both Q3 and the first nine months, and 43.7% of trade receivables at quarter-end. Florida Blue Medicare represented 13.8% of Q3 revenue. Loss, renegotiation or non-renewal of a major contract could materially affect results.
- COVID-19 had not materially affected results or outlook to date, according to management, but future utilization, membership and economic effects remain uncertain. The filing also highlights sensitivity of claims reserves to medical-cost trends and claims-development assumptions.
- The securities class action relating to Passport had proceeded to discovery; the company said it could not estimate a probable loss or range. A shareholder derivative action was also pending, with an amended complaint filed after quarter-end. Evolent stated it believed both matters lacked merit.
Important facts for investors to verify
- Cash available after the 2021 Notes maturity and the funding, timing and regulatory approval of expected Passport capital returns.
- Whether new Clinical Solutions business can offset Passport-related EHS revenue decline, and the sustainability of segment margins and Adjusted EBITDA.
- Customer concentration, contract renewal and reprocurement exposure, particularly Cook County and Florida Blue Medicare.
- Claims-reserve development, partner payment timing and the working-capital impact of rising receivables.
- Vital Decisions’ purchase accounting, integration costs and any earn-out obligations, along with outcomes of the pending litigation.