Evolent Health, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Evolent provides administrative, technology and clinical services to health plans and providers pursuing value-based care. It reports two segments: Evolent Health Services (EHS) and Clinical Solutions.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $297.1 million | $215.1 million |
| Operating loss | $2.8 million | $15.9 million |
| Net loss | $5.4 million | $9.8 million |
| Adjusted EBITDA | $24.3 million | $14.9 million |
| Cash used in operating activities | $57.4 million | $48.2 million |
- Revenue grew 38.1%. EHS revenue was $106.9 million, up from $84.8 million; Clinical Solutions revenue was $190.2 million, up from $130.2 million. Management attributed growth to new partners and expanded services with existing partners.
- Operating margin improved to approximately negative 0.9% from negative 7.4%. Cost of revenue was 74.0% of revenue, versus 73.4%; SG&A declined to 19.8% of revenue from 27.2%. Adjusted EBITDA margin was approximately 8.2%, versus 6.9%.
- Unrestricted cash and cash equivalents were $210.2 million; restricted cash and investments were $52.6 million. Combined cash and restricted balances fell to $262.8 million from $354.9 million at year-end. Operating cash use was driven in part by receivables, prepaid assets, claims reserves and compensation timing. Software and property investment was $8.5 million.
- Long-term debt, net, was $282.6 million. Convertible-note principal totaled $289.6 million: $117.1 million due 2024 and $172.5 million due 2025. Management attributed the higher carrying value versus year-end primarily to adopting convertible-debt accounting guidance, not new borrowing.
- Total assets were $1.34 billion and shareholders’ equity was $611.2 million. A $66.4 million opening-equity adjustment from adoption of the new convertible-instrument standard reduced reported equity.
Material changes and unusual items
- Revenue increased primarily from partner additions and expansions, including growth in Clinical Solutions and the contribution of Vital Decisions, acquired in October 2021.
- Cost of revenue rose 39.2%, including higher claims activity, personnel and third-party service costs, and $9.6 million of accelerated contract-cost amortization for certain customers.
- The company recorded a $6.1 million operating expense from the change in fair value of contingent consideration. The liability, related to the Vital Decisions earn-out, was $32.6 million at quarter-end.
- Q1 2021 comparisons include True Health as discontinued operations, a $23.0 million membership-transfer gain, a $7.8 million equity-method gain and a $19.2 million debt-repayment loss. Q1 2022 included a $0.6 million equity-method gain. These items affect year-over-year comparability.
- Revenue from obligations satisfied in prior periods was $26.5 million, primarily due to net gain share and changes in estimates. The company had $162.0 million of fixed transaction price allocated to remaining performance obligations, excluding most variable platform and operations revenue.
Outlook, risks and contingencies
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management said available cash should cover working capital and capital needs for the next 12 months, and expects cost ratios to improve over the longer term, depending on business mix and growth.
- Management reported no material COVID-19 impact to date, but cited uncertainty from future pandemic developments, inflation and higher labor costs, which could affect partners and liquidity.
- Partner and revenue concentration is significant: Cook County represented 23.9% of Q1 revenue and Florida Blue Medicare 11.9%. The loss or renegotiation of a major partner could materially affect results. Receivables were also concentrated; Florida Blue and Cook County represented 35.3% and 27.9% of short-term trade receivables, respectively.
- Claims and performance-based reserves were $164.2 million. Estimates depend on claims completion factors, medical-cost trends and other assumptions; changes in experience can affect current-period earnings.
- Two shareholder matters related to Passport remain in litigation: a securities class action in discovery and a derivative action with motion-to-dismiss briefing ongoing. The company considers both to have little merit, but outcomes are uncertain.
- Management identified no goodwill or intangible-asset impairment trigger during the quarter. It reported disclosure controls effective as of March 31, 2022 and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, partner additions and expansions continue, and how much growth depends on concentrated customers and variable performance-based fees.
- Whether operating cash use and working-capital demands moderate; distinguish unrestricted cash from restricted and partner-related balances.
- Claims reserve development, medical-cost trends and the effect of capitation and other risk-bearing arrangements on margins.
- The timing and cash or dilution implications of the 2024 and 2025 convertible notes, including any conversion or repayment requirements.
- Vital Decisions’ performance against earn-out targets and any related changes to contingent consideration.
- Developments in the Passport-related litigation and any resulting financial or operational consequences.