Evolent Health, Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Evolent provides technology-enabled services to health care providers moving to value-based care and, beginning in 2018, operates True Health, a commercial health plan in New Mexico. Comparisons with 2017 are affected by the January 2018 acquisition of NMHC assets and the launch of True Health.
Financial performance
- Revenue: Q2 revenue was $144.3 million, up 34.8% year over year. Services revenue rose 13.5% to $121.6 million; True Health contributed $22.7 million in premiums, with no comparable 2017 health-plan revenue. For the first half, revenue was $284.0 million, up 33.1%; Services revenue increased 11.5% to $237.9 million and premiums were $46.1 million.
- Profit and loss: Q2 operating loss was $9.0 million versus $19.1 million in 2017; net loss was $10.0 million versus $19.7 million. First-half operating loss was $23.1 million versus $40.6 million, and net loss was $24.1 million versus $42.8 million. Diluted loss per share was $0.13 for Q2 and $0.31 for the first half, compared with $0.28 and $0.62, respectively.
- Adjusted EBITDA: Management reported $4.9 million for Q2, compared with a $3.6 million loss in 2017; first-half adjusted EBITDA was $12.8 million versus a loss of $8.3 million. This non-GAAP measure excludes specified items, including stock compensation and other adjustments.
- Margins and expenses: Cost of revenue was 47.8% of total revenue in Q2 and 49.6% for the first half, versus 63.5% in both 2017 periods. SG&A was 39.8% of revenue in both 2018 periods, versus 47.7% and 49.1%. Claims expenses, associated with True Health, were $18.4 million in Q2 and $35.2 million for the first half. Depreciation and amortization increased 45.3% in Q2 and 44.5% for the first half.
- Cash flow and liquidity: First-half operating cash use was $18.0 million, compared with $37.8 million in 2017. Investing cash use was $19.4 million, including $20.2 million of property and equipment purchases; financing cash use was $3.7 million. At June 30, cash and cash equivalents were $198.0 million and restricted cash and investments were $57.1 million. Management stated that liquidity was sufficient for at least 12 months from the financial statements’ issuance date.
- Debt: The company had $125.0 million principal amount of 2.00% convertible notes due December 2021, carried at $121.9 million net of discount. Their disclosed fair value was $139.8 million at June 30.
- Balance sheet: Total assets were $1.322 billion and total liabilities were $270.2 million. Current assets were $353.3 million and current liabilities $136.2 million. Restricted balances include funds held for partners’ claims and collateral and are not all freely available for general use.
Material changes versus the prior comparable period
- Revenue growth reflected higher platform and operations fees, 10.9% aggregate enrollment growth on the platform, and the addition of True Health premiums following the NMHC acquisition. Evolent reported more than 30 operating partners, versus more than 25 a year earlier.
- True Health added insurance premiums, medical claims expense, and claims-reserve estimates to the business. At June 30, claims reserves were $9.5 million.
- First-half cash use improved year over year, while capital spending and acquisition/investment-related outlays contributed to investing cash use.
- ASC 606 adoption on January 1, 2018 increased opening retained earnings, including non-controlling interests, by $17.3 million. The transition affected revenue timing and capitalization of certain contract costs; prior-year income statement amounts were not restated. A $4.5 million one-time transition-related adjustment is included in management’s first-half adjusted results and is not expected to recur.
- The company’s economic interest in Evolent Health LLC increased to 99.0% from 96.6% at year-end 2017, largely following Class B exchanges. A March 2018 private sale generated no proceeds for Evolent.
Outlook, risks, and unusual items
- No specific forward-looking revenue, earnings, or cash-flow guidance is provided in the supplied filing text. Management expects transformation services to decline as a share of revenue as the offering becomes more product-oriented; it expects cost of revenue as a share of revenue to continue declining and SG&A to decline as a share of revenue over the long term. It also expects depreciation and amortization to rise as software and acquired intangible assets are amortized.
- Management expects continued investment in growth, partner success, geographic expansion, and capabilities, and cautions that operating losses may continue and additional capital may be needed. It says current liquidity is expected to cover at least the next 12 months.
- Revenue and receivables are concentrated among a small number of partners. The two largest partners represented 29.3% of first-half revenue; one partner accounted for 27.0% of trade receivables at June 30. Contracts may be terminated, renegotiated, or amended, and forecast revenue from remaining performance obligations may not be realized in full.
- Other key risks include health-care regulation and market changes, partner growth and medical-cost control, integration of acquisitions, claims-reserve estimation, cybersecurity and data protection, and the company’s history of losses. The $10.0 million NMHC capital-only reinsurance arrangement is collateralized but, according to the filing, transfers no underwriting risk to Evolent.
- Commitments include up to $5.4 million of equity-method investee funding and $39.9 million of operating lease payments. The company disclosed no legal proceedings it believed would have a material adverse effect. It reported that a previously identified material weakness in internal control over financial reporting was remediated as of June 30, 2018; disclosure controls were deemed effective.
Important facts for investors to verify
- How much of revenue growth and improved adjusted EBITDA is sustainable, separating organic Services growth from the newly acquired True Health business and one-time ASC 606 adjustments.
- True Health’s claims performance and reserve adequacy, including sensitivity to medical-cost trends and claims-payment development.
- Partner concentration, contract renewal or termination terms, and the durability of expected revenue from remaining performance obligations.
- Cash runway using unrestricted cash separately from restricted balances, alongside capital expenditure needs, acquisition plans, and potential additional financing.
- The assumptions and exclusions in adjusted EBITDA, and the effects of ASC 606 and acquisition-related accounting on comparisons across periods.
- Progress in sustaining the remediated internal controls and the outcome of the planned annual goodwill impairment review.