Evolent Health, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2015. Evolent provides technology, analytics, pharmacy benefit management and health-plan administration services to health systems transitioning to value-based care.
Financial performance
The period is not directly comparable with 2014: Evolent consolidated Evolent Health LLC only after the June 4, 2015 offering reorganization. Reported 2015 revenue therefore includes only the post-reorganization period, while 2014 statements did not consolidate LLC operations. Management provides supplemental adjusted comparisons that assume consolidation from the start of each period and exclude specified items.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Adjusted revenue | $36.5m | $24.2m | $73.5m | $44.3m |
| Adjusted operating loss | $12.4m | $10.0m | $22.7m | $20.2m |
| Adjusted cost of revenue / revenue | 68.4% | 73.7% | 69.3% | 73.5% |
| Adjusted SG&A / revenue | 59.7% | 65.0% | 56.7% | 69.2% |
Adjusted measures are non-GAAP and reflect the reorganization as if completed at the start of the period; they also exclude purchase-accounting adjustments, stock compensation and transaction costs. Adjusted operating losses are not net losses.
- Revenue growth: Adjusted Q2 revenue rose 50.7% year over year; six-month revenue rose 66.1%. Platform and operations revenue drove growth, increasing 78.9% for Q2 and 93.1% for six months.
- Operating scale: Lives on the platform increased 108% to 594,020 at quarter-end; partners in the platform-and-operations phase rose to eight from five. Average monthly per-member fee declined 2.3% to $17.41.
- Reported GAAP results: Revenue was $10.4m and operating loss $11.5m for the quarter. Net income was $356.5m, including a $414.1m noncash gain on consolidation; the gain makes reported net income and EPS poor indicators of underlying operating performance. Six-month net income was $345.2m, also including that gain.
- Cash flow and liquidity: Six-month operating cash flow was negative $5.8m; cash and cash equivalents were $219.4m at June 30, plus $6.9m restricted cash. IPO proceeds were $209.1m net. The company reported no debt and said liquidity was sufficient for at least 12 months.
- Balance sheet: Total assets were $1.04bn, including $608.9m goodwill and $168.2m net intangible assets established in the reorganization. Total liabilities were $91.1m; shareholders’ equity was $948.7m, including $294.5m non-controlling interests.
Material changes, outlook and risks
- The June offering reorganization gave Evolent voting control and a 70.3% economic interest in Evolent Health LLC, resulting in consolidation and the one-time $414.1m gain. The preliminary fair-value allocation included $608.9m goodwill and $169.0m identifiable intangibles.
- Management expected continued operating losses while investing in growth, partner support, geographic expansion and capabilities. It said additional capital might be needed if revenue growth objectives are not achieved; no specific financial guidance was provided.
- An April 2015 amendment to the Piedmont WellStar agreement reduced expected contract value by approximately half. Management anticipated revenue from that contract to decline 14% in 2016 and 40% in 2017 versus 2015, with larger reductions expected in 2018.
- Revenue was concentrated: six largest partners represented 81.1% of six-month revenue. The company also cited reliance on UPMC for certain services and identified partner growth, customer retention, healthcare regulation, competition, data security, and its ability to achieve profitability as risks.
- A tax receivables agreement requires payment to specified investors of 85% of certain realized tax savings. No liability was recorded at June 30 because no relevant exchanges had occurred and historical losses had not been utilized.
- Disclosure controls were deemed ineffective because of a material weakness in accounting for complex, non-routine transactions. Management reported remediation efforts, including additional accounting staff, training and review procedures.
Key facts for investors to verify
- Use the adjusted pro forma results, not reported GAAP net income, to assess operating trends; review the reconciliation and exclusions.
- Track partner concentration, renewals and the financial impact and timing of the Piedmont WellStar contract amendment.
- Monitor enrollment, PMPM rates and whether revenue growth translates into improving operating margins and cash flow.
- Assess progress in remediating the material weakness and whether disclosure controls become effective.
- Review the final purchase-accounting valuations, future amortization, potential tax receivables agreement payments and use of IPO proceeds.