Evolent Health, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Evolent provides administrative, technology and clinical services that support value-based care. Results cover two segments: Evolent Health Services (EHS) and Clinical Solutions.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $319.9 million | $222.1 million | $617.0 million | $437.1 million |
| Operating loss | $4.6 million | $7.7 million | $7.4 million | $23.6 million |
| Net loss | $4.6 million | $9.1 million | $9.9 million | $18.9 million |
| Adjusted EBITDA | $21.7 million | $13.3 million | $46.0 million | $28.3 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(43.8) million | $(72.4) million |
Q2 gross margin, calculated as revenue less cost of revenue before depreciation and amortization, was approximately 22.0%, compared with 22.5% a year earlier; the six-month margin was 23.9%, versus 24.5%. Basic and diluted loss per share was $0.05 for Q2 and $0.11 for the six-month period.
Q2 revenue grew 44.1%; six-month revenue grew 41.1%. Clinical Solutions revenue rose to $227.6 million in Q2 from $147.2 million, while EHS revenue increased to $92.3 million from $74.9 million. Management attributed growth mainly to new partners and expansion with existing partners. Adjusted EBITDA is a non-GAAP segment performance measure defined in the filing.
At June 30, cash and cash equivalents were $193.1 million, with a further $87.4 million in restricted cash and investments, much of it held for claims processing or collateral. Total cash, cash equivalents and restricted cash declined $74.5 million from year-end. Long-term debt, net, was $283.1 million; convertible notes had $289.6 million aggregate principal outstanding. Current assets were $423.1 million and current liabilities $342.8 million.
Material changes and unusual items
- Cost of revenue rose 45.1% in Q2, faster than revenue, driven primarily by higher claims activity, personnel costs and professional fees. SG&A increased 38.1%, while SG&A as a share of revenue fell to 18.4% from 19.2%.
- The six-month operating cash outflow improved year over year, but remained substantial. Cash use reflected working-capital timing, including reduced claims reserves and accrued compensation and liabilities.
- A $6.9 million six-month expense from revaluing Vital Decisions contingent consideration reduced reported operating results. Q2 included a $0.8 million expense. The six-month period also included a $0.5 million discontinued-operations disposal loss.
- Adoption of convertible-debt accounting guidance on January 1, 2022 increased the reported carrying amounts of the 2024 and 2025 notes by $25.1 million and $41.3 million, respectively, and changed opening equity; this was an accounting adjustment, not new borrowing.
Outlook, risks and subsequent events
- Management said June-end cash and cash equivalents were sufficient for anticipated needs over the next 12 months. It expects cost of revenue and SG&A to decline as a percentage of revenue over the longer term, subject to growth and service mix. The filing provides no quantified revenue or earnings guidance.
- Management said COVID-19 had not materially affected results or outlook to date, but noted uncertainty around future medical costs, partners and the economy. It warned sustained inflation and labor-cost pressure could reduce margins and profitability.
- Revenue and receivables are concentrated among a small number of partners; Cook County represented 24.1% of Q2 revenue. Loss, termination or renegotiation of a significant partner relationship could materially harm results.
- On August 1, 2022, after quarter-end, Evolent completed its IPG acquisition for $250 million cash and $125 million in stock, with a potential earnout of up to $87 million. It issued 3.7 million shares. It also borrowed $175 million under a new term facility and $50 million under a revolving facility. The new facilities bear floating-rate interest, are secured and guaranteed, and include financial covenants and other restrictions.
- A proposed $23.5 million settlement of a shareholder class action remained subject to court approval; the company expected applicable D&O insurance to fund it entirely. A separate derivative action relating to Passport remained pending.
- The company reported effective disclosure controls as of June 30, 2022 and no material quarter changes to internal control over financial reporting.
Key facts for investors to verify
- Whether revenue growth converts into improved operating profitability and margins, particularly as claims costs and labor expenses rise.
- Cash generation and liquidity after the IPG purchase and the new $225 million of borrowings, including compliance with new credit-facility covenants.
- IPG’s contribution to growth and earnings, and the likelihood and amount of its earnout.
- Partner concentration, claims-reserve estimates and performance under risk-sharing arrangements.
- Final court approval and insurance coverage for the class-action settlement, and the status of the derivative litigation.