Evolent Health, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Evolent provides technology, analytics, pharmacy benefit management and health-plan administration services to provider organizations moving toward value-based care. Revenue comes from transformation services and platform and operations services. At quarter-end, the company had 13 revenue-producing partners and approximately 1.5 million lives on its platform, up from approximately 0.7 million a year earlier.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 |
|---|---|---|---|
| Revenue | $60.2 | $40.4 | $166.2 |
| Operating income (loss) | ($15.8) | ($17.2) | ($203.5) |
| Net income (loss) | ($15.8) | ($17.1) | ($201.6) |
| Net loss attributable to Evolent Health, Inc. | ($11.2) | ($12.0) | ($142.3) |
| Basic and diluted loss per share | ($0.26) | ($0.29) | ($3.34) |
- Q3 revenue increased 49.0% year over year. Platform and operations revenue rose 56.0% to $52.5 million; transformation revenue increased 14.4% to $7.8 million.
- Q3 gross margin was approximately 43.7%, versus 38.7% in Q3 2015; operating margin was approximately negative 26.3%, versus negative 42.7%.
- Nine-month results include a $160.6 million goodwill impairment charge. The 2015 nine-month GAAP comparison is not directly comparable: Evolent LLC’s operations were not consolidated for the full period and 2015 included a $414.1 million gain on consolidation.
- On a non-GAAP adjusted basis intended to improve comparability, nine-month revenue was $166.3 million, up 42.4%; adjusted operating loss was $24.4 million, compared with $32.4 million in 2015. These measures exclude specified items and are not GAAP results.
- Nine-month cash used in operating activities was $14.0 million; investing activities used $22.8 million. Cash and cash equivalents were $109.8 million at September 30, down from $145.7 million at December 31, 2015. The company reported $49.7 million of investments and $6.6 million of restricted cash.
- The company had no outstanding debt. Current liabilities were $65.3 million and total liabilities were $91.4 million at quarter-end.
Changes, outlook and risks
- Q3 operating loss narrowed year over year despite higher operating expenses. Management attributed revenue growth principally to platform enrollment growth and additional partners; cost of revenue declined as a share of revenue.
- The company recorded the $160.6 million goodwill impairment in Q1 after a sustained share-price decline. Further impairment could be material.
- Management expects continued operating losses for the foreseeable future, while stating that cash, investments and other liquidity sources should cover requirements for the next 12 months. It provided no specific numerical revenue or earnings guidance in the supplied filing text.
- After quarter-end, Evolent acquired Valence Health on October 3 for stated consideration of $219.4 million, including $50.3 million cash and 7.0 million shares, with up to $12.4 million of additional stock earn-out. It acquired Aldera on November 1 for $34.4 million, including $24.5 million cash and approximately 0.5 million shares. Neither acquisition is included in Q3 results. After these acquisitions, the filing said $84.7 million remained in cash, cash equivalents and short-term investments.
- Revenue is concentrated: the three largest partners represented 49.9% of nine-month revenue. Management also cited partner termination rights, evolving healthcare regulation, integration and acquisition execution, and data security and service continuity as risks.
- The tax receivables agreement requires payment to certain investors of 85% of specified tax savings. The filing estimated potential payments of approximately $182.7 million under a hypothetical scenario involving all Class B units; actual timing and amounts depend on exchanges, taxable income and other factors. No TRA liability was recorded at quarter-end because the related benefits had not been realized.
- Disclosure controls and procedures were reported ineffective as of September 30, 2016, due to an ongoing material weakness in the financial statement close process. Management described remediation efforts and additional review procedures.
Important facts for investors to verify
- Whether partner and enrollment growth continues, and whether revenue concentration or partner termination materially affects results.
- Post-acquisition cash, liquidity, integration costs and performance of Valence Health and Aldera; acquisition accounting was still being finalized.
- Underlying operating cash use and progress toward profitability, including the impact of continued software investment and acquisition-related costs.
- Goodwill valuation assumptions and the potential for additional impairment.
- Potential tax receivables agreement obligations as exchanges occur and tax benefits are realized.
- Progress in remediating the material weakness and restoring effective disclosure controls.