Evolent Health, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Evolent provides technology-enabled value-based care and health-plan services through its Services segment and operates True Health, a commercial health plan in New Mexico.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $197.8 million | $139.7 million | +41.5% |
| Operating loss | $46.6 million | $14.1 million | Loss widened |
| Net loss attributable to Evolent | $46.7 million | $13.6 million | Loss widened |
| Diluted loss per share | $0.59 | $0.18 | Loss widened |
| Adjusted EBITDA | $(14.8) million | $7.9 million | Declined |
| Cash used in operating activities | $25.7 million | $24.7 million | Outflow increased |
Services revenue rose 29.5% to $150.6 million, led by platform and operations services, up 34.1% to $147.3 million. True Health premiums increased 101.4% to $47.1 million. Transformation services revenue fell 48.5% to $3.4 million.
Costs grew faster than revenue: cost of revenue increased 63.2% to $117.4 million, while claims expense increased 125.4% to $37.8 million. Cost of revenue was 78.0% of Services revenue, versus 61.9%; claims expense was 80.1% of premiums, versus 71.6%. SG&A was $74.8 million, or 37.8% of revenue, compared with 39.7%.
Financial position and liquidity
- Cash and cash equivalents were $170.8 million at March 31, 2019, down from $228.3 million at December 31, 2018. Restricted cash and investments were $58.0 million, compared with $160.8 million.
- Total cash, cash equivalents and restricted cash reported in the cash-flow statement was $227.5 million at quarter-end. The filing attributes much of the cash-flow financing outflow to a $107.5 million reduction in pass-through balances held for partners’ claims processing.
- Long-term debt, net of discount, was $223.3 million. Convertible-note principal totaled $297.5 million: $125 million of 2.00% notes due 2021 and $172.5 million of 1.50% notes due 2025.
- Total liabilities were $479.2 million and total assets were $1.63 billion. Adoption of the lease standard added right-of-use assets and lease liabilities; reported operating lease liabilities were $60.6 million at March 31.
- Management stated that available liquidity was sufficient for at least the next 12 months. The company has incurred operating losses since inception and said it expects losses to continue for the foreseeable future.
Material changes, outlook and risks
- Growth in platform and operations revenue reflected the 2018 New Century Health acquisition, higher average per-member fees and 20.8% aggregate growth in lives on platform. Evolent reported more than 35 operating partners.
- Higher premiums and claims primarily reflected the NMHC quota-share reinsurance agreement: Evolent assumes 90% of NMHC gross premiums and indemnifies 90% of claims, subject to a stated maximum exposure of 105% of ceded premiums. The arrangement materially increases reported revenue and claims expense.
- Q1 SG&A included approximately $11.6 million of one-time transaction, transition and severance costs, versus $2.6 million in Q1 2018. Segment Adjusted EBITDA was $(15.5) million for Services and $0.7 million for True Health.
- Management expects transformation revenue to decline as a share of revenue, and expects cost of revenue and SG&A to decline as percentages of revenue over time. It also expects depreciation and amortization to increase as software investment and acquired intangible amortization continue. The filing provides no specific earnings or revenue guidance.
- Key risks include reliance on a small number of partners and customer contracts, possible contract loss or renegotiation, health-care market and regulatory changes, the ability to manage medical costs and risk-bearing arrangements, and the need to achieve growth and control costs. Passport-related revenue and the partner relationship face uncertainty from rate-adjustment litigation and Passport’s financial condition; the filing warns of possible materially reduced fees or customer loss in 2019.
- The company had an $11.0 million commitment to provide operating capital or reserve support to equity-method investees, potentially callable during 2019. It reported no known legal proceedings expected to have a material adverse effect on financial position or results.
Key investor verification points
- Track operating cash use and unrestricted cash separately from restricted and claims-processing pass-through balances.
- Assess whether Services growth and lives-on-platform gains translate into improving segment profitability, particularly given the higher cost-of-revenue ratio.
- Monitor True Health and NMHC reinsurance claims, reserve development, and the effect of the 105%-of-ceded-premiums exposure cap.
- Review Passport litigation, solvency and contract developments, alongside the disclosed customer and revenue concentration.
- Confirm the timing and funding implications of 2021 and 2025 convertible-note obligations, lease commitments, and potential investee-support commitments.