Evolent Health, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015. Financial amounts are in U.S. dollars; dollar figures are in millions unless stated otherwise. Comparisons require care: Evolent began consolidating Evolent Health LLC after the June 4, 2015 offering reorganization, so reported 2015 and prior-year GAAP results are not directly comparable.
Business context
Evolent provides technology and managed services to health systems adopting value-based care, including population-health platforms, analytics, pharmacy benefit management and health-plan administration. Revenue comes from transformation services and ongoing platform and operations services. The company had ten partners under long-term agreements at quarter-end, nine of them in the platform and operations phase.
Financial performance and position
| Metric | Q3 2015 | Prior comparable period or other detail |
|---|---|---|
| Reported revenue | $40.4 | $0 reported in Q3 2014; not comparable due to consolidation |
| Reported operating loss | $(17.2) | Q3 2014 reported no consolidated operating revenue or expenses |
| Net loss attributable to Evolent | $(12.0) | $(3.2) in Q3 2014 |
| Adjusted pro forma revenue | $43.3 | $29.9 in Q3 2014; up 44.8% |
| Adjusted pro forma operating loss | $(9.7) | $(5.8) in Q3 2014 |
| Adjusted revenue, nine months | $116.8 | $74.2 in 2014; up 57.5% |
| Adjusted operating loss, nine months | $(32.4) | $(26.0) in 2014 |
Adjusted figures are non-GAAP pro forma measures that include Evolent Health LLC as if consolidated from the start of each period and exclude specified stock compensation, transaction and purchase-accounting effects. They should not be treated as GAAP results.
- Revenue mix and activity: Q3 adjusted platform and operations revenue rose 98.3% year over year to $35.7 million; adjusted transformation revenue fell 36.3% to $7.6 million. Lives on the platform increased 146.3% to 717,587, while average monthly per-member fees declined 12.8% to $18.15. Q3 shared-savings revenue included $2.1 million.
- Margins and costs: Adjusted cost of revenue was 56.3% of adjusted revenue in Q3, versus 64.6% a year earlier. Adjusted SG&A was 59.1% of adjusted revenue, versus 52.4%. The company said it expects costs and SG&A to rise as the business grows, with a potential decline as a share of revenue over time.
- Nine-month GAAP result: Net income was $328.1 million, including a non-cash $414.1 million gain on gaining control of Evolent Health LLC. The gain does not represent recurring operating earnings. The period also included $29.2 million of income tax expense.
- Cash and liquidity at September 30: Cash and cash equivalents were $208.2 million; investments were $24.1 million and restricted cash was $3.8 million. Current assets totaled $246.2 million and current liabilities $89.8 million. Total liabilities were $120.1 million; the company reported no debt. Management said available liquidity was sufficient for at least 12 months.
- Cash flows, nine months: Operating activities used $12.2 million; investing activities provided $11.1 million; financing activities provided $209.2 million, primarily from the IPO. The IPO generated $209.1 million net proceeds.
- Other balance-sheet items: Goodwill was $608.9 million and net intangible assets were $165.7 million, primarily recorded in the offering reorganization. Deferred revenue was $33.5 million.
Material changes, outlook and risks
- The June 2015 IPO and offering reorganization gave Evolent voting control over Evolent Health LLC; Evolent owned 70.3% of its economic interests at quarter-end. The accounting change materially affects reported results and created the one-time consolidation gain.
- Management expected operating losses to continue for the foreseeable future while it invested in growth, partner support and capabilities. It gave no specific numerical revenue or earnings guidance in the provided filing text.
- Piedmont WellStar amended its contract after announcing it would discontinue Medicare Advantage and employee plans for 2016. Evolent expected revenue from that contract in 2016 to be about 50% below the amount expected for 2015, with minimal revenue in subsequent years.
- Customer concentration is significant: the six largest partners represented 83.4% of nine-month revenue. The company also relies on UPMC for a substantial portion of services and warned that disruption could adversely affect revenue.
- Goodwill impairment was a stated risk. Evolent noted its share price had fallen below the $17 IPO price after quarter-end and said a future impairment test could result in a material charge.
- Disclosure controls and procedures were deemed ineffective at September 30 due to a material weakness in the financial-statement close process, involving insufficient accounting resources for complex, non-routine transactions. Management described remediation efforts, including hiring and enhanced reviews.
- The tax receivables agreement requires payment to certain investors of 85% of specified tax savings when realized. No liability was recorded at quarter-end because no relevant exchanges had occurred and historical losses had not been used.
Important facts for investors to verify
- Track recurring operating performance using comparable pro forma measures, and distinguish them from GAAP results and the $414.1 million non-cash gain.
- Monitor partner retention, platform enrollment, PMPM trends and the effect of the Piedmont WellStar contract changes on 2016 revenue.
- Assess the sustainability of customer growth and the exposure to the six largest partners and UPMC.
- Review the outcome of the annual goodwill impairment test and any subsequent share-price or operating developments.
- Confirm progress in remediating the material weakness and improving disclosure controls.
- Evaluate cash burn, capital needs and the potential future cash obligations under the tax receivables agreement.