Evolent Health, Inc Class A Common Stock 2026 Q2 Earnings Call

Good morning. Thank you for joining us. Today, we reported a strong second quarter with results that reflect our continued ability to execute on our commitments. In a dynamic healthcare environment, our performance underscores the mission-critical nature of our business, the dedication of our team, and what we believe is the continued value of our solutions to our customers. For the quarter, Evolent reported total revenue of $653 million, up 31% versus Q1, and adjusted EBITDA of $28 million, a 27% increase versus Q1. Our Q2 2026 medical expense ratio, or MER, was 95% compared to 93% in Q1, reflecting the expected impact of the launch of Highmark on May 1, 2026.

Given our performance in the first half of the year and our current visibility into the remainder of 2026, we're increasing our full year revenue guidance range to $2.6 billion-$2.7 billion and increasing the midpoint of our adjusted EBITDA guidance by narrowing the range to $120 million-$135 million. We continue to expect a full year MER of approximately 93% and believe we are well positioned to build on our progress in the quarters ahead. Mario will walk you through our financial results in more detail in a few moments, but I first want to provide you with updates in three key areas of, one, growth and renewals, two, our new Performance Suite oncology arrangements, and three, our AI platform and related cost improvement opportunities. First, regarding revenue growth, we continue to see a very positive sales environment. To that end, we have two partnership announcements today.

First, we're preparing for the go live of an oncology Performance Suite partnership with an existing advanced imaging client. The partnership will cover approximately 1.5 million lives across Medicaid and Medicare populations spread through 11 states. We currently expect this business to launch by December 2026, subject to certain regulatory approvals, and to generate approximately $300 million in annualized revenue. As with other recent Performance Suite arrangements, this relationship includes the full enhanced contractual protections we've discussed on previous calls. Second, a current regional Blue Cross plan and former NIA customer has signed an agreement to broaden its use of our Evolent Specialty Technology and Services Platform by adding new products and extending existing products to additional populations. We expect these implementations to occur during the third and fourth quarters of this year.

While the total annualized revenue from this contract extension is less than $5 million, we expect to generate strong adjusted EBITDA from the contract. Contracts like these continue to prove out the cross-sell opportunity available to us across our entire customer base. Taken together, these announcements demonstrate that our customers are increasingly choosing to expand their relationships with us by adopting additional products and expanding current products across existing populations. As important as our new customer growth is the strength of retention of our existing customers. 2026 has been an outstanding year for renewals as we have successfully renewed three of our largest customers. These renewals, combined with our Aetna and Highmark contracts which launched this year, not only give us confidence about the strong foundation of our business, but they also provide us with significant visibility into our 2027 outlook.

Next, I want to update you on our 2026 Performance Suite launches with Aetna and Highmark. We had a successful launch with Highmark on May 1st, supported by strong collaboration between our teams. While we're only a few months into the launch, we are encouraged by the positive early indicators. Currently, clinical engagement rates are trending above our targets, and provider engagement has exceeded our initial go live expectations. We expect to have greater visibility into claims performance over the next few months, but we're incredibly happy with our progress so far. With respect to Aetna, which launched earlier this year, we continue to see strong clinical engagement results also above our targets and initial claims-based performance that is in line with our expectations.

Given the scale of these two partnerships and their importance to our 2026 and 2027 P&Ls, the strong execution is an important additional data point supporting the overall strength of our business. Finally, I want to update you on our continued efforts around AI and automation through our Auth Intelligence platform. We remain focused on our long-term objective of automatically approving 80% of authorization volume, simplifying the prior authorization experience for providers and patients. We believe Q2 is a tipping point in our AI journey as we saw these efforts take root and accelerate past the pilot phases into a point of meaningful scale with a clear line of sight to more. The results and impact of these AI-enabled capabilities, which are built on our 2024 Machinify acquisition, are at the high end of our expectations, giving us increased confidence in our 2027 outlook.

We also believe we have been improving our performance as we scale. Among customers where these models have been deployed, we are seeing auto approval rate improvements of up to 20 percentage points. For example, auto approval rates that were 55% are now 75%, with no degradation to clinical quality or value to our partners. As a reminder, Evolent has a hard and fast rule that a clinician is always making any recommendation to change treatment and as AI is only used to speed up the process or to approve a case. Importantly, we are seeing that cases approved through our AI models are completed within minutes instead of days, improving timeliness, and we believe reducing administrative burden for providers and for patients.

We are also seeing a large benefit for our employees, who are able to spend more of their time practicing at the top of their license and getting patients faster answers, both of which are important to the job satisfaction of our team. Today, more than one-third of our authorization volume that was previously requiring manual clinical review is now being evaluated through our AuthIntelligence platform. We continue to believe this platform will be a key element of our ability to meet our long-term margin targets and our customer needs. Finally, AuthIntelligence will be aggressively deployed in Q1 2027 as part of one of the major renewals I mentioned earlier in the call. In closing, let me touch on how we are currently thinking about 2027. First, we expect strong revenue growth supported by the strength of our renewing business and the continued growth of our new business.

At the same time, we are committed to delivering strong adjusted EBITDA growth in 2027 against the backdrop of year one investments that come with new Performance Suite growth, AI investments, and expected membership declines in Medicaid and the exchange. We feel confident in committing to strong adjusted EBITDA growth in the year ahead despite those headwinds based on the proven performance of our AuthIntelligence platform, a highly disciplined approach to managing our operating expenses, and what we expect to be the stability and performance of our Performance Suite book of business. With that, let me turn it over to Mario.

Thank you, Seth, and good morning, everyone. We delivered solid second quarter financial results that were above our expectations and the outlook we discussed on the Q1 2026 call in May. Total revenue was $653 million, up 31% versus Q1 2026, and adjusted EBITDA was $28 million, up 27% quarter-over-quarter. The outperformance in adjusted EBITDA versus expectations was driven by the recognition of prior year development in Q2 that we had previously anticipated or recognized in Q3. Given this Q2 timing favorability, we now expect the previously discussed Q2 to Q3 adjusted EBITDA increase of $10 million-$15 million to be more modest. I will address this in more detail later in the call. Turning to revenue by product type, Performance Suite revenue was $485 million, up 50% quarter-over-quarter, driven primarily by higher membership from the launch of Highmark on May 1st.

Specialty tech and services revenue totaled $78 million, a decrease of 3% compared with the first quarter. The revenue decline was driven by code review scope changes as part of AHIP commitments and not by client attrition or pricing pressure. On Administrative Services, revenue declined by 3% sequentially to $48 million, largely due to a prior year reserve true-up recorded in the first quarter. Our medical expense ratio, or MER, for Q2 was 95%, approximately 200 basis points higher than Q1 2026, but in line with our expectations, primarily due to the impact of the Highmark launch and its associated higher reserves. Please note that we did see higher acuity in our exchange populations, consistent with Q1. However, as we discussed during the Q1 call, our contracts are structured to protect against changes in prevalence.

Adjusted cost of revenue, excluding medical claims, but including medical device costs and adjusted SG&A, totaled $163 million for the quarter, improving 5% sequentially. The improvement versus the prior quarter was driven primarily by previously discussed expense management. We ended Q2 with $115.7 million in unrestricted cash and $808.3 million of net debt. We took the opportunity to pay down the ABL revolver by $10 million to bring the balance to its minimum draw of $62.5 million. As expected, cash decreased from our Q1 2026 balance, reflecting approximately $10 million of cash used in operating activities and approximately $7 million of capital expenditures during the quarter. As a reminder, operating cash flow this quarter was unusually low due to the repayment of passthrough PBM proceeds, which had positively impacted Q1 2026 by approximately $20 million.