Evolent Health Inc Class A Aktie

Welcome to the Evolent Earnings Conference Call for the First Quarter ended March 31, 2026. As a reminder, this conference call is being recorded. Your hosts for the call today from Evolent are Seth Blackley, Chief Executive Officer; and Mario Ramos, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations. This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings.

For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations website, ir.evolent.com, and the Form 8-K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. And now I will turn the call over to Evolent's CEO, Seth Blackley. Please go ahead.

Good morning, and thank you for joining us. Today, Evolent reported strong first quarter results that were in line with our expectations. Our performance reflects the continued focus and discipline with which we are executing the plan we laid out to you on our call in February. For the quarter, Evolent reported total revenue of $496 million, representing 9% sequential growth versus Q4 2025, excluding the divestiture of Evolent Care Partners or ECP, and adjusted EBITDA of $22 million, consistent with our expectations and the outlook we provided in February. Our medical expense ratio or MER for Q1 2026 was 93%, improving 150 basis points versus Q4 2025, excluding ECP. This performance, we believe, underscores our disciplined execution and our belief in the growing importance and demand for Evolent solutions in the marketplace. Looking ahead to the full year, we feel confident in our ability to continue delivering against our outlook and priorities.

Accordingly, we are reiterating our 2026 revenue guidance range of $2.4 billion to $2.6 billion as well as our adjusted EBITDA guidance range of $110 million to $140 million and estimated MER will be approximately 93% for the full year. Mario will walk you through our financial results in more detail in a few moments, but I first want to touch on several key business highlights. Starting with our new Performance Suite launches, we had a successful launch with Aetna on January 1, supported by strong collaboration with the Aetna team. While it remains early, initial indicators are encouraging with our clinical intervention and provider engagement metrics above our internal targets for Q1. We will have greater visibility into the performance over the course of the year, but we're happy with the start. We're also pleased to have launched with Highmark on May 1. We have had great collaboration with the Highmark team on the launch, and I will be excited to give you a broader update on Highmark in the coming quarters.

Our pipeline for new business remains strong as we continue to see demand for our products, specifically in oncology. While the market has seen some positive developments this quarter, overall medical trend remains elevated for our plan partners and oncology, in particular, continues to be one of the most challenging categories for health plans to manage as they seek to balance quality outcomes with affordability. We believe Evolent is recognized as a leader in helping health plans manage both quality and cost for cancer care. Our recent wins with marquee plans like Highmark and Aetna as well as our renewal rates with existing partners point to our market position today. At the core of our work in oncology are 2 simple principles: first and foremost, ensuring patients receive the very best care; and second, the cost of that care is thoughtfully managed. I often share with our partners that if I had a family member diagnosed with cancer, I'd absolutely want the Evolent clinical team to review the case.

The clinical reality is that according to certain studies, up to 30% or more of cancer cases involve either an incorrect diagnosis or a suboptimal treatment plan prior to any second review, which is somewhat understandable when you consider, for example, that there are up to 32 different approvable regimens for a typical advanced metastatic non-small cell lung cancer case. While some of this gap can be addressed through traditional utilization management, we believe to more fully close the gap, treating oncologists need to have ready access to the very latest evidence and data as well as the right financial incentives to select the best care plan for my family member or yours. Further, pairing our traditional oncology solution with consumer-facing solutions like our member navigation platform are critical to fully close the gap. And of course, we believe we've been able to show that when we help oncologists and patients pick the right care plan the first time, costs on average come down, a win-win for the patient and the system.

As a result of all these dynamics, we're increasingly seeing interest in our solution, and we're addressing this market demand with both our technology and services solution and with our enhanced Performance Suite solution, which has narrow corridors and the protections we've shared with you on the last earnings calls. Enhanced Performance Suite structure allows us to reduce some of our direct risk exposure while still offering guarantees to our clients. We believe this shift creates a more sustainable, attractive operating model for our clients, Evolent and our shareholders. In terms of new announcements, we have 2 new contracts to announce today. First, an existing Performance Suite client has signed a contract for our advanced imaging solution for 4.5 million lives across commercial, Medicaid and Medicare Advantage. We expect this contract to go live in Q3, subject to state regulatory approvals in certain states, and we view this agreement as further validation of our ability to cross-sell solutions into our existing client base.

More broadly, we believe this new contract validates the nation's leading payers are looking for a trusted partner, not just for our leading solution in oncology, but that there is value in having our company provide our services and technology for multiple integrated solutions. Imaging, in particular, benefits from product integration given the importance of diagnostics for oncology, cardiology and musculoskeletal specialties. And second, in the Performance Suite, one of our national payer clients is expanding their existing oncology and cardiology solution in several new markets across commercial and Medicare Advantage. This expansion is expected to generate over $200 million of annual revenue and slated to go live in Q3, subject to regulatory approvals in certain states. We believe this new win is strategically important, reflecting growing client confidence in our platform and our ability to scale existing solutions across new populations.

Similar to our other new Performance Suite launches, this oncology and cardiology expansion will run at higher MERs initially due to reserve building. We had already incorporated this new expansion into our full year MER expectation, so this announcement does not change our outlook. With respect to our update on the exchange impact, we've seen declines in exchange membership in the Performance Suite as clients saw reduced membership in select markets as previously communicated over the last few quarters. On the specialty D&S side of the business, early indicators are that the exchange membership decline may be slightly lower than the 40% we had assumed, but the data is still coming in, and we expect better clarity around this by the end of Q2. For now, our guidance for the full year continues to take a cautious approach and assumes the 40% decline we referenced previously. Turning to our continued efforts around AI and automation. We recently added a number of strong technology and data science players to our team, including naming Archie Mayani as our Chief Product Officer.

Archie brings deep expertise scaling technology-enabled health care platforms and her leadership further strengthens our ability to execute against our product and automation road map. We continue to test automation initiatives while preserving and in many cases, enhancing the value we deliver to our customers and patients. Our ability to automatically approve authorizations through the use of technology and AI continues to expand and remains central to our goal of auto improving approximately 80% of authorization volume with the goal of making the process easier for providers and patients while driving down our internal operating costs. Deployment of new AI models is accelerated, particularly within our imaging solution. Our initial rollouts have shown auto approval increases in the high teens on cases evaluated by these models and in some cases, up to 30%, all with minimal clinical value loss for our customers. Finally, touching on our capital structure. We ended the quarter with unrestricted cash of $142 million and net debt of $792 million.

With no debt maturities until 2029, we continue to believe that we have the balance sheet strength to support near-term execution while maintaining a clear and credible path to deleveraging over the long term. To conclude, Evolent is off to a solid start in 2026. Our disciplined execution in Q1, expanding Performance Suite footprint and strong early momentum gives us confidence in our full year outlook. Stepping back from the quarter and 2026, we believe there is a large long-term opportunity for Evolent that is supported by 2 major super cycles. First, despite the strength of our product and the opportunity to reduce variability in care and oncology care, Evolent today only manages approximately 10% of the oncology market. We believe this is due to 2 factors. One, we've only been accelerating our work in this area across the last 5 years. And two, we believe that approximately half of the market is still in-sourced by health plans.

As costs and complexities to treat cancer diagnoses have continued to accelerate over the last 5 years, more plans are making the decision to outsource oncology management and upgrade to a more sophisticated partner like Evolent. We believe this will further accelerate over the coming decade as the oncology drug pipeline continues to grow and complexity increases. As such, we expect to be able to meaningfully increase our market share, which in turn should provide a long-term growth opportunity for Evolent. The second super cycle is the massive opportunity that AI can provide in automating specialty reviews. I covered this topic earlier, so I'll just add that our specialties outside of oncology care are especially well suited to automation, and we're investing to be a market leader in the innovations necessary to reach the 80% automation threshold goal I referenced earlier. Taken together, we believe these 2 super cycles should help Evolent continue to meet our near-term commitments and expect them to fuel our long-term success.

With that, let me turn it over to Mario to dive into the quarter.

Thank you, Seth, and good morning, everyone. We delivered solid first quarter financial results that were in line with our expectations and consistent with the outlook we discussed on the Q4 call in February. Total revenue was $496 million, representing 9% growth versus Q4 2025, excluding ECP. In addition, adjusted EBITDA for the quarter was $22 million. Performance Suite revenue was $323 million, up 26% sequentially versus Q4 2025, excluding ECP, driven primarily by membership from our new Performance Suite launches, partially offset by exchange membership declines in select markets and market exits from clients rationalizing underperforming markets. Specialty Tech and Services revenue totaled $81 million, a decrease of 16% sequentially. The lower revenue reflects not only actual exchange membership declines, but also includes our estimate of the revenue impact from additional disenrollment following the grace period expiration.

We have contractual provisions with our specialty T&S clients that require us to return funds after members disenroll. Taken together, this total impact is in line with the 40% membership decline we have previously discussed. We expect to have better visibility into exchange membership by the end of Q2. The impact of exchange membership declines was partially offset by growth in Medicare Advantage membership and the launch of a new specialty for an existing client. Administrative services and cases revenue was $92 million, down 11% quarter-over-quarter, reflecting the expected termination of an administrative services client at the end of last year. This decline was partially offset by better-than-expected membership growth from existing clients in the first quarter. Our medical expense ratio or MER for Q1 was 93%, improving approximately 150 basis points versus Q4 2025, excluding ECP. As a reminder, Q4 2025 MER was temporarily elevated due to out-of-period true-ups as we recognized a full year of savings shared with clients.

Excluding this impact, we saw sequential improvement even though Q1 trend ran above expectations due to higher-than-anticipated prevalence in oncology in a few markets. These markets are almost exclusively exchange markets that experienced membership declines and acuity shifts. We expect the negative impact on our MER from higher prevalence will be retroactively addressed later in the year based on our contractual protections. This cost pressure was partially offset by net favorable prior year development in Q1. Adjusted cost of revenue, excluding medical claims, but including medical device costs and adjusted SG&A totaled $173 million for the quarter. The variance versus our expectation was driven primarily by elevated exchange member servicing costs within Specialty T&S. This is because we are required to continue servicing members during the grace period even if they ultimately disenroll. This impact was partially offset by efficiency gains in our shared services organization and lower-than-budgeted vendor spend.

We believe this exchange-related cost pressure to be temporary and to normalize as we see expected disenrollment in late Q2. We ended Q1 with $142 million in unrestricted cash and $792 million of net debt. Cash decreased modestly from our Q4 balance, reflecting roughly $1 million of cash used in operating activities and $6 million of capital expenditures during the quarter. Operating cash flow includes the settlement of a onetime $15.5 million client overpayment that we highlighted in February's earnings call. It also includes approximately $20 million of pass-through PBM proceeds that were received in Q1 with the corresponding payment occurring at the beginning of Q2. Excluding both the onetime client overpayment and the pass-through timing benefit, normalized operating cash flow for the quarter would have been approximately negative $6 million, which was in line with expectations. Turning to full year 2026 guidance, as Seth noted, we remain confident in our ability to deliver on our 2026 plan.

However, given we're only days into the Highmark launch and do not yet have certainty around the ultimate exchange disenrollment impact, we are reiterating our 2026 guidance, revenue range of $2.4 billion to $2.6 billion and adjusted EBITDA range of $110 million to $140 million. We continue to expect MER for the full year to be approximately 93%. In the Performance Suite, our revenue guidance assumes the continued ramp of our new launches, offset by the membership declines we experienced in Q1 from exchange membership and market exits. In Specialty P&S, our revenue guidance assumes the approximately 40% decline in exchange membership we referenced earlier. As noted, the impact of both the actual and the expected incremental disenrollment required to reach the 40% decline is reflected in Q1 revenue. We should have better visibility into the final outcome of this dynamic by the end of Q2.

On MER, we continue to expect MER to increase throughout the year and peak in Q3 as we see the full impact of the Highmark launch. As discussed, this reflects elevated reserves consistent with a new contract combined with normal seasonality. From there, we expect MER to improve steadily through year-end as the impact of our clinical programs and favorable contractual true-ups flow through in the second half of the year. Finally, on the quarterly adjusted EBITDA cadence, we believe Q2 will be in line with Q1 due to typical seasonality with a $10 million to $15 million sequential improvement per quarter in both Q3 and Q4. A few additional items related to our full year outlook. We continue to expect adjusted cost of revenue, excluding medical claims, but including medical device costs plus adjusted SG&A of approximately $675 million for the year. The elevated Q1 cost pressure related to exchange volumes is expected to moderate, and our efficiency initiatives are tracking on plan.

We continue to expect cash flow from operations of $10 million to $20 million for the year after approximately $60 million of annual cash interest expense. We continue to also expect $25 million to $30 million in software development and capital expenditures for 2026. To wrap up, we are pleased with our first quarter execution and the underlying trends we're seeing across the business. While we're still in the early stages of the Highmark ramp and continue to monitor exchange dynamics, our Q1 performance reinforces our confidence in the plan we laid out and our ability to deliver on our full year priorities. We are reiterating our 2026 guidance and remain focused on disciplined execution, operating efficiency and delivering value for our clients and shareholders. With that, operator, please open the line for questions.

[Operator Instructions] Our first question will come from John Stansel with JPMorgan.

Maybe a bigger picture one here. I think we've heard commentary in the space around not just relaxation of prior authorizations, but standardization across payers and prior authorizations. I guess as we think about the longer-term outlook and how payers are approaching complex care and prior authorizations in general, how are you thinking about that kind of compare and contrast the near-term demand that you see with a robust pipeline and some of those changes that may come down the pipe?

Yes. Great, John, thank you for that question. I'd make, I guess, 3 comments on that. Number one, we're big fans of the standardization that's happening. I think it's the right answer for patients and for physicians and it's very consistent with what you heard us doing with the application of AI to improve as much as possible. So that's kind of point one. I think point two, I think it's important for you guys to have the framing around sort of Evolent is a bit of a tale of 2 cities, meaning vast majority of Evolent's growth is coming in oncology, but about 95% of Evolent's approval volume, like the factory that we have to go through to do the work is not oncology. It's all of our other specialties because there's so much volume in things like imaging or cardiology, right? So -- and I think oncology, in particular, right, is so much more complex. It's going to be harder to standardize.

That example of 32 approvable regimens, the pace of scientific innovation, there's 300 journal articles a month getting published in oncology. So I think the 95-5 rule of the 95 or whatever the example is for the entire industry being as automated as possible, fantastic. Good for everybody, good for us, good for our cost, good for patients, everybody. I think the 5 in our example that is the oncology is where our growth is coming from, where you need such deep clinical expertise and where you're going to need a little bit more of a human touch to help manage this because it's not -- in most cases, these things are not something that is subject to UM. A lot of these interventions we're making are about nudges or incentives or a conversation with the treating oncologists. And then the third thing is just to reiterate it because I think the industry needs this narrative. AI is amazing for doing the automation. We and nobody is ever going to be using AI to provide an adverse determination or a suggestion for a different plan. That's where a human has to come in.

Our next question comes from Charles Rhyee with TD Cowen.

This is Lucas on for Charles. Congrats on a good quarter. Your guys' 1Q MER ratio was better than our estimate. Can you talk about what you saw in the quarter from an oncology and cardiology perspective? And then also, did you guys see any benefit in the quarter related to heavy weather storms in January and February?

Great question. On oncology and cardiology, I think we're pretty much where we thought we would be very close. The exception is a couple of markets where we had higher prevalence because membership dropped a bit, as I had in my comments, membership dropped a little bit. And as a result, acuity was a bit higher than expected. But again, as we've been talking about for the last few quarters, that's exactly the type of contractual protection that we have. So the good news is even though we absorbed a little bit of higher MER in those couple of markets, we expect to make up for that via these contractual protections later in the year.

Yes. And then on the weather thing, I do not think that's material for us. I mean people for elective things, I think it's more material for things like oncology treatment, people tend to figure out a way to get there and get it done.

Our next question comes from Jared Haase with William Blair.

Seth, I think you talked a little bit about the early indicators being good with the launch with Aetna. And I think you mentioned some of the metrics around clinical intervention and provider engagement are maybe tracking above expectations. And I just wanted to double-click on that. I'm curious if there's anything unique to that partner specifically or just perhaps it's an indicator that just as you sign more and more of these deals over the years, you're just getting more efficient with launches. And I wonder if you could then extrapolate that into maybe a faster margin ramp with some of these new Performance Suite engagements.

Yes. Thank you for the question. Yes. Look, I think the metric we really look at is this clinical intervention rate, which think of that as how often are we engaging successfully around our pathways, right? And that should be the leading indicator of the value that we create. I do think it's largely attributable to the teams doing a great job, and that's the Aetna team and the Evolent team together. A lot of credit to Dan and our team for the work we're doing to execute on our clinical team. And so I do think it's about execution. As to whether that then translates into a faster margin ramp, I don't think we're ready to go there yet, but I do feel like the operations Human team is doing a great job.

Our next question comes from Kevin Caliendo with UBS.

I've got 2. In terms of the 2 new contracts, I appreciate that, and congrats on each. How should we think about the potential earnings contribution ramp from those? Just given there's a sort of new diligence around reserving for these and the likes, there used to be a fact pattern around how to think about the profitability ramp as the new contract came on board over 1, 2, 3 years. I'm just wondering if those ramps, and I understand the 2 contracts aren't the same, but how to think about the contribution expectations from each? And then the second one is just to follow up on the prior auth questions. Did anything change in 1Q? Are there any different behaviors happening in the beginning of 2026 versus what was happening in 2025? Is there a movement to more biosimilars? Or are you seeing anything in the marketplace? Are you guys doing anything different that could be affecting trends and particularly in oncology?

Great. Mario, I will start with the build, and then I'll come back to around your...

Kevin. No change to what we've discussed in the past. There is a ramp to ability, which one of the contracts is a risk contract. So it does impact the short term. Nothing that we haven't accounted for in our guidance and our commentary. But again, I think it just creates more potential for next year as we ramp up profitability. The other contract, it's -- there is a gain share component. So there's a little bit of an impact also in the beginning. But again, nothing different than what we've accounted for and discussed with you guys for the year. So basically, no news in that regard. We still are working through different types of structures actually going forward. We may be able to make some changes and tweaks where we can improve the ramp-up. But for now, it's what we have discussed with you guys in the past. Do you want to address?

Yes. Yes. Look, on the your question on is anything new this quarter versus a year ago. Look, I'll reiterate what I said earlier. It is a bit of a tale of 2 cities where in the categories of specialties that are standardizable, simpler, more rote, we're all moving aggressively to doing as much as we can using technology to quickly authorize and automate that work, which, again, I think if I'm a patient, to my family member, it is exactly what I want. I want it simple, I want it fast, I want it done. It's good for the patient. It's good for the doctor. It's good for the health plan. It's good for Evolent's cost structure if we're able to do that, right? So that's new and different across the last years ramping, and we're really supportive of it and trying to lead in that area.

In oncology, which I think was maybe even more of your question, I think there, it really is exactly what it's been now for 5 years, and I think it's going to be for the next 5 or 10, which is incredible pace of innovation. Even as some things may go biosimilar, KEYTRUDA is going to go biosimilar in a couple of years. There's some cutaneous version. There are new applications. There's gene therapy, there's cell therapy. I think if you go do your market checks, call 10 payers and ask them what their #1 cost issue is, it's going to be Part B drugs, particularly in oncology. And I think that is going to continue to be the case for a long time. These are things that are going to be harder to standardize. They're approvable, right, which this is not a UM thing. This is about using evidence and incentives and scorecarding to get to the right answer, and that's really what we do.

Our next question comes from Jessica Tassan with Piper Sandler.

Apologies if you've been through this already. But I guess just any perspective on kind of the competitive landscape given Cigna's decision to pursue strategic alternatives on eviCore? Just any thoughts on why a large competitor might want to get out of the market and how that might impact the competitive landscape? And then I guess -- again, I apologize if you've been through this, but just can you elaborate a little bit on the elevated oncology trend you're seeing? Like is that exclusively in exchange? And then can you comment just a little bit on trends within Medicare relative to your expectations?

Yes. James, on your first question, obviously, we wouldn't comment on any specific situation, but I do think -- I'll say 2 things. One, I think there is a major long-term trend that is happening, and I talked about it earlier, where I think generally, the plans are going to want to look to third-party specialists to do a lot of this work. And I think the third-party part of that is important, like some separation, right? But the specialist part is probably even more important, which is the level of sophistication required to do this kind of work, whether it's the clinical sophistication or the AI sophistication, I think, is where the industry is headed generically.

So I think that's number one. And number two, I'll just say generally Evolent, this is what we do. And I think we're here to be a long-term part of the answer for the industry to help solve this problem to balance how do you manage good things for patients and providers and the best quality, first and foremost, but also help moderate the cost pressure, which will translate into rates for consumers and everything else. So I think we view these types of things as positive and in generally, the direction of travel over the next kind of 5 to 10 years.

Yes. And on the trend, Jess, as I said, the only elevated sort of trend that we've seen has been isolated to a couple of markets where we saw membership drops and acuity went up significantly. So it did not appear to be from utilization or any other factor other than prevalence. So other than that, I think things -- the trend has been as expected, fairly stable. And just to reiterate, that prevalence in those couple of markets are -- is exactly the type of protection that we have in our contracts going forward.

Our next question comes from Jeff Garro with Stephens.

It's Sahil on for Jeff. I wanted to follow up on the new business wins, specifically the new advanced imaging contract with the existing Performance Suite client. I think historically, you've described imaging as the entry point that drives cross-sell Performance Suite. I think it's like novel to see sort of the reverse direction this quarter with the PS client adding imaging. So anything to call out on what this client did or saw in consolidating on to more of your unified platform? And is there any sort of recent innovation in the imaging suite that could potentially reinvigorate it as stand-alone growth going forward?

Yes. I think a thoughtful question. I think you're right. It's a first for us. Look, I think that it highlights a couple of things that you're pointing out. I think one is that if I'm a health plan and I'm trying to manage my cost and quality and patient experience, I've got today dozens and dozens and dozens of partners. And I'd rather have fewer partners to do this kind of work rather than more niche partners. So integration is generally good. I think imaging in particular, usually when you're doing a scan, it's of a tumor or of a bone or of a heart and therefore, our ability to integrate across those things is valuable. That is a little bit new. We're going to be doing more and more and more in that area over time. And so I think that component is also benefits from the work we're doing. So we're really excited about this partnership. I hope to see more of these, and it's a good step for us.

Our next question comes from Matthew Gillmore with KeyBanc.

This is Zach on for Matt. So looking at the reserve to claims table in the slide deck, it looks like there was a favorable revenue true-up of $12 million. Can you remind us what causes the revenue true-ups and give us some context for the $12 million that was booked in the quarter?

Yes. The revenue true-up is actually -- it brings revenue down. So it's unfavorable. It kind of nets out with the claims favorability. And there are a number of factors, but typically when we reserve at the end of the year. We're obviously making estimates on both the revenue side and the claims side because we don't actually have claims information. So everybody typically focuses on IBNR on the claims. But from time to time, if claims come in lower than we expected in some markets, we actually have a downward revision to the revenue side, and that's what's causing it in the quarter.

Our next question comes from David Larsen with BTIG.

Can you just talk about the actual revenue in the quarter and your expectations for the remainder of the year? I mean revenue came in well below our expectations. I'll take the EBITDA beat any time. So I like the higher quality revenue, but revenue was low relative to our expectations and you reaffirmed the full year guide. I think that calls for about 30% year-over-year revenue growth. Just color there, like maybe by division or by plan would be very helpful.

Sure. I think it's a spread issue. Obviously, we spent a lot of time trying to explain what our EBITDA ramp was. It's a little harder with revenue because of all the launches, in particular, the very big Highmark launch, which is why we're not moving off of our revenue guidance for the year. I think last time, we had talked about the fact that Aetna as they were exiting some markets, our expectation was the membership was going to be a little bit lower than what we had talked about before. That has actually been the case. So that pushed down the first quarter revenue. But we also talked about the fact that Highmark had been coming in higher from a membership expectation than what we expected.

So that's exactly how it's playing out. That plus these couple of very, frankly, attractive and big deals that we now are able to announce, which we really couldn't get into prior caused a little bit of a challenge in walking everybody through what the revenue progression was for the year. But I think the takeaway is even though the headline number might be a little lower than what consensus were, it really -- nothing has changed. If anything, we feel even more confident about the rest of the year. As I said, we're not ready to make any changes to the guidance just because of the very meaningful impacts that we're going to see over the next 2 months, High Mark and the exchange disenrollment. But I would just say that there's a little bit of timing in the first quarter that was really a lot harder to model. But hopefully, it's clearer now where we're going for the rest of the year.

Our next question comes from Jailendra Singh with Truist Securities.

This is Eduardo on for Jailendra. You touched on the prior period revenue portion, but can you speak to the $23 million favorable PYD in the quarter? Was that focused on oncology or cardiology parts of the business? And I guess, how much of that, I guess, relative to the revenue adjustment flow through to EBITDA in the quarter?

Yes. So you got to net out the revenue and the claims PYD. So on a net basis, it was a little bit higher than a $10 million favorable impact for the quarter. That's a little higher than the same quarter last year. But for the year, we're not expecting that number to change significantly, and it's very consistent with the prior year, 2025 in particular. On the claims side, the PYD was roughly split a little bit higher on oncology than in cardiology. Again, some very specific markets where as we saw claims run out coming in, they were a little bit better than what we had anticipated and had reserved for. But very consistent with the commentary that we've given you guys over the last few quarters where either trend has been coming down and being stable or in select spots where trend has popped up, we've had contractual protections. And sometimes it's a little harder to determine exactly what the adjustment should be during the quarter. And that's a little bit of what you're seeing there as claims came in, we saw favorability and we're ready to adjust that in the first quarter.

This concludes our question-and-answer session. I would like to turn the call back over to Seth Blackley for any closing remarks.

Thank you for the time this morning. We look forward to connecting over the next week or 2 with everybody. Thanks a lot.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Welcome to the Evolent Earnings Conference Call for the Fourth Quarter ended December 31, 2025. As a reminder, this conference call is being recorded.

Your host for today's call are -- Evolent are Seth Blackley, Chief Executive Officer; and Mario Ramos, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations.

This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of these risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today.

Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most directly comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted in the Investors Relations website, ir.evolent.com and the Form 8-K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation.

And now I will turn the call over to Evolent's CEO, Seth Blackley.

Good evening, and thank you for joining us. Earlier today, we released strong Q4 results with revenue and adjusted EBITDA both landing in the upper half of our guidance range. Our performance reflects disciplined execution and continued momentum across our 3 value-creation pillars of strong organic growth, expanding profitability and disciplined capital allocation. Before I get into detailed updates on each pillar, I want to comment on our outlook for 2026 and the overall state of the union at Evolent.

First, Evolent is retaining and growing its customers. In addition, we're adding market share through new partners, and we're forecasting the business will grow by approximately 30% in 2026. These factors point to a large market opportunity and validate that we believe Evolent is the leading solution to support payers as they balance quality and affordability in specialty care. Oncology, in particular, remains a challenge for health plans seeking to balance affordability and quality with very high trends expected for many years to come.

For 2026, we expect that approximately 65% of our company revenue will come from oncology, up from 36% in 2025, and we expect our oncology product to continue to be the core of our growth in years to come. If you think about why our oncology product is growing so rapidly, we believe it's the combination of very high annual trend that our health plans are experiencing and the incredible opportunity to reduce clinical variability. As an example of clinical variability in oncology, our analysis suggests that for 1 tumor type to -- second line treatment for non-small cell lung cancer, oncologists today follow more than 200 different prescribing patterns. Variation is -- we believe it's not supported by the evidence and it can result in substandard outcomes for patients and unwarranted cost for the system. Evolent's value to our customers is our proven ability to engage with treating oncologists and guarantee the quality and cost benefits from reducing this variability.

This market dynamic as well as our large new business pipeline makes Evolent well positioned to see outsized growth in the years ahead. Further, we've been able to successfully renegotiate contracts and convert them into the new enhanced Performance Suite model, which includes revenue rate adjustments for certain medical expense factors outside of our control as well as MER corridors to protect the downside.

When we embarked on the effort to move our contracts to the enhanced Performance Suite model, there were a lot of questions from investors about our ability to successfully achieve this change while retaining customers and continuing to grow. The fact that we now have approximately 90% of the Performance Suite revenue under this new model, have retained all of our key customers and have signed 2 major new customers this past year under the enhanced model, answers that question in an emphatic way.

As we mentioned at the outset of this renegotiation process, our expectation for margins for the enhanced performance Suite model will be approximately 10% and as opposed to 15% under the old model. As we've rolled out this model, we're seeing opportunities to target margins higher than 10% in some cases, if we feel comfortable with the additional downside exposure. And in other contracts, there are opportunities to eliminate almost all the downside exposure if we will accept a lower maximum margin.

While we will make these trade-off determinations as part of a disciplined underwriting process around each contract, our existing mature contracts will tend to run above 10%. But as we expand, we'll target future Performance Suite opportunity for the entire book around a range of 7% to 10% as we continue to prioritize adjusted EBITDA and cash flow predictability over maximum margin. Still, as Mario will discuss, getting to a target margin of 7% to 10% would create a very significant tailwind for the business in the years to come.

Turning to the outlook for 2026. Specifically, we're forecasting $2.5 billion of revenue at the midpoint, representing revenue growth of approximately 30% and our adjusted EBITDA guide is $125 million at the midpoint. The adjusted EBITDA outlook has 2 significant impacts embedded for '26 ahead of the potential tailwind I described earlier. Both of these impacts hit primarily in the first half of 2026, and we believe that our run rate adjusted EBITDA in the fourth quarter of 2026 will be over $150 million.

Those 2 factors impacting 2026 adjusted EBITDA are as follows: first, our 2026 Performance Suite launches are expected to generate approximately $900 million of 2026 revenue with go-live dates in Q1 and Q2, representing 37% of total 2026 revenue. The 2026 Performance Suite cohort revenue estimate has increased from our previous estimate a few months ago, $550 million, driven by large shifts in our customer membership and by scope expansion on 1 of the new contracts. At the same time, we saw several of our legacy cohort Performance Suite partners lose significant membership and open enrollment, so our total revenue forecast continues to center around $2.5 billion despite outsized growth from the 2026 cohort.

In addition to the increase of new revenue, we decided to take a more conservative guidance approach given the size of these new contracts in 2026. Mario will provide further color on the impact and the timing of those contracts in his comments.

The second major factor impacting adjusted EBITDA for 2026 is that the One Big Beautiful Bill has eliminated approximately $40 million of contribution from expected exchange membership disenrollment and customer plan closures. That impact is at the very highest end of the range we estimated at the end of last year. And with 1 of our largest customers seeing reduced exchange membership up to 60% and our next largest exchange membership book down approximately 40%. Some of this reduction is as a result of the lost subsidies but we're seeing more of it from decisions, the specific plans that our customer base made to shrink exposure to the exchange risk pool. You can see the combined effect of these 2 items on Page 8 of the pack.

Finally, we've been aggressive on efficiency by getting the benefits of AI and other automation across 2025. As we previously communicated, we did slightly exceed the $20 million Q4 2025 annualized savings number we had talked about on previous earnings calls. And we're continuing our cost efforts in 2026, now targeting SG&A, AI and other automation savings. These efforts included a large RIF already announced just a few weeks ago. Our 2026 cost structure efforts modestly improved H1 2026 EBITDA but ramped fully by the second half of the year. Mario will share more details on the 2026 cost point in his section.

Despite these aggressive cost actions, we decided to budget the year and guide around a multiyear opportunity. Accordingly, we have protected a number of product, technology and sales investments in the P&L that weigh on 2026, but we believe will have a positive impact over time.

While we're pleased with our revenue growth, we understand our first half 2026 EBITDA disappointed on the surface due to the One Big Beautiful Bill impact as well as the addition of our new contracts. But as I mentioned, we're confident in the ramp across 2026, and we believe we'll have a very large multiyear tailwind for the business as our 2026 contracts mature and the exchanges likely return to growth over time.

Now let me turn back to give you a few more detailed updates on each pillar, starting with our first pillar of organic growth. Today, we're sharing the expansion of a previously announced partnership and we're disclosing another new contract signing. First, we're excited to share that the large oncology partnership we announced in November is with [ Highmark. ] We're obviously thrilled to have been selected by such a marquee plan. Since November, we have also expanded the partnership to additional geographies and capabilities. This contract is expected to go live on May 1, and we expect it will contribute over $550 million of revenue in 2026 and over $800 million in 2027. As we will discuss in more detail later on the call, the structure for this contract is like Aetna, under our enhanced Performance Suite model.

Finally, we feel there are several exciting expansion opportunities in the [ Highmark ] across these lines of business for oncology and across all lines of business for new specialties, and we look forward to earning that opportunity through strong performance with this initial launch.

And second, we're announcing today that we have launched our Performance Suite in oncology in an additional state with an existing national partner. Beyond these signings and the robust pipeline I mentioned earlier, we're seeing very high renewal rates as well. Across 2025, we retained specialty T&S logos covering over 98% of 2025 revenue, and through a turbulent industry cycle, we have successfully moved our key Performance Suite relationships to the enhanced Performance Suite model. Said simply, our current customers are opting to stay and expand with us even as we require more protective terms. And we're adding market share through new logo signings. We feel all of this data points to the value we can create and to the durability of our company.

Turning to our second pillar of profitability. We continue to focus on both medical and operating expenses as described earlier. I did want to add several additional pieces of data here. In 2025, our medical expense ratio, or MER, came in slightly better than expectations at 89%, excluding our Evolent Care Partners business representing an improvement of just under 700 basis points versus 2024, even amid another year of high trend. We believe this performance reflects strong execution and pathway management, [indiscernible] engagements and alignment with our partners. Mario will walk you through how we're thinking about our 2026 MERs for both new business and the legacy cohort. But I think you'll see that we're making 2 basic assumptions for the year.

First, we estimate the 2026 cohort will run at 103%, inclusive of new reserves and the total cohort run at approximately 93%. We're assuming that 2026 oncology trend will remain high, in line with the 2025 trend. In total, we believe these assumptions are conservative and set us up to meet or beat our numbers across the year.

And our final pillar of capital structure, I'm pleased that we ended the year with strong cash generation. That, combined with the strategic divestiture of our Evolent Care Partners asset enabled us to end the year with net debt of $782 million, below our expected range of $805 million to $840 million. With no maturities until late 2029, we believe our balance sheet strength supports near-term leverage and a clear path to long-term delever.

Before I hand it to Mario, let me say a few words about the macro environment. We've been saying for several quarters now that demand for Evolent services has never been greater. We believe this is borne out in our new business wins as we take share and grow our customer footprint. And this reality continues to be true. The managed care industry, our core customer base is in the middle of a multiyear margin recovery cycle. To manage their own profitability targets, we see health plans are turning to companies like Evolent that have proven solutions to lower cost while improving quality for their members.

At the same time, as we're expanding our business with new partners. The industry is navigating through a period of contracting membership, which presents near-term headwinds for our business as well. We believe we have a clear strategy for navigating through this dynamic moment.

First, we will use this moment to seek to capture share, expanding our customer footprint under strong terms. Demand for our product is such that we can be selective in our partnerships and highly disciplined in our underwriting. Second, we will use our scale and customer volume to drive operating efficiency within our products, enabling us, we believe, to deliver margin expansion over time. We've committed to using technology and AI from our Machinify asset acquisition to get to our long-term goal to automatically approve 80% of baseline authorization volume across our products an outcome that we believe will improve patient and provider experience while driving down our cost structure.

We made great progress on this front in 2025, seeing our imaging auto authorization rates in key test areas go up dramatically in areas where we deployed this technology. For example, through this optimization, our real-time auto authorization rate for [ Chest CT ] scans rose by over 11 points and cervical spine MRI rose by 16 points. In 2026, we'll be deploying additional AI capabilities that will provide additional auto authorization increases.

Third, we'll continue to innovate our product and its value for our customers to ensure that we are the leading specialty platform in the market. As an example of our product investments, one of our Blue Cross partners recently published data showing an approximately 40% reduction in hospitalizations and ER visits for patients who use our new cancer navigation solution.

And fourth and finally, we will achieve these goals within the context of our current balance sheet, continue to prioritize debt paydown as our primary capital allocation focus. I do believe we have the right plan and incredible Board and team and the right product to meet this moment and I remain highly confident in Evolent's future.

As I handed to Mario to go over the numbers, I would just note that Mario has been [indiscernible] Evolent across the last 90 days. He's already had a huge positive impact on the company, and I'm highly confident in his leadership and approach going forward. Mario?

Thank you, Seth. I'm excited to be here and energized by the opportunity ahead. Let me begin with Q4 2025 financial performance. Q4 revenue totaled $469 million and adjusted EBITDA was $37.8 million, which exceeded the midpoint of guidance. After adjusting for our ACO divestiture, baseline fiscal year 2025 revenue was $1.77 billion and adjusted EBITDA would have been approximately $141 million.

Next, let's review our 2025 medical expense ratio or MER which represents Performance Suite claims as a percentage of Performance Suite revenue. For the full year, MER was 89%, excluding ECP with oncology trend tracking in line with expectations. In the fourth quarter, MER was 95%, excluding ECP, driven primarily by out-of-period true-ups as we recognized a full year of savings shared with clients. While these timing items temporarily elevated MER, underlying medical trend remained stable throughout the year, demonstrating the consistency of our results and reinforcing our strong momentum heading into 2026.

I know we have not discussed MER in great length in the past. However, given that Performance Suite revenue will represent more than 2/3 of our business in 2026 and beyond, MER will become the most transparent and consistent way to evaluate performance, so we will provide you with greater visibility into changes in MER going forward.

Turning to 2025 expenses. Outside of the MER calculation, such as non-claims cost of revenue and SG&A, non-claims expenses totaled approximately $765 million for the year and approximately $190 million for the quarter. Our quarterly non-claims cost was lower as a result of cost initiatives and lower expense accruals and more than offset the elevated MER for the quarter. We expect non-claims costs to be meaningfully lower in 2026 as efficiency initiatives continue to materialize. More detail on that shortly.

Turning to cash flow and the balance sheet. Our cash flow from operations was $39 million and total net change in cash and cash equivalents increased by $48 million bringing year-end cash to $152 million. We finished the year with net debt of $782 million, below the range we discussed during the last call. Please note that this did include a $50 million overpayment from a client, which when repaid, will negatively impact 2026 cash flow. Finally, we recorded a large noncash goodwill impairment due to market valuation declines, which has no impact on EBITDA or cash flow.

Let me now turn to our outlook where there are 4 main topics shaping 2026. First, we expect strong Performance Suite growth, with revenue reaching an all-time high. While this increase in revenue creates a powerful foundation for EBITDA acceleration, it also creates a temporary headwind in 2026 and due to our reserving methodologies and the timing of implementation of the new contracts.

Second, Specialty T&S 2026 performance is experiencing a significant headwind from exchange membership declines consistent with the entire industry. Excluding this impact, we expect the Specialty T&S business to deliver modest underlying growth in 2026.

Finally, I will also discuss administrative services as well as the impact of our cost reduction efforts. With these items in mind, let me dive into our revenue and adjusted EBITDA guidance for the year.

Overall, our revenue outlook is $2.4 billion to $2.6 billion, driven primarily by new Performance Suite launches, reflecting both higher membership and a more favorable PMPM mix towards Medicare. We have a bridge on Page 7 of the earnings deck showing the key drivers of 2026 revenue compared to 2025.

The significant Performance Suite revenue increase from new contracts to be launched during the year is partially offset by approximately $100 million of lost revenue from existing Performance Suite clients due to exchange-related membership contraction and some plans exiting unprofitable markets.

We also continue to see solid T&S revenue growth across both existing and new accounts. However, this growth was more than offset by the decline in exchange membership associated with the implementation of the One Big Beautiful Bill. As Seth noted, while we did experience sufficient organic growth to offset the decline from a membership standpoint, there was unfavorable mix shift within these members, which contributed to a reduction in blended PMPM and total revenue.

Finally, we did experience some churn in our administrative services business, notably related to 1 customer who was acquired by a large national plan that subsequently in-sourced our services. As we've noted before, the administrative services business represents a legacy portion of our portfolio and we continue to manage it efficiently while focusing our strategic efforts on the higher growth Performance Suite and Specialty T&S businesses. We do not believe our remaining administrative services contracts have that same acquisition-related risk that impacted us in 2025.

Let's now turn to our 2026 adjusted EBITDA guidance. Our adjusted EBITDA outlook for the year is $110 million to $140 million. Page 8 of the earnings deck provides a bridge summarizing the key drivers of the year-over-year changes in adjusted EBITDA at the midpoint of guidance, and I will walk through each of the components now.

Starting with the Performance Suite and assuming the midpoint of guidance, we expect the existing Performance Suite business to contribute $35 million of additional profitability despite the decline in revenue discussed earlier. This improved performance is driven by the continued realization of savings from our clinical programs, our clients' rationalization of underperforming markets and the impact of the contract amendments Seth described earlier.

On the other hand, while our new launches will drive meaningful adjusted EBITDA acceleration over time as they scale, they are creating a $25 million headwind to 2026 adjusted EBITDA at the midpoint of guidance, reflecting the timing of implementation and our conservative reserving approach.

This represents a shift from our prior expectation of roughly breakeven performance in 2026 and is driven by 2 key factors. First, we have an appropriately conservative approach to reserving for new contracts despite our significantly improved processes and new contract protections. Over time, we expect this headwind to dissipate as reserves are released -- this does create some pressure in the first few months of the new contracts.

Second, the losses of the midyear launches are higher than expected because of higher-than-expected membership volumes. This is offsetting some of the positive lift from other new contracts that are launching very early in the year. As you can see on Page 9 of the earnings deck, the new contracts will temporarily raise our 2026 medical expense ratio.

As a result, we expect MER to be approximately 93% at the midpoint of 2026 guidance compared to 89%, excluding ECP in 2025. We do expect MER to rise at the start of the year due to higher reserve requirements associated with new contracts being implemented on January 1. We then see MER continuing to climb and peaking in the third quarter as we onboard [ Highmark ] and further strengthen claims reserves as well as experience normal seasonality. From there, we expect MER to steadily improve through year-end as we realized modest in-year savings from our clinical programs and realize other favorable accruals in Q4.

Overall, this progression provides a clear and positive path towards sustained margin expansion as our new contracts mature. It is important to note that our underlying medical claims are expected to remain roughly consistent throughout the year. We're not assuming a rapid clinical improvement in 2026 even as our teams work to drive performance gains.

Due to our new contract reserving methodology and the expected progression of MER throughout the year, we anticipate that EBITDA will be 70% weighted towards the back half of 2026. In addition, at the midpoint of our guidance, we expect $20 million in adjusted EBITDA in the first quarter with a $10 million to $15 million sequential improvement per quarter in both Q3 and Q4. This pattern is fully aligned with the timing of our contract implementations, the reserve dynamics in the early part of the year and the growing benefit of our operating initiatives as the year progresses.

As our newly launched contracts mature and our clinical and operational programs take hold, we believe we are well positioned to deliver this earnings trajectory with increasing momentum across 2026 and beyond. It is also worth noting, as we discuss 2026 guidance, that our new contracts include significant downside protections. And because we are reserving these contracts at elevated MER levels, we believe our downside exposure in 2026 is very limited.

Our Performance Suite MER is the most direct indicator of how the business is progressing throughout the year and how we are tracking relative to expectations despite some occasional in-year volatility. While MER can already be derived from our 10-K, we will be introducing enhanced disclosures to provide even greater transparency for investors.

Moving on to Specialty T&S. One of the major factors affecting 2026 EBITDA is the contraction in exchange membership resulting from the One Big Beautiful Bill. This creates a onetime $40 million headwind to Specialty T&S revenue in 2026, consistent with the high-end possibility of a 40% decline in exchange membership we discussed on our last call, net of [indiscernible]. While future changes in subsidies or exchange enrollment, either before or after the midterms could provide upside, our current outlook reflects the full impact of this contraction.

Excluding the impact of exchange membership, T&S at the midpoint of guidance is expected to contribute $5 million of incremental revenue and margin in 2026 driven by growth in membership. Unfortunately, this new membership growth is unfavorable from a revenue mix standpoint, so it is not sufficient to offset exchange-related membership losses. However, this does show how demand continues to grow for our Specialty T&S solutions.

Finally, Administrative Services churn, as mentioned earlier, is meaningful, but is being more than offset by a $50 million year-over-year workforce reduction and efficiencies gained across the enterprise. This includes the $20 million saving we realized by Q4 2025 that Seth mentioned earlier.

Speaking of expense reductions, let me provide additional clarity on those ongoing efforts, which is a big area of focus for our team going forward and discuss how they will flow through our 2026 financials. With the previously mentioned expectation of 93% MER for Performance Suite, we project approximately $1.7 billion of medical claims expense for the year. The remaining expense base, which includes cost of revenue, excluding medical claims, but including medical device costs and SG&A is expected to be approximately $675 million at the midpoint of guidance.

This $675 million reflects a $90 million reduction from 2025 levels. Approximately $40 million of the decrease is driven by the divestiture of Evolent Care Partners. While the remaining $50 million reflects the impact of our efficiency initiatives already in motion, including targeted cost actions taken across the organization.

So if I put it all together, I expect our Q4 run rate EBITDA to be at least $150 million. Should we achieve the Performance Suite 7% to 10% target margin on the forecasted $2.2 billion annualized Performance Suite revenue exiting 2026, we expect to generate roughly $160 million to $220 million in total margin. This is roughly $30 million to $100 million higher than the approximately $125 million of Performance Suite contribution that is in the midpoint of the 2026 guide. We believe this potential to [indiscernible] is the most important factor that will drive shareholder returns over the coming years.

Finally, as you can see on Page 6 of the pack, the enhanced Performance Suite contract structure can create asymmetric upside for shareholders over time. Specifically, if you look at the new launches for 2026, we are forecasting these new contracts to run at 103% MER for the year at the midpoint of the guidance.

In the event of a 7% MER degradation to 110% MER, that will drive a negative $13 million EBITDA impact. However, a 7% improvement to just 96% MER or getting less than half of our target margin would drive a $57 million EBITDA improvement. Please note that because we expect adjusted EBITDA to build throughout the year, our leverage ratios will be higher earlier on and should begin to decline meaningfully in the second half. It is important to note that we are confident our current balance sheet and debt terms provide ample flexibility to manage this temporary dynamic as we ramp these large new contracts.

Turning to cash flow, an item we're watching very closely. We anticipate generating at least $10 million to $20 million in cash flow from operations after paying approximately $60 million in cash in interest expense. Part of the decrease from 2025 is the client overpayment from Q4 that we mentioned earlier as well as $11 million of previously classified dividends which are now reclassified as interest expense and moved into cash flow from operations. We also expect to invest between $25 million to $30 million in software development and CapEx in 2026.

With these financial considerations in mind, let me close with a brief comment on the organization. I want to acknowledge the exceptional work of the Evolent team and where we stand as a company. While there is a significant amount of work ahead, I believe we're well positioned to execute at a high level and accelerate growth as our new partnerships come online throughout 2026. We have a strong foundation, a disciplined financial plan and a team fully aligned around delivering for our partners and driving sustainable value for our shareholders. I'm confident in our ability to navigate the near-term challenges and to capitalize on the substantial opportunity in front of us.

With that, operator, we can open the line for questions.

[Operator Instructions] The first question will come from Charles Rhyee with TD Cowen.

This is Lucas on for Charles. Can you help us understand a little bit more about the rationale and what's driving the conservative approach to reserving. Presumably, this is for the CVS contract. It's our understanding that initially, you guys are reserving for a 0% MER because your fees match the expected acuity of the population you're about to serve. But here, we're looking at an MER of 103%. I guess, can you help us understand what's driving this. You said new membership is expected to drive this MER higher.

It's also understanding that the enhanced contract allows you to retrospectively adjust the fees for this change in acuity. I guess why is that still driving a loss here, if that makes sense?

Yes. So the -- the first thing I'll point out is when we have new contracts, we do reserve, and we have a different level of reserves and ongoing business. So that's a big part of what you're seeing with the ramp-up, and we have $900 million of new business revenue this year. So it's a very meaningful part of our profitability.

These initial reserves are more conservative. In the beginning, there are lots of new data flow implementation that could impact the profitability and the claims coming through. So this framework is not new. It's something we've developed over the last couple of years. So -- and follows GAAP.

The other piece, as you can see on the EBITDA bridge is when we do that and we ramp up [ IBNR, ] there is an explicit margin that's added. It's about $13 million. And that's just again, good reserve accounting that we have, and that's why the new contracts typically have that impact.

The next question will come from John Stansel with JPMorgan.

Great. I wanted to quickly hone in, I know it's early, but given kind of some of your early indicators, what you're seeing with the new membership early on this year, behavior or anything kind of different than you saw last year. I know last year kind of progressing on [ 1 or 2 ] trends.

Yes. John, it's Seth. I'll take that one. So let's start with exchanges. I think I mentioned on the call, we're assuming about a 40% reduction. And the early indicators we're getting from our client base are consistent with that. And we're obviously in touch -- close touch with our clients.

That number is obviously very different than if we had a different footprint of clients. I think more of that decline is from our clients proactively choosing to step away from risk pools as opposed to numbers not renewing because the subsidy changes or something like that.

And I think, again, that one feels like a reasonably conservative assumption. We won't know for sure until in Q2 how the members fully enroll or not. But I think that's it on exchanges. We're trying to be quite conservative. On [indiscernible] I'd say it's mixed. We have a couple of clients who exited a bunch of markets and lost membership materially. We have a couple of clients who gained a lot of membership net. It was sort of a push for us across the year and then Medicaid has been kind of status quo and not much change there.

The next question will come from Daniel Grosslight with Citi.

Just a housekeeping question to begin with. It looks like stock-based comp has been pretty variable over the past few quarters. And I'm just curious how we should be modeling that?

And then my real question is on is on capital deployment for '26, just given the limited free cash flow that you do have available, and it does seem like you are focused on deleveraging. If you just look at the debt markets right now, especially for you guys, you seem to be particularly dislocated, let's call it. And you're trading -- your debt is trading at a significant discount. So I'm curious what your propensity is to go into the open market and buy down debt. Obviously, you have to be careful about messaging all that, but curious on how you're thinking about liability management, given how steep of a discount your debt is trading at?

Yes. So on the stock comp, I wouldn't change your assumptions. I think we're going to be in line with what you guys have seen in the past for the year. It's a good question. We see the same thing. We're obviously very aware of how our convert is trading. It's not -- right now, we're focusing on deleveraging by making sure we can execute. We also have, as I said, a very good, strong, flexible balance sheet, even though leverage is higher than we would like. And we also have some cash and undrawn capacity.

So we feel like we're in a good position, but it is difficult just given the dynamic of the ramp up this year to go out and do much other than what we're doing, which is focused on the business. Obviously, if there are any opportunities to do good liability management and add shareholder value that way, we will look at it and weigh that against other things like cash on the balance sheet. But we are very aware of that dynamic, Daniel.

The next question will come from Jailendra Singh with Truist Securities.

First, a quick clarification. Just trying to reconcile your comment about second half. At 1 point, you said that you expect fourth quarter run rate to be around $150 million but you're also expecting 70% of '26 EBITDA to come in second half, which would imply a much higher run rate. Is there something a dynamic between Q3 and Q4, we should be aware of? Or is there some nonrecurring items second half which should not be part of annual run rate. So that's a quick clarification, if you can.

But my main question is around -- can you talk about your oncology costs and expectations for '26? And if you can update like how did you end up on 25% compared to your 12% expectation you had for the year.

Sure. Yes, that's a very good question. Yes, there are some reversals in the reserves in the fourth quarter and contractual impacts. Not a huge amount, but that's why there's a little bit of a difference between the implied Q4 number that you may be calculating and what Seth said is the implied run rate at that point. So that's part of the reserve requirement process this year with the new business. So there is a little bit of that happening.

On your second question, Yes. So we are seeing sort of very stable trend on the oncology side on both really across the board. And we have looked at 2026 in a very similar trend level as 2025. I will say given 1 of the things that we -- that Seth talked about and we have in the earnings deck, our contracts now work in such a way that not every point of trend is the same. We have a number of different mechanisms to adjust trend for things out of our control.

So a 15% trend as long as it's being caused by the change event metrics that we have in our contracts, may not be a big headwind for us. So we will continue to provide flavor with trend because that will impact MER, but we just want you guys to keep that in mind. The way our contracts work now. There are some very specific things that accrue to us on the trend side, and it really depends where the change is coming from.

And Jailendra, the last thing I'd add on the oncology trend side. I think the baseline that we saw across '25 and what we're expecting for '26, again, is consistent, not up or down in '26 relative to '25 and we -- again, '25 came in roughly where we thought.

The next question will come from Jared Haase with William Blair.

Appreciate all the details as it relates to the EBITDA outlook. Maybe I'll ask 1 on the pipeline. And I think there was a bullet point in the earnings deck you mentioned the late-stage contract opportunities that could provide additional upside here in 2026. And so I just wanted to sort of flesh that pipeline opportunity out a bit more, kind of understand how that's weighted to Performance suite versus T&S.

And then I guess a specific part of the question here would be, if that is weighted to larger Performance Suite deals, could that potentially lead to an additional drag in the back half of the year if those do come to fruition?

Yes. Thanks for the question, Jared. So a couple of things on the pipeline. I'd say, I think I've been saying this for maybe 1 year, 1.5 years about the challenges that managed care companies have do translate into pipeline activity for us. And it's definitely bearing out, growth rate this year, size of the pipeline.

It continues to be really balanced, Jared, to be honest, between Performance Suite and Tech and Services. We have some very significant Tech and Services opportunities. [indiscernible] talk about 2 big Performance Suite opportunities today, but there are a number of both that could affect the growth rates over time.

I think we feel really good about the growth rates over time. I would not worry about announcing a new Performance Suite deal that creates a new drag on '26, that is not something that we're going to be doing this year. With the new Performance Suite contract I think there are some go-lives on the tech and services side that could provide some modest upside. But I think the thing you should take away is that the '26 framework is pretty well locked down at this point. We don't have go get that really that we need to go figure out on the revenue side. And so really, all of this I'm talking about is for '27, and it's a nice blend of Tech-Services and Performance Suite.

The next question will come from Jessica Tassan with Piper Sandler.

Mario, congrats on the first official earnings call. So we appreciate all the new disclosure, but obviously, we've been kind of burned by the Performance Suite business before. So just why should we be confident that the 103% MLR on new contracts in '26 reflects conservatism versus inadequate pricing on new business?

And then just I think your 2025 results kind of imply about a 9% OpEx burden on Performance Suite revenue to get to approximately a 2% performance fleet EBITDA margin. Just what is the MLR and OpEx combo to get us to the 7% to 10% long-term target margins in the Performance Suite?

Jess, I'll take the first one. So look, I think the main thing that I would focus on with respect to the new business is the structure of the contract. And we have a slide in the pack that shows you the asymmetry of how that works, number one.

Number two, at 103% we're definitely underwriting out of the gates, we think at a very conservative place. And being able to apply the combo of conservative underwriting and a good contract does create that asymmetry that we talked about and the third -- last factor that Mario will comment on his run is I think we've taken all that and also applied it to how we guided for the year, meaning you got accounting policies and reserving and 103% does a certain set of things and then just generally how we land on the guide across all the factors of the business. We tried to orient towards conservatism and new CFO, part of that, I think, is a good and healthy dynamic in terms of being conservative.

So that's how it starts. And then on the OpEx thing. I think the thing you got to think about is flow-through economics that 2%. I didn't totally track all the math. But each incremental dollar of care margin in the Performance Suite disproportionately going to fall to EBITDA, Jess, because there is some variable OpEx, but it's not -- it's more of a fixed cost investment on a lot of that.

And so I think the 7% to 10%, we feel really good about. I think we're achieving that today on the legacy cohort as a for instance. And feel really good about being able to get there with the whole book over time.

The next question will come from Jeff Garro with Stephens.

I'll stick on the MER front and trying to think about that 89% actual performance for 2025? And then the 93% expectation for the full book of business for 2026 that has the drag of $900 million at that 103%. And my implied math is there's on the remaining Performance Suite business from '25 to '26. There's some improvement pretty modest, but would love to hear you explain more about the specific drivers of improvement and opportunity even beyond what's kind of underwritten in that 93% full year '26 expectation for the remaining Performance Suite business, much of which is already on those new contract structures.

Sure. I think it's just along the same things we've talked about. It's -- because we have so much new business upwards to $900 million we expect this year and new Performance Suite business, and as typical, we're -- not unusual, we are reserving. We have to build up reserves. We have to build up [ IBNR ] over the first few months. And because, as I said, the new relationships, new data flow, just the team is working together, we do have a framework that tends to be more conservative on the reserving side. That doesn't last all that long, but for special contracts that start in the middle of the year. Once you get over that initial reserving, you actually start looking at some benefits.

And so part of what you're seeing in the fourth quarter, is reversal of some of that. And the base business has continued to perform well. That's why the blend is at 93%, which is worse than last year. It's primarily the new business driving up MER, offset by continued good performance on our existing cohort.

Yes. And Jeff, I think part of the question too is, okay, how does the existing cohort get a little bit better? And there's some ongoing clinical initiative, but there's also some contractual things. I'd say the majority of the improvement is what I would call contractual in nature, which gives us a lot of confidence in it as opposed to go get on the clinical side.

The next question will come from Matthew Gillmor with KeyBanc.

Just following up on some earlier questions. I'd be curious if you could just orient us around some of the swing factors in terms of the high end of the EBITDA guide versus the low end is trend on oncology costs are the main 1 to think about? Or are there other sort of factors that you'd orient this around?

I think it's MER to start with, which is why we've started talking more about it, why we're disclosing it in a different way in our financials. -- really is about MER, especially as we sit here, we have a -- we think we have a good view of membership aside from any other exchange issues. We feel very good about where we are. And then if the evolution of can we accelerate the savings that we're projecting.

Again, as I said, trend can be a factor. We feel like we're being appropriately conservative on those metrics, especially given the new contract provisions where not every [ 1% of ] trend is the same. We have a lot of levers to protect us in case trend is heading the wrong way for things that we don't control. So that is the biggest swing factor by far.

The next question will come from Richard Close with Canaccord Genuity.

A couple of questions. Seth, earlier on, when you talked about exchanges, you said something about return to growth over time. And I'm just curious what goes into that comment?

And then a follow-up with Mario. Just your thoughts, you've been here 90 days, I guess, on the ground. It sounds like your fingerprints are on the guidance and some of the new disclosures, just curious maybe your thoughts in terms of any changes you're thinking about going forward, that would be helpful.

Yes. I'll start on the exchange and then pass it to Mario. So Richard, what I'd say there's 2 things on exchange. One is, if you go just look at how consumers have bought that product, in the marketplace. It has had growth to it that go outside of subsidy swings, and there is interest in the product generally. So we have this dislocation from subsidies being pulled back and risk pools are getting shifted. I think over time, the idea of consumers using it to buy product probably will come back over some time period. And whatever the growth rate that will be, that will be.

Second factor is more of a wildcard, but should there be a change in the midterms or legislation or anything like that to adjust how subsidies work that could be more of a step-up in membership, which are obviously not counting on either of those 2 things in the '26 number, but could be something in the out years.

Yes. And it's been a great 90 days or a long 90 days. I'm just, if anything, I'm more excited to be here than I thought I'd be. The team is amazing. I think what we do is at the heart of what we need more of to fix what's wrong in health care. So all that feels really great.

I've tried to partner with Seth and figure out a way in how we communicate with all of you and our other investors with more clarity, transparency and how it directly correlates to what you're seeing in the financial statement. So I think if anything, I will try to continue to do that, the MER in my mind, gets us quite a bit of the way to a place where we're doing that. But we will continue to look at new and improved ways to try to communicate with you guys so you can understand how our business is performing and holding us accountable.

The next question will come from David Larsen with BTIG.

Can you talk about what your mature Performance Suite EBITDA margins look like? What is that percentage? How long does it take to get there? .

And then just over time, like in 2027, 2028, 30% revenue growth, that's high, that's great. But it seems like it's coming at the cost of margin degradation and free cash flow. So why not grow revenue, let's call it like 10% or 15% year-over-year and focus on more EBITDA growth, EBITDA margin growth and free cash flow and debt pay down.

I think on the -- we're not going to talk -- we don't talk about EBITDA margin, but we can talk generally about our sort of existing book of business. And when you look at the MERs that we're disclosing today around the new cohort and what we had at the end of 2025, you're getting to a pretty good care margin. We've talked around 7% to 10%, the existing book is doing a little bit better than that, partly because what Seth said, we're getting some contractual adjustments that improve our base rate, which aren't temporary but they won't happen every year. They'll stay there. They just won't happen every year.

So for the whole book of business, I think we're feeling very good about how it's performing. And I think I'll let Seth comment on the focus profitability versus growth. I just -- to me, coming in, understanding the [ Highmark ] relationship, some things are just -- they're great for the business, and it may create short-term pressure, but long term, we want to create value. We know that we can lay this out for you guys. So you see the huge opportunity we have in front of us with that partnership with the current revenue this year, even though from a profitability standpoint, we will have to execute to get it to the point that we know we can like the rest of the business that we have.

Yes. And David, I'd add just one other thing, which is the Performance Suite we think, is the best way to create value for our partners, which we got to start with them. And we think it's more economically attractive on a per life basis for us as well. And so I think, particularly when you have the enhanced model, more predictability and the like, you're willing to go through a period of investment to get there. It's kind of what Mario just said. But I do think it's important that the pie of value is bigger under the Performance Suite than Tech and Services. And so when you choose between those 2 products, we've the enhanced Tech and Services, we think is the better of the 2 products. If the client wants Tech and Services, we'll obviously do that. We'll do whatever they are interested in doing.

And then in terms of the investment ramps and the like, again, I think to Mario's point, you find a partner who's a great partner and they're interested in creating a partnership together. You do that because it's going to create value over time. And so I think we're making the right decisions to maximize the value of the company.

Next question will come from Matthew Shea with Needham.

I appreciate the update that 90% of the Performance Suite contracts now have the enhanced protections and MER corridors. But of the 10% that have not migrated, you noted the scope is limited and protections are not economically warranted. Could you just update us on what is in that 10%?

And it sounds like that will stay without protection. So how are you thinking about those contracts longer term? Would you eventually look to migrate or sunset those? Or do you have confidence in them without the protections?

Matthew, I would expect almost all of those to move to the enhanced as well. And maybe there's a couple of percent of the [ 100% ] that never migrate, but I think it's going to be high 90s at some point would be my guess. I can't guarantee that. I think that's where it's headed. And I think it's the right call for our partners and the right call for us it kind of gets everything into a standard structure. So that's how I think about it.

The next question will come from [ Sean Dodge ] with BMO Capital Markets.

Maybe just on the cost efforts you mentioned, Mario, for 2026. You said you expect $50 million of that to be captured within the year. Just the time line on those, are those going to unfold pretty ratably across the year? Are they more kind of early year or later, you're kind of more heavily weighted? And then I guess, just how should we think about the run rate benefit of those going into 2027?

Yes. And those are baked obviously in the adjusted EBITDA guidance into the cost base that is implied by the guidance. I would say, Seth talked a lot about getting $20 million last year in AI and automation initiatives. Those already happened at the end of 2025. So of the $50 million, $20 million were done then. We did another big portion of the remaining $30 million in early this year. And there will be a piece that we will continue to get throughout the year.

So it's largely running through. And as I said, when you look at what we've guided to and the cost base implied by that, the $50 million is in there. There isn't a ton of wrap or additional run rate because they were mostly -- they will almost be done early in the year.

The next question will come from Kevin Caliendo with UBS.

I appreciate the downside protection of your new contracts, but I really want to understand when you are signing new business, what kind of IRR or ROIC are you modeling out or shooting for? And I guess maybe it's not as high as it used to be because you have lower downside. Obviously, there's risk-reward here. But when you're modeling this out, what are you aiming to achieve? Like what's the target return? And how do you think about when that return is going to come about? Year 1, year 2, year 3, et cetera? So just trying to understand from a modeling perspective how to think about it, how do you guys think about it and how we should think about it in terms of total returns.

And -- let me add a little bit more color to how we think about these contracts, which I think will partly answer your question. There's a spectrum from Tech and Services, right, where it's -- there's no investment and no downside all the way to the Performance Suite enhanced model where you might have 10% margin, but you have some downside.

There are things in between. And we are underwriting around our cost of capital at Evolent. You don't want to be over 20% cost of capital return, which gives you space in between our cost of capital and a good return. And again, you have to look at how much downside exposure is there in the opportunity versus how much upside is. But that's how we would think about it as clear a 20% hurdle rate at least.

The next question will come from [ Ryan Halsted ] with RBC.

Just my question is, again, focusing on the MER, Obviously, a key KPI and oncology cost trends is also clearly a big contributor to that. I mean is there -- for the portion of the risk that you are controlling or at risk for, is there a good way of looking ahead at kind of what would be the swing factors into that portion, whether it be -- is it prescribing patterns of higher costs therapeutics. Is that sort of the piece of the oncology cost trends that you're still most exposed to, I guess, or in control of?

Yes. Great question. So yes, we think about it as follows: probably 80% of what we're exposed to are in charge of managing would be the therapeutic. And 20% would be other costs, which might be radiation therapy or things like that. Within the therapeutic exposure that we have, we carve out new drugs and indications or things that are not in our control. So things that would be in our control would be for a given cohort of patients that are receiving similar types of treatment. What is the average cost of the therapeutic [indiscernible] plus the 20% of other. And that's really how we think about it. I think that's our unique value proposition is being able to manage the therapeutic dosing selection, timing et cetera.

You guys know -- I'll use checkpoint inhibitors as an example that everybody understands [indiscernible] been very high cost drugs like KEYTRUDA or OPDIVO or others. The duration of that is the patient on it for 90 days, 120 days, 150 days. If it's not working, are you able to get on to a new therapy quicker. What's the number of vials or dosage that are open, et cetera. It's all of those decisions, which get are very tied to the patient profile and the genome and deeply clinical decision-making, which is really the core of the clinical work we do.

This concludes our question-and-answer session. I would like to turn the conference back over to Seth Blackley for any closing remarks.

Thank you for joining tonight. It's great to have Mario and the team, and I just want to say a big thank you to the entire Evolent team. It's been a lot going on over the last 1.5 years. Our team is highly committed to the mission of this company, I'm really proud of them, and I'm very confident that the team and I and the Board are going to deliver for our shareholders, and I'm excited about that.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good afternoon. This is Kevin Caliendo, health care service and distribution and IT analyst from UBS. Thanks for our last session of the day with Evolent Health, with John Johnson, Chief Financial Officer. John, thank you so much for coming.

Great to be here.

I know this was not an easy week to travel. So...

I made it...

I hope you make it home. I hope you all make it home. Maybe they'll vote tomorrow and miraculously all the FAA workers will be back. But again, all sincerity, thank you for coming.

Let's start out. Your stock did react favorably to the report -- to your third quarter results despite a meaningful new business win, a better quarter and better guide. I mean I think the issue is the lack of visibility into '26 due to potential membership losses and HICS and potentially Medicaid.

And the question we've been getting a lot is how do we frame this? I know you've probably been asked this 100 times today, but let's just talk through it a little bit more. How do we think about -- do you think about it in terms of loss of numbers in HICS? Does it matter which customer it is? Let's just talk broadly about it. Let's try to dive a little bit as we try to maybe streamline our model a little bit.

Yes, of course. So let's talk about the building blocks for next year, right? So we think of 4, there's organic growth where we feel very good, both on the Performance Suite side and on the Tech and Services side. So adding new customers there, launching new business at the beginning of the year, which relative to the Performance Suite, of course, Tech and Services brings with it new EBITDA right away instead of having a maturation curve. So good on the growth side.

Second thing is on the cost structure side. So we've talked about a $20 million year-over-year benefit leading into next year from reductions on the cost of revenue line driven through efficiencies. We feel really good about that as well. The third thing is medical trend and its position relative to our pricing where we feel quite good as we go into next year. Trend feels very much under control in our world and the pricing feels strong relative to the risk that we're taking next year.

That then leaves membership. And it's -- what we laid out in the call is, while there is a wide range of potential outcomes for both MA membership and exchange membership, if you take the downside of the public commentary by some of our customers, then we would find it despite strong performance on items 1, 2 and 3, we would find it difficult to grow EBITDA meaningfully next year from this year's pro forma baseline. So then let's dig into a little bit what that looks like in the exchanges and what that looks like in MA because to your point, individual carrier dynamics certainly matters a lot.

In the -- our HICS business, is about $360 million of revenue today, split about 50-50 between Tech and Services and the Performance Suites. In the Performance Suite, we're most levered to Molina. And so their commentary on membership can be read through to us. In the Tech and Services suite, we're most levered to Centene. And so their commentary on their exchange membership can be read through to us as well. We've heard public commentary from both of those players of as little as the high teens and as much as 2/3 of membership dropping.

What can we then do about that, right? How can we mitigate that issue? The first, I'll talk both about cost reductions and about pricing in the risk business. On the cost reduction side, as you can imagine, we are today, from a planning perspective, ensuring that we're taking the appropriate actions to set up cost actions in the event that we end up at the more extreme side of that scenario, right, so that we are able to react very nimbly when we get final membership information. And you've seen us do that in the past, be highly disciplined on the cost structure and on the SG&A, and we're prepared to do that again.

On the Performance Suite side, there, it's about matching our price with the changes in the population that might result from such a significant downdraft in membership. And our aim there is to ensure consistent MLR in the exchanges from this year to next year. So our pricing targets for next year in that part of the business, we're not seeking to drive EBITDA expansion right now in that area. But we do believe that we will be able to preserve our company average care margin, which is about 7%. That equates to an MLR of 93%, preserve that level of profitability in the exchanges next year based on rate.

So how -- you say you act nimbly. What does that mean? Because I guess the question is when will you know? And how quick -- what does nimbly mean? I'm not -- obviously, this is a sensitive topic. You don't want to -- but from an investor perspective, how do -- how and when will we understand this little better?

Yes. Look, I think open enrollment is going on right now. And we have good dialogue with our planned partners in terms of what they're seeing, and that informs our planning as well. And that should enable us as we come into the beginning of January and have a clear sense for their expectations of their membership that should allow us to kind of take action to rightsize what we need to based on those changes.

And I know this is an obvious question, but what is the greater sensitivity in which part of the business when it comes to the HICS side of the business?

For sure. So look, the relative margin between the Performance Suite and the Tech and Services is pretty different. So average margin -- care margin in the Performance Suite of 7% across the company right now. Average gross margin in the Tech and Services Suite and the exchanges would be between 40% and 50%. And so that's where the SG&A cuts will come into play.

I have to be more on that side.

For sure.

Is it region by region? Like how do you think about this? Or is it nationally run given the HICS -- like -- and I should probably know this, but I don't, which is when you think about it internally, is it market by market that you know? Or is it just big picture...

So we will think about it as a region-by-region membership change. And that's, I think, where we have to estimate together with our partners, what are the actions that they're taking in a particular geography that might result in changes in membership in that geography, that then flows into our overall calculation. But our actual staffing is not geographic specific, right? Actual staffing is nationwide. And so we can titrate based on the aggregate membership decline.

Let me -- I'll ask this in a way, but -- does the HICS business for you guys make sense going forward? Obviously, we've seen CVS exit HICS. People are just saying, I can't make money in this business now. Do you guys look at that as sort of, hey, maybe we shouldn't -- we're basically at the whim of our customers here and it's incredibly volatile. But you make money doing it and it's high margin. So how do you -- I know your new role strategically isn't necessarily -- but this is a C-suite question of, hey, where do we invest our resources in terms of our new business wins? How do you view HICS? How do you view Medicaid? How do you view MA? How do you view some of the other opportunities that you have going forward, just given -- or is this like it's never going to get worse and this is the most disruptive it's going to be. But it's a legitimate question. I'm sure you've had it 100% internally.

Look, here's how we would approach that question, which is 100% through the lens of what's best for the customer, right? Because ultimately, the success for us comes from success for our customers, right? And if we can be their preferred partner across both lines of business, geographies and specialties, then that to us feels like the most durable position to occupy. And that to us is worth the potential volatility of seeing membership up and down in one of their lines of business.

It's a part of the offering. It's going to exist. If they want it, they can have it. I guess just from a question of your own operating leverage, like is it -- do you want it to be the first piece of the business that will last...

For sure. Look, I think it's true -- the best answer to that question is it is the smallest part of our business today, right? It's only about 20% of our revenue, and it's a vanishingly small percentage of the new growth that we've announced for next year, right? So it's not where we're growing right now.

Well, that's a good thing. Let's talk about this revenue guide, the $2.5 billion plus. There's obviously -- you have visibility into this. You wouldn't have guided to regardless of what happens with this membership presumably.

That's right.

How much variability was in that. Is this the baseline now -- is $2.5 billion the baseline when we think about long term? Or is there more above and beyond that, like, okay, that's the new baseline and then we attach some kind of LRP or growth rate to that? How should we think about it beyond this year?

For sure. So I'd say a couple of things. We view $2.5 billion as the current forecast for next year that is contracted, right? And so we haven't sent the sales team home. They're still selling business, and we would aim to sign up more business for next year. And that would then mean both through new business wins and through the timing of go-lives, we'd be exiting next year probably meaningfully north of that $2.5 billion number. That then tees us up for a strong growth into '27 and the size of our pipeline, which we referenced on last week's call is $650 million on a weighted basis, that's probability weighted based on the probability of close. That should set us up for multiple years here of very attractive growth.

Generally, what we have indicated is 15% plus on the top line, obviously set up next year to meaningfully outperform that. And while we haven't given updated sort of long-term outlook beyond that 15%, you could see scenarios where it's meaningfully in excess of 15% for several years to come.

I'd say one more thing on the growth side because it's important. At the same time as we're growing very significantly, one of the greatest things about having a pipeline this deep is we can be very disciplined on the underwriting. And so the construct of both the Tech and Services deals that we're announcing and the Performance Suite deals that we're announcing are very tightly constrained risk contracts to Evolent. They're still risk contracts, right? And we can't minimize that.

But if you look at the protections that are contained in these enhanced risk contracts for Evolent that match our rate to things like changes in prevalence, changes in case mix and contractual protections that have corridors that cap our losses, things like that. It allows us to feel very comfortable in those underwriting standards given the pipeline that we have, we can demand those kind of terms.

That's great. Obviously, it's important because the risk metrics and margins are -- have been an issue, have been a controversy. You said that some of the new business that you've won, we should think about the margins peaking at around 10%. Is that the go forward? Like when we think about your business in '27 and '28 and the like, obviously, the mix of Performance Suite versus Tech-enabled. But how should we think about margins for your company starting -- if we want to start with this year as a baseline, but next year as a baseline? How should we think about the longer-term margin opportunity here, too, because, again, this has been a [indiscernible] controversy. I don't think you're winning new businesses. I think it's...

For sure. I'd highlight maybe 3 things. The first is on the Performance Suite. Last year, care margin was 3%. The historical average was 10%. This year, we've got 400 basis points of recovery already delivered. We're at 7% this year and on our way back up to that 10%. That is the right long-term target as we see it today for that part of the business. On the Tech and Services side, average gross margins there today are around 50%, 5-0. We see an opportunity there through these automation and AI activities to increase that gross margin over time while also bringing costs down for our customers. I think we can have both of those 2 things. That's a win-win.

Let me give you an example of what this sort of cost work looks like. In April, we deployed some machine learning technology on a broad swath of codes in one part of the business. And between April and over the summer, iterated more than 50x tuning those models to best approximate what our case reviewers were doing when they were reviewing those particular codes. At the end of that fine-tuning, we saw more than double the rate of auto approvals of those codes than we had seen prior to that work. And so that's the kind of AI automation that we're talking about that then directly translates into improvements in our staffing ratios and turnaround times for our customers.

Have you quantified it?

So that is -- you add that up across a lot of different projects, and that's what gets you to the $20 million improvement for next year. And then thinking longer term, we see that as a $50 million EBITDA opportunity.

I mean that's a huge number.

It's a giant number.

What are the KPIs? Like how do we know that this is working and how do we just see it in the results like this $20 million, I'll just -- will you be able to call that out as what's -- incremental?

Yes, for sure. But you'll see it show up in the cost of revenue line is where it will show up because these are direct staff. And as we are rolling this out further across the organization and adjusting the staffing ratios at the end of this year during Q1, we'll be able to call those out and what changes those have translated into from the cost structure perspective.

Got it. The other debate, obviously, the margin for next year and the loss of membership and that was an overhang. But it's also brought in affect the balance sheet a little bit. So let's talk a little bit about that. You've done some things to mitigate your near-term capital structure risk, if there's such a thing as capital structure risk. Tell us sort of where we are now and what's the plan to delever going forward? How should we be modeling that '26, '27, how should we be thinking about what's the company's plan? What have you -- I don't know if you've had to talk to the banks, covenants, any other issues you did an offering. But just talk through -- let's understand a little bit.

Yes. So a few things to note there. So let's go to the numbers first. We would expect to end this year after paying down about $100 million of the senior term loan with the proceeds from our Evolent Care Partners divestiture, we would expect to end the year with about $800 million in net debt that would translate to about 5.5 turns on our 2025 EBITDA. From there, between EBITDA growth and cash flow, we would expect to be able to delever by about 1 turn per year, getting us below our target, which is 4x in, call it, mid- to late 2027. So that's the plan and the goal.

I'd note a couple of other things. Just in terms of bank covenants because you mentioned that, it's very covenant-light debt. We only really have one, which is 8.5x the senior secured portion. We have a very significant amount of cushion to that covenant, not something that we're concerned about.

Okay. And after you did the offering last year, you don't have any maturities coming due for at least 3 years...

The end of 2029.

So 4 years.

That's right.

4 years. Okay. So -- and I'm presuming free cash flow is basically going to be devoted entirely to this.

Correct. That's right.

No other -- there's not going to be any M&A. There's not going to be any -- this is like we're in a deleveraging...

That's right.

Okay. I think that's pretty clear. I do understand why investors are concerned. And getting back to the EBITDA question, I guess this is a place to ask it. You said you can mitigate, but it will be hard to grow significantly. Does that mean that like what -- I'm not going to hold you this guidance, but is a worst-case scenario flat? Like regardless of what happens if these -- the worst-case scenario with membership is -- happens, you can still at least be flat.

Yes. Based on everything that we know today and looking at some of those extreme scenarios that have been put out by some of our customers, if we run that through the model, add it to it, all the growth, add to it the actions that we know we can take, then we see that as our baseline for next year. So flat to a pro forma number this year.

Okay. All right. So that's not formal guidance.

Not formal guidance for sure.

Fair enough. The oncology costs, you mentioned that they're running a little bit below the sort of target they have been. We track it pretty closely. We have a whole oncology script model that we built that Andrea, my colleague was able to uncover. It's fantastic. We get more requests for that than we get almost any...

I believe it's a good model.

But you mentioned you saw a spike in cardiology utilization, specifically September into October. How much impact does cardiology utilization actually have on your model? Like that's a harder one for us to track because that's more procedure than it is on drug. The drug correlation to in oncology is higher, cardiology is more procedure driven. It's harder for us to track that. So maybe tell us the impact that has on your total cost trend, how much is cardiology as a percentage of your total cost?

Yes. Yes. So cardiology represents about 40% of our Performance Suite revenue. And I want to be explicit about where we're seeing this trend because it's not broad-based. It is in the exchanges. And we believe that it is likely driven by what's been called a benefits rush, where people who are currently covered with an Affordable Care Act plan who see the possibility of, boy, my premium might go up by 50%, I might not stay covered. Before I make that decision, I'm going to go see a doctor and get a clean bill of health and maybe that visit uncovers something.

And that is what in our hypothesis leads then to this spike in care. We did see that in cardiology in the exchanges in September a little bit, in October, a little bit more. And so then our guide contemplates $3 million of increased cardiology expenses in the third quarter -- or sorry, in the fourth quarter. That is effectively -- if you look at the midpoint of our guide, it went from 52.5 -- $152.5 million to $149 million, and that's basically all this cardio benefits rush.

And if that were to continue, so you basically -- your working assumption is this is going to run out at the end of the year.

It feels transient to us. That's right, because of the way that it's coming about.

And there wasn't a similar spike in oncology probably because...

Not particularly. You could imagine a little bit, maybe somebody similarly goes to the doctor and they catch something, right? They get screened for cancer. But obviously, oncology treatment is a little less elective. And so it's more likely that somebody would have gotten that checkout.

There's been a lot of debate here at this conference around what happens when biosimilars come to oncology drugs in the context of the distributors, in the context of PBMs, in the context of payer models and all these -- it's -- what happens if the IRA price comes down, what happens to ASP? Like it's a debate going on. But I'm interested what happens to Evolent when you contemplate in 3 or 4 years when, say, KEYTRUDA goes biosimilar, maybe the price comes down by 30% in year 1. How do we think about that? How do you guys model that? Is it a tailwind for a year? Or is it automatically readjusting your rates because it's so huge, that particular drug is massive. So how do we think about that? Is it a good thing for 1 year and bad thing after that because everything reprices lower, how do we think about it?

Yes. Let me say a couple of things. The first note I would make is our experience in navigating the introduction of biosimilars in oncology is we can position Evolent as a change agent to our key customer, which is the health plan, right? Because biosimilar adoption doesn't just happen, right? It is physician behavior change. And that is an area that we can support. And so we can make that adoption happen where it's clinically indicated, we can make it happen faster. So we can create more value. We then get to capture some of that value in our Performance Suite, and we would share some of that value with our customers as well. So we would see this as a tailwind.

The other note that I would make is the -- as I look at drivers of cancer trend over the next 2 to 3, 4 years, while checkpoint inhibitors will continue to be an important piece of the trend, you've got antibody drug conjugates right behind them, right? I think drugs like ENHERTU and things like that, that we are -- have longer time horizons on this biosimilar issue. So I don't think that we're going to wake up in '29 and see a dramatically lower cancer trend. I think these elevated levels persist for some time.

So you can help move patients to the biosimilar regardless of like a PDM decision and the like. And do they get -- is the cost base on the biosimilar list? Or is there -- if they use the brand, but the brand gets a bigger rebate, like how does your cost? Is it the rebate because they're the GPO negotiated price? How does that work for you guys?

So generally for us, in the Performance Suites, we don't control the fee schedule, right? That's controlled by the plan. And generally, it's going to be indexed on ASP. And so it's going to move with the average selling price.

Okay. And if they throw the whole ASP model out, how does that work? I mean it's something that CMS is talking about doing and that's why I'm not joking.

No. Look, so let's do that real example. Let's say that in a couple of years, there's a wholesale update to unit costs in oncology. What would happen in that context in the Performance Suite is our rates would update based on those changes. And if it was a significant change, it would happen in that same year.

Okay. I got it. You're now -- it was a year ago this quarter, the third quarter, a year ago when everything changed, right? And the world turned upside down a little bit for you guys and you had to go and recontract new risk corridors. We've talked about the limit to -- now we talk about 10% margin and things like that. You've won some business as well now with these new quarters. And that was a concern going in like, hey, if Evolent is not willing to take the same amount of risk, will people still pay for their services? They are. What has the sales pitch? How has the sales pitch changed? Who's coming to you? What are they asking for differently than may have been 16 months ago?

Yes. So look, I think there's been this wholesale change in how MCOs approach this kind of contract because of the realization that a company like Evolent can create a ton of value in a specialty where we're very deep, but we can only do that if it is sustainable for both parties. And so that's the context of these conversations. And we have now a number of reps, both recontracting the book between last November and February and now a significant number of new wins with these enhanced protections that I think we have proven that there's significant appetite and belief in the value that we're creating independent of some of these protections. And so we're pretty excited about that.

Are they asking for anything different or in return?

Yes, there's a clear trade, which is we share more of the upside, right? And so how does that typically manifest? Often, it manifests as beyond a certain MLR for Evolent, we start sharing 50% of the savings back to the plan. And that's what results in our target margin for that business moving from the mid- to upper teens, which it was 2 years ago, down to 10%. Now that's -- it's still a very aligning structure, right? It's not like we're capped. We're still motivated to go out and continue to create value. And the plan is aligned with us if they're sharing in that value.

Got it. It makes sense. Is there any -- I'm just trying to think of like the new contracts that you have -- that you've won, CVS and this Blues plan. How do we think about onboarding and margin progression? You talked a little bit about this on the earnings call. We talked about a little bit afterwards. But -- if we were just to bridge core business and then layering on these new contracts, how do we layer on revenue progression versus adjusted EBITDA or EBIT margin? How do we get there?

For sure. So in the Performance Suites, revenue comes on day 1. And we think of it as a 2-year ramp to target profitability. So in year 1, we will generally expect minimal EBITDA contribution. We're building the reserves. We're driving change through the network that takes some time. Year 2, during the actual year 2, we would expect margins of between 5% and 7%. And then exiting year 2 is when you start to get to that 10% target.

And then year 3.

Then year at steady state.

Right. And these contracts are 3 years. So you're going to get at least 1 year full margin benefit. The extension beyond 3 years, is that -- how does that -- how many contracts have you not renewed past 3 years? I'm sure there's been some, but like...

Very few.

Very few?

Yes. Our retention rate on the specialty side has been very, very strong. And I think it speaks to the value that we've been able to create for our customers. If you think of Evolent generating 10% margin at maturity, the plan is usually also capturing 10% savings relative to that benchmark or better, right? And so it's a situation that can really work for both parties.

The -- if I'm thinking about just the new contracts and when they onboard because the Blues Plan doesn't onboard 1/1, right? It's 5/1. So there's not going to be a ton of EBITDA contribution in '26 from either contract...

That's right. But very nice tailwind as we move into '27.

Right. So when we're bridging your earnings and the like, it's really take the '25 baseline, adjust the normal growth and there's some maturity in margin in some of the business there.

That's right.

Right? So there's some business that's moving to the peak margin for 2026, you have this membership headwind, whatever it might be. And then you should be getting, in essence, the start of margin, 5% to 7% for a full year in CVS and half -- roughly half a year the Blues plan.

That's right.

That's the way to model. And then whatever other core growth you have because there's other things -- okay...

That's right.

It's not an easy model to build, and it's fair. The free cash flow in the quarter was negative...

The free cash flow was because of the $40 million share buyback.

So you had this $40 million it's receivable. Is that...

So we had -- so 2 things. We had -- the free cash flow is negative because we bought back $40 million of shares in August as a part of the refinancing of the '25 convertible notes. We also -- CMS had planned to pay us the $42 million shared savings payments for MSSP in September. That was delayed until October. So we've now collected that money, but that did result in operating cash flow for the quarter being $15 million instead of quite a bit higher, which is the initial expectation.

How should we think about it for the full year?

Yes, for the full year...

Operating and free cash flow.

Yes. So as we move through Q4 here, we've collected that $40-plus million from CMS. We don't have any significant outflows other than normal course stuff for Q4. So we would expect to end the year, the number that we've put out there is an expectation of net debt at the end of the year of between $805 million and $840 million. And that variability is largely driven just by timing of customer collections. Somebody pays us on December 27 or January 3.

Free cash flow again next year, we understand these new contracts aren't going to be onboarding. There's probably CapEx associated with them as well.

A little bit.

Does CapEx go higher? I'm getting to -- let's just say adjusted EBITDA is flat, the worst-case scenario, you mitigate [ Europe ] flat. CapEx goes up like in free cash flow -- free cash flow positive next year, presumably in that scenario, but maybe less than what it was this year or...

Yes. So free cash flow positive next year for sure. I would expect software CapEx this year is $35 million. I would expect that to come down a little bit next year because some of the CapEx this year was -- you could think of it as onetime in service of some of these AI acceleration initiatives.

Okay. Got it. Is there anything else we haven't covered?

No.

We're sort of out of time, but I want to make sure I didn't miss anything.

Yes. Good set of questions.

Great. Well, sir, thank you very much. We appreciate the time.

Thank you. Thanks.

Welcome to the Evolent Earnings Conference Call for the Third Quarter ended September 30, 2025. As a reminder, this conference call is being recorded. Your host for the call today from Evolent are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations.

This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today.

Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations website, ir.evolent.com and the Form 8-K filed by the company with the SEC earlier today.

In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. And now, I will turn the call over to Evolent's CEO, Seth Blackley. Please go ahead.

Good evening, and thanks for joining the call. On the call this evening, I'll take you through our results across the 3 areas of shareholder value creation. John will then provide details on the numbers, and I'll close with some additional thoughts before we take your questions. We're pleased to report financial results for Q3 that exceeded expectations on both the top and bottom line.

These results, we believe, demonstrate that Avance products are resonating in what continues to be a very dynamic time in the industry. Let's start with updates on our 3 areas of shareholder value creation of one, organic growth; two, margins; and three, capital allocation. Starting with organic growth. Q3 revenue of $479.5 million was at the top of our guidance range. And we expect our revenue for the full year to be between $1.87 billion and $1.88 billion. We're announcing 2 new revenue arrangements today, 1 in the Performance suite and 1 in the technology and services suite.

First, we have signed a contract with 1 of the largest Blue Cross plans in the country to launch our Performance suite for oncology across more than 650,000 MA and commercially fully insured members. At typical capitation rates, we expect this to contribute north of $500 million in revenue annually. This new partnership leverages our enhanced performance suite framework and includes retroactive adjustments for prevalence, case mix and the like as well as bidirectional risk corridors that significantly limit our downside while increasing value sharing to our partner ensuring that our economics are closely tied to the value we're creating and mitigating event exposure to volatility that's outside of our control.

We're honored to add is planned as a major new first-time partner for Evolent and look forward to doing excellent job supporting their members and accessing the very best oncology care while also balancing affordability for members in the plan. While the final implementation shift slightly in either direction, we are currently expecting a May 1, 2026 go live and therefore, expect the contract to contribute approximately $300 million in 2026 revenue. Finally, it's important to note the revenue estimates I just discussed are just for the fully insured commercial and Medicare Advantage lives.

The commercial ASO and Medicaid membership at this plan would represent additional growth opportunities over time. And our second revenue arrangement we've announced is a large provider-sponsored health plan in the Southwest and they have signed a contract to deploy our oncology condition management, technology and services solution across their membership adding to their existing muscoskeletal solution.

With these additional announcements, we have signed contracts for 2026 go-lives that will add more than $550 million in new 2026 revenue and annualized contract value of over $750 million. These new signings take total revenue under contract for 2026 to approximately $2.5 billion. Well of course, finalize our revenue outlook for 2026 in February once we have final membership and go-live dates.

But this forecast of $2.5 billion in revenue takes into account our current expectations for revenue decreases in conjunction with membership reductions in the exchanges, Medicare Advantage and Medicaid. Additionally, we believe the expected contract launch timing in 2026 will position the company for strong bottom line growth in 2027 and even after today's announcement of more than $500 million in annual contract value, our probability weighted pipeline exceeds $650 million annually and continues to grow.

On margin expansion, our Q3 adjusted EBITDA of $39 million was in the upper half of our expected range and represents 23% growth year-over-year. John will talk more about the drivers of our adjusted EBITDA performance and our outlook for this year. With today's announcement, we anticipate over 90% of our Performance Suite revenue in 2026 will be covered by our enhanced protections which update our pricing for disease prevalence, mix and other factors and include risk corridors that limit our downside, enhancing our ability to drive sustainable margin growth in the future.

We continue to work towards our long-term goal to auto approve over 80% of our baseline authorization volume, delivering on faster authorizations at a lower cost. During the quarter, we began rolling out our artificial intelligence reviewer copilot within out intelligence into our muscoskeletal workflows, and we're beginning to realize the AI efficiency improvements we expected. On the capital allocation front, the sale of our primary care business, EdenCare Partners is on track to close later this year.

We plan to use the proceeds from that sale to pay down approximately $100 million of our senior term loan lowering our cash interest burden by about $10 million annually. With the retirement of our 2025 convertible notes, we have no significant liabilities until the end of 2029 and we reiterate our commitment to use free cash generation from the business to delever. We believe our growth in the continued strength of our pipeline is driven by the unique value we deliver to all of our core stakeholders, health plans, providers and members.

I want to provide an update now on our product development efforts as we continue to innovate. Our health plan partners turned to Evolent to address excessive specialty car costs, particularly in oncology, where we believe we provide a critical service in this environment, which is delivering savings while seeking to improve the patient and physician experience. As evidenced by our accelerating pipeline and new contract signings, we believe the current environment presents an opportunity to increase the penetration of our specialty care model at a time when demand for our offerings has never been higher.

For example, in oncology, we believe we touch approximately 9% of all oncology cases in the United States today, about 8% in our technology and services model and only 1% in our performance suite lot. As evidenced by today's announcements, we are seeing the differentiation relative to our competitors. We expect our enhanced Performance suite model to grow over the coming years. We believe this market opportunity will provide our customers with significant value and importantly provide Evolent with a strong and sustainable source of growth in the coming years.

We also believe the enhanced protections in our modified contracts will provide a path to driving strong and disciplined adjusted EBITDA growth in the years to come. To give you a sense for the longer-term opportunity with the oncology Performance suite, increasing our oncology risk penetration to 15% of the market represents an addressable growth opportunity of greater than $15 billion annually over time. On the provider front, we're excited to announce a strategic partnership with American Oncology Network, which strengthens our provider alignment model under our Oncology Care Partners brand.

The model seeks to enable high-quality, more affordable and connected cancer care, all without relying on utilization management instead relying on EMR integration to drive decision-making at the point of care. The model should significantly lower the burden on oncologists, enabling them to focus on what matters most of caring for their patients on their cancer journey. Part of the partnership, physicians and patients will have access to Even's comprehensive cancer navigation program. The American Oncology Network is 1 of the nation's fastest-growing network of community oncologists and shares our dedication to innovation and cancer care.

Finally, we're excited about the continued progress of our comprehensive cancer care navigation program. By combining Everyone's expertise in oncology services and care management with the Kerology mobile application. This program has delivered exciting results this year that now extend into reducing inpatient costs whereas our traditional -- even oncology model focuses on outpatient costs and drug costs. For example, our navigation model is now live in multiple markets and has shown decreases of up to 40% in inpatient and emergency department utilization and match case studies. The program also has patient satisfaction scores exceeding 90%.

Before I hand it over to John, let me make some quick comments on the policy environment and our outlook for 2026 and beyond. Across the last 24 months, we had seen 2 dynamics at work. One, we have been taking share, particularly in oncology, further penetrating into top health plans, winning important new logos while continuing to renew existing customers and updating our performance suite contracts demonstrating the long-term durability of our model. And two, membership in our core government sponsored market has been going to a significant shift, shrinking in number and growing in acuity. We expect both of these trends will continue in 2026.

Recall that our previous expectation for 7% to 9% membership growth in MA for 2026 and was offsetting an expected contraction of approximately 20% in the exchange market for 2026. CMS' most recent forecast from the end of September now expects overall MA membership to contract by about 3%. In the exchanges, there remains a wide range of potential outcomes depending on how and when the federal government has reopened with health plans over the last couple of weeks forecasting exchange membership declines of as little as 15% and to as much as 65%.

While we expect to grow our customer footprint and revenue meaningfully next year, and while we're on track to achieve our expected efficiency targets for 2025, our 2026 adjusted EBITDA outlook is more uncertain than usual for this point in the year, given the wide range of outcomes on our customers' membership in Medicaid, exchange and Medicine based, in particular, on the changes from the 1 big beautiful bill. For example, if exchange membership declines are towards the higher end of that forecasted range and our customers' Medicare Advantage membership shrinks it's unlikely we'll be able to deliver meaningful adjusted EBITDA growth in 2026, above our pro forma 25 baseline.

If robust subsidies are reinstated as part of reopening the government, this headwind may be reduced. Likewise, the details of membership declines will matter. For example, while the MA market in aggregate may shrink by 3%, it's possible that our MA customers may gain market share. Regarding to some membership dynamics, it's important to note that based on new contracts signed to date, we will exit 2026 with more than $750 million in newly launched annualized performance at revenue.

Consistent with our past commentary, we are expecting minimal adjusted EBITDA contribution from these new launches in 2026 and PAUSE but would expect them to generate adjusted EBITDA contribution of $75 million or more at target mature margins. These new contracts as well as others we expect to sign in the future quarters should provide a significant earnings tailwind in the years to come. We intend to use this moment of health plan P&L pressure to cement Evolent's position as a leading specialty solution.

The pain felt by our customers, both on membership and utilization is creating a very significant growth opportunity for Evolent. We now have signed 13 new contracts in 2025 and we have contracts in place that should drive more than 30% top line growth in 2026, and we also anticipate continued strong growth into 2027 and 2028. It is our belief that capitalizing on this period of industry disruption, with disciplined growth will create significant long-term value for all of our stakeholders. With that, let me turn it over to John to go through the numbers.

Thanks, Seth. Q3 revenue of $480 million represented 8% sequential growth versus the second quarter, driven by new launches across both the Performance Suite and the technology and services suite. Sequential growth in our per member per month fees in both the Performance Suite and tech and services was driven principally by product mix with the Q3 launches at a higher-than-average fee as we continue to demonstrate pricing resilience in a dynamic end market.

With these launches, we are currently tracking towards the upper end of our full year revenue guidance, and we have narrowed that range accordingly. Adjusted EBITDA of $39 million was modestly ahead of our expectations and represented growth from our technology and services business and the early success of our AI operational efficiency projects, offset by initial reserve building for our new Performance Suite launches. Our Specialty Performance Suite Care margin, which is the difference between our capitated revenue and claims expense was approximately 7% and consistent with our performance year-to-date. Normalized oncology trend continues to be just under 11% year-over-year.

Note that during September and into October, we saw an increase in medical utilization in our exchange book primarily in cardiology, consistent with industry-wide expectations of a benefit rush ahead of significant premium increases in 2026. Given this expectation, we have opted to maintain our conservative reserving posture consistent with our behavior during the first half of the year, and we have narrowed our adjusted EBITDA outlook accordingly.

Note that we are not seeing this trend variability in Medicaid or Medicare where cost trends remained stable versus our first half results. Turning to the balance sheet. We ended the quarter with $116.7 million of cash and equivalents and $47.5 million of revolver availability. Cash change versus our Q2 ending balance was driven by $15 million in cash flow from operations, offset by software development cost of $9 million and $40 million in net cash used in the August transaction refinancing our 2025 convertible notes and buying back common stock. Cash from operations of $15 million was lower than expected, driven by timing of cash receipts, particularly from the Medicare shared savings program, which was paid in October instead of September.

Our net debt of $910 million reflects the exchange of our $175 million in Series A preferred stock into second lien debt. Recall that this exchange included no changes in economic turns to Evolent, other than the interest now being tax deductible. Between cash generation and the divestiture of Evolent Care Partners, we expect to end the year with net debt of approximately $805 million to $840 million, which would represent a net leverage ratio of approximately 5.5x at the midpoint of our 2025 adjusted EBITDA guidance. With the retirement of our 2025 convertible notes, we have no maturities until the end of 2029, but delevering remains our primary capital allocation priority.

As we near the end of the year, we are narrowing our guidance ranges for 2025 revenue and adjusted EBITDA to be between $1.87 billion and $1.88 billion and $144 million to $154 million, respectively. These ranges presume a 12/31 close for our ECP divestiture and would be slightly lower as the transaction closes earlier. The corresponding quarterly ranges are $462 million to $472 million in revenue and $30 million to $40 million in adjusted EBITDA. We are not assuming any new launches in our revenue outlook. The primary variable is changes in our customers and rules membership. And as I mentioned earlier, this adjusted EBITDA range presumes a further decline in exchange margins from what we experienced in Q3.

While this outlook is conservative, we believe that is the appropriate foster given the industry-wide commentary on this segment. With that, I'll turn the call back over to Seth.

Thank you, John. I want to close by commenting on our CFO transition announced this afternoon. First, I want to thank John for his incredible contributions to Evolent as our CFO over the last 6 years. I look forward to continue working with him as he takes on the Chief Strategy Officer role for the company. The role will include supporting our rapid oncology growth in the time ahead and our work to drive our target oncology trend down in addition to more traditional strategy functions.

I also want to welcome [ Mario Ramos ] to one. Mario was previously CFO and of CVS Caremark division of CVS Health, in addition to holding other CFO roles at CBS. Most recently, Mario was CFO of Welbes Senior Medical, a risk-bearing value-based care provider. Based on his track record and reputation in the industry, I'm highly confident Mario will be an incredible addition to the team. Mario will join Evelyn on November 17 and assumed the CFO role on January 1.

In addition, as our growth accelerates and AI becomes a more important factor in the operations of our business, we're making a number of other important organizational investments and adjustments that we noted in our press release.

In closing, I remain incredibly confident in Evolent's future. We believe we have developed the leading specialty platform in the industry. I believe the exceptional renewal rates of our current customers, along with the validation of new customer contract signings under our enhanced performance suite model demonstrate the value and durability of our solution.

While the industry is undergoing significant changes, Evolent is taking market share with a new disciplined contract structure, and I believe we are becoming a more critical part of a system that desperately needs higher value, higher satisfaction and lower cost solutions, particularly in high-cost areas like oncology. We have the right team in place to take advantage of the opportunity ahead and drive value for our customers, employees and our shareholders. With that, we will take your questions.

[Operator Instructions] And the first question will be from Kevin Caliendo from UBS.

I want to talk a little bit about the new contract wins. It's obviously a huge number. I appreciate you giving us that it's not going to really contribute much next year. And I believe you said potentially $75 million when they keep margins. How should -- can you maybe break this down a little bit? Is 10% sort of the new -- the way we should be thinking about new business in terms of peak margins going forward? Is there something about the mix of these contracts that affects that. Just trying to understand sort of because the new contracts and the restructuring of your contracts going forward is a big question mark.

And this is obviously a huge amount of new business that's on. And I'm just trying to think, as we think longer and longer term, is this how we should be thinking about new business? Or is there something unique about the mix of these contracts that get you to sort of 10%-ish peak margin?

Yes. Great question, Kevin. So this is Seth. Let me make a couple of points. Number one, yes, this -- all of these contracts that are in that $750 million that we talked about are under the enhanced performance suite. That's the only way we're setting up new contracts going forward that has prevalence and case mix adjustments but also has a narrower corridor model attached to it. So that's the contract structure.

I think the second thing I want to highlight that I'll get to your question is between Aetna and this contract, and what we're seeing in the pipeline, I think we feel really good about our ability to use this contract structure as the standard going forward. It's also the standard that we have implemented backwards into all of our existing contracts are almost all of them at this point. So that's how you should think about it going forward.

I think 10% is a reasonable mature margin to think about, yes. That is lower than historically we used to talk about, and that's intentional. The bell curve is narrower. So we have taken downside from our exposure, and we've also given a little bit back to our partners. I think you should think of the business, I think it's a reasonable mature margin target to your point.

I think you should also think about lower volatility, more predictability, and that's the model that we believe in going forward? Does it leave some net present value, if you will, on the table? Perhaps it does, but I think more predictability, discipline with these contracts is the right trade-off to be making

And the next question will be from Daniel Grosslight from Citi.

A strong quarter. I'd like to focus on the puts and takes around 2026 EBITDA. Seth, it sounds like the big variable here is just what happens on the exchanges, but I was hoping maybe you could help PAUSE quantify that impact a bit maybe on the high end and low end and then maybe on top of that, if you can layer on any additional investments you're making in 2026 other than what you've announced this year and if you're still expecting to see that, I think it was a $20 million improvement in EBITDA from AI. I just want to make sure that you're still expecting to realize that next year.

Sure. So I'll start, and then I think I'll pass it to John to add a little bit of color. So the big factors that set up '26 are number one, growth. We feel very good there. Number 2 is you asked about it, but our cost structure and the efficiencies baked into that. We feel good about that, and we're achieving the results that we want. And the third big one will be trend, right? Particularly in oncology, and we commented on that today so we feel good about where we are.

It feels like our forecast have been right and we feel like we're still set up in a good way. And the fourth one is membership. To your point, yes, that is the big one that's open. I think it's too early to tell what the width of the ranges that we're talking about. And it's also a little bit hard to give you an algorithm for, okay, plug in, this percent membership decrease, I give you that EBITDA change. I think that a lot of it depends on our cost structure. So the more membership comes down, the more we have to look at our cost structure, there's variable costs and there's fixed overhead.

And we're going to have to look at fixed overhead, if membership comes down by a certain percentage, right? So it's hard to give you an algorithm is the short answer. I think the way we framed it in the script is probably the best we can do with the width of the ranges that are out there, which is -- could be tough to get meaningful growth or we have a good path to EBITDA growth, depending on what happens with membership.

The next question will be from John Stansel from JPMorgan.

I wanted to dig in a little bit more on the MA growth assumptions for enrollment next year. I appreciate the commentary about CMS forecast, the idea that enrollment could decline by low single digits. But I think some of your large customers have taken different strategies, in particular, 1 of your largest customers is potentially position themselves for share gains. So I guess, can you talk about your different outcomes you think within MA enrollment and what that means for 26 and how you're thinking about your large payer customers performing into next year?

Yes. It's a good observation, Jon. And I think that, well, we don't have a crystal ball on that, of course. We do think that if 1 or more of our current partners ends up as meaningful share gainers for MA membership next year, that would be a nice tailwind for us, in particular, in the technology and services suite.

Thank you. And the next question will be from Charles Rhyee from TD Cowen.

This is Lucas on for Charles. In terms of thinking about the HIC subsidies and whether they expire, can you help us understand, obviously, you're talking about a membership impact right now, but can you help us understand maybe the acuity shift that could come along with that and maybe compare it to the Medicaid redetermination acuity shift that you saw over the past 18 months and help us out with that piece.

Yes, for sure. So just to put some numbers around it, revenue from the exchanges this year is around $360 million, about half in the performance we have in tech and service. So that's the top line in terms of the total capitation that we're talking about here. The second thing that I'd say there, Lucas, is recall that our contracts have these protections and automatic adjusters for changes in the population, prevalence, disease mix, et cetera. go a long way towards protecting us against wild acuity shifts. And the last thing that I'd note is because this is such a -- such a topic, right, and a known item going into next year.

We have very active discussions with our payer partners in the exchanges for next year around ensuring rate adequacy based on the population that they end up with next year. So we have a high degree of confidence in our pricing for 2016 as it relates to our expected acuity shift.

The next question is from Jailendra Singh with Truist Securities. PAUSE.

This is Eduardo Ron on for Jindra. Just on the oncology trends, which appear to be still better than the 11% that you guys guided for the year. And can you perhaps give some color on how that's played out from Q1 and now has that trend improved as the year progressed? Has it gotten worse in any way? Just if you could flesh that out, that would be great.

For sure, a, we're seeing it about flat across the year. With the 1 tweak that over the last couple of months, we have seen a bit of that benefit rush in the exchanges. Most of that has been in cardiology. But we've seen a little bit of it in both. But in Medicaid and in Medicare Advantage, oncology trend across the year has been relatively stable.

The next question is from Jeff Garro from Stephens.

Maybe go back to the pipeline. And great to hear the positive commentary there. I was hoping you could add to it in terms of the pacing of decisions. and related to potential timing of go lives, what's determining the pacing of remaining decisions? And as those prospects or existing clients make decisions, are we now looking at 2027 go-lives? Or are wins still possible that could translate to midyear 2026 go-lives?

Sure, Jeff. Helpful. So look, I think what I would say on the pipeline is it's generally about the same as it's always been. It's not sped up or slowed down. I think the overall demand is really significant, as I mentioned, and I think that's going to continue. Could we still have some things that go live in 2026 that are new? Yes, we could. For sure. And so -- and we've got a lot in the pipeline that could convert over the coming months even.

So I think the' '26 outlook is still open partly based on opportunities for additional revenue as well. And again, I'd just say the biggest factor, I think we're feeling right now, Jeff, is just really significant demand because of the pain that folks feel in the market trying to manage and balance great care, whether it's oncology or anything else with affordability and we're getting a lot of phone calls to get support on that issue.

And our next question will be from Jessica Tassan from Piper Sandler.

I guess just maybe first, can you elaborate a little bit on the adversity that you're seeing in the exchanges? I guess, just because I don't necessarily think about oncology as being subject to induced utilization, but what are you seeing there? Is it just acuity mix into the end of the year because of like marketplace integrity efforts?

And then just secondarily, I appreciate you guys addressing the 26% EBITDA guide. But can you maybe just give us a sense of what are the items we should be thinking about in terms of bridging from 2025 to 26, maybe starting with ECP and then going through the AI efficiencies, et cetera.

.

Yes. So on the first one, Jess, the benefits rush is really in cardiology, which as you point out, is a little bit more discretionary in terms of timing that is oncology. So that's really where we're seeing that uptick that we noted into the end of Q3 and into Q4 here. I'd just note on that 1 before I talk about 26, as I said in the script, we have assumed in our guide a provision for that trend accelerating. We haven't seen, but that seems like the right posture for us right now in the exchange line of business.

So then talking about '26, let's just hit a couple of numbers. On the ECP divestiture, do you expect that to be about $10 million of EBITDA associated with that divestiture. And so the -- think of the pro forma EBITDA this year as $10 million less if we land that's your launching point for next year, assuming we have it for the whole year. The second piece, you asked about the AI initiatives. I think $20 million is still our expectation or year-on-year improvement there. Of course, that's a unit cost number. So to the extent that there are significant shifts in membership, that number could move around a little bit. But we're quite pleased with the progress that we've made on towards that $20 million number.

The third thing that I would note is just on the performance fee margin maturation. Again, excited about what we've been able to drive this year. I feel confident about our pricing going into next year and ability to continue to drive value there. And the last question is really membership, as we noted earlier.

The next question is from David Larsen with BTIG.

With regards to the potential extension for the subsidies, I mean what odds would you put that at what's happening? Since you're in Washington, I imagine you're pretty close to the hill. I mean, do you think there's a greater than 50% chance of subsidies being extended? Just any thoughts there would be helpful.

David. So, I think it's a pretty reasonable chance. I want to put a number on it that subsidies are extended, whether it's for a year or 2 years, that kind of thing. I think the bigger question at [ Peyto ] really given how late in the year it is and given the specific mix of plans, how much does that really change some of the numbers on a given population. So I think it's a very complex thing to put numbers on right now, both because you got the federal government question that you asked, and then you have the downstream question of, okay, it's pretty late in the year, how does that then affect open enrollment and had plans already filed?

What they are pricing around and the like. And so I think the odds of the extension are good, David, that translating that even if I had a very specific number into, okay, I know this is going to do that to membership. That second piece is quite difficult. And I think that's part of the reason for the broader ranges that you're hearing from the different payers in the market.

And our next question will be from Matthew Shea with Needham.

I wanted to talk much on the product development. It seems like there's a lot of excitement there. Maybe with the oncology navigation solution, sounds like continuing to roll this out, I guess, first, have you scaled this beyond that initial 300,000 members? Or is that still the right way to think about this at this point?

And then last 2 quarters, you've alluded to the Navigation Solutions potential to allow you to create risk-based offerings for Part A oncology spend. Would love to get an update on where you are in terms of a formal development of an offering there and whether we should view the partnership with American Oncology Network as sort of a stepping stone on that journey.

Yes. Yes. So in terms of rollout, we were still in the 2 major markets. I think we are pretty close to adding a number of additional markets right now. And I think you'll have that happen live in 2026. If you think about the benefits of doing the work, to your point, most of it's on Part A. We mentioned some of the matched case studies around the significant reductions in ED and hospital utilization. So will we be beginning to take some management accountability on for Part A as we head into next year? Yes, we likely will. And that is a positive, obviously, for our partners because I think they are looking for answers everywhere they can find them and more integrated is better than not.

So it is accelerating. I think is the right way to think about our navigation work. It's going to be included in more and more of our efforts. I think the American Oncology network partnership is related but a little bit different. So those oncologists across 20 states who have access to the navigation product that we just talked about. But there's a lot more to that partnership that goes beyond navigation.

The bigger things, right, are completely go [ carding ] and turning off utilization management and inserting the intellectual property of our oncology programs into the EMR at the point of care. And those fit really well with the navigation product. There are 2 parts to a coin, if you will, 2 sides to a coin, and they're both valuable and they're both part of the same dynamic, which is everything we're doing is trying to make care better for patients, which navigation does and point-of-care decision-making does and make them more affordable. And both of those things that we just talked about make care more affordable. So all of our product development efforts should have those 2 things in true north, better care for patients and easier to access for providers and more affordable.

And the next question is from Matthew Gillmor with KeyBanc.

I want to follow up on the American Oncology partnership. So just curious, sort of as you roll out, that doesn't sound like it's revenue-generating today, but how do you envision that sort of generating revenue for Evolent over time? Is that through the payers or through this relationship with the providers? And then is there any early feedback on that gold card program from some of the big payers.

Yes. Great question. So on your first point, it really, to your point, is not about revenue primarily. The work with that partner and other oncology groups like it over time, is really about improving the quality, the experience and reducing the cost. And so if we're in a risk-bearing situation, having that in place in those markets where we have the enhanced performance suite in place, we think we can drive better outcomes.

And you can make patients happier and provide better care for them. So that's going to be the primary way to use. Might it also be something that payers love to see and their proposed into a new market and it becomes sort of revenue generating as a knock-on effect. I think the answer is probably yes to that. But to your point, that's not the primary approach to it. And what we're really focused on is the ability to drive the quality and cost in the right direction.

And ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back to Seth Blackley for any closing remarks.

Great. As I close the call, I just want to thank John again as he moves on to his new role, but really also thank the 4500 people at Evolent who wake up every day and run in our mission to support our patients but also our shareholders. So thanks for the time tonight. We look forward to catching up off-line.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Welcome to the Evolent Earnings Conference Call for the second quarter ended June 30, 2025. As a reminder, this conference call is being recorded.

Your host for the call today from Evolent are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer.

This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations.

This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our second quarter press release issued earlier today.

Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations website, ir.evolent.com, and the Form 8-K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation.

And now I will turn the call over to Evolent's CEO, Seth Blackley.

Good evening, and thanks for joining the call. We're pleased to announce another quarter of adjusted EBITDA performance ahead of expectations as well as four new partner announcements and an accelerating new business pipeline. We achieved these results through strong execution, but also because of the fit between our products and the top need in the industry, which we believe is balancing quality and cost for the most complex and expensive specialty conditions.

We have a number of positive developments to share today across all three pillars of shareholder value creation of organic growth, margin expansion and capital allocation. So let me walk through the updates now on each of those three themes.

Starting with organic growth. We have four new revenue agreements across both Technology and Services and the Performance Suite, bringing us to 11 new agreements year-to-date. On the Technology and Services side, we're announcing three new agreements, which are: one, a current partner in the Northeast will add our cardiology, radiation oncology and MSK services across multiple lines of business for more than 400,000 members. Two, a regional partner in New England will add MSK and cardiology services across multiple lines of business; and three, a national partner will add additional MSK services to its plans in the Northeast.

In the Performance Suite, we're pleased to expand our oncology and cardiology solution to a new Midwestern state for an existing national partner expected to go live later this year. Also in the Performance Suite, you'll recall that we previously announced a partnership with a national health plan for oncology services. We're pleased to announce today that, that partner is Aetna across 250,000 Medicare Advantage members in the state of Florida. Since that announcement, we've been working closely with Aetna to ensure we are well set up to scale to additional Aetna states over time by ensuring that key partnership components like data exchange processes are well honed.

We've also been impressed with Aetna's leadership position on innovation in this area, including leading the market on the new AHIP and CMS prior authorization commitments. Evolent's road map is highly aligned with Aetna's vision for ramping interoperability and clinical data exchange, improving member experience and reducing provider administrative burden. We plan to launch together in Q1 2026. We're excited to partner with this national payer and look forward to earning the opportunity to expand in additional states and specialties over time. Across all these partnerships, we expect total new revenue in excess of $250 million by the time they are fully live in Q1 2026.

Furthermore, as our customers search for more ways to control costs, we are seeing our addressable market expand. Historically, our Oncology Performance Suite offering has generally been limited to specialty pharmacy and professional spending. We are now seeing some potential for Performance Suite customers to come to us seeking help managing select inpatient or Part A oncology costs. With our expanded capabilities provided by our partnership with Careology and the acquisition of Oncology Care Partners, we believe we can now meet this market opportunity while simultaneously limiting our risk through our enhanced Performance Suite contract structure.

Finally, we continue to have a very strong late-stage pipeline and expect to make additional growth announcements across the fall. As we mentioned earlier in this year, we are seeing the pipeline accelerate as health plans struggle with new pressures on their P&Ls, including in risk adjustment shortfalls and medical utilization trends. Combining those issues with the membership pressure created by recent legislative developments, we expect the selling environment to be very strong across the next couple of years.

Next, I want to turn to margin expansion, where we're focusing our efforts in two areas, which are: one, Performance Suite margin maturation; and two, AI and automation in our Technology and Services Suite. On the first, we continue to see oncology expenses below our forecast for the year, contributing to potential tailwinds as we move into the second half of 2025. As John will outline in more depth, we are maintaining a conservative approach to reserving and forecasting for the guide for Q3 and Q4, but are currently encouraged by our performance so far this year.

Our AI and automation work is on track to our plan for this year as well. Our principal goal with this effort is to get to yes faster for members and providers, leaving our expert clinicians more time to intervene with treating physicians on complex cases. Many of you will recall the investment we made last year in the AI-driven future of our business by acquiring the auth intelligence solution for Machinify, a company that reviews over $200 billion in claims annually using AI. We believe the transaction allows us to more aggressively roll out AI capabilities given that we today process over 8 million clinical reviews each year and drive the opportunity to bring the right talent and mindset into the organization. We believe the AI opportunity at Evolent represents the rare win-win investment where we can both reduce costs while improving member experience and outcomes through efficiency, speed to answer and accuracy based on the latest clinical evidence.

We have now integrated this technology into a number of our workflows, improving review efficiency by roughly 11% in the last quarter since starting to roll it out. More importantly, we're striving to become a leading AI-first company across the next 24 months, targeting 80% of our current authorization volume to be auto approved, allowing our clinical talent to focus on cases where intervention is required.

We believe we'll be able to do this while meaningfully improving the experience and health outcomes for our clients and members. We'll have more details on this in the coming quarters as we roll out these solutions more broadly, but we believe this puts us in a leadership position in leveraging AI to improve quality of care for the 40 million members we touch each year.

As a reminder, we expect to exit the year with a net $20 million annualized run rate EBITDA improvement across a number of AI and operational efficiency initiatives. But we believe the total addressable market expansion and EBITDA improvement opportunities from AI will be much larger over time.

Finally, on capital allocation, our priorities remain the same. First, investing in organic product development and deploying free cash to delever. We do not expect to pursue any M&A in the near or medium term and continue to believe we have the key assets and capabilities necessary to execute on our strategy. John will comment in his remarks on our cash flow expectations for the rest of the year.

Before we go to the numbers, let me say a few words about the evolving macro environment. Our primary customers are navigating a very challenging confluence of events of elevated utilization, lagging premiums and a backlash against traditional methods of medical cost control.

Earlier in the summer, CMS and several health plan industry groups announced a series of commitments for streamlining prior authorization, all of which are highly aligned with our approach and future road map. We believe these new commitments will likely accelerate adoption of our solutions as health plans move away from in-house solutions or legacy partners, both of which we believe will struggle to meet the new requirements.

Later that same week, CMS introduced a new pilot called the Wiser model to pilot new prior authorization requirements for certain specialty areas in traditional Medicare in attempt to balance affordability and quality. These twin announcements, one streamlining clinical oversight and the other expanding it encapsulate the moment that faces the industry. Against this backdrop, we believe Evolent is a durable and critical part of the health care ecosystem. We see customers choosing us at an increasing rate as their clinical decision support partner because of our ability to improve clinical quality, reduce physician burden and improve member experience, all while also lowering cost.

With multiple ways to grow the earnings of the business, including strong organic growth and margin expansion opportunities in both services and the Performance Suite, we remain confident in our ability to grow adjusted EBITDA at 20% per year despite industry volatility.

I'll now hand it over to John to go through our results in more detail.

Thanks, Seth. Q2 adjusted EBITDA of $37.5 million was in the top half of our range, driven by strong results across both our Tech and Services and Performance Suite models. In the Performance Suite, normalized oncology trend of approximately 10.5% continues to be modestly below our initial forecast for the year of 12%. As is typical, we have visibility into claims for about half the claims expense in Q2, with the rest comprising an actuarial reserve based in part on leading indicators.

For oncology in Q2, our key leading indicator, which is authorizations per 1,000, was flat to down on a per capita basis versus Q1 for each line of business. Recall that we closed Q1 with an elevated level of conservatism in our reserves compared to what we saw in the authorization data. With claims for Q1 now about 90% complete and reflecting expenses in line with what our leading indicators suggested, we have released the majority of that conservatism. That favorability from Q1 claims development was offset by a similarly conservative approach to Q2 for a net neutral impact on our year-to-date results.

Prior year claims development was a favorable $11.7 million in the quarter, partially offset by $4.6 million in revenue updates for a net benefit of approximately $7.1 million. This was in line with our expectations. Given the level of focus on medical trend across the managed care industry, I want to go deeper on what we are seeing. Make no mistake, the last nine months represents the highest per member per month trend that we have seen in oncology in the history of our company, driven both by elevated prevalence and cost per active case.

Despite this, we are currently favorable to our forecast year-to-date for two reasons. First, we were intentionally conservative in our outlook for this year, including a provision in our guidance for continued deterioration in the environment beyond the elevated levels seen exiting Q4 of last year. And while medical trend has remained elevated in 2025 to date, we have not seen this further deterioration in trend that was contemplated in our guidance. Second, we continue to deliver on the core goal of our platform, lower cost by increasing adherence to best evidence medicine. This enables us to consistently deliver below market trend.

On the top line, Q2 revenue was $444 million, $11 million below the midpoint of our guide. $4.6 million. This deviation was driven by the lower revenue for 2024 that I just referenced, with the rest attributable to go-live timing for Performance Suite market where our planned partner was working through a local regulatory matter. This issue is now cleared, and that market is scheduled to go live in September. As a reminder, our Q1 results included $55 million in gross revenue from one contract that switched to net revenue in Q2. Adjusting for that item, we saw a $16 million sequential step-up from Q1, driven principally by the new launches and recognition of revenue from the Medicare Shared Savings Program. Looking out across the year, our revised revenue outlook incorporates our latest estimates go-live timing with Performance Suite partners, including the national partnership Seth referenced.

As you know, the first few months of a Performance Suite contract are typically neutral to adjusted EBITDA. So there is no flow-through of that change to our bottom line this year. Importantly, since this is a timing-related adjustment, our view of our 2026 opportunity has not changed. While it is too early to provide formal top line guidance for next year, based on our weighted pipeline and current market dynamics, we see a clear path to delivering 2026 revenues in excess of $2.5 billion with continued strong growth thereafter. This pipeline is across both Technology and Services and Performance Suite opportunities. And importantly, all prospective Performance Suite deals are under our new risk model, which includes enhanced protections against unfavorable changes in our risk pools, standardized data flows and hard limits to our liability for gaps and historical data.

Turning to the balance sheet. We ended the quarter with unrestricted cash of $151 million. Cash used in operations of $26 million was driven by two factors: first, performance reconciliations for 2024 contracts that have since been restructured, consistent with our expectations; and second, a collection slowdown during the second quarter, similar to what we saw during the fourth quarter of last year. Since the quarter closed, we received $24 million in catch-up payments from these customers, bringing us back in line with overall expectations.

In response to this variability, we have recently experienced in our working capital, we have taken important steps that we believe will improve the timeliness of payments, including working with our partners to amend the payment terms in our contracts to ensure more predictable cash flows for Evolent. With those improvements and the catch-up collections in July, we expect DSO to remain normalized for the rest of the year, allowing us to generate approximately $40 million in cash from operations in the April through December period, consistent with prior expectations.

Note that included within our operating cash flow this year are several nonrecurring cash items, including reconciliations for Performance Suite losses from 2024 that have since been restructured and lease termination fees together totaling approximately $84 million for the first half of 2025. After this year, we would expect to return to our normal range of EBITDA to cash flow conversion, which would result in significant year-over-year growth in cash flow.

There are a number of updates on the policy and macro front that inform our outlook for the rest of the year and into 2026. So let's go through these and our current view on impacts organized by line of business. First, about 1/4 of our Q2 revenue and more than 80% of the new business thus far announced for 2026 is in Medicare. Our view of this line of business is the trend has largely stabilized with a favorable rate notice for 2026, we anticipate a return to normal macro membership growth within MA, which averaged about 8% between 2020 and 2024. We expect this to be a tailwind for our membership. Second, roughly 10% of our Q2 revenue is in the commercial fully insured line of business in Technology and Services, which we expect to be stable over time. Third, about 45% of our Q2 revenue and about 10% of the new business we've announced for 2026 is in Medicaid.

Absent policy changes, the Medicaid population typically grows between 2% to 3% annually. While there remains uncertainty on how states will implement the provisions of The One Big Beautiful Bill, we do not currently anticipate meaningful impacts until 2027. We continue to estimate that a 5% membership reduction would result in an EBITDA headwind of approximately $8 million to $10 million. Finally, about 20% of our Q2 revenue and less than 10% of the new business we've announced for '26 is in the Affordable Care Act exchanges.

While this has been a fast-growing line of business across the country over the last two years, driven in part by Medicaid disenrollment and enhanced subsidies, membership in 2026 is likely to face headwinds from the potential expiration of those subsidies and other impacts.

Our updated guidance for 2025 incorporates a modest pull forward of medical utilization within the approximately $180 million of annualized Performance Suite revenue in the exchanges during the second half of 2025.

So to sum up from a line of business perspective, we currently have the least exposure to exchanges and the majority of our booked revenue growth for next year is in Medicare Advantage. We feel the macro trends on the horizon are reflected in our guidance for 2025 and our targets for 2026 and beyond.

Now let me go through guidance before we open it up for questions. With continued successful execution, we are updating our outlook for adjusted EBITDA to be between $140 million and $165 million and initiating Q3 adjusted EBITDA between $34 million and $42 million. This outlook incorporates our strong performance year-to-date, while remaining prudently conservative for the second half given the volatility experienced by managed care. On the revenue line, we are updating our full year outlook to be between $1.85 billion to $1.88 billion, with a corresponding Q2 outlook of between $460 million and $480 million. This update principally reflects the Aetna go-live timing Seth referenced earlier.

With that, we'll open it up for your questions.

[Operator Instructions] The first question comes from Jared Haase at William Blair.

I wanted to ask one on the Aetna announcement. And I think you mentioned 250,000 MA lives in Florida. I know Florida has been a big market for you. So maybe you could talk a little bit about just kind of the power of density. How much did the existing relationships that you have in that market kind of lead to that win? And any framing you could share in terms of how we should expect the margin profile in that market to ramp with Aetna?

Yes, Jared, it's Seth. I'll take it initially. Let me just first comment on Aetna generally, which is obviously we're honored to be partnering with them. It's an innovative marquee partnership opportunity for us. And I think it really is set up for it to be the first of multiple states. We have to earn that right by doing a great job for them, but that is certainly the intent.

To your point, Florida is a logical place to start. But to be honest, I think it's a little bit less about us. And I think we are able to do some slightly different things in Florida, but it's not the biggest driver of this. A lot of it is just about the opportunity with this partner where they have membership and need. And so that's where we're starting, but I would expect this to be able to go to additional states over time, assuming we execute and deliver for the partner.

On the margin ramp, Jared, we'd expect it right now to be consistent with our normal Performance Suite margin ramp to getting to that target 10% margin over the course of the first two years.

The next question comes from Kevin Caliendo of UBS.

I want to talk about your new contracts. But in the context of given all that changed last year, the way you're structuring your contracts and all that's happened with some of your customers and the trends that they're seeing.

Can you just talk about how the conversations are different now? When did they come back to you and reengage? Or what are they looking for now that might be different from in the past?

I'm really just trying to understand how you fit into the ecosystem now given your changes and given what's going on with a lot of them who are clearly seeing higher trends.

Yes. Yes. Great question, Kevin. So look, on the pipeline in general, let me just say a couple of things, and I'll get into the protections. We have about $1 billion in our weighted pipe right now. And that's across Tech Services and Performance Suite. Within the Performance Suite, it does have this enhanced version of the Performance Suite contract.

I think the reason we've been able to generate that, that's weighted, as I mentioned, that's sort of what we expect to happen. The reason that has gone up so much is while we're having enhanced contract terms is I think the challenges in the industry have grown, right? So our payer partners across the country are feeling pain around trying to manage these high-cost specialty categories. And they're trying to do it in the context of a world where you don't want to burden the patient or the provider unduly. So you need an innovative way to do it, and that is a perfect fit for who we are.

And so I think we've been saying this, I know for a while, there is a countercyclical nature to our business, meaning when the payers are looking around for solutions, I think we fit very well into that. A lot of the costs are in oncology, the cardiology and MSK 2. And to put a very fine point on it, everything we have in our pipeline has the enhanced contract terms for the Performance Suite that we've talked about, that's corridors, that's around data and historical statute limitations on old claims and all the adjusters that we've talked about.

That does give up some of the upside that we historically would have had in exchange for more protection. So I think it's a fair trade for our partners. And as the pipeline size and our indication around '26 and revenue for '26 indicate, I think we feel really good about those coming to fruition and creating a lot of value for our partners and for us at the same time.

The next question is from Daniel Grosslight at Citi.

I want to go back to the Aetna contract. Great to see the new logo there. I'm just curious if maybe you can go into a little bit more detail on kind of the push out to the first quarter of '26. What needs to happen there before you're comfortable launching? And why kind of the more drawn out process?

Yes. Yes, Daniel. So we're very confident it's going to launch on that time frame. So that -- I'll just say that first. In terms of why it's delayed a little bit from initial, I think this is a case of a couple of things. One, being extremely disciplined about making sure everything we need under an enhanced partnership is in place, the things that I just mentioned.

But secondly, I think there's a concept of slowdown to speed up, which is getting the data feeds and the data exchange well-honed such that you have an excellent go-live and you can have a faster follow for additional states. And in this environment, we chose to be a little more disciplined around the speed, and there's a trade-off on that, but I think that will have a payoff with respect to the opportunity to go to additional states over time. So that's the summary of it.

The next question is from John Stansel with JPMorgan.

I know the exchanges are a smaller portion of your book, I think 20% of 2Q revenue and $180 million in the back half. Can you just talk about qualitatively how you're thinking about '26 given the expectation of increased morbidity in the ACA risk pools and how your payer discussions have gone in that space?

Yes. So 20% of our revenue overall, about half in tech and services, half in the Performance Suite. So as we think about that margin on that book of business overall in '26, because of the composition of that business, it tends to trend towards lower-margin services. There's a fair bit of surgical management business in there, for example, that has a lower gross margin than average on the Tech and Services side, et cetera.

And then on the Performance Suite side, as we look out to next year prior to any changes that might come from demographic movements, we project them to be a little less than our target 10% based on where they are in their maturation curve. So that's sort of your starting point.

I think it's too early to know exactly what happens. I think what -- where we're focused right now is, one, protecting the downside, as Seth noted, ensuring that we have the right protections in the contracts, which we do around corridors and the like. And then focused on growing the business in a disciplined way to deliver on our target to grow EBITDA in a wide range of potential outcomes on the exchanges. That's where we're focused.

The next question is from Jeff Garro at Stephens.

Maybe we'll return to the pipeline and ask you to drill down a little bit on the pipeline for Performance Suite from net new clients. I think you already hit the specialty vector with a focus on oncology. But maybe you could add to it on where you're seeing potential interest there from a line of business?

And then what type of plan, more national accounts or regional or Blues, where are you seeing those different vectors of opportunity play out in the pipeline for Performance Suite?

Yes, Jeff, I'd say on the Performance Suite side, it's shaded towards oncology. I'd say that's where the biggest need in the marketplace is right now. It's not just oncology, but it is certainly shaded in that direction. There are a mix of national plans, regional and blue plans in that pipeline.

And look, I think the dynamic is what I described earlier, which is two things. One, organizations looking around for new and different solutions. I'd say there's a higher mix of new logo in there than has ever been in the past. And that's great. We're excited about that. I think that's great for the business and from a diversification perspective. And so there's a lot of new logo in there.

And then secondly, I do think where CMS is headed thematically and specifically with the commitments they've pushed into the marketplace with the new programs they're launching is going to create an environment where if you're today in-sourcing one of these specialties, which is maybe 30% to 50% of the market depending on which specialty it is, I think it's going to become very hard to in-source over time as those commitments become required around clinical data exchange and sophistication of the timing. So that will be a tailwind.

And then I think, again, I mentioned this before, I think some of the -- there are some vendors in the marketplace, I think, will have a harder time meeting those commitments. So there's a couple of different things driving this shaded towards oncology and a lot of new logo in there.

The next question comes from Jailendra Singh with Truist.

This is Eduardo Ron on for Jailendra. Just on the -- I think, John, you made the comment that you see a path to in excess of $2.5 billion in 2026. Just given the Q4 run rate, that's like $1.9 billion or so, that's a $600 million step-up to next year. Just curious -- and the new contracts that you talked about is $250 million. So just curious what line of sight you have into the incremental $350 million or so million that you're talking about here.

Yes. So that $350 million, Eduardo, is based on the weighted pipeline that we have now that Seth referenced over $1 billion with some expectations of when that pipeline might go live during 2026. So that's the root of our confidence around that number.

Yes. And just to put a finer point, I think the comment was at least $2.5 billion. We obviously -- the $1 billion would take you well above that. And so to John's point, it's really around timing is the only question.

The next question comes from Charles Rhyee at TD Cowen.

I just wanted to follow up on some of your answers here. Maybe first on the $2.5 billion sort of target, understanding that the pipeline -- your comments around pipeline. But in relation to sort of your assumptions for HIC for individual exchange, does that assume -- because it seems like, John, you don't have yet an estimate of what you think that impact might be for '26. Do you make any assumption for a decline in that business within that $2.5 billion?

And then secondly, obviously, Aetna signing for MA starting next year sounds great. Just curious about sort of the large customer that you had that was doing Performance Suite in oncology, in Florida and another state, obviously, going to tech and suites. Any discussions now that trend -- this kind of higher level of utilization has stabilized of them coming back to kind of switch back to Performance Suite yet?

Yes. Sounds good. I'll take the first one and I'll kick to Seth second one around customer commentary. Yes, we have assumed in our build for next year at this point, some decline in the exchange population across both tech and services and Performance Suite.

Yes. And then on the other question you asked about specific partner, I'd say in general, I'll answer it generically, which is the Performance Suite solution is the best way to create value for our partners, for members, for providers.

So I think over time, if you're Tech Services, you're going to move some states to Performance Suite, always timing based. There's been a lot of volatility in membership, which does make it harder to price and go live with the market, and that's one of the challenges that we had there. But I do think because of the value proposition, those things are likely to happen. And it's a timing thing, which I don't want to throw out specific time lines, but I do think those types of things will happen.

The next question is from Matthew Glimmer at KeyBanc.

I wanted to ask a guidance question on the oncology trend. I think you said the trend was 10.5%. John had mentioned that you closed 2Q conservatively similar to 1Q and then 1Q developed favorably. Can you give us some sense for where the first quarter oncology trend is ultimately developing relative to the 12% guide?

And then I think there was also a comment about an assumption about a pull forward of utilization maybe around the exchange business that you've incorporated in the guide. I was wondering if you could quantify that just so we understand if there's extra burden that you're putting under the guide.

Yes. Good questions, Matt. So as you think about the first half, the 10.5% that I mentioned is the rate for the full first half of the year. And so the first quarter being more fully complete is a little lower than that, and we closed the second quarter above that. As we think about our guide, as I mentioned, we've largely remained conservative.

And so what does that look like? It's about 12% for the second half of the year. That's composed of modestly better underlying expectations, offset by, as I mentioned, this idea of a potential benefits rush in the exchange business, smallest part of the business, but there ahead of potential changes in membership next year. So those 2 net out to what we think is a relatively conservative 12% assumption at the midpoint of our guide for the back half of the year.

The next question is from Matthew Shea at Needham.

Nice to see the sales momentum year-to-date. I guess, with total signings now at 11 looking at the guide for the remainder of the year, is there much go get left in terms of new customers in the full year guide? Or have you pretty much filled the bucket at this point?

We have filled the bucket. So any new launches that we haven't already announced for this year would be incremental for 2025. really now focused on building up '26.

The next question is from David Larsen at BTIG.

This is Jenny Shen on for Dave. It's encouraging to hear that the oncology cost trend is trending favorably. Just any of your thoughts on overall utilization. We've seen some of the hospitals report lighter volumes in areas like ortho and MSK. Does that have any positive read-through to you guys? What are you seeing in the other specialty areas?

Yes. So just going specialty by specialty, we've seen cardiology trend be quite consistent with our expectations this year. So it's elevated relative to a 10-year baseline, for example, but it's pretty consistent with what we expected.

On MSK, radiology, other specialties in our stable, we don't take risk there. And so we're less sensitive to volumes. we haven't seen a particularly significant shift in either direction in our particular book of business.

This concludes our question-and-answer session. I would like to turn the conference back over to Seth Blackley for any closing remarks.

All right. Thanks for the time this evening. Look forward to connecting soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.