Alignment Healthcare, Inc. (NASDAQ:ALHC) Q3 2023 Earnings Call Transcript

Alignment Healthcare, Inc. (NASDAQ:ALHC) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good day, and thank you for standing by. Welcome to Alignment Healthcare Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to John Kao, Founder and CEO. Please go ahead.

John Kao: Hello, and thank you for joining us on our third quarter earnings conference call. We are pleased to deliver strong results through the third quarter as we exceeded our outlook expectations across each of our four key performance indicators. For the third quarter of 2023, our total revenue of $456.7 million represented approximately 27% growth year-over-year. We ended the quarter with health plan membership of 115,600 members, growing approximately 18% year-over-year. Adjusted gross profit was $60.6 million, producing a consolidated MBR of 86.7%, while our MBR excluding ACO REACH was 85.7%. Lastly, our adjusted EBITDA was negative $8.4 million, ahead of our outlook range. Our third quarter’s success continues to demonstrate that we are executing against our founding vision of delivering high-quality and low-cost outcomes through our member-first operating model.

These include strong performance across three key value drivers; growth, utilization, and Stars. In terms of growth, our strong intra-year membership growth momentum is a tangible sign that our sales and retention improvements are yielding results. Following our third quarter outperformance, we are raising the midpoint of our membership guidance to reflect 20% membership growth for year-end 2023, while also increasing our revenue guidance to reflect 24.8% growth year-over-year. Further, as I’ll share more during our call today, we are feeling confident about our AEP positioning and membership growth outlook for 2024. Regarding utilization, our MBR results in the quarter reflect continued progress at our clinical operations, improvements to our medical management model, and steady utilization performance.

Our provider engagement at Care Anywhere teams, enabled by AVA, delivered 152 admissions per thousand in the third quarter despite absorbing higher than anticipated new membership growth. Lastly, turning to Stars, we are pleased to announce that 92% of our health plan members are in plans rated four stars or above for 2024. This significant achievement is a testament to the quality of our member experience delivered through the seamless relationship between our internal team and our external providers. Each of these achievements demonstrate the power of having a purpose-built MA platform which unites the best-in-class technology with integrated member experience and provider engagement. Expanding further upon our Stars results, our 4-star California HMO contract rating marks the seventh consecutive year in which our largest contracts achieved at least four out of five stars.

Our strong result is particularly notable this year as the percentage of members in plans rated 4-star or [technical difficulty] fell from approximately 80% to 55% across our California markets. In 2025, many competing plans will now face declining stars payments and the phased-in effects of the new V28 risk model. Amidst this environment, we will continue to capitalize on our relative funding advantage and our high-quality low-cost operating model. Outside of California, our North Carolina and Nevada markets will have 4.5-star-rated contracts. As we continue to grow in our new states, we are driving continued improvements in star ratings by doubling down on our support with doctors across these regions to create a seamless experience for our providers.

Turning to AEP, we are pleased with our results for the first two weeks of AEP, and we expect to grow January 1 membership at or above 20% year-over-year. For the 2024 plan year, we once again enhanced our portfolio of curated products supported by the strength of our stars and cost management capabilities. While many of our local competitors have declining or flat benefits, Alignment’s low-cost position and commitment to quality and product innovation enabled us to fund increased benefit richness across all of our flagship plans for 2024. Specifically, we are excited to share that 95% of our non-S&P members have the same or lower maximum out-of-pocket costs and monthly premiums, with expanded dental allowances across many of our plans. We also curated our selection of products to address the distinct needs of seniors everywhere, whether it’s a health-conscious member who values direct savings or someone in need of a more dedicated care regime.

Further, the recent collaborations with leading household brands, like Instacart and Walgreens, exemplify our drive to integrate innovative solutions into the healthcare landscape. This is just a sample of how our pioneering and disciplined approach to product design leads us to be optimistic about 2024 membership growth. We look forward to providing you with a more fulsome update on our AEP results in early January. In conclusion, our year-to-date progress reinforces our confidence in achieving our 2023 guidance, our 20% growth target in 2024, and an adjusted EBITDA breakeven result next year. Now, I’ll hand the call over to Thomas to cover the third quarter financials, as well as our outlook for the remainder of the year. Thomas?

Thomas Freeman: Thanks, John. For the quarter ending September 2023, our health plan membership of 115,600 members increased approximately 18% compared to a year ago. The year-over-year improvement and outperformance against guidance were led by both sales and retention improvements as investments made earlier this year on our sales infrastructure, distribution, and member experience began to take hold. Our favorable membership growth, combined with sustained revenue PMPM performance drove our third quarter revenue to $456.7 million, representing approximately 27% growth year-over-year. Year-to-date revenue grew approximately 27% year-over-year, and grew approximately 22% excluding ACO REACH. Adjusted gross profit in the quarter was $60.6 million, reflecting an MBR of 86.7% or 85.7% excluding ACO REACH.

As John mentioned, our results in the third quarter marked our second quarter in a row where inpatient admissions per thousand ran in the low-150 range. Continued strength in our performance was supported by strong member engagement with our clinical programs and stable underlying utilization trends. SG&A in the quarter was $83.1 million. Excluding equity-based compensation expense, SG&A was $71.3 million, an increase of approximately 19% year-over-year. SG&A excluding equity-based compensation expense as a percentage of revenue decreased year-over-year by approximately 100 basis points in the third quarter, and 180 basis points year-to-date. Taken together, our adjusted EBITDA of negative $8.4 million was better than our expectations heading into the quarter.

Moving to the balance sheet, we remain solidly positioned, and entered the quarter with $515.6 million in cash and short-term investments. Our cash balance at the end of the quarter again included an early payout from CMS of approximately $146.3 million. We recorded the early payment as deferred premium revenue in Q3, and will recognize it as revenue in Q4. As a reminder, this does not have any impact on our income statement metrics. Cash and short-term investments excluding the early payment were approximately $369 million. Turning to our guidance, for the fourth quarter, we expect health plan membership to be between 117,600 and 118,600 members, revenue to be in the range of $422 million and $442 million, adjusted gross profit to be between $46 million and $54 million, and adjusted EBITDA to be in the range of a loss of $18 million to a loss of $10 million.

For the full-year 2023, we expect revenue to be in the range of $1.78 billion and $1.8 billion, adjusted gross profit to be between $206 million and $214 million, and adjusted EBITDA to be in the range of a loss of $34 million to a loss of $26 million. On the back of strong third quarter performance, we are once again increasing our full-year 2023 membership guidance and raising our full-year revenue guidance. Our latest membership and revenue guidance reflect 20% and 24.8% growth at the midpoint, respectively, consistent with our long-term objective to reliably drive 20% annual growth. Meanwhile, our narrowed adjusted gross profit guidance range for the full-year implies an MBR of 88.3% at the midpoint, roughly unchanged from our prior outlook.

Our latest guidance reflects MBR tailwinds from our strong year-to-date outperformance and utilization balanced by a higher mix of new members in the fourth quarter. As a reminder, our year-end membership outlook has increased by 4,100 members at the midpoint relative to our initial guidance, and new members typically start at higher MBRs as we ramp up our clinical engagement activities. Additionally, we are reinvesting some of the year-to-date favorability towards certain clinical and annual wellness visit activities in support of our 2024 objectives. Lastly, our adjusted EBITDA range of negative $34 million to negative $26 million now implies a 200 basis point year-over-year improvement in our implied SG&A outlook as a percentage of revenue.

This includes incremental SG&A from the ramp up of resources to support our anticipated January 1st growth. As John mentioned, we are pleased that the strength of our product positioning is translating into solid performance during the first 2 weeks of AEP, and we expect to deliver January 1st membership growth at or above 20% year-over-year. To wrap things up, our year-to-date results continue to demonstrate the headway we are making towards our long-term growth and profitability targets, and we look forward to updating you on our AEP results in January. With that, let’s open the call to questions. Operator?

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Q&A Session

Operator: Thank you, sir. [Operator Instructions] Please stand by while we compile the Q&A roster. And I show the first question comes from the line of John Ransom from Raymond James. Please go ahead.

John Ransom: Hey, good afternoon, everybody. Just thinking long-term, I know you’ve got some long-term margin goals that look a little bit more like a traditional MA. Where you sit now, what kind of revenue and/or membership do you think you need to get to get to those longer term margin goals?

Thomas Freeman: Hey, John, this is Thomas here. The way we would think about that is a function of not just a certain level of membership or revenue, but additionally taking into consideration the pace of our new market expansion initiatives over time, just given the drag on profitability, both MBR and SG&A that a new market has. And so, for instance, I think if we were to focus on only driving market share gains in our existing geographies and not add a single incremental county or new state over time, I think we could likely reach that goal faster. I think given the value proposition of extending our care model and kind of capturing some of that growth opportunity outside of our existing geographies, means we will likely continue to add new markets looking out into maybe 2025 or 2026.

And so, I’m not sure we’re going to draw a line in the sand on a certain revenue or membership target, but I think that’s how we sort of think about the main drivers as to the pace of that growth time.

John Ransom: Thank you.

Operator: Thank you. And I show our next question comes from the line of Scott Fidel from Stephens. Please go ahead.

Scott Fidel: Hi, thanks. Good evening and nice to be joining you all on the call tonight. Question, just appreciate the initial color and visibility into the growth in the AEP. And just be interested if you can break that down a little bit more in terms of what you’re seeing in terms of growth from a traditional individual MA as compared to D-SNP and then maybe some observations on sort of how the growth is looking in the core California market as compared to your other markets. Thanks.

Thomas Freeman: It’s got happy to provide some color there. So, we’re obviously a little over two weeks in now and I’d say what we’re seeing so far is generally consistent with our expectations heading into AEP. So, we’ve shared in the past that we see a significant growth opportunity across our counties in California and that will likely continue to be the largest driver of our overall net membership growth looking out into 2024. Based on the first two weeks of results, I believe that will continue to be the case and you’ll continue to see that be the largest driver looking ahead to next year. Outside of California, it’s probably a little too early to provide too much commentary, but we’re seeing some pretty solid progress across most markets, and we’re excited about what that means for our 2024 setup.

In terms of our product mix, as John mentioned in his section, we really try to take a balanced approach to design products for different populations across the acuity spectrum, across the income spectrum, different products tailored for different ethnicities. And the idea is that we really want to have a product offering that meets the needs of really every type of senior consumer. And so, I’d say what we’ve seen so far is a pretty balanced level of growth across our different types of products. To your point, we do have about 30% of our members today that are dually eligible, and we’ve enhanced some of our C-SNP products heading into 2024. I think we’ll see some nice growth there. But we’ve also designed products on the other end of the spectrum, looking at products that are more cash rich or rebate products that tend to attract a younger or healthier senior.