Privia Health Group, Inc. (NASDAQ:PRVA) Q1 2024 Earnings Call Transcript

Privia Health Group, Inc. (NASDAQ:PRVA) Q1 2024 Earnings Call Transcript May 11, 2024

Privia Health Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Privia Health First Quarter 2024 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 your speaker, Robert Borchert, SVP of Investor and Corporate Communications. Please go ahead.

Robert Borchert: Thank you, Tana, and good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer; and David Mountcastle, our Chief Financial Officer. This call is being webcast, can be accessed in the Investor Relations section of priviahealth.com. Today’s financial press release and slide presentation are posted on the Investor Relations pages of priviahealth.com. Following our prepared comments, we will open the line for questions. We ask that you please limit yourself to one question only, and return to the queue if you have a follow-up, so we can get to as many questions as possible. The financial results reported today are preliminary and are not final until our Form 10-Q for the first quarter ended March 31, 2024, is filed with the Securities and Exchange Commission.

Some of the statements we will make today are forward-looking in nature based on our current expectations and view of our business as of May 9, 2024. Such statements, including those related to our future financial and operating performance and future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result, these statements should be considered along with the cautionary statements in today’s press release and the risk factors described in our company’s most recent SEC filings. Finally, we may refer to certain non-GAAP financial measures on the call. Reconciliation of these measures to comparable GAAP measures are included in our press release and the accompanying slide presentation posted on our website.

Now I’d like to turn the call over to my CEO, Parth Mehrotra.

Parth Mehrotra: Thank you, Robert, and good morning, everyone. Privia Health delivered solid first quarter results to start 2024 as we continue to drive towards our long-term vision to build one of the largest ambulatory care delivery networks in the nation. This morning, I’ll cover some key highlights and provide a business update. And then David will discuss our recent financial performance and our 2024 guidance outlook before we take your questions. During the first quarter, Privia Health continued to execute at a very high level with a focus on growth and profitability. As we noted on our February earnings call, we were able to nimbly respond to the changing Medicare Advantage reimbursement environment and protect our earnings power by restructuring certain MA capitation contracts.

We believe these actions demonstrate the flexibility, diversity and differentiation of the Privia business model. Our Q1 practice collections increased 7.4% year-over-year, which includes the impact of restructuring certain MA capitation contracts for more favorable terms. Our top line performance continues to reflect steady growth of same-store and new provider additions. Adjusted EBITDA was up more than 18% as we continue to benefit from operating leverage. This was despite absorbing incremental investment in new markets we’ve entered over the past 18 months. We are also being prudent and assuming minimal increase in accrued shared savings in 2024 versus 2023. Our sales pipeline is strong across all our markets, and we have a robust business development pipeline of new market opportunities.

Our strong balance sheet and free cash flow profile allows us the flexibility to take advantage of any dislocations in the physician enablement space. So overall, we feel really good about our business momentum and operating execution in the current environment. We are closely monitoring medical cost trends and claims data so that we can be proactive in our actions. We feel very positive about the moves we’ve made in the past two quarters to mitigate the downside risk in our Medicare Advantage book and are reiterating our full year 2024 guidance. The combination of our diversified value-based book and strong underlying fee-for-service business serving the entire physician practice continues to be a key differentiator. Privia’s national footprint continues to expand as we build one of the largest primary care-centric delivery networks in the country.

At the end of Q1, we had 4,359 implemented providers caring for over 4.9 million patients in 13 states and the District of Columbia. As of March 31 of this year, we estimate Privia serving approximately 1.14 million attributed lives across more than 100 value-based care contracts in commercial and government programs. The total attributed lives increased more than 10% from Q1 a year ago. This positions our business as one of the broadest and most balanced value-based care platforms in the industry. Our commercial attributed lives increased 8% from last year to 685,000. As we noted last quarter, our ability to earn care management fees and shared savings that are incremental to our highly predictable fee-for-service management fees offers a very unique value proposition to our medical groups in the commercial book of business.

Core to our long-term strategy is to thoughtfully move lives into increased risk arrangements over time when we are confident it will provide significant opportunities for adjusted EBITDA and free cash flow growth. Our strong and stable performance is a testament to Privia’s proven ability to manage risk across a diverse set of 100-plus value-based contracts. We leverage our clinical operations, performance management, actuarial expertise and close alignment with our physician partners to manage patients across the risk spectrum. In aggregate, Privia’s ACOs or risk entities are managing approximately $9 billion of medical spend in 2024 across commercial, MSSP, Medicare Advantage and Medicaid programs. The current environment, scale of our medical spend and potential variability of shared savings require us to be particularly thoughtful in our risk taking to maintain our earnings power for both our provider partners and our shareholders.

We are well positioned to opportunistically increase our attribution in various risk arrangements over the next 24 months to drive future earnings growth. Now I’ll ask David to review our Q1 financial results and 2024 guidance outlook.

David Mountcastle: Thank you, Parth. Privia Health delivered another solid quarter of performance in the first three months of 2024. Our implemented provider count of 4,359 was up 17.3% year-over-year. Solid ambulatory utilization trends, new implemented providers and additional attributed lives led to practice collections increasing 7.4% from Q1 a year ago to reach $707.7 million. As we noted in February, the balance and flexibility of our operating model enabled us to shift attributed lives out of capitated agreements for improved contribution margin. Most importantly, we continue to invest in existing and new market growth while generating operating leverage. Our adjusted EBITDA was up 18.1% over Q1 last year to reach $19.9 million.

Following our solid Q1 performance, we are reiterating our full year 2024 guidance. Our business momentum and diversified book of business has positioned us well to drive organic provider growth, limit downside in risk arrangements and increase operating leverage for adjusted EBITDA growth in 2024. Implemented providers are expected to increase 9.2% year-over-year to reach 4,700 by year-end at the midpoint of our guidance. As we noted in late February, we are also assuming a minimal increase in shared savings year-over-year as part of our prudent accruals. This implies expected 2024 growth in fee-for-service practice collections of approximately 10% driven by implemented provider growth in our more mature markets in 2023 as well as early provider growth momentum in newer markets.

Adjusted EBITDA growth of approximately 21% at the midpoint of our guidance is expected to be driven by operating leverage in our more mature markets, which should more than offset new market entry costs. We also anticipate our newer markets to contribute significant growth in providers, attributed lives and adjusted EBITDA in the future. Our full year guidance assumes a reduction of approximately $198 million in our top line from 2023, given lower risk exposure from MA capitation agreements. As we continue to invest across our business enterprise, our 2024 adjusted EBITDA guidance absorbs approximately $10 million to $12 million in new market platform investments. We expect to scale our new market significantly in the coming years as we grow our provider base and attributed lives in these new states.

Our balance sheet and capital position continue to be very strong with cash of $351 million and no debt. Similar to previous years, Q1 is typically our lowest cash flow quarter. Our cash balance declined sequentially due to timing differences in cash received at the end of Q4 with the related outgoing payments occurring in January 2024. We also paid our annual employee cash bonuses in March. We expect capital expenditures to be less than $1 million this year as part of our capital-light operating model. This should lead to approximately 80% of our full year adjusted EBITDA converting to free cash flow. Finally, we have an undrawn and available $125 million credit facility and plan to continue maintaining a conservative balance sheet. Privia Health remains focused on profitably growing and expanding our business for many years to come and investing to support this growth as we build our national footprint.

We would like to thank our physician partners and employees for their dedication and hard work to deliver consistent solid results quarter-over-quarter, especially in the current environment. We are now ready to take your questions.

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Q&A Session

Operator: Certainly. [Operator Instructions] Our first question will come from A.J. Rice of UBS. Your line is open.

A.J. Rice: Thanks. Hi everybody. I appreciate it. Obviously, you step back from the risk arrangements and trying to provide yourself some more cushion there. Can you just comment, though, on – obviously, we’ve got a second tough year funding environment for MA as we look toward 2025. How about your discussions, how you’re looking at that, how your underlying providers are looking at that, and any discussions with the Medicare Advantage plans about adjustments they might be making that will impact you?

Parth Mehrotra: Yes. Thanks for the question, A.J. So a few points. Number one, we proactively anticipated with our slightly contrarian view over the last 18 months. And so whatever changes we’ve had to make, we’ve made, and so we feel pretty good about how we execute over the next 12, 24 months. As you can see, we are managing 197,000 lives in MSSP, 171,000 lives in MA. And we are happy to take all the risk we can downstream as long as we are getting paid and our providers are getting paid to take that risk. And I think that’s where you’re going to see some challenges where we clearly see the payers being challenged with the upcoming V28 impact as they revise their bids and so on and so forth. So while they adjust, it’s going to be a discussion on how they are going to enable provider entities like ours downstream, and are they willing to share some of the upside and economics from us taking risk.

So we are willing and capable of taking as much risk as possible. We just have to be thoughtful and take it as long as we’re getting paid to do so and there’s a positive adjusted EBITDA and free cash flow impact both for our providers and our shareholders. So we’ll keep having those discussions, but we’re very well positioned to increase our risk book.

A.J. Rice: Okay, thanks a lot.

Operator: And our next question will be coming from Elizabeth Anderson of Evercore ISI. Your line is open.

Sameer Patel: Hi, guys. This is Sameer Patel on for Elizabeth Anderson. Congrats on the solid quarter. Maybe just sticking within capitation. Just given the mix in contracts, is the 1Q sort of PMPM an appropriate way to think about the PMPMs for the rest of the year sort of in that 1,050 to 1,100 range? Or how should we think about that for the remaining quarters?

David Mountcastle: Yes. I mean, obviously, it’s still early in the year. But at this point, I would say that’s probably a good way to look at it.

Sameer Patel: Got it. And if I could ask a quick follow-up. Just within your ongoing contracts, have you guys looked to negotiate any sort of off-cycle rate adjustments or any sort of retroactive relief for 2023? I know some of your peers have done that. Do you think there’s an opportunity to do so?

Parth Mehrotra: We’ve done whatever we had to, as we discussed on our prior earnings call. So at this point, we feel pretty good about 2023. We feel pretty good about 2024. We’ve received a lot of the data for 2023 as you would expect by May of this year. So that’s all reflected in our accruals. So we made all the adjustments we had to.

Operator: And our next question will be coming from Joshua Raskin of Nephron Research. Joshua, your line is open.

Joshua Raskin: Hi, thanks. Good morning. I heard you say you’re being more prudent around accrued shared savings. I assume that’s MSSP and maybe across the book. But what are some of the underlying metrics and saving rates that you’re tracking, suggesting? And are you being more conservative than you’ve been in the past? And I guess, last part of that is change healthcare, if any, the outage have anything to do with that?

Parth Mehrotra: Yes. Thanks, Josh. So on the first part of the question, the same process we followed over the past many years. We get data across our different books of business, and it’s not homogenous, as you would expect, between commercial, MSSP, MA and then Medicaid. So there are always some nuances on each of these books. I just think even if we get – we look at the same trends effectively, the same underlying operating metrics in terms of utilization in patient ED visits, so on and so forth, quality metrics just by each book. Overall, I think it’s early in the year. So while at this point, we feel pretty good about 2023 performance as we’ve gotten most of the data for 2024, it’s still – we just ended Q1. So I think just given the environment and the utilization trends, I think it’s just prudent to be much more thoughtful as to what our accrual estimates are.

And if there’s positive or negative variances over the course of the year, we’ll just adjust. So I don’t think it’s any different than what we’ve done previously. And then on your second point, we saw minimal impact from change, and that’s reflected in our strong Q1 practice collections. Whatever little impact we had, it was mitigated pretty quickly with our technology partners. And there continues to be no known compromise of Privia’s provider or patient data. So we don’t think that, that impacted anything.

Joshua Raskin: Got you.

Operator: And our next question will be coming from David Larsen of BTIG. David, your line is open.

David Larsen: Hi, Parth. Congratulations on a good quarter. Can you maybe talk a little bit more about your vision for care delivery components of the business. Like there’s a lot going on in the space. Health plans are under pressure with their stars ratings. There’s a lot of costs tied to GLP-1s, obesity health that’s having a very significant impact on pharma drug trend. Just like things like putting winning skills in the home or creating preferred narrow networks. And then just related to that BASS Medical Group in San Fran, I just find it interesting that they’re going to be working with a competitor of yours. Just any color on your vision for new products and solutions would be very helpful. Thank you.

Parth Mehrotra: Thanks, David, for the questions. So on the first part, look, I mean, we are differentiated because we are – our business model includes creating a very large medical group with physician governments, pairing that up with a risk entity and then our full suite of tech and services platform that is serving every single patient, every single provider in a practice across any reimbursement model. I just think that is so differentiated because it gets to what you alluded to, we can take that broad network and go to the payers of healthcare and create all kinds of products and services, both to the self-insured employer, to large commercial payers, for profit, not-for-profit, Blues plan and then obviously to CMS.

And I think there will be opportunities for us to help the payers manage risk downstream. It’s a community-based physician network, lowest-cost setting in the healthcare ecosystem, best relationship with members of the family, whether it’s the child, it’s the mother, it’s a working-class person or it’s a senior. And I think we are trying to take risk in the commercial book, which is pretty unique then obviously in MSSP, MA and Medicaid. And then each of those lines will lead us to innovate to better manage care downstream and have much more closer partnerships with the payers. So I think you’ll keep seeing us do different things. But I think that’s a true differentiation for us, where we’re not just going to only the PCP and offering one single line of product to take risk.

It’s for the entirety of the practice. And then for your second question, I mean, we covered this pretty extensively in the last call. We’re not in the business of delegating claims and taking risk on specialists and so forth. So there’s no impact to our economics of vision for what we have to do in California. We think it’s a big opportunity. And we work closely with BASS. I think we covered all of that in the last call.

Operator: And our next question will be coming from Richard Close of Canaccord Genuity. Your line is open, Richard.

Richard Close: Great, thank you. Congratulations. Parth, there’s been a number of news articles and comments, I guess, coming out of Congress and the FTC about healthcare M&A. And also with the change hike, I guess, Optum is come under a little bit more scrutiny and their competitors. So I’m just curious how you think all that potentially impacts your business, if you’re seeing any kind of increased demand in your model? And maybe comments on the quality of the pipeline would be helpful.

Parth Mehrotra: Yes. Thanks for the question, Richard. So I think we have a very unique model, just tagging on to the question that David asked. I think what’s underappreciated is we offer a unique model of partnership to physician practices, where they can retain their autonomy and yet be bought as something bigger across all lines of business, all patients, every single provider. We’re not buying physician practices. We don’t have non-competes and so on and so forth that restrict them in certain other arrangements. And every time there’s disruption, I think physicians are realizing that Privia can help them in many ways to take better care of the patients, get paid for that and yet retain their autonomy. And I think that’s a very differentiated value proposition.

So we feel really good. As you saw last year, we implemented 699 providers. It was a record year for us. You can see our implemented provider guidance, and we feel really good about the pipeline. The metrics in our mature markets are even better where over 50% of inbounds are referrals from our existing physicians, and the conversion rates on those are extremely high to close. And that’s a flywheel that gets into effect once we enter state, we establish ourselves, we have performance history and then the snowballing happens. So I think as we see disruption in the marketplace, as we see private equity stepping back or not able to do deals and as we see some of the new VC or private equity funded businesses faltering, I think physician practices are looking for a much stable partner.

And given our strong balance sheet, cash flow position and how we perform now over the past many years, hopefully, it makes us a partner of choice.

Operator: And our next question will be coming from Andrew Mok of Barclays. Andrew, your line is open.

Andrew Mok: Hi, good morning. Can you provide a little bit more detail on the timing-related items impacting free cash flow in the quarter? I understand there’s some seasonality there. But it looks like the impact was a greater degree than we typically see. And it sounds like you’re paying more cash bonuses in Q1 even though stock-based comp more than doubled in the quarter, I think. So can you give us a sense for what’s going on there? Thanks.

David Mountcastle: Yes. So if you go back and look historically, Q1 is always our low cash flow quarter for the year. It’s due to a lot of value-based care agreements paying us in late Q3 or late Q4. And so we received the cash for those in Q4, and we end up paying out the amount to our physician partners in January. And it just happened timing-wise where some of the payment, maybe a larger percentage of the payments came in later in the year last year, and so a larger percentage of them got paid in January. And then our annual bonus we pay in March every year. We’ve done that historically for 10 years. And so that’s just an annual cash item for the quarter. We do expect by the end of the quarter to be – excuse me, by the end of the year that we should be over $400 million in cash, excluding any business development deals that we do during the year.

Robert Borchert: Stock comp question.

David Mountcastle: Yes, what was the stock comp question?

Robert Borchert: How it was higher in this quarter.

David Mountcastle: Yes. So yes. So from a stock comp perspective, one big difference – it’s effectively a timing difference. Last year, our annual grants occurred in Q2. This year, our annual grants occurred in Q3 – excuse me, in Q1. And so we got a full year of last year’s stock comp in Q1 of this year. That’s why the Q1 of last year over Q1 of this year comparison looks a little bit odd. Going forward, we expect to do our annual grants in Q1. So we don’t expect going forward this will be an issue. For the full year, we’re expecting stock comp to be in the $55 million to $60 million range. So yes, our noncash stock comp.

Operator: And our next question will be coming from Jeff Garro of Stephens. Your line is open.

Jeff Garro: Yes, good morning. Thanks for taking the questions. I’ll try to compound a few on business development together. So in terms of potential new anchor practices in new markets. Any color you can provide on types of markets, types of practices that you’re interested in and what stages you are in the various processes on that front? And second one, the script was specific in calling out potential weakness in the provider enablement space, and you’ve commented a little bit more on that. But wanted to ask how that fits into the business development pipeline, thinking about kind of potential for horizontal mergers rather than new relationships with new provider practices. Thanks.

Parth Mehrotra: I appreciate the question, Jeff. So look, the pipeline continues to be pretty strong. As you’ve seen in the past few years, the timing just depends on when we can get the deal done in 13 states. So we have many states to go. And as you saw in the past 18 months, we could – just given the timing, you could have four or five hit in a pretty short period of time and then or some may not hit. So I think over time, our target is the same that we alluded to when we went public three years ago. We’re going to target one or two new markets every year. It could be higher or lower depending on when the deals happen. On the nature of the deals, it will be similar again as to what you’ve seen in the past three years from us.

Given the three components of our business, we’re looking to form integrated medical groups, risk entities, service platforms. And you can see us do each of those three types of deals. Again, it gives us much more flexibility to enter a state than many others. We’ve acquired medical groups, so the tax IDs of medical groups previously, like we did in Washington. We’ve acquired MSO entities like we did with BASS. And we’ve acquired risk entities like we did in Connecticut, an IPA or an ACO entity. Our guidance excludes any new markets, and that’s what we’ve done historically as well. So as we enter any new states, whatever the impact might be, we’ll update guidance appropriately. And then I think to your last half of your question on potential disruption, look, I think you saw an excess of investment in this space, a lot of venture capital dollars chasing physician practices, private equity dollars chasing them.

And I think you’re going to see some of that unwind over the next few years as you see pressures in MA specifically that you all are well aware of. So I think it gives – whenever disruption happens, we’re a proven model, proven unit economics, proven value proposition to the physician practices. So it’s just rinse and repeat for us and just being disciplined. And then I think we’re in a pretty enviable position to have close to over $400 million of cash, as David outlined, by the end of this year and no debt. So I think we’re going to be very opportunistic in how we can grow the business.

Operator: And our next question will come from Jack Slevin of Jefferies. Jack, your line is open.

Jack Slevin: Hey, good morning. Thanks for taking the question. Just wanted to touch on cadence quickly and how you’re thinking about that throughout 2024. Just looking at the fee-for-service side growth running a little bit hotter, and that’s really good in the first half versus the full year guide. And I think on the shared savings side also looks pretty strong, even though I know the conservative accrual approach is sort of what you’re taking. So I just want to make sure I have my bases covered in terms of how you’re thinking about the progression of both revenue and earnings over the next couple of quarters. Thanks.

Parth Mehrotra: Yes. Thanks for the question, Jack. So from a seasonality perspective, I think it should be the same as previous years. It’s a pretty predictable business in the fee-for-service side with seasonal trends. So you should not expect anything different. It’s always good to have a solid performance in the first couple of quarters so that it positions us really well for the back half of the year. It’s still early in the year, and we reiterated our guidance, but we feel really good. The variability at this point is really in the value-based book. While we are accruing prudently as we say on our slide, it’s called risk for a reason. So there can be some elements as we true up for 2024, and we’ll see how that plays out over the course of this year.

But we feel really good about our guidance and our ability to achieve it. If you look at the past 12 quarters, we’ve met or exceeded. So we don’t anticipate deviating from that cadence. Hopefully, we’ll be able to do the same this year.

Operator: And our next question will be coming from Lisa Gill of JPMorgan. Lisa, your line is open.

Unidentified Analyst: Good morning. It’s Kyle on for Lisa. I wanted to ask about the performance of the capitated MA book and the fee-for-service book. Just any color you could give on utilization trends within those businesses, and then any update on the ramping of new markets and how the physician recruitment is going there. Thanks.

Parth Mehrotra: Yes. So on the first half of the question, it’s pretty much as expected. We didn’t see any big deviations from our accruals or the data we’ve received was pretty much expected. We’ve anticipated whatever utilization trends everybody is seeing. And so that’s all – that was all factored into our initial guidance and then what we’ve accrued for. So we feel pretty good about how we’ve anticipated some of these trends and reflected that. So no major differences to report as is reflected in our results. On the second half on the physician recruitment, again, I mean, we see – this is just answering the questions we did a couple of questions ago. I mean we see a pretty good pipeline, and recruiting remains pretty strong.

And we feel pretty good about our year-end implemented provider guidance. Every provider, given the five, six-month lag that we have between signing and implementing is pretty much sold at this point in the year. So we feel pretty confident.

Operator: And our next question will come from Jess Tassan of Piper Sandler. Jess, your line is open.

Jess Tassan: Hi, guys. Nice quarter. So given the conservative posture around MSSP accruals, can you just break down the sequential growth in shared savings revenue a little bit? And I guess, just maybe some of that growth is from the shift of lives from full cap to upside, downside, but how did you restructure those MA contracts to make them so much more profitable? And then just some of the sequential growth implying more favorable pricing in commercial value-based care. Thanks.