Alignment Healthcare, Inc. (ALHC) Earnings Call Transcript

Good afternoon, and welcome to Alignment Healthcare's Second Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Leading today's call are John Kao, Chairman and CEO; and Jim Head, Chief Financial Officer. Before we begin, we would like to remind you that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and information currently available to us. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC, including the Risk Factors section of our annual report on Form 10-K for the fiscal year ended December 31, 2025. Although, we believe our expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. In addition, please note that the company will be discussing certain non-GAAP financial measures that they believe are important in evaluating performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures, a reconciliation of historical non-GAAP financial measures can be found in the press release that is posted on the company's website and our Form 10-Q for the fiscal quarter ended June 30, 2026. I would now like to hand the conference over to John Kao, Executive Chairman and CEO. Sir, you may begin.

Hello, and thank you for joining us on our second quarter earnings conference call. For second quarter 2026, health plan membership of 294,100 represented year-over-year membership growth of approximately 31%. This drove total revenue of $1.3 billion, which increased 32% year-over-year. Adjusted gross profit of $183 million represented an adjusted MBR of 86.3%, which improved by 40 basis points year-over-year. Meanwhile, adjusted SG&A of $115 million improved as a percentage of revenue by 20 basis points year-over-year to 8.6%. Taken together, Q2 adjusted EBITDA of $68 million produced an adjusted EBITDA margin of 5.1% and represents 60 basis points of margin expansion year-over-year. This quarter marks our lowest MBR as a public company and culminated in first half adjusted EBITDA of $106 million, putting us well on track to achieve our full year guidance of $154 million at the midpoint. Importantly, we accomplished this while continuing to invest in our business. Our year-to-date performance reflects our unique ability to balance both growth and margin objectives by actively managing our members through our Care Anywhere clinical teams. With 6 months of experience into the year, we have strong visibility into the acuity profile of our members and remain focused on engaging our polychronic population who are most at risk. Strong second quarter performance is supported by the deployment of the newest version of our AVA AI-powered stratification model. This advancement improved our ability to predict which members are going to be hospitalized. Our model now accurately and dynamically predicts the 10% of members who account for nearly 70% of hospital admissions over the next 30 days. Innovations such as this and the deployment of our disease state registries support the proactive engagement activities of our Care Anywhere teams. While we continue to demonstrate strong year-over-year improvement across each of our key financial indicators, an even greater opportunity remains ahead of us. Given our rapid growth in recent years, approximately 50% of our members are still in a year 1 or year 2 cohort. This results in significant embedded earnings potential within our existing membership, which we expect to realize as we engage members through our clinical programs over time. When we first shared the embedded gross profit potential within our membership in early 2025, we indicated a total opportunity of approximately $600 million of adjusted gross profit. Today, the midpoint of our 2026 full year guidance already indicates expectations for $640 million of adjusted gross profit. Meanwhile, the embedded gross profit potential of today's membership has grown to approximately $880 million. This positions us well to deliver further earnings growth from the existing members we serve today, while future membership growth further expands our embedded earnings potential. Equally important are the investments we have made in our core systems, cross-functional workflows and talent, each of which are strengthening the durability and scalability of our MA platform. These investments are translating into better clinical outcomes, reinforcing the confidence we have in our operations and highlighting a core principle of our business, creating alignment among providers, members and shareholders, which enables us to do well by doing good. While we invest thoughtfully for the future, our near-term SG&A leverage demonstrates the efficiency of our operating model and improving unit economics. First half adjusted SG&A as a percentage of revenue of 8.7% improved 40 basis points year-over-year and more than 300 basis points over the past 3 years. All of this was achieved while making investments like implementing a more scalable human resources platform, clinical EHR capabilities and enhanced claims processing systems. Looking ahead, we continue to see opportunities to invest in the second half of the year to drive further operating leverage in the future through automation of back-office processes and greater economies of scale. As we capture these efficiencies, we expect to reinvest a portion of our savings in areas with tangible, measurable returns. This includes new market expansions, branding initiatives and deepening our AI capabilities. Beyond its potential to unlock efficiencies in our cost structure, AI represents a meaningful opportunity to further enhance our care model and support providers. Most importantly, our approach to AI is grounded in decades of clinical expertise and reinforces our commitment to high-quality care. This is further supported by a governance framework to ensure responsible use, human accountability and equitable treatment of our members. In closing, our strategy of balancing rapid growth, disciplined margin expansion and continuous investment to scale our operations remain unchanged and continues to underpin our story. We achieved this by putting seniors first and supporting our providers. Our second quarter results underscore the strength of our model. As we move forward, we will maintain our disciplined approach to strike the right balance between growth and profitability. With that, I'll turn the call over to Jim to further discuss our financial results and outlook. Jim?

Thanks, John. I'll dive into our second quarter results. For the quarter ended June 2026, health plan membership of 294,100 increased 31% year-over-year, supported by strong new member additions and high retention amongst our existing members. This drove revenue of $1.3 billion in the quarter, representing 32% growth year-over-year. Second quarter adjusted gross profit of $183 million represented an adjusted MBR of 86.3%, which reflects an improvement of approximately 40 basis points year-over-year. Adjusted MBR, excluding the final suite pickup related to our new members was 86.7%, which was favorable to the midpoint of our guidance range. Overall, medical cost trends continue to track closely to our expectations. Consistent with typical seasonal patterns and our outlook for the year, inpatient admissions per 1,000 declined sequentially and core medical utilization was in line with our assumptions. Meanwhile, Part D and supplemental benefits expense ran modestly favorable to our expectations year-to-date. We believe each of these factors are supportive of our full year guidance. Turning to operating expenses. Our adjusted SG&A was $115 million, an increase of 29% year-over-year. Adjusted SG&A as a percentage of revenue was 8.6%, which improved 20 basis points year-over-year and outperformed the midpoint of our implied guidance range by 40 basis points, even as we continue to invest in our automation and scalability initiatives, as John highlighted earlier. Finally, second quarter adjusted EBITDA of $68 million grew by 48% year-over-year and produced an adjusted EBITDA margin of 5.1%, which represents approximately 60 basis points of margin expansion year-over-year. In addition, first half adjusted EBITDA of $106 million represents an increase of 60% versus the prior year. Moving on to cash flow and the balance sheet. We generated $111 million in operating cash flow during the first half of the year, and our liquidity profile remains strong. We concluded the quarter with $702 million in cash, cash equivalents and short-term investments. Lastly, our funded leverage ratio at the end of Q2 improved to 2.2x our trailing 12 months EBITDA. Moving to our guidance. For the full year 2026, we expect health plan membership to be between 298,000 and 301,000 members, revenue to be in the range of $5.20 billion to $5.23 billion, adjusted gross profit to be between $630 million and $650 million and adjusted EBITDA to be in the range of $145 million to $163 million. For the third quarter, we expect health plan membership to be between 295,500 and 297,500 members, revenue to be in the range of $1.30 billion to $1.32 billion, adjusted gross profit to be between $148 million and $158 million and adjusted EBITDA to be in the range of $20 million to $30 million. With respect to our full year guidance, we are increasing our membership growth expectations given continued strength of our sales execution. In conjunction with the increase in our membership outlook, we are also raising our full year revenue guidance to approximately $5.2 billion at the midpoint, which reflects 32% growth year-over-year. Turning to our profitability metrics. We are raising the low end of our adjusted gross profit range by $10 million and increasing the low end of our adjusted EBITDA guidance range by $7 million to reflect increased confidence in our full year objectives following a strong first half of the year. Spending a moment on seasonality. The midpoint of our full year guidance and year-to-date results indicate that we expect approximately 30% of our full year adjusted EBITDA to be generated in the second half. This compares to approximately 40% of full year EBITDA in the second half of the prior year. The change in our seasonality expectation is partially driven by a flatter slope to our Part D MBR, along with investments we are making in our clinical operations during the third quarter. Meanwhile, we continue to take a prudent approach to our utilization assumptions across each of our major cost categories for the remaining 6 months of the year. As we move into the back half of the year, given our strong performance, we will continue to make further investments in clinical innovation, AI and talent. In the third quarter, we anticipate additional investments in Care Anywhere and an earlier ramp of our clinical hiring in preparation for new market growth and expansion, which will result in a seasonally higher MBR when compared to the prior year. Likewise, we expect a greater portion of our full year SG&A expenses to be incurred in the third quarter compared to prior years due to the timing of our investments. In closing, we are very pleased with our performance throughout the first half of the year, which reflects our continued disciplined focus on our care model and our members and consistent execution against our operating plans. The progress we are making on the transformational progress we have discussed today further strengthens our competitive advantages long term. This reinforces our confidence in our ability to deliver continued growth and capture the substantial opportunity ahead for Alignment. With that, let's open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair.

I wanted to dive a little bit deeper into the Q3 guide. I think that's probably the focus of investors heading out of the print. Can you go into a little bit more detail about just the timing of some of the investments you're making? And any more color digging deeper to what some of those investments are, how transitory and then what benefits you see in the back half of the year and maybe more importantly, into '27 and '28?

Sure. I think the -- probably there's 2 dimensions to this Q3 guidance. It's kind of the seasonality aspect and then the investment aspect. So inside that seasonality, we'll dive into the investments. But sequentially, we're going to see a little bit of an uptick in our MBR, and that is from investments. It's a little bit year-over-year new member mix and it's Part D. So think about those 3 components that are driving that. But as it pertains to the investments, we're just continuing to find areas to invest in the business. And John and the team has been pretty consistent about this throughout the last couple of years in terms of putting ourselves in a position to really take advantage of the opportunity in front of us. So more specifically in the investments, we're going to make it in 2 different areas. One is going to hit the MBR, and that's in our clinical operations, Care Anywhere, preparing for new market growth and some other investments we're making there. And the other part is going to be in SG&A as we continue to push forward, get ready for market launches in 2027 and put ourselves in a position to get some returns in '27 on these projects. So think about automation, AI, things of that nature. They're not insignificant. And we think they're a really good return and set us up for the long term. It could be in the second half, an additional double-digit million across clinical and SG&A categories with the weighting of some of that being a little bit higher in Q3. okay? But this was all very deliberate. And it's inside the financial commitments we're making for 2026. So to kind of step back for a moment, we had a great '25. We're signing up for '26 and delivering against a very good first half, as you know, and still managing to invest in the business to put us in a good position for the future because we really feel it's -- there's a lot of opportunity in front of us. But it will impact the second half of the year in terms of our MBR and our SG&A, but we're still going to deliver on our commitments.

Our next question comes from the line of Michael Ha with Baird.

Multipart question. First, I'm backing into roughly $6 million sleep benefit. Is that right? And if so, any reason why it's smaller than last year, even though your book is larger this year? Second, I noticed in the 10-Q, you had, I think, about $6.5 million of unfavorable prior year development this quarter. I was wondering if you could elaborate on the timing and nature of those costs. And then last, just the underlying 2Q MLR, excluding both those items, I'm getting roughly around 86.2%. Is that about right? And any comments on like monthly cadence throughout second quarter when it comes to trend?

Let's do the 3 parts. The first one was the suite. And this is -- Michael, you're referring to the newbie final suite for 2025. And as you're aware, we take a prudent approach on that in the sense that we do not have visibility on that suite. And so we tend to take a cautious approach and just book to the MMR until we see it. And the thing that can impact that beyond just the number of members, Michael, is the mix. I think one of the bigger impacts is V28 as the second year of V28 rolled into our 2025 dates of service and then just risk-sharing agreements around it. So you're absolutely right. It was a smaller number than last year. And I guess you could call it on a per member basis, it was smaller. I think one of the bigger drivers there was V28. And so is it -- you mentioned $6 million, that's circa pretty close to what it means. We talked about 40 basis points on the call in terms of impact. So that's point number one. The second thing is prior period reserve. So just to kind of put it in context, we are always looking at our reserve positions, and that's in all states of service. Year-to-date, we're favorable about $2 million on prior year in total. And we feel good about where we're at. Inside Q2, we had a very solid quarter, as I just mentioned. And within that strong beat, we chose to bolster our reserves by about $6 million, okay? And this is -- we looked at the development of the claims in 2025. And we're always looking at that and saying, can we take a position and increase our reserves. And we looked at the quarter and said this is a good time, this makes sense. And so we feel pretty good about our reserve positioning year-to-date. And then the last one, I just want to make sure, I think you had the third part.

Yes. It was if you were to exclude the unfavorable development and the sweep benefit am I thinking about underlying like core 2Q MLR at about 86.2%?

Yes. I haven't done the math, Michael. But if you add back the prior period and then subtract out 40 basis points, I mean, it's a dollar and a percentage, but I think it's probably net around the same level on MBR.

Our next question comes from the line of Justin Lake with Wolfe Research.

Can you talk a little bit about the Q3 seasonality in terms of Part D and why it's different? And then also in terms of in terms of the new member mix and why that's driving a difference there?

Yes. And so Justin, it sounds like you're asking to amplify those 3 components or 2 of the 3 components. So the Part D is just a little different versus last year. It's a flatter slope between the first half and the second half. And that's just kind of the behavior in the second year post IRA and the behavior of our experience. And then the new member mix year-over-year, we just have more acuity in the new member mix, which is adding a little bit more to the MBR across the board. And so if you compare it to Q2 last year, it's a little bit heavier. But that investment that we talk about is a big piece of that, the investments in the clinical infrastructure.

Our next question comes from the line of Matthew Gillmor with KeyBanc.

Jim, I wanted to see if you'd be willing to share the 80,000 metric for the quarter or just year-to-date. And then more broadly for John, I was curious if you'd offer any perspective on just 2027 bids. I know you may be limited on what you may say in terms of how you approach, but just be curious in terms of the perspective you'd offer and how you think the industry will approach 2027 bidding.

Matt, thanks for that. So as we mentioned on the call, 80,000 did improve sequentially. And I'll be more specific, it was in the mid-150s and in line with our expectations given our membership mix and how we're tracking this year. So pretty much in line. I would say, Matt, that on an ongoing disclosure perspective, I think we're going to move away from digitally disclosing it every quarter. And I'll give you the rationale. While it's really important internally how we manage the business, our clinical operations, et cetera, externally, it seems to create a little bit of noise. And I think it doesn't necessarily affect the overall health of our operations. So Q1 last quarter was a perfect example of like talking about AK and kind of creating probably more static than signal. But having said that, we'll find a balance because we want to continue to provide the right context around our performance and the trends going forward. So I know you're mindful of this, and we'll be respectful of it, but it's just -- I don't know if we're going to get into the digital precision that we've had in the past because it isn't the story per se.

Yes, Matt, John here. With respect to '27, I mean, I'm going to give you the standard. It's too early to talk about the bids with respect to our strategy, obviously, for competitive reasons. I will say, I feel about as comfortable as I've ever felt about our overall product strategy and the amount of work that went into this year. I feel very, very strong about it. And a lot of these investments we've been talking about are designed to realize scale and portability. That's what we think we need to prove and that you are looking for us to focus on. And everything is designed around that. It's scale and portability. I'm really happy -- really, really happy about our progress along that front. And so that gives me confidence with our ability to support the growth we expect in '27. With respect to the industry, I think you're going to have more of a mixed bag. I think you've got people still that are going to be more margin focused than others. But I think there are going to be 1 or 2, maybe 3 players that come out of the woodwork that have not been aggressive over the last 2 years, and will be a little bit more aggressive just given some of the market chatter that we're hearing.

Our next question comes from the line of John Stansel with JPMorgan.

It seems like the upcoming MA technical rule has arrived at OMB somewhat sooner than some industry observers expected. And I think some have concluded that might mean it's a bit of a larger, more substantive rule. In your discussions, do you have a view or an expectation of what we might see from CMS when they roll out the new technical rule?

Yes. John, if you got something new, can you share because we're not to, frankly. Yes, I don't know. I'm not sure. We're all looking at each other, we miss something. John, are you there?

It was -- no, you said, it's under review at OMB already, the 28 technical rule.

Yes, no. We've heard that we don't have visibility to it. If there's anything that would have caused it to get there this early, it probably would be around stars would be my guess. But I don't know. We've heard the same that the ruling is in there now and -- but we don't know what it is technically.

Our next question comes from the line of Kevin Fischbeck with Bank of America.

Great. I guess last quarter, there's a bit of focus on MLR performance within California versus outside of California. I wonder if you could provide a little bit of disclosure about how those 2 sets of businesses performed.

Yes. Yes, there's been some focus on the statutory filings in California as a signal to broader performance. I just would remind you that these are statutory financials. They're not linked necessarily to our GAAP consolidated parent company financials. But I would say the following that we've got a mature California market that's performing quite well, and you've got pretty substantial growth over the last 2 years in our non-California markets. And the right way to think about it is cohort maturation. If you've got a more mature portfolio in our -- with our care model and our model that we employ, we actually see MLRs improving. And so if the average kind of member is in 3, 4 years versus 1, 2, you're going to see a better MLR. And so there's a lot of embedded value in the ex-California states, but we feel very pleased with how they're performing right now year-to-date. And so I guess you'll see some of that in the filings, but we generally don't operationally focus on those statutory filings as a proxy for our business. We run our business differently. But I know investors have been focused on it. And we just feel like we're tracking to our expectations across both of those arenas.

Our next question comes from the line of Jessica Tassan with Piper Sandler.

So in terms of your long-term MBR, I think in your '25 JPMorgan deck, you all implied 93% year 1 and 82.1% year 5 MBR. That was based on 2024. Is that framework still valid after 3 years of V28? Or should we assume some degradation? And then just in light of the MBR opportunity on tenured members, should we kind of expect stable benefits in existing markets and existing products in '27? John, you mentioned 2 to 3 competitors could be more aggressive next year. So just interested if you could talk about how alignment is positioning for that change or for that expected change.