Privia Health Group - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered double‑digit growth and margin expansion: revenue $480.1M (+15.6% y/y), adjusted EBITDA $26.9M (+35.1% y/y), adjusted EPS $0.22, driven by strong ambulatory utilization, same‑store growth, and provider additions.
• Guidance raised to the mid‑to‑high end for all FY’25 ranges (GAAP revenue, care margin, platform contribution, adjusted EBITDA), with attributed lives unchanged; tax rate 26–28%, ≥80% EBITDA→FCF conversion, de minimis capex.
• Strategic entry into Arizona via IMS ($95M cash); ~70 providers, 21 locations, ~28k attributed lives; revenue recognized immediately, care margin/EBITDA begin post implementation in Q4 2025; market expected EBITDA‑positive in Q4 and meaningful contribution in 2026.
• Management emphasized cautious stance on MA downside risk (V28/star score/utilization headwinds), prioritizing shared‑risk contracts and diversified value‑based programs; operating leverage and cash balance ($469M, no debt) support disciplined BD pipeline.

What Went Well and What Went Wrong

What Went Well

• Adjusted EBITDA rose 35.1% y/y to $26.9M with margin expansion to 25.6% of care margin (+460 bps y/y), reflecting operating leverage in cost of platform and G&A.
• Strong practice collections $798.6M (+12.8% y/y), implemented providers +11.7% y/y to 4,871, attributed lives +11.1% y/y to 1.27M, underscoring broad‑based growth.
• Quote: “Adjusted EBITDA increased 35.1%… while we continue to invest in growth and expansion. This highlights the scale and strength of our business model.” — CEO Parth Mehrotra.

What Went Wrong

• Operating cash flow negative in Q1 (−$24.1M) due to typical early‑year outflows (bonuses, provider payments) and working capital timing; accounts receivable increased ($72.5M).
• Capitation claim liabilities rose to $86.4M (from $66.4M at year‑end), reflecting higher incurred costs; management remains cautious on full capitation amid V28/star/utilization headwinds.
• GAAP diluted EPS remained $0.03 given non‑cash stock‑based comp ($17.8M) and “other expenses”; reliance on non‑GAAP adj. EPS to reflect underlying performance.

Transcript

Operator (participant)

Thank you for standing by. My name is Dee, and I will be your conference operator. At this time, I would like to welcome everyone to the Privia Health First Quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would like to turn the call over to Robert Borchert, Senior Vice President of Investor and Corporate Communications. Please go ahead, sir.

Robert Borchert (SVP of Investor and Corporate Communications)

Thank you, Dee. Good morning, everyone. Joining me are Parth Mehrotra, our Chief Executive Officer, and David Mountcastle, our Chief Financial Officer. This call is being webcast and will be accessed through the Investor Relations section of priviahealth.com, along with today's financial press release and slide presentation. Following our prepared comments, we'll open the line for questions. 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 today. The financial results reported today are preliminary and are not final until our Form 10-Q for the first quarter ended March 31, 2025, is filed with the Securities and Exchange Commission. Some statements we will make today are forward-looking in nature based on our current expectations and view of our business as of May 8, 2025.

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, and 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 hand the call over to our CEO, Parth Mehrotra.

Parth Mehrotra (CEO)

Thank you, Robert, and good morning, everyone. Privia Health started 2025 with strong growth and momentum as we continue to execute very well across all aspects of our business. This morning, I'll cover our first quarter performance and recent business highlights. Then David will discuss our market presence, financial results, and our 2025 guidance update before we take your questions. Privia's growth team has continued to deliver strong new provider signings across all of our markets, which underpins our visibility through 2025. Implemented provider growth of 11.7% and value-based attribution growth of 11.1% year-over-year helped drive total practice collections growth of 12.8%. Adjusted EBITDA increased 35.1%, with EBITDA margin expanding 460 basis points year-over-year while we continue to invest in growth and expansion. This highlights the scale and strength of our business model.

In early April, we announced our entry into the state of Arizona as we pursue disciplined growth to complement our organic sales engine. Following this outstanding overall performance in the first quarter, we are raising our 2025 outlook to the mid to high end of our initial guidance. Attributed Lives guidance remains unchanged. This guidance raised early in the year is being driven by our excellent operating execution and continued exceptional performance by all of our provider partners in the current healthcare services environment. We announced our partnership in early April with IMS as our anchor practice to enter the state of Arizona. IMS is one of the largest independent multi-specialty practices in Arizona with approximately 70 providers. This is a very strategic market entry for Privia as the demographics of Arizona offer a compelling value-based care opportunity.

IMS has more than 28,000 value-based care attributed lives across commercial, Medicare, and Medicaid programs. The transaction value was $95 million at closing. Privia Health owns Medical Group Entity and the Management Services Organization in Arizona. IMS remains physician-owned and will operate with significant clinical autonomy. We expect the Arizona market to be EBITDA positive in the fourth quarter this year following IMS's implementation on the Privia platform. We also expect it to meaningfully contribute to adjusted EBITDA in 2026, giving us confidence in our ability to continue to target 20% EBITDA growth. We look forward to building on the IMS culture of delivering high-quality community care as we continue to align with like-minded providers across the United States. Now I'll ask David to review our market position, recent financial results, balance sheet, and discuss our 2025 guidance outlook in more detail.

David Mountcastle (EVP and CFO)

Thank you, Parth. With the addition of Arizona, Privia Health now operates across 15 states and the District of Columbia. Our footprint of high-quality community-based medical groups and risk entities comprises 4,871 implemented providers caring for over 5.2 million patients in more than 1,200 care center locations. Privia now serves 1.27 million attributed lives across more than 100 commercial and government value-based care programs. This breadth and geographic reach positions us as a highly diversified and balanced value-based care organization. Total attributed lives at March 31 increased 11.1% from a year ago. This was driven by new provider growth as well as new value-based care contracts in certain programs. Commercial attributed lives increased 13.6% from last year to reach 779,000. Lives attributed to the Medicare Shared Savings Program were up almost 5%. Medicare Advantage and Medicaid attribution increased more than 8% and 11% respectively from a year ago.

The diversification of Privia's value-based care contracts gives us confidence in our ability to build scale and profitability across the business despite challenges in any one particular program or contract. We remain highly focused on generating positive contribution margin in our value-based care contracts as we pursue attribution growth, manage risk, and implement clinical and operational enhancements in our partner practices. We continue to evaluate moving to greater downside risk when we believe contract economics appropriately compensate our physician partners for the level of risk incurred. Ultimately, our goal is to achieve consistent and sustainable earnings growth for our medical groups and shareholders. Privia Health executed very well to start 2025 with strong growth and momentum across all our markets. Implemented providers grew 82 sequentially from Q4 to reach 4,871 at March 31st, an increase of 11.7% year-over-year.

The growth in implemented providers, along with strong ambulatory utilization trends and value-based performance, led to practice collections increasing 12.8% from Q1 a year ago to reach $798.6 million. Adjusted EBITDA, which has reconciled to GAAP net income in the appendix, increased 35.1% over first quarter last year to reach $26.9 million, representing 25.6% of care margin. This is a 460 basis point improvement from a year ago as we generated operating leverage across both cost of platform and G&A while investing across all markets. We ended the first quarter of 2025 with $469 million in cash and no debt, following typical quarterly cash outflows early in the year related to employee bonuses and value-based care payments to providers. This does not reflect the $95 million deployed in April for the Arizona acquisition.

Our healthy balance sheet continues to position us with significant financial flexibility to deploy capital for business development and take advantage of opportunities in the current market environment. We are raising our full-year 2025 guidance to the mid to high end of the initial ranges due to the strength of our first quarter performance and visibility throughout the remainder of the year. Guidance for attributed lives remains unchanged. We are maintaining a robust pipeline of existing market expansion and potential new market opportunities. However, our 2025 guidance does not assume any additional business development activity beyond Arizona. Capital expenditures are expected to be de minimis again this year as part of our capital light operating model. We continue to expect at least 80% of our full-year adjusted EBITDA to convert to free cash flow.

Privia has delivered consistent growth and profitability across economic, healthcare, and regulatory cycles over the past seven years. The power of our business model and consistent execution is evident in how we have compounded all key metrics over time. Our 2025 guidance demonstrates our expectation for another year of strong EBITDA growth and free cash flow conversion. We look forward to continuing to serve our physicians, providers, and health system partners, and in turn creating value for our shareholders as Privia Health builds large-scale primary care-centric delivery networks across the nation. Operator, we are now ready to take questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your questions, simply press star one again. If you are called upon to ask your question or are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when you ask a question. Our first question comes from the line of Singh Jaliendhra. Please go ahead.

Jailendra Singh (Senior Equity Research Analyst)

Yeah, this is Jailendra Singh from Truist. Congratulations on the strong quarter and, of course, on the Arizona market entry. Can you take some time to talk about the IMS transition and prospects you've seen in that market? What differentiated this ask from ones you have done in the past? How much practice collection and EBITDA benefit are you including in your guidance right now? Thank you.

Parth Mehrotra (CEO)

Yeah, thanks for the question, Jalandra. Look, IMS, as we said, Arizona is a pretty important healthcare state. Big TAM, good demographic trends. IMS has been operating for many years and came out of a health system a few years ago and established itself as an independent practice. A lot of cultural alignment with what we are trying to do. Very large practice, good size, many locations, really well-established patient panels. Overall, really good partner to have and pursue the Privia mission in that state. Pretty important transaction relative to the value, pretty significant EBITDA contribution. Given the nature of the deal, we're not disclosing specifics on the deal or specific EBITDA contributions specifically allocated to Arizona or to IMS. It's all embedded in our guidance.

As we've noted in our prepared remarks, this will be EBITDA positive from the first day that they're implemented, pretty significant contribution next year, and that gives us a lot of confidence to keep growing EBITDA 20% into next year.

Jailendra Singh (Senior Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from the line of Josh Raskin from Nephron Research. Please go ahead.

Josh Raskin (Research Analyst)

Hi, thanks. I'm going to follow up on Arizona as well. I guess I'm specifically interested in sort of that PCP versus specialist mix that IMS has, maybe relative to your existing provider base. Anything we should be thinking in terms of differences in collections per physician and maybe how IMS is positioned with the larger payers in the market. Finally, did that strong value-based care opportunity that you guys talk about, did that make the transaction more attractive, less attractive? How are you thinking about that in the context of the broader Privia?

Parth Mehrotra (CEO)

Yeah, thanks for the question, Josh. So they're a multi-specialty practice. You can go on their website and they've listed every single specialty and provider, so it's all public info. Slightly more skewed towards specialist versus primary care, but pretty healthy mix. You see, we disclosed the attributed lives of 28,000, so that's all attributed to the PCPs. Again, it's very similar to some of our other states. It's not skewed one way or the other in one direction. It's a multi-specialty practice covering all specialties. Slightly higher practice collections per provider, as you would expect from that perspective. I think from an opportunity perspective, there's a day-one opportunity with the group with 28,000 lives. More importantly, I think Arizona is a pretty important state as far as MA is concerned, the demographic trends are concerned, the availability of independent providers.

I think we can have a pretty good presence over the next 4, 5, 10 years. That's always our playbook. As we enter these states, it's not a one-two-year play. We're looking to establish a pretty large medical group over time. I think the TAM opportunity is there for us to go get in Arizona, so we're pretty excited about that.

Thanks.

Operator (participant)

Our next question comes from the line of Richard Gross with Canaccord. Please go ahead.

Richard Gross (CEO and Founder)

Yes, congratulations. Thanks for the questions. When you guys are calling out strong ambulatory utilization, can you provide some perspective in terms of how it came in versus maybe what was baked into your guidance and your thoughts on utilization throughout the rest of the year and maybe how that factored into the updated commentary on guidance?

Parth Mehrotra (CEO)

Yeah, thanks for the question, Richard. I think it's been pretty strong. The flu season varies every year. We have a pretty significant portion of our providers as pediatricians, as PCPs, as family medicine, as you know. Given which months the flu season hits in that, call it November through March timeframe or April timeframe, some years it's earlier, some years it's later. We kind of normalize for that in our guidance over the years. We've expected and experienced pretty strong trends continue, and that's reflected in practice collections. I think we're going to continue to see those trends going forward. I mean, we've said that pretty consistently. Utilization continues to be at this elevated level, and I think that bodes well for our fee-for-service business. It's also great for the value-based business because we are seeing the patients much more frequently.

Our guidance fully reflects those trends continuing.

Operator (participant)

Thank you. Our next question comes from the line of Matthew Gillmor with KeyBanc. Please go ahead.

Matthew Gillmor (Director and Equity Research Analyst)

Hey, thanks for the question. I just wanted to ask a clarification on IMS in the guide. Are you absorbing any new market entry costs as it relates to Arizona within the guide? Also, can you just remind us in terms of how the accounting works? Do you recognize any revenue prior to them being implemented on the Privia platform? Thanks.

Parth Mehrotra (CEO)

Yeah, thanks for the question, Matt. I'll start, and then David will take the accounting question. We always have new market entry costs because, as you know, the model, we enter a state and we establish our sales team, implementation teams, our operations to go get other providers in the state to join our platform in addition to the anchor practice. Our guidance assumes absorbing those costs starting this year and then going into next year. Obviously, that highlights the merits of this transaction that despite absorbing those costs, we expect the transaction to be positive EBITDA this year upon implementation and pretty significantly next year. That was really attractive to us. I'll let David handle the accounting question.

David Mountcastle (EVP and CFO)

Yeah. So from an accounting perspective, because we acquired the medical group, as soon as we acquire the medical group, we get revenue and practice collections from that entity. However, the deal works where we do not get care margin and adjusted EBITDA until we implement them on the Athena platform, which we expect to happen in Q4 this year.

Operator (participant)

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

Jessica Tassan (Senior Research Analyst)

Hi, guys. Thanks so much for taking the question and congrats on Arizona and the strong quarter. I was hoping maybe you could talk a little bit about the growth in capitated lives quarter over quarter with the growth, just population growth within existing contracts, and then any perspective on Medicare Advantage in 2026, just whether you're interested in expanding with new health plans or expanding the scope of your MA capitated contracts. Any color on just how you're thinking about 2026 in light of the rate announcement? Thanks.

Parth Mehrotra (CEO)

Yeah, thanks for the question, Jess. Yeah, the growth was pretty much organic in the CAP book, either in the same existing contracts, so existing providers participating, seeing a few more patients and expanding the panels, and then some new providers joining the same contracts in those geographies and patients coming with those new providers. It was a few thousand lives, and that's our objective once we enter these contracts. We want to improve performance. We want to add attributed lives and continue to expand that book of business if we think we're going to do well. On your second question, our view on MA remains pretty much the same as we discussed at length on the last earnings call.

I think we are in this three, four-year period, which is going to be pretty challenging for MA for all the factors that you all know pretty well and we've articulated in the past calls. We will continue to pursue our strategy of sharing risk with the payers in MA contracts. We would look to grow our book, grow our attributed lives in MA. I would not expect us to get into full CAP or 100% risk deals. Our preference is to continue to enter into shared risk arrangements with the payers just given the environment. We actually think that's the best long-term sustainable model. If we are able to underwrite any deals where we think we're going to get significantly compensated for the level of risk in a full CAP kind of contract, we look to add those.

At this moment, you should not expect us to enter fresh, new, fully 100% capitated contracts. We'll continue to grow the book with both existing payers and look for new payers in existing or new states in growing that MA book.

Operator (participant)

Our next question comes from the line of Alberta Massillon with Learning Partners. Please go ahead.

Alberta Massey (Equity Research Associate)

Hi, this is Alberta Massey for WITT. Thanks for taking the question. We're about halfway through V28 now. Are there any surprises with the implementation versus expectations in MSSP? Would be curious to hear about any changes in practice care management strategies. Thanks.

Parth Mehrotra (CEO)

Yeah, thanks for the question, Alberta. V28 doesn't impact MSSP as much per se. It's mainly related to MA. I mean, the average risk score in MSSP is around one, and risk scoring, while it plays some role, it's not a big factor in our performance. As far as the MA book is concerned, it's playing out as we expected. We took a very conservative view since the beginning of last year when we exited two capitation contracts. We think it's a pretty significant headwind to the industry, to the MA business, both for the payers and then providers downstream. It's playing out as we expected. You've seen pressures on different payers at different points of time, either last year or this year. You've seen pressures on the provider group. I think we continue to be pretty cautious and see how it plays out.

Fundamentally, we've got to get paid to take additional risk in MA, and we'll keep looking for those opportunities, as we just said.

Operator (participant)

Our next question comes from the line with AJ Rice with UBS. Please go ahead.

AJ Rice (Managing Director)

Hi, everybody. Maybe just broaden out the discussion. There has been some speculation, some of the trade press, that the Trump administration might look at some changes to the MSSP program. I think we're largely supportive in the first term. Have you heard anything along those lines and maybe more broadly with all the discussions about Medicaid changes? I know that's about a fifth of your government lives, but it sounds like you've only got upside arrangements. Any thoughts about any of that and whether it will present opportunities and maybe just last on the government stuff? They haven't been able to get the doc fix legislation this year. Does that have any impact on you? I assume some of your providers are impacted by that, but any comment on that?

Parth Mehrotra (CEO)

Yeah, thanks for the question, AJ. So I'll take them in order. We haven't heard anything new since last quarter. I think we covered it pretty extensively. MSSP continues to be a pretty well-established program, one of the most well-established programs out of CMS. I think they understand it. The folks in the administration understand it. We continue to expect it to stay at the level that it is today. If we hear anything differently, they'll make an announcement, and obviously, we'll comment on it. We haven't heard anything new on any potential changes to MSSP. To your second question, I mean, it's all fully baked in our guidance. On the Medicaid side, we don't take any risk, as you mentioned. It's about 100,000 lives. It's upside only. We get some care management fees. We're trying to manage those lives without taking risk.

It's not a big part of our fee-for-service business. I think what's important to recognize is we have an ambulatory care delivery network with community-based providers. That's the front line of healthcare with some of these Medicaid patients, doctors in the communities taking care of children, mothers, family members. I think that's a pretty important aspect of the level of care in that population. We don't expect that we'll be impacted that significantly from cuts. If anything, folks will likely, hopefully, seek that level of frontline care versus some of the more acute care that could be impacted downstream from potential cuts. Again, we'll see how it plays out. On your last question, yeah, I mean, there may be some impact, but again, we have a pretty big diversified book.

It's all factored in our guidance, and nothing material to call out on that particular legislation.

Operator (participant)

Our next question comes from the line of Thomas Walsh with Barclays. Please go ahead.

Thomas Walsh (Equity Research Associate)

Hi, this is Thomas Walsh for Andrew. Hoping you could comment on if you've seen any behavioral change in patients using their coverage this year, whether that's induced by premium increases or changes in patient cost responsibility.

Parth Mehrotra (CEO)

No, nothing out of the ordinary that's worth calling out. Again, we have a pretty diversified book, five-plus million patients. So we haven't seen any fundamentally different levels of activity.

Operator (participant)

Our next question comes from the line of Ryan Langston with TD Cowen. Please go ahead.

Ryan Langston (Director and Senior Analyst)

Hey, thanks. Just go back to the guidance. Obviously, updated at this quarter. Last couple of years in the first quarter, you simply just reiterated the guide. Most other companies this quarter maintain guide as well. It sounds like you're a little bit more confident than some of your peers based on your prepared comments. Is this mostly just the IMS pickup in the guide, or is it really just what you're seeing in the underlying business performance driving that guidance?

Parth Mehrotra (CEO)

Yeah, I appreciate the question. I think it's a combination of both. I mean, Q1, there was no IMS impact, and you're seeing the outperformance across the board on all our metrics all the way down to EBITDA. That has no impact from Arizona. As we noted in our prepared remarks, all that impact starts in Q4, at least care margin downwards on our P&L. I think it's a combination of both. We saw pretty good results this quarter. You're right. It's still early in the year, but given the strong performance, given the impact of the transaction, we feel pretty confident for the rest of the year. We'll see how the year plays out and then update guidance further. At this point, we felt pretty comfortable going in given the strong start to the year.

Operator (participant)

Our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Elizabeth Anderson (Senior Managing Director)

Hi, guys. Thanks for the question. A slight two-parter for me. One, not to beat a dead horse, but so the attributed lives for IMS come in in which quarter? I just want to make sure I have that down correctly. And then two, you had a nice, obviously, organic improvement in G&A in the quarter. Should we just think of that as continuing to sort of be smoothly across the year or anything sort of one-time you need to call out that would impact the cadence of the rest of the year? Thanks.

Parth Mehrotra (CEO)

Yeah, thanks, Elizabeth. The attributed lives will flow through in the following quarter. That is not yet reflected in the March 31st number for IMS. That is why you are seeing while we have kept that piece of the guidance unchanged, we are still below the low end of the guidance, which is very typical for Q1 where some of the lives or some of the employers change their carriers on the commercial book. MA members change plans. If you look at past years, it is very typical for us to have that churn. The patient's not going anywhere. The doctor's not going anywhere, but it is just a movement of different health plans. We will pick up all that attribution going forward. Sorry, could you repeat your second question again?

Robert Borchert (SVP of Investor and Corporate Communications)

It was a G&A question.

David Mountcastle (EVP and CFO)

Yeah, I think the second question was around G&A, and I'll take that, Bart. From a G&A perspective, we saw a sequential decline in G&A from the fourth quarter, mainly attributed to what we accrued for bonuses and our contractor expenses. Early on in the year, we pretty much just stay pretty consistent on bonus accruals and do not look to increase that until we get further on in the year. It is just those two things. Yeah, I think you were asking about throughout the rest of the year, I would say follow similar trends to previous years is what we are expecting.

Operator (participant)

Our next question comes from the line of Constantine Davides with Citizens JMP. Please go ahead.

Constantine Davides (Managing Director)

Thanks. Parth, just following up on Arizona, what made them move to partner with you in this type of transaction, and what was important to them with respect to what Privia checked the boxes on, maybe relative to some other platforms or options they may have evaluated? Just given their higher sort of mix of value-based lives relative to the number of PCPs they have, are they moving away from a prior enablement partner? Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Constantine. I think it's a pretty important question that highlights the strength of our platform. Any practice that size, as we've stated in previous calls, has been approached by everybody you can imagine: health systems, private equity, bigger payers, other consolidators, so on and so forth, other enablement companies. I think what was key to them partnering with us is, number one, we just have a unique model that can cater to the entirety of the practice: all specialties, every single patient, every single line of business, every payer, comprehensive tech services platform. That coupled with an ability to maintain clinical autonomy in a model like Privia where you're not getting employed by another entity from your compensation perspective. You're able to make the decisions in day-to-day working at the clinic and how you practice medicine.

I think that was immensely important to the physician leadership there. They came out of a health system, and so obviously, the group is fiercely independent and believes in autonomy of private practice, which leads us to having a pretty strong cultural alignment. I think we can have a great business in Arizona with their help and grow that business, grow their clinics as well as grow around them. I think it is a combination of all of those. They did partner with other enablement companies, and I think we'll just evaluate those contracts over time. We fully own the medical group, risk entity, MSO entities. We will just evaluate how we move some of those contracts over time.

That, again, highlights the importance where even though some of these practices can partner with other entities, once we come in with a comprehensive solution, that overweighs any prior decision. We'll just see how those play out and what the contractual terms are and how they're performing and take it from there.

Operator (participant)

Our next question comes from the line of Jack Slevin with Jefferies. Please go ahead.

Jack Slevin (VP of Equity Research Analyst)

Hey, thanks for taking the question and congrats on a really strong quarter. Two-parter. One, just to clear this out. IMS, are they participants in MSSP or ACO REACH currently? When you say that they've got other enablement agreements presently, is that what you're referring to? The second one, really just thinking more about how we look at fee-for-service utilization in 2025. The United callout was that AWV ran really, really hot. I would think you would benefit from similar trends in the first quarter, but I'm just trying to get a sense of sort of what you've seen year to date in terms of PCP or primary care provider utilization versus specialist in your book.

Is there an expectation that that sort of front-running of AWV might bring some upside throughout the year as you sort of trend downwards towards or downstream towards the rest of the specialists in the ecosystem? Thanks.

Parth Mehrotra (CEO)

Yeah. On the first question, the short answer is yes. They do participate in MSSP/ACO REACH or one of those programs. We're not going to comment on which one and how many lives, but they do participate currently, and so we'll inherit that book. On the second one, yeah, I think as we said previously, I won't categorize it just AWVs per se, but we've experienced pretty strong ambulatory utilization at our PCPs, pediatricians, OB-GYNs, even some of the specialists. We've seen in-office community-based physician utilization to be pretty strong. That's reflected in our practice collections. We don't see any reason to believe that that would not continue for the rest of this year. We'll just see how it plays out. That's reflected in our guidance. We'll update that as we go forward.

Operator (participant)

Our next question comes from the line of Jeff Garro with Stephens. Please go ahead.

Jeff Garro (Managing Director of Healthcare IT Equity Research)

Yeah, good morning. Thanks for taking my question. I want to go back to the fall of 2023. You had announced an AI partnership that targeted physician productivity. I was hoping for an update on how adoption has been of that solution by your providers and what kind of productivity gains you've realized. Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question. The utilization has been great. I mean, we've adopted that pretty significantly across our provider base. We continue to innovate with the partner, Novena, and we think it's a great solution that streamlines clinical documentation, prevents errors, highlights care gaps at the point of care to the PCP right when they're seeing the patient. I think it's another way where we are continuously evaluating where AI and other tools can improve the workflow, reduce the time that is spent. We have a case study out that I think is public on our website, so we can send it to you after the call that highlights all the stats on this particular partnership. I think they also showcased that at HIMSS recently. Overall, pretty happy, and we'll continue to improve this in other areas with the adoption of AI.

Operator (participant)

Our next question comes from the line with Ryan Daniels with William Blair. Please go ahead.

Ryan Daniels (Group Head of Healthcare Technology and Services)

Yeah, thanks for taking the question, guys. I guess most of the big ones have been answered. I want to do a follow-up there and just ask, are there any other big IT initiatives or clinical initiatives that Privia is looking at for the next 6 to 12 months? We've heard a lot on AI, but also more on specialty referrals and things like healthcare. So curious kind of what's on the agenda for the team. Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Ryan. As you know, we have a very comprehensive full tech service platform across all lines of business, both fee-for-service, rev cycle, value-based care. We are continuously looking to improve. The value-based care is a big, big area, obviously, both on improving the clinical workflow, decision-making, how the data comes in from different payers, different contracts. We have 100-plus value-based contracts. To take risk, you want to make sure you're getting real-time data as much as possible or with minimal lag. We have a lot of visibility into it. There is a lot of effort just to keep improving those. I think we've had our good performance is reflective of the stack we have currently that you need to have in place, but there is always scope for improvement. That is a big area for us to focus.

On the regular workflow, as a patient comes in and through their life cycle with the doctor during the year or over many years, I think we've continuously looked at different solutions that are getting improved now, whether it's on scribing, on RCM workflows, on just improving, again, accuracy, timelines, speed. We have a bunch of things that are in the works that get implemented on the platform on a continuous basis with our clinical IT committee, which is chaired by a lot of the providers that we practice with. I think the interesting thing is we eat our own cooking. We are the medical group and the service provider all in one. There is a very good feedback loop. I think that's the strength of our platform where we can implement things that can be really used by our providers if they want.

Operator (participant)

Our next question comes from the line of David Larsen with BTIG. Please go ahead.

David Larsen (Managing Director of Healthcare IT and Digital Health Analyst)

Hey, congratulations on the good quarter. Parth, I always like how you're very careful around which risk contracts you get into. I did see capitated revenue increase pretty significantly sequentially. I think your medical loss ratio contracted by about 150 basis points sequentially. Can you maybe just talk about the growth in cap revenue? I think you said it's organic. How much visibility do you have into those physicians and those members? Are these groups that have been on your platform for a couple of years, so you're very comfortable with them bearing risk with those new members? Any thoughts on the cap? EBITDA would be very helpful. Some of your peers have had some pressures on the side of the thing, side of the house, which is why I'm asking. Thanks a lot.

Parth Mehrotra (CEO)

Yeah, I appreciate the question. So yes, we did see some. I think this question asked before. We saw a few thousand lives increase in the cap book, pretty much all organic, either existing doctors seeing more patients or a few more doctors joining with new panels in that contract. So that's reflected in the cap book. I mean, you can see from the disclosure in the press release, it's still early days in the year, and it's not like we're making many significant EBITDA yet. Our hope is that, I mean, it's still positive contribution pretty slightly. As the year progresses, our expectation is we'll continue to hopefully do well, and this will be positive margin. Otherwise, there's no point doing capitation to lose money. I think that's going to be our strategy. We've articulated it pretty carefully.

We want to take risk when we're getting paid to take risk, especially in this environment with all the pressures in MA. I think we'll continue to do that. Otherwise, we're just happy to have a pathway to risk, 50/50 risk sharing with the payers, and keep expanding our MA book from that perspective. I think the growth was in that one particular contract that we have pretty much organically.

Operator (participant)

Our next question comes from the line of Matt Shea with Needham. Please go ahead.

Matt Shea (Analyst)

Hey, good morning. Thanks for taking the question and congrats on the Arizona expansion. In the past, you've commented on new markets requiring $2 million-$3 million in investment, and you tend to break even on that in 18 months. With Arizona break even expected in the fourth quarter, it appears you guys are ahead of schedule. Curious what the dynamic is there. Are you starting to break even faster in new markets or just requiring less initial investment? Maybe something specific about IMS or Arizona, any color there would be helpful.

Parth Mehrotra (CEO)

Yeah, I appreciate the question. I think Matt Gillmor asked the same one or similar question earlier. We will have new market entry costs. I think this transaction is unique in that it comes with pretty significant EBITDA contribution, which offsets some of that cost this year into next year. While we'll continue to spend that, again, every anchor transaction that we do is different in nature, size of the practice, nature of our relationship, management fees, so on and so forth. I think that's reflected in the purchase price, which we've disclosed. I think, again, future markets may or may not look like this. We've entered all kinds of markets in our past.

If you look at that slide 11 and see all the different markets that we've entered each of the years, some may not come with a pretty significant practice or significant EBITDA contribution. In fact, we burned some cash in the first few years given the new market entry costs. The market turns profitable. In other cases, the market comes with a pretty significant book of business that can be EBITDA positive. I think it just depends on the nature of the transaction, which market. There are no other new markets in our guidance for this year other than Arizona. If we end up deploying more capital and enter any new states, we'll update guidance accordingly. Like we've said previously, if you're putting significant capital to work, we're going to be pretty disciplined and make sure we're focused on EBITDA and free cash flow.

I think we'll just continue to do that the way we've done and keep compounding EBITDA here.

Operator (participant)

Our next question comes from the line of Jamie Perse with Goldman Sachs. Please go ahead.

Jamie Perse (Equity Research Analyst)

Hey, thanks. Good morning. A question on operating leverage you showed here in the first quarter. Cost of platform has been up mid-teens the last two years. I think that reflects some of the infrastructure build-out you've done in new markets that you've entered over that period. Here in the first quarter, cost of platform was up 10% versus 13% practice collections growth. You're getting operating leverage there. The broad question is just how to think about cost of platform investments in 2025. More specifically, are some of these new markets you've entered over the last couple of years now at a point where the infrastructure is in place and as you grow, you'll see a lot of operating leverage there?

Parth Mehrotra (CEO)

Yeah, it's a great question, Jamie. Appreciate you asking it. I think it's more to go back to slide 11. And if you see our EBITDA margin as a percentage of care margin, we've just grown that significantly over the past four, five, six years despite entering some of the new markets. Some years we get some leverage, some years we're investing. You saw that 2022 to 2023, it was pretty flattish EBITDA as a percentage of care margin. You see the operating leverage in the subsequent years. I think our long-term margins that we've guided to previously is around 30%-35%. We are sitting at very close to 25% with our guidance. We were over 25% in this quarter. If you look at our midpoint of our guidance, it's kind of at 24.6%. We are pretty significantly there.

This is fully expensing all of G&A, public company costs, full sales and marketing, all of our technology development. As you know, we do not capitalize much at all. I think you are seeing the strength of the business model that as we have scaled and grown our medical groups, gotten some of these markets to even come out of that initial one- or two-year initial ramp-up phase, we start to see operating leverage all the way down to EBITDA and then conversion, 80+% conversion to free cash flow. I think we continue to be pretty excited in how we have delivered this. Our guidance reflects for the rest of the year what we expect. If we perform better at the high end, it could be better than what we have. We will just see how the year plays out.

I think it's also important to understand we're delivering this despite pretty significant headwinds in the value-based space. I mean, as you know, our management fee structure is pretty significantly skewed towards moving lives into risk arrangements of all shapes and sizes. That's where we earn 40% of the shared savings. Despite having a period where value-based care shared savings is flat year over year, we're still delivering on operating leverage. I think we feel really good about the progress of the business, progress of the cost structure. As we add more lives, more providers, I think the existing infrastructure scales really well. I mean, once we get to close to 30%, I think you'll see some stability. Our endeavor is to continue to keep expanding that EBITDA margin over time.

Operator (participant)

Our next question comes from the line of Danielle Grosslight with Citi. Please go ahead.

Danielle Grosslight (Senior Research Analyst of Healthcare Technology)

Hi, thanks for taking the question. Congrats on the strong start to the year. I'm just curious how your conversations with providers have changed, if at all, this year. Are they more or less receptive to joining the Privia platform, particularly as it relates to potentially moving into some of these value-based care arrangements? Parth, you mentioned that at least in IMS, they had been approached by everyone under the sun just given their size. I'm curious with other smaller providers, is it a similar dynamic where most folks now have been approached by someone to do something like what Privia is doing? Or are you still really kind of chatting with folks where this is more new to them? Thanks.

Parth Mehrotra (CEO)

Yeah, I appreciate the question, Danielle. I think it's a pretty important question. I think the comprehensiveness of our platform across all specialties, all lines of business, all payers, joining a medical group versus just partnering with a company on one particular risk contract, I think it's very attractive to a lot of small providers. They've been approached by someone or the other. It is very rare that even a small practice is just totally independent and did everything themselves and has never spoken to anybody in either the physician enablement space or some hospital or private equity or whatever have you, depending on their size. Our sales team is performing really well as we said in our prepared remarks. Last two, three years, we've seen a lot of great momentum. I think we are one of the survivors in this industry given all the shakeout that's happening.

I think we are operating from a position of strength. The results are there for everybody to see. I think our performance speaks for itself. Ultimately, our existing physician base is our best sales team. As we enter a state, the flywheel just snowballs and runs where existing practices that have been live for two, three, four, five years act as a great referral to new practices. Doctors speak with doctors, as you know. I think even in some of our mature markets, we are seeing where a lot of the top of the funnel activity is referrals from our existing providers. That comes with a very high conversion rate.

I think the fact that we have really performed well in this model, this model works, physicians are able to stay independent, autonomous, and yet be part of something bigger, I think it really resonates for the totality of the practice. We're not going in doing anything artificial, giving them money, protecting downside risk, giving them equity. All those things run their course over some period of time. I think from a sustainability perspective, this is the right long-term partnership model that we think. Obviously, I'm biased, but I think all those things over time just help you continue to grow this business. I think we're seeing some of that across all our states.

Operator (participant)

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

Michael Ha (Senior Research Analyst)

Thank you. Just quickly first, I'm not sure if you'll comment on this, but how many of the 28,000 IMS lives are forced capitation? Then in terms of earning seasonality for this year, just given how first quarter was quite meaningful outperformance and historically looks like one Q is generally softer in terms of full-year earnings contribution, curious if we should be how we should think about the remainder of the year. Do we expect anything different versus historical? Any difference from these new Arizona costs? And last question.

With some of your larger value-based care for risk providers in the market facing some pretty meaningful issues this year, when you see all this, plus you're consistently scanning the country for profitable capitated providers, we'd love to hear if you've seen anything noticeable in terms of maybe 2028 impacted Chad, maybe more specifically in your view, if you think the cohort economics over the past five years for these provider models might now be structurally impaired. Thank you.

Parth Mehrotra (CEO)

Yeah, thanks for the question, Michael. Three in one, I'll try and take them in order. On IMS, yeah, we don't usually disclose, but none of the lives are capitated. That's a short answer of the 28,000. On the second one, again, it's early in the year. You shouldn't expect anything different from a seasonality perspective. We've entered the year pretty strong. We'll update guidance as the quarters go by. We don't expect any anomaly this year versus previous years from a quarterly cadence perspective on how the P&L should run its course. We'll see again, the biggest variable, as you know, is the value-based book. As we get more data, we'll update our accruals and see how it all plays out. We feel pretty comfortable updating our guidance the way we did.

On the third one, I think that's a pretty interesting question. I think there have been a lot of models, public and private, that try to get these providers in some way, shape, or form in contracts of certain tenure. They haven't performed, as it's pretty obvious, in full risk. I think over time, the providers, these provider practices will make the decision on whether to stick with their existing partner or look for a switch. We've again said we're not out there hunting for capitated lives. I mean, that's just the nature of a financial contract between the payer and an entity like us. I think it's important to do value-based care and MA risk thoughtfully in a manner where all three entities, the payer, an enablement company like Privia, and the doctor or the physician group, all have skin in the game. It's long-term sustainable.

You're not doing anything artificial just for the sake of doing capitation. People are getting paid to take their risk and paid to do the piece of job that they're supposed to do. I think a lot of these companies entered into some contracts that didn't validate that thesis. Financially now, some of these contracts or structures might be impaired, just unsustainable from a payer enablement company perspective or unsustainable from the relationship that they have with the provider group that they signed in terms of economic sharing, overall opportunity to earn shared savings, so on and so forth, as all these impacts happen on the MA book from V28 and star scores utilization, so on and so forth. I think all that should bode well for us. I think we'll continue to see some disruption.

We've said previously, we look to take advantage of that and get these groups in hopefully, which is a model that is much more sustainable like ours, so organically and then also inorganically.

Operator (participant)

The last question comes from the line of Joanna Gajuk with Bank of America. Please go ahead.

Joanna Gajuk (Equity Research Analyst)

Hey, good morning. Thanks for squeezing me in. Actually, I want to ask about the M&A pipeline. With all the cash that you have now on the balance sheet, would you look to do more deals immediately or is it more likely first to kind of digest the Arizona before you move on? Also, what I'm getting at is just curious because somewhat related to the prior question around, are there a lot of interests from practices, right? Is there activity there in terms of deals just floating around? The other part of the question is around valuations. How should we think about what you typically pay in terms of multiples for deals of that size? Thank you.

Parth Mehrotra (CEO)

Yeah, thanks for the question, Joanna. The pipeline remains really strong. Again, you can see slide 11, we've entered one, two, or more states every year pretty consistently. Some years it's more states, some years it's less. It just depends on when we do the deal. We are still in 15 states, 35 to go. Our view is we'll keep looking for opportunities to enter different states, also increase density in existing states. We've done all kinds of deals. As you know, we bought medical group entities, risk entities, MSO entities, combination of them. It just depends on what kind of deal we find where, given our unique model where it's a pretty comprehensive platform, again, catering to all specialties, all payers, all patients, all lines of business.

The valuation then just is reflective of the entities we buy, the earnings stream from that. We have pretty disciplined buyers focused on EBITDA free cash flow. If we are putting significant capital to work, like we did in the Arizona deal, you should expect pretty significant EBITDA contribution. If it is a smaller deal, we may be just entering a state, buying a tax ID, buying a risk entity, so on and so forth, and playing the long game there. It just depends on the nature of the transaction. We will continue to be pretty disciplined. If you are putting significant capital, you should expect that it will come with hopefully good earnings contribution. Lastly, I would say, again, this environment, we are in a position of strength with our balance sheet and our free cash flow generation to take advantage of as many opportunities that arise.

Obviously, we don't have billions of dollars, but I think we are hopefully a partner of choice, both given our business model, ability to partner with different kinds of provider groups as they make a decision whether to join us or a private equity group or any other payer. I think it's a pretty unique time to be in this space, and we're glad to be operating from a position of strength.

Operator (participant)

We have no further questions. Management, please continue.

Robert Borchert (SVP of Investor and Corporate Communications)

Thank you for listening to our call today. We appreciate your continued interest and look forward to speaking with you again in the near future. Have a great day.

Operator (participant)

This concludes today's conference call. You may now disconnect.