Prepared remarks
Good afternoon, and welcome to Alignment Healthcare Second Quarter 2026 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question during the session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. We ask that you limit yourself to one question only. Please note that this event is being recorded. Leading today's call are John E. Kao, Executive 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 sections of our annual report on Form 10-K for the fiscal year ended 12/31/2025. 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 and the most comparable GAAP measures and reconciliations of historical non-GAAP financial measures can be found in the press release posted on the company's website and our Form 10-Q for the fiscal quarter ended 06/30/2026. I would now like to hand the conference over to John E. 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 thousand 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 AVA Care Anywhere clinical teams. With six 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. Innovation such as this and the deployment of our disease state registries support the proactive engagement activities of our AVA 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 three 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 remains 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 will turn the call over to Jim to discuss our financial results and outlook. Jim?
Thanks, John. I will dive into our second quarter results. For the quarter ended June 2026, health plan membership of 294 thousand increased 31% year-over-year, supported by strong new member additions and high retention among 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 sweep 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 in our outlook for the year, inpatient admissions per thousand 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 2.2 times our trailing twelve months EBITDA. Moving to our guidance, for the full year 2026, we expect health plan membership to be between 298 thousand and 301 thousand 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 296 thousand and 298 thousand 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 six 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 AVA 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 work 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 Align. With that, let's open the call to questions. Operator?
Questions and answers
You, please press *11 on your telephone, then wait for your name to be announced. To withdraw your question, please press *11 again. Please limit yourself to one question. Our first question comes from the line of Ryan Daniels with William Blair. Your line is open.
Hey, guys. Thanks so much for taking the questions. Appreciate it. Wanted to dive a little bit deeper into the Q3 guide. I think that is probably the focus of investors leaving out of the print. Can you go into a little bit more detail about just the timing of some of the investments you are making and any more color digging deeper into what some of those investments are, how transitory they are, and then what benefits you see in the back half of the year, maybe more importantly, in 2027 and 2028?
Sure. I think there are probably two dimensions to this Q3 guidance: the seasonality aspect and the investment aspect. So inside that seasonality we will dive into the investments. But sequentially, we are going to see a little bit of an uptick in our MBR, and that is from investments, a little bit of year-over-year new member mix, and Part B. So think about those three components that are driving that. But as it pertains to the investments, we are just continuing to find areas to invest in the business. John and the team have 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. More specifically, the investments are going to hit in two different areas. One is going to hit the MBR, and that is in our clinical operations—AVA Care Anywhere—preparing for new market growth and some other investments we are making there. The other part is going to be in SG&A as we continue to push forward to get ready for market launches in 2027 and put ourselves in a position to get some returns in 2027 on these projects. Think about automation, AI, and things of that nature. They are not insignificant, and we think they are really good returns 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. But this is all very deliberate, and it is inside the financial commitments we are making for 2026. To kind of step back for a moment, we had a great 2025, we are signing up for 2026 and delivering against a very good first half, and still managing to invest in the business to put us in a good position for the future because we really feel there is 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 are still going to deliver on our commitment.
Great. Super helpful color. Thank you.
Please stand by for our next question. Our next question comes from the line of Michael with Baird. Your line is open.
Multi-part question. First, I am backing into roughly a $6 million sweep benefit. Is that right? And if so, any reason why it is smaller than last year even though your book is larger this year? Second, I noticed in the 10-Q you had about $6.5 million of unfavorable prior year development this quarter. Could you elaborate on the timing and nature of those costs? And last, the underlying Q2 MBR excluding both those items, I am getting roughly around 86.2%. Is that about right? Any comments on monthly cadence throughout second quarter when it comes to that? Thank you.
Let's do the three parts. The first one was the sweep, and this is about the new-member final sweep for 2025. As you are aware, we take a prudent approach on that in the sense that we do not have visibility on that sweep, and so we tend to take a cautious approach and just book to the MBR until we see it. The thing that can impact that beyond just the number of members is the mix. One of the bigger impacts is V28—that is the second year of V28 rolled into our 2025 dates of service—and then just risk-sharing agreements around it. So you are absolutely right: it was a smaller number than last year, and on a per-member basis it was smaller. One of the bigger drivers there was V28. So if you mentioned about $6 million, that is circa and pretty close to what it means. We talked about 40 basis points on the call in terms of impact. That is point number one. The second thing is prior period reserve. We are always looking at our reserve positions across all dates of service. Year-to-date, we are favorable by about $2 million on prior year in total, and we feel good about where we are at. Inside Q2, we had a very solid quarter, and within that strong performance, we chose to bolster our reserves by about $6 million. We looked at the development of the claims in 2025 and said this is a good time to increase reserves. We feel pretty good about our reserve positioning year-to-date. And then the last one, if you were to exclude the unfavorable prior period development and the sweep benefit, are you thinking about underlying core Q2 MBR at about 86.2%? I have not done the math here on the call, but if you add back the prior period and then subtract out about 40 basis points for the sweep, it is a dollar and a percentage, but I think it's probably net around the same level on MBR.
Thank you.
Please standby for our next question. Our next question comes from the line of Justin Lake with Wolfe Research. Your line is open.
Thanks. Can you talk a little bit about Q3 seasonality in terms of Part D and why it is different? And then also in terms of the new member mix and why that is driving a difference there?
Yeah. So Justin, it sounds like you are asking to amplify on those components. Part D is just a little different versus last year; it is a flatter slope between the first half and the second half, and that is just the behavior in the second year post-IRA and the behavior of our experience. Then on the new member mix year-over-year, we just have higher acuity in the new member mix, which is adding a little bit more to the MBR across the board. If you compare it to Q2 last year, it is a little bit heavier. But the investment that we talk about is a big piece of that—the investments in the clinical infrastructure.
Thank you.
Please stand by for our next question. Our next question comes from the line of Matthew Dale Gillmor with KeyBanc. Your line is open.
Hey, thanks for the question. I wanted to see if you would be willing to share the HCCs metric for the quarter or just year-to-date. And then more broadly for John, curious if you would offer any perspective on 2027 bids. I know you may be limited on what you can say in terms of your approach, but just curious in terms of the perspective you would offer and how you think the industry will approach 2027 bidding.
Yeah, Matthew, thanks for that. As we mentioned on the call, HCCs did improve sequentially, and to be more specific, it was in the mid-150s and in line with our expectations given our membership mix and how we are tracking this year. On an ongoing disclosure perspective, we are going to move away from disclosing it with the same digital precision every quarter. While it is really important internally for how we manage the business and our clinical operations, externally it seems to create a little bit of noise and does not necessarily reflect the overall health of our operation. Q1 was a perfect example where focusing on a single metric created more static than signal. Having said that, we will find a balance because we want to continue to provide the right context around our performance and the trends going forward.
Matthew, with respect to 2027, the standard answer is it is too early to talk about bids. With respect to our strategy, for competitive reasons I will be limited, but I will say I feel as comfortable as I have ever felt about our overall product strategy and the amount of work that went into it this year. I feel very strong about it. A lot of the investments we have been talking about are designed to realize scale and portability. That is what we think we need to prove, and everything is designed around that: scale and portability. I am really happy with our progress along that front, and that gives me confidence in our ability to support the growth we expect in 2027. With respect to the industry, I think you are going to have a mixed bag. There are people who will be more margin-focused than others, but we expect two or three players to potentially be more aggressive next year based on market chatter.
Thank you.
Please stand by for our next question. Our next question comes from the line of John Stansel with JPMorgan. Your line is open.
It seems like the MA technical rule has arrived at OMB somewhat sooner than some industry observers expected, and I think some have concluded that might mean 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? Thanks.
I—yeah.
It is John. We are not privy to it, frankly. We have heard the same thing that the 2028 technical rule is under review at OMB, but we do not have visibility to it. If there is anything that would have caused it to get there this early, it probably would be around STARs, in my view. But I do not know; we are all looking at each other trying to see if we missed something. We have heard that the ruling is in there now, but we do not know what it is technically.
Please stand by for our next question. Our next question comes from the line of Andreas Mock with Barclays. Your line is open.
Hi. We have seen a meaningful upward drift in STARs cut points in recent years as we shift focus to bonus year 2028 STARs. What are your expectations for further movement in those thresholds, and how confident are you in your ability to perform against those benchmarks? Thanks.
Andreas, we are not sure about how the thresholds will move. We are going through all the CASPER data; we just got the CASPER data and are reviewing that. We expect to get more visibility to HOS data down the line. It is a little early to start speculating. I will say that the regulatory and legal footing surrounding STARs is a little shaky right now, and a lot of outcomes could be different based on how some regulatory changes are implemented. This is related to litigation involving another MA plan that has implications for the rest of the industry. All we want is a consistent and fair regulatory landscape. I do not have a definitive answer now, but I feel good about our position.
Please stand by for our next question. Our next question comes from the line of Whit Mayo with Leerink Partners. Your line is open.
Hey, Tim—sorry, I wanted to go back to the prior year development. I know we are going to get the question in the queue that the PYD was due to deteriorating collections and higher costs. I am just trying to reconcile your comments on proactively strengthening reserves. I know these are not big numbers, but wanted to flesh that out.
Yeah, it is consistent. You have two things going on in prior year: your payment integrity activity and collections, and then how you are looking at the paid claims coming through. We look at all of our dates of service across the triangles and make sure we are positioned well. Our MD&A is accurate on that; we feel good about our reserve positioning. A prior year adjustment must be called out in the financials, but this is normal course of business across all our triangles.
And John, I do not know if you are going to share what new markets you plan to enter, but maybe what are some of the underlying characteristics of those markets?
We are not going to share specific markets until bids are public in October. We have balanced growth and margin profile planned for 2027 with meaningful market expansions within our existing state footprint, and we expect to expand the number of states in 2028. The work we are doing in 2025, 2026, and part of 2027 is preparing for service area expansions in February 2027 and 2028. A lot of the operational preparedness is in anticipation of scaling the business, and we will come back with proof points on getting embedded earnings leverage in some of these new states as we progress.
Please stand by for our next question. Our next question comes from the line of Jonathan Young with UBS. Your line is open.
Hey, thanks for taking the question. I just want to go back to the costs that are coming in Q3 and Q4. Are any of these one-time in nature or should we view these as ongoing costs? Similarly, as we think about how 2027 will shape up in relation to your growth strategy for 2028, will we see investments where there may be a bolus leading up into the 2028 period?
That is a really good question. In the near term, the second half of this year we saw an opportunity to make some investments, but the cardinal rule is we keep it inside our commitments on guidance and on our commitments to continue to reduce SG&A levels over time. One of our themes is to make investments that lower cost, then take some of that savings and reinvest it back in the business. You are seeing that in action in the second half of this year. On the SG&A front, we are investing back into new markets and branding. On the clinical side, we make these investments and expect returns in two important ways: members benefit because we are helping to make them healthier, and we are avoiding cost. So these investments have returns, and we want to keep them inside the guardrails of what we are committing to.
Thank you.
Please stand by for our next question. Our next question comes from the line of Parker Schmoore with Raymond James. Your line is open.
Hey, good afternoon. I was wondering if you could talk about your performance in your SNP members versus non-SNP members and how those are tracking relative to expectations. Also, you are adding a fair amount of C-SNP members this year and you mentioned some higher acuity in your new member mix. Curious if those two dynamics are related?
Related and intentional. This year, about 50% of our new members were C-SNP eligible, D-SNP eligible, and dual eligible—more acute categories. In the early part this implies the MBR is a little elevated compared to a typical new member, but we are making that investment intentionally because our care model is tailor-made to help these populations and make them healthier and reduce costs over time. We intentionally understood the upfront burden on MBR and believe we can create a favorable MBR over time. This is the balancing act between staying in line with our commitments and investing for the future.
Please stand by for our next question. Our next question comes from the line of Ryan Langston with TD Cowen. Your line is open.
Great, thanks. Maybe on the 2027 bids, just putting aside the particular makeup, could we still expect that you are targeting a 20% enrollment growth in 2027? Also, taking into account the sweep benefit that was not guided for the $5 million EBITDA guidance raise at the midpoint and the investments you called out—potentially double-digit millions of EBITDA—was it fair to say you could have raised the guide by that double-digit million of EBITDA? Or were some of those investments already planned when you originally set the full year guide?
I think that is fair regarding the 20% enrollment growth target for 2027. Regarding the guide, we did make some incremental investments in the second half that are a little bit above and beyond what we originally had planned for in our guidance. So inside the year we are sticking to our commitments, but we saw some opportunity to make further investments.
I'll add this: if you look at the proxy and filings, management is highly incentivized to drive shareholder value, and part of how we think about this is how to reach long-term targets. Making these investments now in a year in which we are meeting high-end expectations makes strategic sense for long-term results. Passing along a raise now may not have been in the best interest of our long-term ability to hit those targets. Everything we are doing is focused on long-term scale and portability. We have been consistent in our approach and are executing on that strategy.
Thank you.
Ladies and gentlemen, I am showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect.