Good morning, and welcome to Babylon's First Quarter 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. If you'd like to be placed into question queue, please press star one on your telephone keypad. Please note this event is being recorded. Leading the call today is Dr. Ali Parsa, Founder and Chief Executive Officer, Charlie Steel, Chief Financial Officer, and Steve Davis, Chief Technology Officer. Before we begin, we'd 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 of 1995 and is further described at the end of the press release that is posted on the company's website.
These forward-looking statements reflect Babylon's current expectations based on the company's beliefs, assumptions and information currently available to the company and are subject to various risks and uncertainties that could cause actual results to differ materially. Although Babylon believes these expectations are reasonable, the company undertakes no obligation to revise any statements to reflect changes that occur after this call. Descriptions of some of the factors that could cause actual results to differ materially from these forward-looking statements can be found in the Risk Factors section of the company's annual report on Form 20-F, filed on March 30, 2022, and other filings with the Securities and Exchange Commission. In addition, please note that the company will be discussing certain non-IFRS financial measures that they believe are important in evaluating performance.
Details on the relationship between these non-IFRS measures and the most comparable IFRS measures and reconciliation of historical non-IFRS financial measures can be found at the end of the press release that is posted on the company's website. The presentation slides for today's call are also available on the company's website. With that, I'd like to turn the call over to Babylon CEO, Dr. Ali Parsa. Please go ahead.
I would like to welcome everyone and thank you for your time and interest in Babylon. I'm joined today by Charlie Steel, our Chief Financial Officer, and Steve Davis, our Chief Technology Officer. Today, I will share an update on our business progress in the first quarter of 2022, including our outstanding revenue growth and cohort engagement. I will then pass the call to Steve to provide more color around our highly advanced technology platform and how our focused technology investments are enabling best-in-class data analysis and risk assessment for Babylon members. Charlie will then provide more details on our financial results before we open the call for questions. I would like to center my comments today around four key themes. Firstly, our continued exponential revenue growth. Secondly, our operating discipline. Thirdly, our continued strong engagement trends. Finally, our technological advantage.
I will begin by expanding on our growth this quarter. After achieving 4x revenue growth in 2021 to a record of $323 million, I am pleased to share that our top line growth has continued well into 2022, with our first quarter revenue coming at $266 million, comfortably beating consensus estimates. This amount represents 3.5x growth from the first quarter of 2021 and is just under $60 million shy of the revenue generated by Babylon in the entirety of 2021. Importantly, we were able to achieve this level of growth while maintaining excellent levels of customer engagement and satisfaction. We remain extremely optimistic about our prospects for 2022 and are confident that we are tracking to at least $1 billion of revenue for the full year.
Accordingly, we are increasing our revenue guidance to $1 billion or greater, up from a range of $900 million-$1 billion previously. As Charlie will discuss in a few minutes, this represents a revenue growth greater than threefold from 2021, on top of the fourfold growth we achieved last year. Our revenue growth has been powered by a robust expansion in our value-based care membership. Our U.S. VBC membership grew by more than 300% year-on-year to over 270,000 members as of March 31. This growth was driven by the launch of three new value-based care contracts this quarter, which added a further 105,000 U.S. VBC lives across three states.
We are proud to now provide clinical services in eight states across the United States and to work with a broad variety of payers, including BCBS in New Mexico and United, Humana, Aetna, and Anthem, Blue Cross, through our IPAs in California. I appreciate that revenue growth has become an unfashionable word, and the mantra for most investors has turned from growth is everything to profit is everything.
Like many, I have seen these cycles come and go, and in my view, the companies that on one hand do not stay oblivious to the prevailing environment around them, but on the other stay focused on executing their plan, will be the ultimate winners. In the same way that we never subscribed to the previous dominant view of growth at any cost and always curbed our growth at a sustainable level, today, we do not believe in the now dominant bias against growth.
We always believe that we should deliver profitable growth and profitability in platform businesses will come from scale and continuous investment in innovation. The operational leverage that I will highlight in more detail shortly shows that once the scale is achieved, it should lead to substantial cash generation as every incremental dollar contributed to the gross margin should in large part fall directly to the cash line.
Moving on to my second point regarding operating discipline, we continue to make progress towards our goal of profitability no later than 2025, delivering an adjusted EBITDA for the quarter ahead of consensus expectations. As we emphasized in our fourth quarter call, the key priority for us in 2022 and beyond is to demonstrate to the market that we can continue to deliver exponential growth while at the same time diligently focusing on balancing the cost of that growth. We're monitoring all contracts from this perspective and have a disciplined approach to their cost structure. For example, when taking on new contracts, we are focused on only those where we can see a path to gross margin neutrality from year one and with the potential to drive significant margin improvements every year after that until maturity.
In addition, we are focusing on expanding our portfolio beyond our initial start with Medicaid to growing our Medicare Advantage and commercial population. To this end, we are being very selective in our consideration of new or even existing Medicaid contracts and only accept or continue with those that are in line with the above objectives. This decision is factored into our outlook and demonstrates the selectivity of our approach and our resolution to grow in a disciplined manner, achieving profitability by or ahead of our targeted timeframe. Moving on to discuss engagement, I would like to take a few minutes to talk about the very positive trends we are observing across our VBC contracts. Engagement is a key to our business model and to our patient journey. In the U.K., we have already proven our ability to create downstream cost savings through high upfront engagement.
An independent study by the National Health Service and Ipsos MORI showed we reduced ER visits by over 25%, and a peer-reviewed study proved we create acute care cost savings of up to 35%. Engagement is key to this. By creating a service that is highly accessible and members love, we are able to become the gateway to the overall healthcare system. Once our U.K. members attend their first appointment, they'll return for an average of seven more appointments annually. I'm pleased that we are seeing the same pattern of engagement across our U.S. contracts this quarter. We saw members in our most mature contract in Missouri return for an average of four further appointments annually.
To help you understand why this is and why our members keep returning to our services, we've shared one member's testimonial about their experience with Babylon, which you can access through this conference's accompanying deck posted on the investor relations page of our website. In addition to this success with engagement, we also see that our service in the U.S. leads to a reduction to expensive emergency room visits. Across all of our VBC contracts, 27% of appointments this quarter resulted in avoidance of emergency room and urgent care visits. Moreover, we are also seeing that our ability to engage members has ramped up to be even faster over time. For example, compared to our older New York and Missouri contracts, our rate of signing up high-risk members under new contracts in Georgia and Mississippi has been respectively 4x-5x and 8x-10x faster.
We have been able to do this due to continuous optimization of our outreach approaches. For example, by adding the ability for our staff to manually sign up members live on an initial phone call and by shifting our focus from high volume of outreach to creating fewer but high-quality interactions. We are very pleased with this success and confident that we will continue to optimize further and ramp up even faster in future. What we are learning today will give Babylon a structural advantage tomorrow in the way we can onboard and engage our future members at scale and speed. Babylon took on its first value-based care deal in October 2020 in the midst of the COVID-19 pandemic, assuming global risk of approximately 17,000 Medicaid beneficiaries.
It is worth noting that some of these beneficiaries were intentionally selected by Babylon's payer partner based on a lack of historical primary care utilization. Over the contract, nearly 40% of households have engaged with Babylon's digital-first model of primary care and integrated behavioral health. This is a significant accomplishment, especially given these beneficiaries' historical disengagement from the healthcare system, the headwinds of COVID, the presence of digital divide in the rural markets, and the lack of accurate contract information that is endemic in Medicaid population. Despite the headwinds faced by Medicaid health plans nationally during 2021, whereby many saw worsening MLR performances, Babylon maintained the MLR for our members at projected levels and observed decreased patient utilization over the first 15 months of the contract, all while increasing engagement and access to the care for these historically underserved Medicaid members.
Just as we have seen in the U.K., in our U.K. population, once our members are engaged on our platform, we are able to deliver significant cost savings. Currently in the U.S., 59% of our total VBC membership was added last quarter, and a further 23% were added in the fourth quarter of the last year. Members, by definition, have a higher cost profile when they enter our system. However, these cohorts mature over time, we expect to see these contracts flip to profitability as the impact of our investments in proactively engaging members upfront in preventative care reduces the longer-term dips in healthcare costs. In a moment, I will turn the call to Steve to expand upon our technology platform. Before I do, I would like to give you some more detail on the advantages provided by our technology.
As we have stated in the past, our technology and our ongoing investment in R&D are a key differentiator for Babylon. Our AI and data analytics will increasingly be able to stratify population, conduct detailed risk assessments, and positively influence outcomes while ultimately driving down costs. Our significant investments and advances in the Babylon suite of technology and analytics are the key to switching from costly reactive sick care to proactive healthcare, improving members' health, and creating cost savings for both our partners and ourselves. While we cannot be certain how the accelerating pace of innovation will cause our technology to unfold, we expect that unlike our clinic-focused peers, our costs of computing, the scale of data collection, speed of processing, and ability to predict to prevent will exponentially improve with time.
Our belief remains that there are structural advantages to a digital-first approach, and betting against technology has often proved wrong in the past and will do so in the future. Technology licensing will be a key revenue flywheel within our business model. Through our licensing partnership across three continents, we are able to expand the reach of our technology's learning and bring in very high-margin revenue. We continue to focus on building our technology licensing capabilities and pipeline this year with the expectation to convert the pipeline to increasing licensing revenue growth from 2023, driving towards our goal of profitability no later than 2025. Understanding the importance of our technological moat is key to understanding Babylon's competitive advantage. We are a technology company just as much as we are a healthcare company.
We employ over 600 engineers and developers with roughly 100 in the specialized areas of AI, data science, and predictive analytics. We expect to invest somewhere between $125 million-$135 million this year on our technology, having already invested over $350 million in our technology since 2019. This investment enables us to stay ahead of the innovation curve and stay leaps ahead of our competition. Through our technology, we are able to achieve significant operational leverage. Last year alone, while growing our top line by over 300%, we reduced our cost of technology as a percentage of revenue from 75% to 28% of the revenue. This quarter, we made further progress, reducing the cost of technology to just 10% of revenue.
In addition, through leveraging this investment and scaling our business, we will bring down our operating costs to a steady state and reach our goals of profitability. Before handing over to Steve, in closing out my prepared remarks, I'd like to thank the entire Babylon team for their hard work so far this year. Our company has continued to make strong progress this quarter, and we have much to celebrate. I am, of course, also conscious that due to many factors, both general to the market sentiments and the specific challenges around the liquidity of our stock, our share price has not performed well.
We will do all we can to address the part of this challenge that is in our hands. As I mentioned in my inaugural shareholder letter, our focus in Babylon has always been to create a platform that delivers a compounding competitive advantage to us over the long term. As Benjamin Graham wrote, "In the short term, the market is a voting machine, but in the long term, the market is a weighing machine." We will remain focused on putting the weight on Babylon's long-term advantage. I am so proud of the amazing work of our team that continues to relentlessly drive us towards our goal to make high-quality healthcare accessible and affordable for everyone on Earth. With that, I'll pass the call over to Steve, who will provide more details about the Babylon technology suite. Steve, over to you.
Thanks, Ali. One of the reasons I joined Babylon over a year ago was the belief that human life is one of the most valuable assets in the world, and the impact that we as an organization can have with the right technology strategy tied to such an incredible mission. Having worked in industries where the investment into purpose-built platforms fueled by data and AI unlock so much value for hundreds of millions of consumers around the world, I saw that same unlock and potential here at Babylon. Providing higher quality healthcare at a lower cost will result in the level of scale already achieved in other industries, yet healthcare seems continually to lag behind. Over the past year, our global teams have been hard at work.
They focused on delivering immediate value, as well as investing into the core building blocks of our platform, which we believe will provide us a competitive advantage in the delivery of value-based care and growing our Babylon Cloud Services strategy. At the core of that platform is our investment into our Health Graph strategy and platform. The Health Graph is our ability to ingest large volumes of data, both in real time and in batch, unstructured and structured, from hundreds of various providers, wearables, and health record systems. This platform creates a data access strategy that powers our integrated AI capabilities while simultaneously enabling real-time member and clinical product experiences, all coupled with advanced analytical use cases. Sitting on top of that Health Graph platform is our HealthIQ service. HealthIQ is a growing library of predictions that allows for real-time segmentation and health record enrichment of our members.
These predictions provide our care teams with a scalable and effective way to service our members that may be at higher risk. Furthermore, our continued investment in causal AI has led to the growth of our triage product, which now includes Babylon Advisor. Babylon Advisor gives us the ability to codify industry-leading care guidelines into actionable member insights that allow our clinical care teams to provide scalable care delivery. Our goal with our technology investment and delivery is to elevate the quality of care, improve its accessibility, and deliver it in the most cost-effective way at scale. This reflects our core mission as a company. You will hear more about our latest release, which is a large coordinated development effort that introduces upgrades to our platforms and applications in a single seamless experience at our Capital Markets Day on May 23.
It remains our goal to continuously improve our purpose-built platform with our proprietary technology to assure a sustainable competitive advantage in the delivery of value-based care. With that, I'll pass the call over to Charlie to give an update on our financial progress this quarter. Charlie.
Thank you, Steve, and thanks to everybody today for joining the call. We appreciate your time and interest in Babylon. Today, I plan to provide some further perspective on the performance and trends we are seeing in the business as we review our Q1 2022 financial results, as well as providing an update on our 2022 revenue guidance. As Ali mentioned, we're very happy with our financial performance this quarter and are pleased to report we exceeded our revenue and EBITDA goals, delivering revenue of $266 million and beating the consensus estimates for the quarter by over $30 million. We also achieved adjusted EBITDA margins of -27% for Q1, ahead of consensus and ahead of our guidance of -30% for the full year.
For the Q1 financial highlights in the quarter, I'd like to discuss our financial performance and some of our KPIs, such as our cost of care delivery margin, as well as the impact of our increase in value-based care revenue through our new contracts in Georgia and Mississippi, and our new DCE, Direct Contracting line of business, which launched this quarter. We also generated significant operating expense leverage due to discipline on our expense management in combination with our significant top-line year-over-year growth. Moving to our financial results. As mentioned earlier, revenue for the quarter came in at $266 million, which is more than 3.5x the revenue we generated in the first quarter of 2021. Top-line revenue growth was again driven by our value-based care segment and was over nine times the value-based care revenue we generated in the first quarter of 2021.
During this first quarter, we also initiated new contracts for over 100,000 new members, bringing our total global managed care membership, which includes our GP at Hand and Royal Wolverhampton NHS Trust members in the U.K., to over 440,000. In terms of the contribution mix, our most significant contributor to top-line growth was value-based care revenue. VBC and related revenue increased by $219.3 million in the first quarter to a total of $246.6 million and accounted for 93% of Q1 revenue.
This has been driven by significant increases in our VBC membership base, including adding 86,000 members in Q1 through new contracts in Iowa and Georgia and 19,000 members in California through our partnership with a direct contracting entity as part of the CMS Direct Contracting model. Where we provide crucial care management services to Medicare beneficiaries in California in a value-based care arrangement. Licensing revenue was $7.8 million during the first quarter of 2022, versus $36.0 million in Q1 2021. Although this is a decline year-over-year, this is largely due to upfront revenue recognition in connection with the software licensing arrangement in Q1 last year of $28.4 million. When normalizing the figures for this one-off item, year-over-year licensing revenue growth would have increased by 2%.
As Ali mentioned this year, we are actively engaged in building our licensing pipeline with the aim to increase our proportion of high margin licensing revenue in 2023. Licensing revenue will also be a key contributor towards our profitability by mid-2025. Clinical services revenue, which includes our clinical services delivered in the U.K. and Rwanda, as well as our U.S. fee-for-service business, was $12.1 million during the first quarter of 2022, which is an increase of 50% from $8.1 million in the first quarter of 2021. This year-on-year growth is attributable to the additional 1.7 million clinical service members in New York added in the last year, as well as organic growth in GP at Hand and Bupa memberships in the U.K.
Over the first quarter of 2022, we have continued to diversify the mix of our U.S. VBC members. We are more than 2.5x increase in our Medicaid population from 4Q 2021, 11,000 to 31,000, primarily due to our partnership with Direct Contracting entities. For this quarter, we report a total of 271,000 U.S. value-based care members, of which 83% were Medicaid, 6% were commercial, and 11% were Medicare. Compared with the end of the first quarter of 2021, where we had 66,000 U.S. value-based care members, of which 88% were Medicaid and 12% were Medicare. One of the key focuses in 2022 is to enhance cost of care delivery margin and utilize our operational leverage as we scale.
Our continued rapid revenue growth has had associated margin impacts in the short term as we proactively engage our members up front, which comes with associated costs in order to prevent expensive crises and reduce long-term downstream healthcare costs. In order to provide more clarity on the components with our cost of care delivery expense this quarter, we have broken this out into two components of claims expense and clinical care delivery expense. We've done this to help differentiate any costs incurred by Babylon delivering our service offerings, which as we've discussed previously, is a highly scalable operating model. Our members' claims expenses are the main driver of our value-based care cost of care delivery margin, which typically start in the range of 100%-105%.
As each value-based care cohort matures, we expect to see their claims cost as a percentage of revenue reduce over time, and we believe that by breaking these metrics out, we'll be able to show the market our route to profitability as we scale. For this quarter, claims expense was $247.6 million, which is an increase from $23.9 million in Q1 2021, primarily due to the addition of over 200,000 new value-based care members in the last year.
As Ali mentioned, we're continually optimizing our processes, and we are seeing the results of this in two new value-based care contracts which launched in Q4 2021, where we're signing up high-risk members far faster than we were able to previously, allowing us to engage our members even earlier and impact patient health and therefore claims expenses faster than ever before. Clinical care delivery expense increased year-on-year, coming in at $23.9 million for the first quarter of 2022, up from $11.8 million in Q1 2021.
We expect our clinical care delivery expense to be highly scalable, and we have seen progress this quarter with costs dropping as a percentage of revenue from 17% in the first quarter of 2021 to 9% this quarter, and progress quarter-over-quarter in clinical care delivery expense from 21% to 9% due to utilizing operational leverage across our network that comes with scale. We are exploring additional operational opportunities to further leverage our economies of scale. For example, we are obtaining practice licenses for our U.S.-based clinicians across all states in the U.S., which allow our clinicians to be utilized more efficiently to deliver care on a national basis and better match supply and demand for clinical services, thus significantly increasing clinician efficiency. Further, this model also allows for longer treatment or high-quality care from a workforce that truly practices virtual first care.
Combining both, our cost of care delivery expense came to $271.5 million for the quarter, which is an increase from a $129.2 million figure announced in Q4 2021. However, on a percentage revenue basis, we've seen improvements from quarter-over-quarter, with cost of care delivery dropping by 6 percentage points to 102% of revenue from 108% in Q4 2021. I'd like to now move to discuss our operational costs. As mentioned earlier, digital scalability and operational leverage is a key pillar in our path to profitability, and we're pleased to see both technology and SG&A expenses falling as a percentage of revenue this quarter.
Our technology expenses, which comprise platform and application expenses and research and development expenses, were $26.8 million in the first quarter of 2022, which is an increase of $9.9 million from Q1 2021. While our total technology expenses were greater as a result of increased platform expenses this quarter, due to the operational leverage of our technology costs actually decreased as a percentage of revenue by more than half from around 24% in the first quarter of 2021 to just 10% this quarter. Similarly, our SG&A expenses, which increased to $58.3 million this quarter versus $31.5 million in Q1 2021, have also decreased as a percentage of revenue. SG&A expenses halved to 22% this quarter compared to 44% of revenue in the first quarter of 2021.
Both demonstrating the scalability of our operations and also considering the significant amount of our increase in SG&A expenses comes from being a publicly listed company. Moving on to discuss adjusted EBITDA. For the first quarter of 2022, our adjusted EBITDA loss was $72.2 million, an increased loss from Q1 2021 adjusted EBITDA loss of $4.6 million. However, this figure includes the previously mentioned $28.4 million one-off licensing revenue recognition. Excluding this, comparative adjusted EBITDA loss would have been $32.9 million to Q1 2021.
On this normalized basis, we can see a continuing trend margin of improvement from an adjusted EBITDA loss margin of 77% in Q1 2021, compared to 27% in Q1 2022, which represents 50 percentage points improvement year-over-year, and is a beat of our guidance for the year of 30%. Moving to the balance sheet. I'll provide the most relevant balance sheet and cash flow information and some context on the changes. Cash and cash equivalents at March 31, 2022 was $275.0 million, and debt raised through our AlbaCore facilities totaled $300 million since October 2021.
As mentioned on our fourth quarter earnings call, at the end of 2021, we executed an additional debt funding arrangement for $100 million from AlbaCore to cover growth of insurance costs, which we received the funds at the end of March 2022. This was received without any interest expense for Q1 2022, and is included in the cash and debt figures I've just mentioned. We are comfortable our cash and borrowing capacity can fund operations sufficiently through to year end without the need to raise additional capital. I'd also like to address our outstanding share count on this call following the end of our lock-up period April 21. As the registration documents that we filed on May 6, Babylon currently has 416.4 million ordinary shares issued and outstanding.
Which includes 38.8 million stockholder earn-out shares and 1.3 million sponsor earn-out shares. I'd like to end by giving an update on our guidance for our 2022 performance. In January 2022, we increased our revenue guidance from $700 million to a range of $900 million-$1 billion. As Ali mentioned, given our revenue over attainment during the first quarter and our current revenue run rate now exceeding $80 million per month, we are very comfortable increasing our revenue guidance again from our prior range of $900 million-$1 billion to now achieving revenues of $1 billion or greater.
We are also updating our adjusted EBITDA guidance to firm up our expectations for the year by guiding to adjusted EBITDA loss being a maximum $295 million to revenues at the $1 billion mark. We are confident that we continue to see positive trends in our profitability and reiterate our expectations of being EBITDA and cash flow break even by 2025. This concludes. I'm incredibly proud of the strong financial results we've delivered so far this year, and I'd like to thank all Babylonians for their hard work this quarter. I look forward to continuing to work alongside our amazing team to deliver our mission to make high quality healthcare accessible, and affordable for everybody on earth. Operator, with that, we're now ready to open the call to questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please while we poll for questions. Our first question today is coming from David Larsen from BTIG. Your line is now live.
Hi. Congratulations on the beat and raise in the quarter. Can you maybe talk a little bit more about the speed of you know, interactions and onboarding for new value-based care lives? I think you mentioned, you know, for the high-risk groups, the rate of communications with those members has accelerated significantly relative to your initial Missouri cohorts. What's driving that? Any color there would be very helpful, especially on the tech side. What are you doing on the tech side from an automated AI perspective that you know, identifies which members are at the highest risk of high claims costs and you know, how, like, how are you measuring consistent communications with them? Thank you.
David, thank you for your question. This is Ali. As you can imagine, we are a highly learning organization, and what we do as we go forward with any new cohort, we spend a significant amount of time analyzing what we had done in the past, and we learn every week based on our interactions with our members that how we can improve our interactions as we encounter them again. As a result of that continuous learning, and that is the advantage, as you quite rightly say, of a technology-based approach.
We can learn from every interaction and we improve it, and as a result of that, as you quite rightly said, we improved our results in Georgia by 4x-5x for the same period of time compared to Missouri, and I believe around 8x for the same period of time in Mississippi. That learning will continue. We're still at the very beginning of our approach and our data capabilities. I think as time goes by, you should expect to see better and better approach. That is fundamentally the advantage of a learning organization that is based on data analytics.
Oh, okay. That's very helpful. Thank you. Can you talk a little bit more about some of the mix shift? I can see that your penetration rate in commercial and Medicare is increasing. Can you maybe talk about how you're winning those lives? Is that part of a lot of the new RFPs? What are the economics like for commercial, Medicare relative to Medicaid? Thanks.
Yeah. Thanks, David. It's Charlie here. I think as we previously announced, that DCE is accounting for a lot more of the Medicare population. As we said in the past, we want to improve the mix away from purely being Medicaid where we have been in the past, and I think you're seeing those numbers come through quite strongly. Commercial, we also see as a great opportunity for us, and part of the reason for that is it's easier to get employers to help us drive people through the funnel as well, and to accelerate that engagement once again. I think going forward is what you'll see more and more of is more of that mix starting to evolve, particularly with commercial and Medicaid.
As I say, a lot of the change in Medicare for first quarter is as a result of DCE.
Okay. The Direct Contracting program with CMS, I mean, you, how many lives are in that? We've seen with like Oak Street Health and a couple of other public providers that, you know, it can take time to stabilize those Direct Contracting lives. Just any color on, you know, are those Medicare lives or Direct Contracting lives gonna be breakeven in 2022? Or, any thoughts there would be helpful.
Yeah, sure. We've got 19,000 lives under management under the DCE program. Exactly as you say, David, we've actually adopted a very conservative approach to how we're thinking about MLRs on DCE. There are a couple of percentage points that you take because CMS retains that. On top of that, we've been again quite conservative on how we accrue for the quality ratings as well, and the revenue we get from that. In first quarter, we've assumed that our MLR on DCE is around 104%. As you can see, that's basically making up actually the majority of the drag on the MLR for the overall business.
Over the course of the year, we expect that to improve.
Okay. The last one for me, and I'll hop back on the queue. When health plans go to increase their premium prices, and there's typically an increase every year, let's call it, mid- to high-single digits. How do you make sure that you get your fair share of that? Is that built into your contracts or not? Thanks.
The answer is absolutely yes, David. We take a percentage of the premium of the totality of the MLRs where possible. Sometimes there will be some exceptions to the amount. The part of the MLR we take, there are parts of the MLR we just cannot influence, so we may sometimes exclude those. Otherwise, we take the totality of the MLR, which usually is a percentage of the premium. As a result, as the premiums go up, our revenue also goes up.
Assuming you can hold the cost trend at a pretty stable pace or even improve cost trend or reduce it, those premium increases should flow through to earnings and margin for you.
Correct.
Okay. Congrats on a very good quarter. I'll hop back on the queue.
Thank you.
Thank you. Next question is coming from Dev Weerasuriya from Berenberg. Your line is now live.
Hey, good morning, everybody, and great quarter. Thanks for taking my questions. I'll kick it off. I actually just wanna follow up on David's question. Just to confirm, you know, if the premium is increased as a percentage, you know, the percentage you're taking stays stable. Is that premium increase really to address kind of inflation and cost of claims expenses? Or do you think you're gonna have kind of additional, you know, gap between kind of inflation and claims expenses and the premium expense where it'll be a benefit to margin?
Yes, Dev. That's exactly correct. As the prices go up, we will be the beneficiaries of that. Clearly, though, that does take an assumption that you can hold the cost stable, underlying that. In general, there's a reason why the prices are going up, is because there's a general market overview of the costs going up. Now, where we've been so far is we've actually been very efficient from holding those costs stable. As I say, like, while we do get the benefit coming through on the revenue, we also do need to continue holding those costs stable.
Yes, absolutely. I'd just like to ask a couple questions around, you know, care margins. Could you talk a little bit about your line of sight into claims expenses? You know, provide a little bit of color on the leverage in particularly just the clinical care delivery expense from the technology side. You know, as you bring on different geographies, different contracts, you know, what are kind of the implementation costs? Is it very minute or does it take a little bit, you know, more costs as you bring on new contracts to get them set up and then that goes down, I would assume, you know, pretty dramatically over time? Any color on that, those two would be helpful. Thanks.
Yeah. The incremental cost of taking on new states on the OpEx side are actually very small. I think that's the reason why you've seen the massive operational leverage come through in the business, particularly in the last couple of quarters, where we've increased revenue both on a relative and absolute basis hugely. When we think about the OpEx costs to take on new business, that sort of largely sits around marketing. There is a little bit of IT cost as well that you have with that. In the rare cases, we have some level of customization, but also, at the same time, you might have some regulatory stuff that you need to amend. There's a small amount of variable costs as people use the platform.
By and large, though, we do have huge operational leverage in the business by taking on new contracts.
Yep. Just on the line of sight into kind of claims expenses, could you talk about, you know, how, you know, how far ahead does your technology enable you to kind of see that, you know, get a line of sight into claims expenses and maybe the benefit to get there versus peers using your technology?
The fundamental thing that we all need to understand, and we all do understand about healthcare, and you do very well, is that usually about 20% of all your members account for 80% of your expenses. The important work, therefore, is to identify who those 20% are, and instead of sitting back reactively and waiting for them to hit crisis and emergencies and land in hospitals, is to proactively engage with them ahead of time to try to keep them healthy and away from those crises.
Our technology and our employees, what they do is they as soon as we take over a contract, we analyze deeply the data available on those members, and we have the ability to proactively reach out to them, to try to bring them and sign them up to one of our programs and to try and be with them throughout their journey on healthcare. That usually takes away enough of their challenges to be able to save costs. I mean, in a nutshell, that is what any healthcare company should do to keep members healthy. Now, the reality is, of course, as you know, most what we call healthcare is a sick care companies who wait until you get sick and then you go through the usual things, and the fee-for-service system is designed to benefit from that.
We have a very different approach and a philosophy of how we make these things work.
Okay, great. I'm gonna I'll have just one more, and then I'll hop back in the queue, please. On the interactions between, you know, the engagement, it seems like it's ramping up quite nicely here. Could you talk about any differences between the different contracts, whether it's Medicare, Medicaid or commercial members, and whether the ramp up in engagement or the, you know, the types of interactions differ?
Absolutely. As you know, traditionally, the Medicaid community, the community with which we started, has been the most difficult community to engage. Often the cohorts that have been given to us are the cohorts that insurers or the payers have found the most difficult to find, engage, and sometimes they have been included in our members because they had very little engagement with the existing health system, and they wanted our help to find them, seek them and then engage them. When you get a result of as much as 37% engagement in our very first cohort from Missouri, or now that number is increasing or it's accelerating by 4x to 5x to 8x on our new contracts.
What you have is not your normal Medicare cohorts that would have joined a practice or a clinic one at a time, and therefore, by definition, they should be engaged, but a cohort of employees who always are at work or are through the structure of a company can easily be found. Often these people are people whose addresses, email addresses, phone numbers are not even identified. So the work that our team has done to identify these people, to bring them online, to engage them, I think is exceptional. As we move from Medicaid to Medicare and then to the corporate, to the commercial, I think what you will see is a significant improvement on these engagements because it's simply a lot easier.
Great. Thank you so much for your color. I appreciate it.
Thank you. Next question today is coming from Daniel Grosslight from Citi. Your line is now live.
Hi, guys. Thanks for taking the questions. You know, Medicaid redeterminations are likely to come back in the second half of this year. If you look at some of the projections by geography, some of your states are gonna get hit pretty hard. Missouri down around a third in Medicaid enrollment. Georgia projected to go down around a quarter in Medicaid enrollment when redeterminations come back. I'm just curious how you're factoring in Medicaid redeterminations into your guidance and growth strategy going forward.
Yeah. Hi, Daniel, and thanks for the question. I think sort of as we've said before, we've got a massive pipeline. We'll actually also be announcing some more contracts at our Capital Markets Day on May 23rd that will bolster that as well. We have factored that in. One thing to note, though, is that the Medicaid redeterminations have been pushed out further than we originally believed at the start of the year. Therefore, that was sort of one of the factors we had in our ability to increase guidance for the full year revenue as well.
Yeah. Okay. That's helpful color. Looking forward to that Analyst Day. Just on your cash burn and path to profitability. Ali, you mentioned and I appreciate kinda that first point in your prepared remarks about growing profitably. You mentioned that you're going to still target reaching profitability by 2025 at the latest. You know, you have around $275 million of cash now. You burned around $80 million of free cash flow this quarter. It seems if you're gonna continue to grow rapidly in value-based care, you're gonna need to raise additional capital before hitting that 2025 bogey. Can you just help bridge your capital needs as you run towards that profitability target?
Yeah. Daniel, I think what we've said is, I'll reiterate this now, that we do not need to raise capital in order to ride out this year. That it sort of goes again with what Ali said about thinking very, very strongly about cash requirements when we take on new contracts. We're very cognizant of the burn. It's incredibly important to us to be focusing on that, and I think you should be expecting to see that reduce during the rest of this year. Some of that will be how we think about contracting. I think one of the advantages we've got at the moment is we've got a massive pipeline. We've already raised our guidance twice so far this year.
Therefore, we don't feel as though we need to be by any stretch of the imagination chasing any type of revenue. We can be incredibly selective about the revenue we take on, and making sure that that's beneficial to us from a cash perspective.
Yeah. I was really talking about 2023 through 2025. I know you're not providing that type of guidance quite yet, but just how should we think about that burden in outer years and your propensity to issue either more debt or more equity to fund that growth? Should we think about you guys titrating growth down in outer years, so you don't have to come back to the capital markets in 2023, 2024, and 2025 before you reach profitability? Or should we have you funding yourself with additional capital in outer years?
Exactly. We do not intend to be coming back to the market. Well, we don't intend at this stage to be coming back to the market in 2024, 2025, for sure. At the same time, though, it looks like we're very confident the market has basically turned massively since November last year. I think we're in a very different market environment today than we were six months ago. We might be in a very different market environment in 2024 versus 2025. Whilst I would never say never, at the same time, though, it goes back to how we think about our growth. We want to create a growth engine where that's fueled by the revenue that we're taking on rather than additional capital, and that's really our focus in the outer years.
Okay, great. One last one for me, and I'll hop back in the queue. You saw a substantial amount of PMPM uplift this quarter. I assume that's largely due to the mix shift to Medicare and DC in particular. I was curious just to get your thoughts on the causes behind that and cadence going forward. Sorry, just to add on to that. On that DC question, how much of that DC membership is flowing through your California IPAs?
To start with, all of the DC is going through California. That's where our DC contract is based. You're exactly correct, Daniel, it's all coming through the Medicare. It's basically Medicare DC is the big uplift in the PMPMs.
Thank you.
Thank you. As a reminder, that's star one to be placed into question queue. Our next question is coming from Glen Santangelo from Jefferies. Your line is now live.
Oh, yeah, thanks for taking my question. Hey, Ali, I just wanted to follow up on some of your prepared remarks. You were talking about, you know, the typical path to profitability for some of these contracts when you sign them, suggesting that, you know, they're higher cost. They have a higher cost profile when they enter the platform, and then they flip the profitability. I was wondering if you could maybe, you know, describe maybe in a little bit more generalized terms what that normalized path to profitability looks like? You know, also in your prepared remarks, you talked about the engagement trends that you originally experienced in the U.K. versus what you're seeing now in the U.S.
I was wondering if you could maybe talk about what that normalized path to profitability looked like in the U.K., and if you think it'll be very similar in the United States. I just have a quick follow-up. Thanks.
Glenn, thank you for the very thoughtful question. I think that goes to the core of our model. What we see in the U.K. is that normally when a patient uses us, the member uses us, initially, they use us once or twice, and then as they get used more and more to the platform, they use us significantly more than the average in the country. While the average usage of healthcare in the U.K. by a cohort similar to ours in the age and demographic is around 3x , our members use us at least twice as much as that. As a result of this continuous engagement, they're often monitored by us, and their conditions are helped by us.
As a result of that, we've seen cost savings as much as 35% on the totality of the medical expenses for the National Health Service in the U.K. Now, in the U.K., we are only the beneficiaries of the primary care expenditure, and therefore the savings go to the National Health Service, and you've seen a peer-reviewed data published based on the NHS data that demonstrate that. When we came to the United States, we hope to follow the same program of identifying our members early, particularly those in most need, targeting them significantly, trying to onboard them, and then as a result of that, trying to get the benefits.
Down the street. When we take on a new contract, as you quite rightly say, our starting point is, of course, zero engagement. Often, if they are Medicaid contracts, these are the people who often have been unfoundable, if you wish, or unreachable by many other companies. As a result, we have a big job on our hands. In our very first contract, it took us about 15 months or so to just reach to shy of 40% of members' engagement. As you know from your work with other organizations in other sectors, numbers like 40% is very high in any sector, but unheard of, particularly in the Medicaid sector. As we learn more and as we analyze our data continuously, what we figured out is how to engage the teams better.
What you saw in Georgia is a significant improvement on Missouri by a factor of 4x-5x . Then what we saw in Mississippi was a significant improvement on that too by, as we mentioned, by 6x-8x . We are a learning organization, as I mentioned before. We are improving our methods of reaching out to people better every time based almost on every interaction. The more the engagement comes, we should see the same approach, and we're seeing that already. Those members who are now using us, well, their average usage of our system has gone now to about 3x a year. We see that in the older cohorts, and that should bring significant benefits with.
Ali, may I just ask a related question to that? You know, if we assume for a second that we're looking at roughly, I don't know, a two- to three-year path to profitability for these different contracts or cohorts, you know, just to sort of think about that relative to the promise to be profitable in fiscal 2025. I'm trying to understand what does that really say about your expectation for future revenue growth, right? You know, if you continue to bring on business, you know, at the same level with which you did, you know, over the past 12 months, right? You're continuously adding, you know, negative profitability into the mix, right? From new contracts. I appreciate you'll be able to leverage your technology and SG&A costs, right?
The market and investors are very focused on this path to profitability as you have some older vintages maybe turning profitable, but you're adding unprofitable vintages, you know, as you go between now and 2025. I think to follow up on Dan's question, right? I think people are trying to just model out with that cash burn, just sort of given what your revenue growth rate will look like.
Uh.
Sorry. I know there's a lot there, but hopefully that makes sense.
No, no, I think that's super helpful. Let me be very clear. When we take a contract on the first year, we do everything possible to make that contract break even on that first year. The only additional cost we have, if it starts in a new state, so if the contract belongs to a new state, is we need to set up our clinical services, which as you know, is fundamentally virtual and therefore costs significantly less than setting up chains of clinics or others to deal with it. Then we have some marketing costs or reach-out costs to our members. We hope that every contract almost breaks even or comes near break even in its first year and be profitable by the second year.
The way we look at it is that in the first year, you are hopefully break even. In the second year, you make a 0%-5% gross margin contribution, and then you add up to 5% a year after that if you can. Contracts fluctuate, and there are differences between geographies, between Medicaid and Medicare and so on and so forth. We try, and today because of our very strong pipeline, we have the ability to choose the contracts that are not necessarily loss-making, and certainly not for a period of as long as two to three years.
Okay. Super helpful. Thanks, Ali.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.
As I mentioned before, I'm super grateful to all of you for your interest in Babylon in this very tough market for all of us, and you. We understand what all of you are going through, and we're grateful to you for your time in this busy period. I'm also, once again, I have to finish by being grateful to my colleagues and my Babylonian team. Companies do not deliver. It's people who do. It's their hard work and their sweat and toil that gives the result that it does. We're gonna stay steadfast on our part. We have a very clear idea of the way that the Babylon platform will deliver in time, and we'll keep going. Thank you so much for your time.
We look forward to talking to you, hopefully all on our Analyst Day on the 23rd of this month. Looking forward to seeing you there.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.