Press Release

Inovalon Reports Fourth Quarter and Full Year 2018 Results

February 20, 2019 at 4:15 PM EST

Full Year 2018 Highlights

  • Full year revenue of $527.7 million, up 17% year-over-year
  • Full year net loss of $39.2 million, resulting in net loss of $0.27 per share
  • Full year Non-GAAP net income of $39.3 million, resulting in Non-GAAP diluted net income of $0.27 per share
  • Full year Adjusted EBITDA of $151.9 million, up 39% year-over-year
  • Full year Adjusted EBITDA margin of 28.8%, up 450 basis points year-over-year
  • Full year net cash provided by operating activities of $90.4 million, representing 17.1% of revenue
  • Full year Non-GAAP net cash provided by operating activities of $103.8 million, representing 19.7% of revenue
  • Full year ACV1 signed, excluding ABILITY and Services, of $113.2 million, up 77% year-over-year

Fourth Quarter 2018 Highlights

  • Q4 revenue of $136.3 million, up 19% year-over-year
  • Q4 net loss of $11.0 million, resulting in net loss of $0.07 per share
  • Q4 Non-GAAP net income of $7.6 million, resulting in Non-GAAP diluted net income of $0.05 per share
  • Q4 Adjusted EBITDA of $38.8 million, up 52% year-over-year
  • Q4 Adjusted EBITDA margin of 28.5%, up 620 basis points year-over-year
  • Q4 ACV1 signed, excluding ABILITY and Services, of $17.0 million, up 25% year-over-year

2019 Guidance Highlights

  • Reiterating 2019 guidance, including revenue of $637 million to $657 million (reflecting 21% to 25% year-over-year growth, including 13% to 17% organic growth2)
  • Providing first quarter 2019 guidance, including revenue of $143 million to $146 million (reflecting 54% to 57% year-over-year growth, including 12% to 15% organic growth2)

Please refer to our Fourth Quarter & Full Year 2018 Earnings Presentation Supplement available at http://investors.inovalon.com for additional information, including financial metrics, guidance details, and other information that will be referenced during the Company’s conference call.

BOWIE, Md., Feb. 20, 2019 (GLOBE NEWSWIRE) -- Inovalon (Nasdaq: INOV), a leading technology company providing advanced, cloud-based platforms empowering data-driven healthcare, today announced financial results for the fourth quarter and full year of 2018, reaffirmed guidance for the full year 2019, and issued guidance for the first quarter of 2019.

“We are seeing accelerating demand for the capabilities and differentiation of our platform as seen in a 77% increase in year-over-year sales and 108 new clients, a 29% increase in new logos, year-over-year,” said Keith Dunleavy, M.D., Inovalon’s chief executive officer and chairman of the board. “Coming from each of our business units, serving payers, providers, pharmacy, and life sciences, these strong sales are fueling steady expansion of our revenue coverage visibility. Now with 96% of our 2019 guidance solutioned, we have strong confidence in our 2019 guidance of 21% to 25% year-over-year growth. Our continued focus on innovation, coupled with significantly expanded sales capabilities, implementation capacity, and meaningful operational leverage, have set the scene for the strong growth and profitability we are seeing in 2019 and beyond.”

Fourth Quarter 2018 Financial Results

  • Revenue for the fourth quarter of 2018 was $136.3 million, a year-over-year increase of 19% compared with $114.6 million for the fourth quarter of 2017.
  • Cost of revenue for the fourth quarter of 2018 was $35.9 million, or 26.3% of revenue, compared with $37.1 million, or 32.4% of revenue, for the fourth quarter of 2017. This translates into gross margin for the fourth quarter of 2018 of 73.7%, a year-over-year increase of 610 basis points compared with 67.6% for the fourth quarter of 2017. Removing the impact of ABILITY, gross margin for the fourth quarter of 2018 was 68.5%, a year-over-year increase of 90 basis points compared to the fourth quarter of 2017.
  • Net loss for the fourth quarter of 2018 was $11.0 million, resulting in net loss per share of $0.07, compared with net income of $17.4 million and diluted net income per share of $0.12, respectively, for the fourth quarter of 2017. Net income and diluted net income per share for the fourth quarter of 2017 include a benefit of $15.5 million and $0.11 per share, respectively, as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).
  • Adjusted EBITDA for the fourth quarter of 2018 was $38.8 million, a year-over-year increase of 52% compared with $25.5 million for the fourth quarter of 2017. Adjusted EBITDA margin for the fourth quarter of 2018 was 28.5%, a year-over-year increase of 620 basis points compared with 22.3% for the fourth quarter of 2017.
  • Non-GAAP net income for the fourth quarter of 2018 was $7.6 million, resulting in Non-GAAP diluted net income per share of $0.05, compared with $7.8 million and $0.06 per share, respectively, for the fourth quarter of 2017.

Full Year 2018 Financial Results

  • Revenue for 2018 was $527.7 million, a year-over-year increase of 17% compared with $449.4 million for 2017.
  • Cost of revenue for 2018 was $144.8 million, or 27.4% of revenue, compared with $151.0 million, or 33.6% of revenue for 2017. This translates into gross margin for 2018 of 72.6%, a year-over-year increase of 620 basis points compared with 66.4% for 2017. Removing the impact of ABILITY, gross margin for 2018 was 68.6%, a year-over-year increase of 220 basis points compared with 2017.
  • Net loss for 2018 was $39.2 million resulting in net loss per share of $0.27, compared with net income of $34.8 million and diluted net income per share of $0.24, respectively, for 2017. Net income and diluted net income per share for 2017 include a benefit of $15.5 million and $0.11 per share, respectively, as a result of the Tax Act.
  • Adjusted EBITDA for 2018 was $151.9 million, a year-over-year increase of 39% compared with $109.0 million for 2017. Adjusted EBITDA margin for 2018 was 28.8%, an increase of 450 basis points compared with 24.3% for 2017.
  • Non-GAAP net income for 2018 was $39.3 million, resulting in Non-GAAP diluted net income per share of $0.27, compared with $41.8 million and $0.29 per share, respectively, for 2017.
  • Net cash provided by operating activities was $90.4 million for 2018, a year-over-year decrease of 7% compared with $97.7 million for 2017, and representing 17.1% of revenue.
  • Non-GAAP net cash provided by operating activities was $103.8 million for 2018, representing 19.7% of revenue.

“We are pleased with the transformation that we have achieved in 2018,” said Jonathan Boldt, chief financial officer. “As we look ahead, the combination of our strong sales momentum and subscription-based platform offerings have set the scene for a strong expansion, with increased visibility and confidence in double-digit organic revenue growth, profitability, and cash flow generation.”

Adjusted EBITDA, Adjusted EBITDA margin, and Non-GAAP net income are Non-GAAP measures. Net income is the GAAP financial measure most directly comparable to Adjusted EBITDA and Non-GAAP net income. Reconciliations of net income to Adjusted EBITDA and Non-GAAP net income, identifying the differences between net income and each of these Non-GAAP financial measures, are included in this press release after the consolidated financial statements.

Key Highlights

  • Increasing Differentiation Resulting in Strong Demand, Sales and Expanding Market Penetration. Inovalon continued to release new capabilities enabled through the Inovalon ONE® Platform during the fourth quarter and full year of 2018, leveraging its expanding connectivity, extensive primary source datasets, increased compute and analytics sophistication, and expanding applications of its machine learning and AI capabilities. These capabilities are being seen as highly differentiated within the marketplace and have supported strong client contract renewal and retention rates, with 2019 client revenue retention seen at 103%, with all significant renewals for 2019 already completed. Additionally, the Company’s cloud platform capabilities have fueled strong new sales with the ACV of the new sales, excluding ABILITY and Services, expanding by 77% year-over-year. As further evidence of the broad-based nature of the demand, Inovalon signed business with 108 new logos in 2018, a number that reflects a 29% year-over-year increase, with the Company now proudly providing solutions to 24 of the top 25 health plans in the United States. Further, in addition to the expansion in payer marketplace penetration, the Company has seen its penetration of the specialty pharmacy marketplace expand to approximately 40%, and saw its pharmaceutical and provider market penetration each expand in 2018 – a dynamic that is seen as continuing in the first quarter of 2019 and going forward.
  • Increasing Operating Leverage and Profitability. Fourth quarter 2018 gross margin of 73.7% increased 610 basis points year-over-year, driven by the Company’s solution mix continuing to shift to increasingly higher-value, data-driven SaaS offerings, as well as ongoing leverage from automation, connectivity, and machine learning. Fourth quarter 2019 Adjusted EBITDA margin of 28.5% increased 620 basis points year-over-year, driven by higher gross margin, as well as G&A leverage from ongoing efficiency-enhancement and cost-reduction initiatives, including facility consolidation, internal process improvement, and continuing integration initiatives. Adjusting for non-comparable and one-time expenses, normalized G&A in the fourth quarter was $46.3 million, reflecting a year-over-year increase of only 10.5% in the setting of a year-over-year revenue increase of 19%. These factors driving the Company’s increasing operating leverage and profitability are seen to be continuing in 2019 and contributing to the continued projected expansion of profitability going forward.
  • Increasing Revenue Visibility. With a differentiated and expanding portfolio of cloud-based SaaS solutions enabled by the Inovalon ONE® Platform, the successful transition to a subscription-based revenue model, strong client revenue retention, and new business signings, Inovalon has increasing revenue visibility and predictability going forward. In this setting, the Company is reiterating 2019 financial guidance as provided on November 7, 2018, and providing guidance for the first quarter of 2019. Inovalon’s 2019 guidance implies revenue growth of 21% to 25% (inclusive of 13% to 17% organic growth). The Company has steadily increased its coverage visibility regarding its 2019 revenue guidance, initially announcing on November 7, 2018 that it had visibility to approximately 94.5%, a number that has increased to approximately 96% as of today.
  • Integration of ABILITY. The Company’s integration of ABILITY continued to progress well in the fourth quarter, with strong market demand for, and sales of the cloud-based point-of-care and in-workflow applications. The Company achieved the targeted $8 million 2018 cost synergy during the year, and is on track to achieve the $11 million run-rate synergy expected for 2019 and beyond. Revenue from new synergy solution offerings has begun with a positive pipeline of what are believed to be industry-leading solution releases.

Other Financial Data and Key Metrics

The following constitute other financial and key metrics which are presented quarterly.

  • Growth of Datasets: At December 31, 2018, the MORE2 Registry® dataset contained more than 264 million unique patient counts and nearly 43 billion medical event counts, increases of 10% and 13%, respectively, compared with December 31, 2017. Data resulting from the integration with ABILITY is not yet fully reflected within the MORE2 Registry® dataset and is therefore not fully reflected within the aforementioned data metrics as of this date.
  • Investment in Innovation: For the quarter ended December 31, 2018, Inovalon’s ongoing investment supporting innovations in advanced, cloud-based platforms empowering data-driven healthcare was $17.5 million, or 12.8% of revenue. For the full year 2018, Inovalon’s Investment in Innovation was $79.6 million, or 15.1% of revenue.
  • Analytical Process Count Growth: Inovalon’s trailing 12-month Patient Analytics Months (“PAM”) count, which the Company believes is indicative of the Company’s overall level of analytical activity, grew to 48 billion as of December 31, 2018, an increase of 14% as compared with December 31, 2017.

Please see the Company’s filings with the Securities and Exchange Commission (“SEC”) for further detail regarding the preceding other financial data and key metrics.

Shares Outstanding

As of January 31, 2019, the Company had 72.0 million shares of Class A common stock outstanding and 80.6 million shares of Class B common stock outstanding.

Financial Guidance

The Company is reiterating its full year 2019 guidance as initially provided on November 7, 2018 as provided below.

 
Financial Metric   Reiterated Full Year 2019
Guidance Range

Initially Provided
November 7, 2018
Revenue   $637 million to $657 million
Net income   $1 million to $5 million
Non-GAAP net income   $61 million to $69 million
Adjusted EBITDA   $200 million to $210 million
Net cash provided by operating activities   $130 million to $145 million
Capital expenditure   $52 million to $58 million
Diluted net income per share   $0.01 to $0.03
Non-GAAP diluted net income per share   $0.41 to $0.47
     

Given the strong anticipated growth seen in 2019, the Company is providing first quarter 2019 guidance below.

 
Financial Metric   First Quarter 2019
Guidance Range
Provided February 20, 2019
Revenue   $143 million to $146 million
Net loss   ($8 million) to ($7 million)
Non-GAAP net income   $10 million to $11 million
Adjusted EBITDA   $42 million to $44 million
Diluted net loss per share   ($0.05)
Non-GAAP diluted net income per share   $0.07
     

Additional assumptions made within the Company's full year and first quarter 2019 guidance are as follows:

  • While changes in the stock price could change the fully diluted share count, under the treasury stock method, guidance assumes 149 million weighted average diluted shares.
  • Guidance assumes an effective tax rate of approximately 30% for the full year.

Reconciliations of net income, the GAAP financial measure most directly comparable to Adjusted EBITDA and Non-GAAP net income, and of net cash provided by operating activities, the GAAP financial measure most directly comparable to Non-GAAP net cash provided by operating activities, identifying the differences between each of these Non-GAAP financial measures and the most directly comparable GAAP financial measure, are included in this press release after the consolidated financial statements.

Conference Call

Inovalon will host a conference call to discuss its fourth quarter 2018 results at 5:00 p.m. Eastern Time today. To participate in Inovalon’s conference call, please dial (855) 783-2604, conference ID 2689676; international callers should dial (631) 485-4882 using the same conference ID. A replay will be available on Inovalon’s investor relations website (http://investors.inovalon.com).

Please refer to our Fourth Quarter & Full Year 2018 Earnings Presentation Supplement available at http://investors.inovalon.com for additional information, including financial metrics, guidance details, and other information that will be referenced during the Company’s conference call.

About the Inovalon ONE® Platform

The Inovalon ONE® Platform is an integrated cloud-based platform of more than 80 individual proprietary technology toolsets and deep data assets able to be rapidly configured to empower the operationalization of large-scale, data-driven healthcare initiatives. Each proprietary technology toolset is referred to as a Component, which are grouped into Modules, and informed by the data of billions of medical events within Inovalon’s proprietary datasets. Combinations of Components and Modules are configured to empower highly differentiated solutions for client needs quickly and in a highly scalable fashion. The flexibility of the modular design of the Platform enables clients to integrate the capabilities of the Platform with their own internal capabilities or other third-party solutions. The Platform brings to the marketplace a highly extensible, national-scale capability to interconnect with the healthcare ecosystem on a massive scale, aggregate and analyze data in petabyte volumes, arrive at sophisticated insights in real-time, and drive meaningful impact wherever it is analytically identified best to intervene and intuitively visualize data and information to inform business strategy and execution.

About Inovalon

Inovalon is a leading technology company providing cloud-based platforms empowering data-driven healthcare. Through the Inovalon ONE® Platform, Inovalon brings to the marketplace a national-scale capability to interconnect with the healthcare ecosystem, aggregate and analyze data in real-time, and empower the application of resulting insights to drive meaningful impact at the point of care. Leveraging its platform, unparalleled proprietary data sets, and industry-leading subject matter expertise, Inovalon enables better care, efficiency, and financial performance across the healthcare ecosystem. From health plans and provider organizations, to pharmaceutical, medical device, and diagnostics companies, Inovalon's unique achievement of value is delivered through the effective progression of “Turning Data into Insight, and Insight into Action®.” Supporting thousands of clients, including 24 of the top 25 U.S. health plans and 22 of the top 25 global pharma companies, Inovalon's technology platforms and analytics are informed by data pertaining to more than 964,000 physicians, 519,000 clinical facilities, 264 million Americans, and 42 billion medical events. For more information, visit www.inovalon.com.

Forward Looking Statements

Certain statements contained in this press release constitute forward-looking statements within the meaning of, and are intended to be covered by the safe harbor provisions of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this press release other than statements of historical fact, including but not limited to statements regarding the roll-out of any product or capability, the timing, performance characteristics and utility of any such product or capability, and the impact of any such product or capability on the healthcare industry, future results of operations and financial position, business strategy and plans, market growth, and objectives for future operations, are forward-looking statements. The words “believe,” “may,” “see,” “will,” “estimate,” “continue,” “anticipate,” “assume,” “intend,” “expect,” “project,” “look forward,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this press release include, but are not limited to, statements regarding the expected benefits and impact of the combination of Inovalon and ABILITY, expectations about future business plans, prospective performance and opportunities, strategies and business plans, expectations regarding future results, expectations regarding the size of our datasets, our ability to meet financial guidance for the first quarter of and full year 2019, and statements with respect to visibility, revenue retention and recurring revenue, including ACV. Inovalon has based these forward-looking statements largely on current expectations and projections about future events and trends that may affect financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs as of the date of this press release. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, which could cause the future events and trends discussed in this press release not to occur and could cause actual results to differ materially and adversely from those anticipated or implied in the forward-looking statements.

These risks, uncertainties, and assumptions include, among others: the Company’s ability to continue and manage growth, including successfully integrating acquisitions, including ABILITY; ability to grow the client base, retain and renew the existing client base and maintain or increase the fees and activity with existing clients; the effect of the concentration of revenue among top clients; the ability to innovate new services and adapt platforms and toolsets; the ability to successfully implement growth strategies, including the ability to expand into adjacent verticals, such as direct to consumer, growing channel partnerships, expanding internationally and successfully pursuing acquisitions; the ability to successfully integrate our acquisitions and the ability of the acquired business to perform as expected; the successful implementation and adoption of new platforms and solutions, including the Inovalon ONE® Platform, ScriptMed® Cloud, Clinical Data Extraction as a Service (CDEaaS™), Natural Language Processing as a Service (NLPaaS™), and Elastic Container Technology (ECT™); the possibility of technical, logistical or planning issues in connection with the Company’s investment in and successful deployment of the Company’s products, services and technological advancements; the ability to enter into new agreements with existing or new platforms, products and solutions in the timeframes expected, or at all; the impact of pending M&A activity in the managed care industry, including potential positive or negative impact on existing contracts or the demand for new contracts; the effects of and costs associated with compliance with regulations applicable to the Company, including regulations relating to data protection and data privacy; the effects of changes in tax laws in the jurisdictions in which we operate; the ability to protect the privacy of clients’ data and prevent security breaches; the effect of competition on the business; the timing, size and effect of business realignment and restructuring charges; and the efficacy of the Company’s platforms and toolsets. Additional information is also set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 20, 2019, included under the heading Item 1A, “Risk Factors,” and in subsequent filings with the SEC. The Company is under no duty to, and disclaims any obligation to, update any of these forward-looking statements after the date of this press release or conform these statements to actual results or revised expectations, except as required by law.

Use of Non-GAAP Financial Measures

In the Company’s earnings releases, prepared remarks, conference calls, slide presentations and webcasts, there may be use or discussion of non-GAAP financial measures. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed, and a reconciliation of the differences between the comparable GAAP financial measure and each non-GAAP financial measure are included in this press release after the consolidated financial statements.

1 Annualized Contract Value (ACV) is defined as the total revenue expected from a contract divided by the duration of that contract.
2 Organic revenue growth is defined as growth excluding revenue from businesses acquired within the last 12 months.


Inovalon Holdings, Inc.
Consolidated Statements of Income (unaudited)

(In thousands, except per-share amounts) Three Months Ended
December 31,
  Twelve Months Ended
December 31,
  2018   2017   2018   2017
Revenue $ 136,314     $ 114,619     $ 527,676     $ 449,358  
Expenses:              
Cost of revenue(1) 35,898     37,132     144,826     151,046  
Sales and marketing(1) 13,802     9,738     45,534     34,103  
Research and development(1) 7,092     6,533     28,638     27,383  
General and administrative(1) 48,265     41,946     205,038     149,948  
Depreciation and amortization 26,868     14,575     96,725     53,089  
Restructuring expense 36         9,500      
Total operating expenses 131,961     109,924     530,261     415,569  
Income (Loss) from operations 4,353     4,695     (2,585 )   33,789  
Other income and (expenses):              
Interest income 307     1,384     2,181     5,429  
Interest expense (16,624 )   (1,676 )   (50,898 )   (6,225 )
Other expense, net (414 )   (25 )   (2,255 )   (406 )
(Loss) Income before taxes (12,378 )   4,378     (53,557 )   32,587  
Benefit from income taxes (1,358 )   (13,071 )   (14,393 )   (2,231 )
Net (loss) income $ (11,020 )   $ 17,449     $ (39,164 )   $ 34,818  
Net (loss) income attributable to common stockholders, basic and diluted $ (11,020 )   $ 16,864     $ (39,164 )   $ 33,828  
Net (loss) income per share attributable to common stockholders, basic and diluted:              
Basic net (loss) income per share $ (0.07 )   $ 0.12     $ (0.27 )   $ 0.24  
Diluted net (loss) income per share $ (0.07 )   $ 0.12     $ (0.27 )   $ 0.24  
Weighted average shares of common stock outstanding:              
Basic 147,547     140,338     145,389     142,225  
Diluted 147,547     140,928     145,389     142,737  

_______________________________________________________

(1) Includes stock-based compensation expense as follows:              
  Cost of revenue $ 83     $ 463     $ 237     $ 1,652  
  Sales and marketing 359     555     735     2,011  
  Research and development 336     364     1,937     1,293  
  General and administrative 4,238     3,611     13,253     12,362  
  Total stock-based compensation expense $ 5,016     $ 4,993     $ 16,162     $ 17,318  
 


 
Inovalon Holdings, Inc.
Consolidated Balance Sheets (unaudited)
 
(In thousands, except share and par value amounts) December 31,
 2018
  December 31,
 2017
ASSETS      
Current assets:      
Cash and cash equivalents $ 115,591     $ 208,944  
Short-term investments 7,000     267,288  
Accounts receivable (net of allowances of $3,350 and $2,038 at December 31, 2018 and 2017, respectively) 104,405     90,054  
Prepaid expenses and other current assets 34,801     10,441  
Income tax receivable 10,330     11,987  
Total current assets 272,127     588,714  
Non-current assets:      
Property, equipment and capitalized software, net 141,758     125,768  
Goodwill 956,029     184,932  
Intangible assets, net 535,343     89,326  
Other assets 16,158     6,338  
Total assets $ 1,921,415     $ 995,078  
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable and accrued expenses $ 31,295     $ 34,109  
Accrued compensation 25,298     18,592  
Other current liabilities 50,765     15,277  
Deferred revenue 20,628     6,954  
Deferred rent 619     1,818  
Credit facilities 9,800     45,000  
Capital lease obligation 2,905     336  
Total current liabilities 141,310     122,086  
Non-current liabilities:      
Credit facilities, less current portion 939,514     191,250  
Capital lease obligation, less current portion 13,927     12,109  
Deferred rent, less current portion 3,186     219  
Other liabilities 30,220      
Deferred income taxes 110,669     26,642  
Total liabilities 1,238,826     352,306  
Commitments and contingencies      
Stockholders’ equity:      
Common stock, $0.000005 par value, 900,000,000 shares authorized, zero shares issued and outstanding at each of December 31, 2018 and 2017, respectively      
Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 86,679,575 shares issued and 72,059,400 shares outstanding at December 31, 2018; 77,588,018 shares issued and 62,967,843 shares outstanding at December 31, 2017      
Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 80,608,685 shares issued and outstanding at December 31, 2018; 80,957,495 shares issued and outstanding at December 31, 2017 1     1  
Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at December 31, 2018 and 2017, respectively      
Additional paid-in-capital 618,674     534,159  
Retained earnings 270,471     308,905  
Treasury stock, at cost, 14,620,175 shares at December 31, 2018 and 2017 (199,817 )   (199,817 )
Other comprehensive loss, net of tax (6,740 )   (476 )
Total stockholders’ equity 682,589     642,772  
Total liabilities and stockholders’ equity $ 1,921,415     $ 995,078  
 


 
Inovalon Holdings, Inc.
Consolidated Statements of Cash Flows (unaudited)
 
  Year Ended December 31,
(In thousands) 2018   2017
Cash flows from operating activities:      
Net (loss) income $ (39,164 )   $ 34,818  
Adjustments to reconcile net income to net cash provided by operating activities:      
Stock-based compensation expense 16,162     17,318  
Depreciation 52,742     37,853  
Amortization of intangibles 43,983     15,236  
Amortization of premiums on short-term investments 289     1,958  
Amortization of debt issuance costs and debt discount 3,138      
Deferred income taxes (12,495 )   (6,665 )
Restructuring expense, non-cash 7,075      
Change in fair value of contingent consideration 7,212     (5,200 )
Bargain purchase gain     (1,434 )
Other 332     406  
Changes in assets and liabilities:      
Accounts receivable 3,280     (977 )
Prepaid expenses and other current assets (20,002 )   3,346  
Income taxes receivable 2,208     3,293  
Other assets (4,209 )   (3,355 )
Accounts payable and accrued expenses (6,007 )   8,252  
Accrued compensation 9,292     3,030  
Other current and non-current liabilities 17,672     (5,373 )
Deferred rent 2,219     (440 )
Deferred revenue 6,674     (4,360 )
Net cash provided by operating activities 90,401     97,706  
Cash flows from investing activities:      
Maturities of short-term investments 96,588     174,416  
Sales of short-term investments 161,772     1,175  
Purchases of property and equipment (25,505 )   (32,565 )
Investment in capitalized software (39,469 )   (32,977 )
Acquisition, net of cash acquired of $23,850 and $1,535, respectively (1,082,740 )   (3,490 )
Net cash (used in) provided by investing activities (889,354 )   106,559  
Cash flows from financing activities:      
Repurchase of common stock     (93,586 )
Proceeds from credit facility borrowings, net of discount 965,300      
Repayment of credit facility borrowings (238,700 )   (30,000 )
Payments for debt issuance costs (18,269 )    
Proceeds from exercise of stock options 1,833     4,967  
Capital lease obligations paid (1,201 )   (113 )
Tax payments for equity award issuances (3,363 )   (4,272 )
Net cash provided by (used in) financing activities 705,600     (123,004 )
(Decrease) Increase in cash and cash equivalents (93,353 )   81,261  
Cash and cash equivalents, beginning of period 208,944     127,683  
Cash and cash equivalents, end of period $ 115,591     $ 208,944  
Supplemental cash flow disclosure:      
Cash (received) paid during the year for:      
Income taxes, net of refunds $ (4,136 )   $ 962  
Interest 43,573     5,972  
Non-cash investing activities:      
Capital lease obligations incurred 5,677     12,231  
Accruals of purchases of property, equipment 12,097     7,924  
Accruals for investment in capitalized software 1,495     2,711  
Acquisition consideration 84,156      
           
           

Inovalon Holdings, Inc.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (unaudited)

Inovalon defines Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) as net income or loss calculated in accordance with GAAP, adjusted for the impact of depreciation and amortization, other expense, net, interest income, interest expense, provision for income taxes, stock-based compensation, acquisition costs, restructuring expense, tax on equity exercises, and other non-comparable items. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of revenue.  A reconciliation of net income to Adjusted EBITDA follows:

(In thousands, except percentages) Three Months Ended
December 31,
  Twelve Months Ended
December 31,
  2018   2017   2018   2017
Reconciliation of Net (loss) income to Adjusted EBITDA:              
Net (loss) income $ (11,020 )   $ 17,449     $ (39,164 )   $ 34,818  
Depreciation and amortization 26,868     14,575     96,725     53,089  
Interest income (307 )   (1,384 )   (2,181 )   (5,429 )
Interest expense 16,624     1,676     50,898     6,225  
Other expense, net 414     25     2,255     406  
Benefit from income taxes (1,358 )   (13,071 )   (14,393 )   (2,231 )
EBITDA 31,221     19,270     94,140     86,878  
Stock-based compensation 5,016     4,993     16,162     17,318  
Acquisition costs:              
Transaction costs 1,127     356     6,654     1,177  
Integration costs 1,293     289     6,788     1,805  
Contingent consideration accretion (1,794 )   (2,300 )   7,306     (5,200 )
Compensatory contingent consideration (358 )   558     1,674     1,966  
Restructuring expense 36         9,500      
Tax on equity exercises             32  
Other non-comparable items(1) 2,304     2,365     9,721     5,038  
Adjusted EBITDA $ 38,845     $ 25,531     $ 151,945     $ 109,014  
Adjusted EBITDA margin 28.5 %   22.3 %   28.8 %   24.3 %
  1. Other “non-comparable items” include items that are not comparable across reporting periods or items that do not otherwise relate to the Company’s ongoing financial results, such as certain employee related expenses attributable to advancements in automation and operational efficiencies, and legal expenses beyond those in the normal course of business. Non-comparable items are excluded from Adjusted EBITDA in order to more effectively assess the Company’s period over period and ongoing operating performance.


Inovalon Holdings, Inc.

Non-GAAP net income (unaudited)

Inovalon defines Non-GAAP net income as net income or loss calculated in accordance with GAAP, adjusted to exclude tax-affected stock-based compensation expense, acquisition costs, restructuring expense, amortization of acquired intangible assets, amortization of debt issuance costs and debt discount, tax on equity exercises, and other non-comparable items. The Company defines Non-GAAP basic net income per share as Non-GAAP net income divided by basic weighted average shares outstanding. The Company defines Non-GAAP diluted net income per share as Non-GAAP net income divided by diluted weighted average shares outstanding. A reconciliation of net income to Non-GAAP net income follows:

(In thousands, except per-share amounts) Three Months Ended
December 31,
  Twelve Months Ended
December 31,
  2018   2017   2018   2017
Reconciliation of Net (loss) income to Non-GAAP net income:              
Net (loss) income $ (11,020 )   $ 17,449     $ (39,164 )   $ 34,818  
Stock-based compensation 5,016     4,993     16,162     17,318  
Acquisition costs:              
Transaction costs 1,127     356     6,654     1,177  
Integration costs 1,293     289     6,788     1,805  
Contingent consideration accretion (1,794 )   (2,300 )   7,306     (5,200 )
Compensatory contingent consideration (358 )   558     1,674     1,966  
Amortization of acquired intangible assets 13,366     3,851     43,983     15,236  
Amortization of debt issuance costs and debt discount 1,062         3,138      
Restructuring expense 36         9,500      
Tax on equity exercises             32  
Other non-comparable items(1) 2,304     2,365     9,721     5,038  
Tax impact of add-back items (3,402 )   (4,328 )   (26,441 )   (14,949 )
Tax Act benefit     (15,461 )       (15,461 )
Non-GAAP net income $ 7,630     $ 7,772     $ 39,321     $ 41,780  
               
GAAP basic net (loss) income per share $ (0.07 )   $ 0.12     $ (0.27 )   $ 0.24  
GAAP diluted net (loss) income per share $ (0.07 )   $ 0.12     $ (0.27 )   $ 0.24  
Non-GAAP basic net income per share $ 0.05     $ 0.06     $ 0.27     $ 0.29  
Non-GAAP diluted net income per share $ 0.05     $ 0.06     $ 0.27     $ 0.29  
Weighted average shares of common stock outstanding:              
Basic 147,547     140,338     145,389     142,225  
Diluted 147,775     140,928     145,611     142,737  
  1. Other “non-comparable items” include items that are not comparable across reporting periods or items that do not otherwise relate to the Company’s ongoing financial results, such as certain employee related expenses attributable to advancements in automation and operational efficiencies, and legal expenses beyond those in the normal course of business. Non-comparable items are excluded from Non-GAAP net income in order to more effectively assess the Company’s period over period and ongoing operating performance.


Inovalon Holdings, Inc.

Non-GAAP net cash provided by operating activities (unaudited)

The Company defines Non-GAAP net cash provided by operating activities as net cash provided by operating activities calculated in accordance with GAAP, adjusted to exclude certain acquisition costs, specifically transaction costs and integration costs. The Company uses Non-GAAP net cash provided by operating activities as a liquidity measure to evaluate its ability to generate cash to support its ongoing business operations, to service and repay debt, and to invest in its businesses. A reconciliation of net cash provided by operating activities to Non-GAAP net cash provided by operating activities follows:

(In thousands) Year Ended
December 31, 2018
Reconciliation of Net cash provided by operating activities to Non-GAAP net cash provided by operating activities:  
Net cash provided by operating activities $ 90,401
Acquisition costs:  
Transaction costs 6,654
Integration costs 6,788
Non-GAAP net cash provided by operating activities $ 103,843
 
 

Inovalon Holdings, Inc.
Key Metrics (unaudited)

The Company believes the key metrics illustrated in the tables below are indicative of its overall level of analytical activity and its underlying growth in the business. Data resulting from the integration with ABILITY is not yet fully reflected within the MORE2 Registry® dataset and is therefore not fully reflected within the related data metrics below as of this date.

  December 31,
(In thousands) 2018   2017
MORE2 Registry® dataset metrics      
Unique patient count(1) 264,220   240,180
Medical event count(2) 42,898,600   37,813,583
Trailing 12 month Patient Analytics Months (PAM)(3) 48,099,042   42,156,422
  1. Unique patient count is defined as each unique, longitudinally matched, de-identified natural person represented in the MORE2 Registry® as of the end of the period presented.
  2. Medical event count is defined as the total number of discrete medical events as of the end of the period presented (for example, a discrete medical event typically results from the presentation of a patient to a physician for the diagnosis of diabetes and congestive heart failure in a single visit, the presentation of a patient to an emergency department for chest pain, etc.).
  3. Patient Analytics Months, or PAM, is defined as the sum of the analytical processes performed on each respective patient within patient populations covered by clients under contract. As used in the metric, an “analytical process” is a distinct set of data calculations undertaken by the Company which is initiated and completed within the Company’s platform solutions to examine a specific question such as whether a patient is believed to have a condition such as diabetes, or worsening of the disease, during a specific time period.


Inovalon Holdings, Inc.

Investment in Innovation (unaudited)

The Company’s business model is based upon the ability to deliver value to clients through the combination of advanced, cloud-based data analytics and data-driven intervention platforms focused on the achievement of meaningful and measurable improvements in clinical quality outcomes and financial performance in healthcare. The Company’s ability to deliver this value is dependent in part on the ability to continue to innovate, design new capabilities, and bring these capabilities to market in an enterprise scale. The Company’s continued ability to innovate the platform and bring differentiated capabilities to market is an important aspect of the Company’s business success. The Company’s investment in innovation includes costs for research and development, capitalized software development, and expenditures related to hardware and software platforms on which data analytics and data-driven interventions capabilities are deployed as summarized below.

  Three Months Ended
December 31,
  Twelve Months Ended
December 31,
(In thousands, except percentages) 2018   2017   2018   2017
Investment in Innovation:              
Research and development(1) $ 7,092     $ 6,533     $ 28,638     $ 27,383  
Capitalized software development(2) 8,145     10,219     38,253     34,789  
Research and development infrastructure investments(3) 2,260     9,602     12,748     23,642  
Total investment in innovation $ 17,497     $ 26,354     $ 79,639     $ 85,814  
As a percentage of revenue              
Research and development(1) 5 %   6 %   5 %   6 %
Capitalized software development(2) 6 %   9 %   7 %   8 %
Research and development infrastructure investments(3) 2 %   8 %   3 %   5 %
Total investment in innovation 13 %   23 %   15 %   19 %
  1. Research and development primarily includes employee costs related to the development and enhancement of our service offerings.
  2. Capitalized software development includes capitalized costs incurred to develop and enhance functionality for our platform solutions.
  3. Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement.
 
 
Inovalon Holdings, Inc.
Forward-Looking Guidance Adjusted EBITDA (unaudited)
 
  Guidance Range
  Year Ending
December 31, 2019
(In millions) Low   High
Reconciliation of Forward-Looking Guidance Net income to Adjusted EBITDA:      
Net income $ 1     $ 5  
Depreciation and amortization 107     107  
Interest expense 66     66  
Interest income (1 )   (1 )
Provision for income taxes(1)     1  
EBITDA 173     178  
Stock-based compensation 19     19  
Acquisition costs:      
Transaction costs 1     1  
Integration costs 3     4  
Contingent consideration 1     4  
Other non-comparable items(2) 3     4  
Adjusted EBITDA $ 200     $ 210  
Adjusted EBITDA margin 31.4 %   32.0 %
 


           
    Guidance Range   
    Three Months Ending
March 31, 2019
 
(In millions)   Low   High  
Reconciliation of Forward-Looking Guidance Net loss to Adjusted EBITDA:          
Net loss    $  (8)    $  (7)  
Depreciation and amortization    28     28  
Interest expense      16     16  
Interest income     (1)     (1)  
Provision for income taxes (1)   (3)     (2)  
EBITDA      32     34  
Stock‑based compensation    6     6  
Acquisition costs:          
Transaction costs     1     1  
Integration costs     1     1  
Other non-comparable items (2)   2     2  
Adjusted EBITDA     $  42    $  44  
Adjusted EBITDA margin 29.4%   30.1%  
           
(1) A 30% tax rate is assumed in order to approximate the Company’s effective statutory corporate tax rate.
(2) Other “non-comparable items” include items that are not comparable across reporting periods or items that do not otherwise relate to the Company’s ongoing financial results, such as certain employee related expenses attributable to advancements in automation and operational efficiencies, and legal expenses beyond those in the normal course of business. Non-comparable items are excluded from Adjusted EBITDA in order to more effectively assess the Company’s period over period and ongoing operating performance.

 


 
 
Inovalon Holdings, Inc.
Forward-Looking Guidance Non-GAAP net income (unaudited)
 
  Guidance Range
  Year Ending
December 31, 2019
(In millions, except per-share amounts) Low   High
Reconciliation of Forward-Looking Guidance Net income to Non-GAAP net income:      
Net income $ 1     $ 5  
Stock-based compensation 19     19  
Acquisition costs:      
Transaction costs 1     1  
Integration costs 3     4  
Contingent consideration 1     4  
Amortization of acquired intangible assets 53     53  
Amortization of debt issuance costs and debt discount 4     4  
Other non-comparable items(1) 3     4  
Tax impact of add-back items(2) (24 )   (25 )
Non-GAAP net income $ 61     $ 69  
       
GAAP diluted net income per share $ 0.01     $ 0.03  
Non-GAAP diluted net income per share $ 0.41     $ 0.47  
Weighted average shares of common stock outstanding - diluted 149     149  
 


           
    Guidance Range   
    Three Months Ending
March 31, 2019
 
(In millions, except per share amounts)   Low   High  
Reconciliation of Forward-Looking Guidance Net loss to Non-GAAP net income:          
Net loss    $  (8)    $  (7)  
Stock‑based compensation      6     6  
Acquisition costs:          
Transaction costs     1     1  
Integration costs     1     1  
Amortization of acquired intangible assets    13     13  
Amortization of debt issuance costs and debt discount   1     1  
Other non-comparable items (1)     2     2  
Tax impact of add-back items (2)     (6)     (6)  
Non-GAAP net income     $  10    $  11  
           
GAAP diluted net loss per share    $  (0.05)    $  (0.05)  
Non-GAAP diluted net income per share  $  0.07    $  0.07  
Weighted average shares of common stock outstanding - diluted   148     148  
           
(1) Other “non-comparable items” include items that are not comparable across reporting periods or items that do not otherwise relate to the Company’s ongoing financial results, such as certain employee related expenses attributable to advancements in automation and operational efficiencies, and legal expenses beyond those in the normal course of business. Non-comparable items are excluded from non-GAAP net income in order to more effectively assess the Company’s period over period and ongoing operating performance.
(2) A 30% tax rate is assumed in order to approximate the Company’s effective statutory corporate tax rate.


Non-GAAP Financial Measures

Inovalon provides the measures Adjusted EBITDA, Adjusted EBITDA margin, and Non-GAAP net income as additional information for evaluating the Company’s operating results and Non-GAAP net cash provided by operating activities as a liquidity measure to evaluate the Company’s ability to generate cash to support its ongoing business, to service and repay debt, and to invest in its business. These measures are not prepared in accordance with, or as an alternative for, GAAP accounting and may be different from non-GAAP measures used by other companies.

Investors frequently have requested information from management regarding depreciation, amortization and other non-cash charges, such as stock-based compensation, as well as the impact of non-comparable items and management believes, based on discussions with investors, that these non-GAAP measures enhance investors’ ability to assess Inovalon’s historical and projected future financial performance. While management believes these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of non-GAAP financial measures. For example, one limitation of Adjusted EBITDA is that it excludes depreciation and amortization, which represents the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our business. Inovalon compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reconciling the non-GAAP financial measures to their most comparable GAAP financial measures. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the comparable GAAP measures that are provided above.

These non-GAAP measures include financial information that is prepared in accordance with GAAP and presented in our consolidated financial statements and are used to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions and are an important factor in determining variable compensation.

Adjusted EBITDA and Adjusted EBITDA Margin

The Company defines Adjusted EBITDA as net income calculated in accordance with GAAP, adjusted for the impact of depreciation and amortization, other expense, net, interest income, interest expense, provision for income taxes, stock-based compensation, acquisition costs (including transaction costs, integration costs, costs related to contingent consideration accretion and compensatory contingent consideration), restructuring expense, tax on equity exercises, and other non-comparable items. A reconciliation of net income, which is the most directly comparable GAAP financial measure, to Adjusted EBITDA is provided above.

Adjusted EBITDA margin is the Company’s calculation of Adjusted EBITDA, divided by revenue calculated in accordance with GAAP.

The Company uses Adjusted EBITDA and Adjusted EBITDA margin as supplemental measures of performance to gain insight into operating effectiveness. The Company uses Adjusted EBITDA and Adjusted EBITDA margin as key metrics to assess its ability to increase revenues while controlling expense growth and the scalability of the Company’s business model. The Company believes that the exclusion of the expenses eliminated in calculating Adjusted EBITDA and Adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of the Company’s core business and operating results by excluding items that are not comparable across reporting periods or that do not otherwise relate to the Company’s ongoing operating results. Accordingly, the Company believes that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating the Company’s operating results. However, use of Adjusted EBITDA and Adjusted EBITDA margin as analytical tools has limitations, and investors and others should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in Inovalon’s industry, might calculate Adjusted EBITDA and Adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Non-GAAP net income and Non-GAAP net income per share

The Company defines Non-GAAP net income as net income calculated in accordance with GAAP, adjusted to exclude tax-affected stock-based compensation expense, acquisition costs (including transaction costs, integration costs, costs related to contingent consideration accretion and compensatory contingent consideration), restructuring expense, amortization of acquired intangible assets, amortization of debt issuance costs and debt discount, tax on equity exercises, and other non-comparable items.

The Company defines Non-GAAP basic net income per share as Non-GAAP net income divided by basic weighted average shares outstanding. The Company defines Non-GAAP diluted net income per share as Non-GAAP net income divided by diluted weighted average shares outstanding.

The Company uses Non-GAAP net income as a supplemental measure of performance to gain insight into financial effectiveness. The Company uses Non-GAAP net income as a key metric to assess its ability to increase revenues while controlling expense growth and the scalability of its business model. The Company believes that the exclusion of the expenses eliminated in calculating Non-GAAP net income provides management and investors a useful measure for period to period comparisons of the Company’s core business and financial results by excluding items that are not comparable across reporting periods or that do not otherwise relate to its ongoing financial results. Accordingly, the Company believes that Non-GAAP net income provides useful information to investors and others in understanding and evaluating the Company’s performance. However, use of Non-GAAP net income as an analytical tool has limitations, and investors and others should not consider this measure in isolation or as a substitute for analysis of the Company’s financial results as reported under GAAP. In addition, other companies, including companies in Inovalon’s industry, might calculate Non-GAAP net income or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Non-GAAP net cash provided by operating activities

The Company defines Non-GAAP net cash provided by operating activities as net cash provided by operating activities calculated in accordance with GAAP, adjusted to exclude certain acquisition costs, specifically transaction costs and integration costs. The Company uses Non-GAAP net cash provided by operating activities as a liquidity measure to evaluate its ability to generate cash to support its ongoing business operations, to service and repay debt, and to invest in its businesses. The Company believes that the exclusion of certain acquisition costs in calculating Non-GAAP net cash provided by operating activities provides management and investors a useful measure for the expected cash flows generated from the Company’s core business by excluding items that do not otherwise relate to its ongoing liquidity. However, use of Non-GAAP net cash provided by operating activities has limitations, and investors and others should not consider this measure in isolation or as a substitute for analysis of the Company’s liquidity as reported under GAAP. In addition, other companies, including companies in Inovalon’s industry, might calculate Non-GAAP net cash provided by operating activities or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Contacts:

Inovalon
Kim E. Collins
Phone: 301-809-4000 x1473
kcollins@inovalon.com

 

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Source: Inovalon Holdings, Inc.

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