Inovalon Reports Second Quarter 2016 Results

BOWIE, Md., Aug. 3, 2016 /PRNewswire/ --

Second Quarter 2016 Highlights

• Second quarter revenue of $123.8 million
• Second quarter net income of $16.3 million, resulting in diluted net income of $0.11 per share
• Second quarter Non-GAAP net income of $20.6 million, resulting in Non-GAAP diluted net income of $0.14 per share
• Second quarter Adjusted EBITDA of $40.8 million
• MORE² Registry^® dataset medical event count expanded to more than 11.7 billion
• Accelerating transition to pure cloud-based platform and adjusting 2016 financial guidance

Please refer to our Second Quarter 2016 Earnings Presentation Supplement available at http://investors.inovalon.com.

Inovalon (Nasdaq: INOV), a leading technology company providing advanced cloud-based data analytics and data-driven intervention platforms to the healthcare industry, today announced financial results for the second quarter of 2016.

"During the second quarter, we made strong progress against our strategic plan. Revenue in the first half was consistent with our expectations, our investments in sales and marketing translated into significant sales pipeline expansion, we pushed further into adjacent markets, saw strong increases in interconnectivity, dataset size, and compute volumes, and saw growing market appeal for our big data cloud platform capabilities," said Keith Dunleavy, M.D., Inovalon's chief executive officer and chairman of the board.

"Concurrently, while we achieved many significant milestones during the quarter, the time it took for our investment in sales capacity to translate into pipeline growth has resulted in the associated benefit being achieved later in the year than planned. In addition, we have seen an accelerated change in our clients' purchasing patterns on one of our older product lines. We are proactively addressing their needs by converting to a more modular platform which leverages our expanding cloud capabilities. This conversion, which will result in a short-term revenue impact, is being well received by existing and potential clients and bodes well for us in the medium and longer term. The associated revenue impact, as well as higher investments in product innovation, technology infrastructure, and sales and marketing, have led us to revise our expectations for the second half of 2016. However, we see these impacts as a short-term phenomenon amidst a strong set of positive indicators and an early view of what we see as a strong 2017. We remain confident in what we are seeing with respect to our path forward and are steadfastly focused on leading the marketplace's transformation to data-driven healthcare and the achievement of our 2020 growth and profitability goals."

Second Quarter 2016 Financial Results

• Revenue for the second quarter of 2016 was $123.8 million, an increase of approximately $6.2 million, or 5%, compared with $117.6 million for the second quarter of 2015.

• Cost of revenue for the second quarter of 2016 was $43.2 million, or 35% of revenue, compared with 29% of revenue for the second quarter of 2015.

• Net income for the second quarter of 2016 was $16.3 million resulting in diluted net income per share of $0.11, compared with $26.1 million and $0.17 per share, respectively, for the second quarter of 2015.

• Adjusted EBITDA was $40.8 million for the second quarter of 2016, compared with $52.7 million for the second quarter of 2015. Adjusted EBITDA margin was 32.9% in the second quarter of 2016, compared with 44.8% for the second quarter of 2015.

• Non-GAAP net income for the second quarter of 2016 was $20.6 million, resulting in Non-GAAP diluted net income per share of $0.14, compared with $27.4 million and $0.18 per share, respectively, for the second quarter of 2015.

• Net cash provided by operating activities was $32.4 million for the first six months of 2016, an increase of 64% from $19.7 million in the year-ago period.

"Revenue in the first half of 2016 was in-line with our previously conveyed expectations, and we continue to deliver healthy cash flow that further strengthens our balance sheet," said Thomas Kloster, chief financial officer of Inovalon. "During the quarter we initiated the process of transitioning several of our more legacy platforms to more advanced cloud-based technologies, initiated several new platform initiatives, and accelerated an expansion of our big data cloud capability infrastructure. These decisions, and the associated decision to avoid inappropriately chasing lower-profitability business, will have an impact on our shorter term financial performance over the next few quarters. We believe, however, that these decisions are positive for the Company's differentiation, growth, and profitability in the medium and longer term."

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

• Demand and Record Sales Pipeline: Our sales pipeline has been expanding significantly, more than doubling in magnitude since the beginning of the year a reflection of our investments in sales and marketing as well as our expanding platform capabilities. In Q2, we signed new business in virtually every line of business and product line. Signings included both multi-year single product contracts and multi-product contracts, and with ACOs, regional health plans, multi-state health plans, provider organizations, life sciences companies, and leading national health plans. In a number of cases we have been engaged to implement up to eight products, displacing four or five competitors at a time we believe this represents the beginning of a shift back toward greater appreciation of end-to-end integrated capabilities, for which Inovalon is uniquely positioned. Of additional note, Inovalon signed large-scale implementations of our leading QSI-XL cloud-based big data quality outcomes analytics platform with market-leading national healthcare systems, and signed multiple Data Diagnostics contracts with a range of client types and sizes. In both products' cases, there is also a significant number of prospective clients in various stages of discussion and contracting. While the ramping of our sales infrastructure took longer than desired, and the "later-shifted" nature of the ramp results in a degree of revenue delay, the appeal and traction of our products in the market is readily apparent and expanding.

• Progress Expanding into Adjacent Markets: Consistent with our stated growth strategy, the Company continues to successfully expand into the adjacent markets of pharma/life sciences and providers. During the second quarter, we entered into multiple pharmaceutical contracts, including with Bristol-Myers Squibb, a leading global BioPharma company, to help support BMS's real-world outcomes and value-based contracting initiatives. The engagement leverages the capabilities of Inovalon's data platforms and Avalere's extensive industry experience to address a significant emerging trend in healthcare. A material component of the Company's current investment efforts is occurring in the platform capabilities planned for the provider and life sciences markets. We are excited about our planned and growing capabilities in these adjacent markets and are pleased with the growing pipeline of opportunities we see before us.

• Cloud Capability Investment Acceleration & Product Line Transition:  During the quarter we embarked on an ambitious program to accelerate the transition of our entire platform portfolio into a pure cloud capability. We initiated investments in significant core platform capabilities to allow for dynamic storage and compute capacity provisioning, scaling and load balancing across various clouds and the creation of additional large-scale private cloud facilities. By early 2017, we will have the ability to balance between three private clouds, with the capability to undertake dynamic "bursting" into public cloud environments, providing what is referred to as an active-active-active arrangement with both pure private and hybrid cloud flexibility providing effectively unlimited compute capacity while also supporting industry-leading business continuity capabilities. These critical features will drive our vision of large-scale, on-demand, transactional data-driven healthcare.
  
  
  In parallel with these investments, we also accelerated the transition of certain product platforms, such as our retrospective risk score accuracy improvement offering known as CARA^®, to take greater advantage of our expanding cloud capabilities to drive greater platform flexibility, differentiation, speed, cost efficiency, and value impact. To date, this process has been very successful in supporting the renewal and signing of new business, but also entails additional investment translating into a degree of dampening impact on revenue and margins. The Company believes very strongly in the long-term value and opportunity related to these technologies, and sees the associated downward financial impacts as a short term transition playing out over the next six to nine months.

• Continued Interconnectivity Expansion:  Our connectivity within the healthcare market continues to expand significantly, improving data accessibility and efficiency, which in turn enables greater value realization for our clients and operating efficiencies for Inovalon. Since the end of the first quarter, we have further expanded our access to provider organizations, activating large numbers of individual physician groups, and new regional EHR platforms such as Medent in New York. In addition, we signed industry-leading partnerships with organizations such as athenahealth, and collaborated with Epic to dramatically expand access capabilities between the Inovalon platform and more than 100 Epic healthcare systems.

• Growth of Proprietary Data Sets and Scale of Compute:  Growth in Inovalon's client base, connectivity, and product breadth can be seen in the significant continued expansion of the Company's proprietary data assets and compute volume. The expansion of data within the MORE² Registry^® accelerated in Q2, with the number of medical events within the platform climbing to more than 11.7 billion, representing a 20% year-over-year increase. These datasets are a significant differentiator for the Company, informing and powering unique capabilities at nearly every stage of our platforms' processes. Reflecting this, the magnitude of analytical processing undertaken by the Company during the second quarter climbed to record levels, bringing the trailing 12-month Patient Analytical Month (PAM) count to more than 24.2 billion, a 29% increase compared to the same time in 2015. We believe the continued growth in dataset scale and compute volume are meaningful indicators of the Company's growing leadership role within the data-driven healthcare marketplace.

Other Financial Data and Key Metrics

The following constitute other financial and key metrics which are presented quarterly. Please see the Company's filings with the Securities and Exchange Commission (SEC) for further detail.

• Growth of Datasets: At June 30, 2016, the MORE² Registry^® dataset contained more than 137 million unique patient counts and 11.7 billion medical event counts, increases of 11% and 20%, respectively, compared with June 30, 2015.

• Investment in Innovation: For the quarter ended June 30, 2016, Inovalon's ongoing investment supporting innovations in advanced, cloudbased data analytics and datadriven intervention platforms was $16.5 million, or 13% of revenue, increasing significantly compared to $11.2 million, or 10% of revenue, in the quarter ended June, 30, 2015.

• Analytical Process Count Growth: Inovalon's trailing 12-month Patient Analytical Month (PAM) count, which the Company believes is indicative of the Company's overall level of analytical activity, grew to more than 24.2 billion as of June 30, 2016, an increase of 29% as compared with June 30, 2015.

In addition to the metrics provided in this press release, the Company has made available a supplemental second quarter earnings presentation. This presentation (entitled: "Second Quarter 2016 Earnings Presentation Supplement") can be found within the investors section of the Company's website at www.inovalon.com. 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.

2016 Financial Guidance

Inovalon is adjusting the full-year 2016 guidance originally issued by the Company on February 25, 2016. The update in guidance is intended to reflect the confluence of factors outlined within this release. While the Company continues to focus on its long term growth and profitability, and is affirming its financial targets of $1 billion in revenue and 40% EBITDA margins by 2020, shorter term variations in performance are expected. The resulting updated 2016 guidance is summarized as follows:

• Revenue is expected to be between $470 million and $490 million
• Net Income is expected to be between $43 million and $53 million
• Adjusted EBITDA is expected to be between $130 million and $148 million
• Non-GAAP net income is expected to be between $60 million and $70 million
• Diluted net income per share is expected to be between $0.28 and $0.35
• Non-GAAP diluted net income per share is expected to be between $0.39 and $0.46

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

While implementation of the share repurchase program or changes in the stock price could change the fully diluted share count, under the treasury stock method, the Company is assuming152.8 million shares for the full year 2016.

More information on the Company's 2016 financial guidance is provided in the Second Quarter 2016 Earnings Presentation Supplement available in the investor section of the Company's website.

Shares Outstanding

As of July 31, 2016, the Company had 67,780,585 million shares of Class A common stock outstanding and 84,655,525 million shares of Class B common stock outstanding.

During the second quarter of 2016 the Company's Board of Directors authorized a program to repurchase up to $100 million of shares of Inovalon's Class A Common Stock. Due to the administrative processes required to set up and initiate the share repurchase program, and the closing of the time window during which such repurchases could be initiated, no shares have yet been repurchased as of the date of this release, leaving the full $100 million authorized by the Board to be applied towards share repurchases between now and the end of the calendar year.

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