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Edited Transcript of INOV.OQ earnings conference call or presentation 29-Jul-20 9:00pm GMT

Q2 2020 Inovalon Holdings Inc Earnings Call

Bowie Jul 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Inovalon Holdings Inc earnings conference call or presentation Wednesday, July 29, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason B. Capitel

Inovalon Holdings, Inc. - COO

* Jonathan R. Boldt

Inovalon Holdings, Inc. - CFO

* Keith R. Dunleavy

Inovalon Holdings, Inc. - Founder, Chairman & CEO

* Kim E. Collins

Inovalon Holdings, Inc. - SVP of Corporate Marketing & Communications

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Conference Call Participants

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* Alexander Yearley Draper

SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research

* Daniel R. Grosslight

Citigroup Inc. Exchange Research - Research Analyst

* David Larsen

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Glen Joseph Santangelo

Guggenheim Securities, LLC, Research Division - Analyst

* Jared Phillip Haase

William Blair & Company L.L.C., Research Division - Research Analyst

* Jessica Elizabeth Tassan

Piper Sandler & Co., Research Division - Research Analyst

* Yueli Zhang

SVB Leerink LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Inovalon Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

And now I'll turn the conference over to your host, Kim Collins. Please begin.

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Kim E. Collins, Inovalon Holdings, Inc. - SVP of Corporate Marketing & Communications [2]

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Good afternoon. This is Kim Collins, Senior Vice President of Communications at Inovalon. I'm here today with Dr. Keith Dunleavy, Inovalon's Chief Executive Officer and Chairman of the Board; and Jonathan Boldt, Inovalon's Chief Financial Officer. I'd like to welcome you to our second quarter 2020 earnings call.

The press release announcing our financial results for the second quarter was distributed this afternoon and a replay of today's call will be available shortly, posted on the Investor Relations page on Inovalon's website. For those of you listening to the rebroadcast of this call, we remind you that the remarks made herein or as of today, July 29, 2020, and will not be updated subsequent to this initial earnings call.

I'll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995, including statements related to future results of operations and financial position, our business strategy and plans, market growth and our objectives for future operations. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's earnings release and filings with the SEC.

In an effort to provide additional information to investors, this conference call and webcast is accompanied by a presentation, which is available on the IR section of our website. You're encouraged to download a copy of this presentation to follow along with our prepared remarks.

Our presentation also includes certain non-GAAP financial measures. You'll find definitions of these non-GAAP measures and reconciliation charts at the end of the company's earnings release and on the company's website.

Now it is my pleasure to turn the call over to Dr. Keith Dunleavy.

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [3]

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Thank you, Kim. Good afternoon, everyone, and thank you for joining our call. Let me begin by saying I continue to be extremely impressed with the Inovalon team, their dedication, energy and performance in every corner of the company, as the entire organization continues to execute successfully despite the obvious COVID-19 pandemic challenges. The company's cloud-based platform leadership within the healthcare vertical demonstrated itself well during the second quarter. With accelerating adoption of the company's capabilities, Inovalon delivered a new sales record of $76 million of new annual contract value during the quarter, a 31.8% increase versus the second quarter of 2019, another sequential quarter of 13% year-over-year subscription-based platform revenue growth and continued expanding profitability with leading SaaS industry gross margins, operating margins and earnings per share performances.

In addition, we continue to have strong operating cash flow, voluntarily repaid in full the $99 million that was previously drawn from the company's revolver and stand with a positive view towards our second half of 2020, and even more so toward 2021 as a growing number of the company's expanding platform offerings and larger platform implementations come online.

In addition to what our performance metrics say about what we did in terms of sales, margins and cash flows during the second quarter, similarly important is with whom we did it. The client portfolio of the company continued to expand impressively during the quarter and notably among industry-leading marquee organizations. Specifically, the second quarter demonstrated the broadening adoption of Inovalon's cloud-based SaaS solutions, with industry-leading wins across multiple segments of the marketplace, including one of the world's largest consumer retailers, namely Walmart; one of the world's largest medical distributors, namely Cardinal Health; and one of the world's largest payers, each of which entered into long-term contracts for 5 to 7 years in duration, with the payer contract alone resulting in a total contract value of greater than $150 million. Also important, as a reflection of the company's strong transition to being a leading provider of cloud-based SaaS platforms, empowering the healthcare vertical, each of these marquee contracts are for 100% subscription-based SaaS cloud-based engagements, providing highly differentiated, high-value capabilities to the respective client organization, each of which have the reach, prowess and resources to develop technology internally or sourced from any technology organization in the world, but instead, chose the Inovalon ONE® Platform for their long-term strategic purposes.

Also during the quarter, we were pleased to see continued progress on many additional important fronts. We achieved rapidly expanding adoption of the company's virtual health visit capabilities during the quarter, a process which continues to ramp now in the third quarter, with applications being expanded from the health plan payer client base to now include offerings that are being sold within the direct-to-provider client base. We launched additional new capabilities, including InfectionWatch for provider organizations and our Consumer Health Gateway, designed for multiple current and future customer audiences in response to the CMS-mandated interoperability patient access API requirements of the 21st Century Cures Act. We made strong progress on other platforms scale, capability and efficiency initiatives and continue to make progress on a number of additional offerings planned for release during the second half of 2020.

And finally, in the setting of the tremendous work and success of so many colleagues, I'm proud to say that Inovalon is increasingly being seen within the marketplace as a leading organization, not only to work with, but to be part of translating into tremendous morale, increasing organizational effectiveness and a deepening of our bench with strong recruitment of additional great talent, all supporting our plans and expectations for a very positive road ahead. The set of platform capabilities that we have amassed, our connectivity, our primary source, real-world data assets, our libraries of purpose-built data-informed analytics and our cloud-based architecture of highly configurable modules is increasingly being seen as highly differentiated within the marketplace. Importantly, we have achieved these capabilities with a balanced view toward persistent, innovative leadership and associated investment, coupled with prudence toward delivering on the more near-term operational efficiency, profitability, cash flow and balance sheet strength.

As we have increased the sophistication and scale of our sales capabilities, these factors have come together to increasingly translate into market leadership, sales and sustainable longer-term growth acceleration. Taken together, demonstrated by the resilience of our business model and strength of our sales, particularly during a unique moment in history and the current state of the economy, puts Inovalon in a rarified field with other leading SaaS companies that are helping C-level executives and boards to engage in larger scale digital transformations in healthcare to ensure that their companies are well positioned to compete in a post-pandemic world and the 21st century economy that will be more interconnected and data-driven in the cloud than ever before.

With that, allow me to turn the call over to Jonathan to review the financial results of the quarter and outlook for the third quarter and balance of the year. Jonathan?

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Jonathan R. Boldt, Inovalon Holdings, Inc. - CFO [4]

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Thank you, Keith, and good afternoon. I'd like to begin by highlighting a few key points building on Keith's opening remarks. First, second quarter financial results were solid, with revenue delivery toward the high end of our guidance range, continued double-digit platform revenue growth, profitability above our guidance ranges and continued strong cash flow growth. Second, Q2 new sales ACV of $75.7 million was a company record, achieved despite travel and face-to-face meeting restrictions and COVID-19 response distractions at client organizations. And third, we are updating our full year 2020 financial outlook to increase the low end of our revenue guidance range and our profitability based on strong execution in the second quarter and expected second half performance.

Now turning to our second quarter results. Second quarter revenue was $162.2 million, an organic increase of $5.2 million or 3% year-over-year. This increase was primarily attributable to an increase of $15.8 million in subscription-based platform offering revenue, an increase of 13% year-over-year. Year-over-year subscription-based platform growth was partially offset by a $8.9 million decrease in revenue from reduced utilization of legacy platform offerings and a decrease in service revenue of $1.6 million attributable to the COVID-19 pandemic. This was consistent with our second quarter expectations we outlined during our first quarter earnings call. Subscription-based platform revenue was 88% of total second quarter revenue compared to 80% in the second quarter of 2019. Services revenue represented 9% of second quarter 2020 revenue with legacy the remaining 3%.

Focusing on our subscription-based platform revenue performance, the second quarter not only showed strong growth itself in the setting of the COVID market challenges, but it showed a strong, steady continuation of growth that has been ongoing for some time. The second quarter's trailing 12-month subscription-based platform revenue was a total of $563.1 million, an increase of 17.5% compared with $479.4 million for the preceding 12-month period. This growth continues to reflect the company's strong transition to cloud-based SaaS platform offerings and strong market adoption of our cloud-based Inovalon ONE® Platform offerings. Further, supporting the value recognized by the market and the growing strength in adoption, new sales ACV during the quarter came in at a record $75.7 million, an increase of 38.1% year-over-year. Second quarter new platform sales ACV, excluding services, was $57.5 million or an increase of 48.4% year-over-year.

During the second quarter, the company's continued focus on cloud platform architecture efficiencies, including connectivity and process automation, together with the realization of continued product diversification and strong market value recognition, resulted in increasing profitability for the company.

Looking at gross margin, second quarter gross margin was a record 77%. Gross margin increased by 350 basis points year-over-year, primarily as a result of favorable revenue mix to predominantly subscription-based platform revenue. Increased revenue, strong gross margins and significant operating expense efficiency drove strong profitability. Second quarter adjusted EBITDA was $56.6 million, an increase of $4.4 million or 8% year-over-year and $4.4 million above the top end of our second quarter guidance range. The adjusted EBITDA margin for the second quarter was 34.9%, representing an increase of 160 basis points compared to the year ago period. And non-GAAP net income per share was $0.15, an increase of 15% compared to Q2 2019 and $0.03 above the high end of our second quarter 2020 guidance range.

Turning to cash flow. Net cash provided by operating activities in the second quarter increased 95% year-over-year, coming in at $49 million, which is after interest payments of $13.9 million. On a trailing 12-month basis, net cash provided by operating activities was $129.7 million, an increase of 18% compared to $110.2 million during the preceding 12-month period. And in the setting of new product offering expansion and new contract implementations, second quarter CapEx was $19 million.

Moving to the balance sheet. Inovalon's financial position and liquidity is strong. With strong cash flows, increasing profitability and positive outlook, the company voluntarily repaid the entire $99 million of its outstanding revolver during the second quarter. Following this voluntary paydown, Inovalon's cash and cash equivalents as of June 30, 2020, was $95.6 million, total outstanding debt was $912.9 million, reported balance sheet debt was $890.1 million, net of issuance discounts and deferred financing fees and the net debt position was $817.3 million. The company's net debt leverage ratio, as defined within our debt agreement, continue to improve to 3.69:1 as of Q2 2020 as compared to 3.79:1 as of the end of the first quarter 2020 and down from 4.32:1 at the end of the second quarter 2019.

Now let me conclude by sharing updates to the company's 2020 financial outlook. For the full year, we are raising the low end of our revenue range. We are increasing non-GAAP net income and EPS ranges and adjusted EBITDA ranges based on our strong second quarter performance. We are increasing our CapEx guidance range to reflect some expected increases in implementation investments based on the strong deal closures in the second quarter as well as our belief that we will continue to see such deals in the second half of 2020. And we are updating our GAAP net income and EPS ranges to reflect our updated CapEx views while reaffirming our net cash provided by operating activity ranges previously mentioned. For the third quarter of 2020, we expect $175 million to $185 million in revenue. We expect adjusted EBITDA to be $61 million to $65 million. And we expect non-GAAP diluted net income per share of $0.16 to $0.17. Please refer to today's earnings release and our second quarter supplemental earnings deck for detail on our 2020 guidance ranges and expected revenue cadence.

Before going to Q&A, I'd like to reiterate that the second quarter performance was a strong reflection of the company's continued shift to cloud-based SaaS subscription-based platform offerings. Our ability to bring these real-world data-driven cloud-based capabilities to the healthcare vertical is increasing in its velocity and efficiency. The differentiated value and adoption that this platform is demonstrating to the most advanced marquee leaders within the marketplace is a testament to Inovalon's industry-leading position.

With that, let me turn the call back over to our operator to conduct our Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Sandy Draper of SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [2]

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Congratulations, guys, on a really good quarter in what's obviously a really challenging environment. So maybe just 2 questions, and I'll jump back in the queue. First 1 on the ACV and revenue, obviously, the real highlight was very strong sales. And if I go back and look historically, the last time you had sort of a couple of quarters of really strong ACV back in the second and third quarter of '18. If I take the fourth quarter of '19, the second quarter of '20, similar, it took about 2, 3, 4 quarters before you really started seeing the sequential improvement in the SaaS revenue. Is that a reasonable -- I know you guys don't -- I'm not trying to get 2021 guidance, and you don't give us the waterfall for ACV, but is there anything about this ACV from the fourth and second quarter versus that that's different? Or is that a reasonable sort of general way to think about how this really strong sales is going to eventually trickle into the P&L?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [3]

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Sandy, this is Keith. Thanks for the question. And you've got it spot on. The only modification I'd say is we wouldn't use the word trickle.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [4]

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Right. Got it. Hopefully, it's the real full waterfall. Second question. Obviously, gross margins were very strong this quarter. I'm assuming a lot of that is the mix and because the -- with services and legacy solutions being down, that drove the really positive margin. So is it reasonable to think that your gross margin sequentially -- at least second half gross margins are lower than the second quarter is because it looks like you're expecting some lift coming back in services and legacy?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [5]

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Sure, Sandy. And I'm going to hand that one to John. And then also just to let our audience know that Jason Capitel is here with us again today for any of these questions as well. John?

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Jonathan R. Boldt, Inovalon Holdings, Inc. - CFO [6]

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Yes, Sandy, regarding gross margins, they were absolutely strong in Q2 at 77%. And that's the right way to think about the second half of the year. We do expect to see gross margin go down slightly as a result of the increasing mix of our legacy and services, but we remain absolutely focused on investing in innovation, new product launch and really driving top line results.

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Operator [7]

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Our next question comes from Glen Santangelo of Guggenheim.

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Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [8]

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Dr. Dunleavy, you talked in the prepared remarks about having continued momentum in the second half with respect to your contracting. Could you maybe -- what type of visibility do you have at this point? I mean do you feel pretty confident based on your conversations or maybe there's something you can share with respect to July's business or anything along those lines?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [9]

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Sure. Thanks, Glen. Thanks for the question. I mean look, the credit here goes to a lot of people and under Jason's oversight, the pipeline was tremendously strong in Q2, as we referenced on our Q1 call, and it continues to be impressively strong today. So this is a very significant pipeline that has hundreds of different opportunities in it at varying different stages, and the team has very much increased their capability and sophistication of tracking and progressing those, as I think we've demonstrated nicely here in Q2. So we feel good about where we are with the pipeline and as things are progressing through. And as we comment in the supplemental slides, we spent some time during Q2 thinking about when working through the go-to-market evolutions that you do when you're not face-to-face. And I think as the results show, the team was still able to do quite well in that environment, and that's continuing today, so that's a skill set that they can now add to their list. And we feel real positive about what we're seeing in the second half of the year. Jason, do you want to add anything to that?

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Jason B. Capitel, Inovalon Holdings, Inc. - COO [10]

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No. I think you covered it, Keith. Look, value realization is what the key is. And as long as we remain focused on that, we feel great about what we're doing with our clients.

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Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [11]

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Maybe if I could just ask 1 quick follow up. Also in your prepared remarks, you talked about the 21st Century Cures Act next year. Maybe could you just remind us what you think the technology burden is going to be for your clients? How you're positioned for that? And if that's a conversation you're starting to have with your managed care customers today? And has that maybe giving you some confidence in the outlook here?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [12]

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Yes, Glen. Look, this is a very positive opportunity for us. So just to review the numbers for those that might not be as familiar with the 21st Century Cures Act, the 21st Century, it's a massive document. It's something like 800-pages in total. And the Interoperability section of that requires different participants within the healthcare landscape to make data available at the request of a patient or a representative of a patient to be available effectively in real time. And this is done through API gateways, the specifics of which are rather detailed. So you have -- the first wave of this is mandated by July 1, 2021. So to have that all in place, organizations are having to now work through the whole procurement and implementation process, which I'll actually ask Jason to touch upon here in a moment. So for health plans alone, that's a marketplace of, call it, directionally of size, 500 different health plans, that by CMS' estimates alone, our spending on average will require, on average, around $2 million to just implement things and get things set up. We're fortunate to work with a significant number of those healthcare organizations. We're fortunate to already have their trust in our ability to manage data, manage those platforms. We're fortunate already to have master service agreements and HIPAA agreements and data interoperability agreements and obviously, strong relationships with a significant number of those. So we're excited about that, we're in full swing of that right, and I'll ask Jason to put any more color on that.

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Jason B. Capitel, Inovalon Holdings, Inc. - COO [13]

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Yes. Thanks, Keith. And Glen, look, this is squarely in the realm of both health care and IT. And so if you think about these plans and what they have to do, there are multiple disparate data sources, there are multiple disparate access points, and healthcare and IT have to work very, very well together in order to do it. We're fortunate in the fact that we have an equal number of IT folks as well as healthcare expertise, where I believe we're uniquely positioned to actually help our clients through this process. And so we're pretty excited about it, it's what we do for a living every day. And again, I think we're uniquely positioned based on our IT and healthcare expertise to be the translators. And when I say translators, I mean the healthcare business speaks one language, IT speaks another language. In order to do this right, you really have to speak both languages to make sure that the communications are there so that you're covering all your bases.

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Operator [14]

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Our next question comes from Ricky Goldwasser of Morgan Stanley.

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Unidentified Analyst [15]

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This is Raymond on for Ricky. I wanted to ask one first on the ACV. So it was a record-breaking $76 million in the quarter. How much of that was from the large marquee clients that you signed in the quarter?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [16]

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Raymond, good to hear from you. So as you -- as we point out, ACV is only the first year of revenue. And obviously, TCV is much, much larger here as we -- I gave some insight into that within our commentary here as we're starting to get an increasing number of 5- and 7-year contracts. And another little nugget of information is we've also now been seeing people extend from their 5 years to their 7-year -- to 7-year agreements on quite large agreements as well. You don't see that show up in a sale or an ACV anywhere because we only count the new revenue. So as those get larger, obviously, our TCV just keeps building up and building up. But getting back to your question, because of the way these deals are structured, if we're implementing for a client before they go fully operational, the first year of revenue can be quite different than what is expected in the outer years as that client comes online and grows a lot. So you can have a large marquee customer that you could expect to go 3x, 4x, 5x or 10x in growth up from what you might see in our first year of revenue as they explain to us what the ramp intentions are or what they exactly intend to do with the platform. So the marquee clients, they were great additions to that ACV, but they were not the dominant portion of that ACV.

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Unidentified Analyst [17]

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Got it. And then the follow-up question, given that the reimbursement environment has changed somewhat dramatically during the pandemic, I'm wondering if that's affected your conversations with some of your clients, especially on the payer front? And how has that sales process changed during this time?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [18]

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Yes. Raymond. Certainly, COVID, I think has changed just about every corner of everything, frankly. If I -- let me interpret your question first as what is the nature of the sales engagement process during the quarter and how has it changed because of COVID. So let me first take it at that, and then you tell me whether I answered your question. So walking through the different target verticals that we are in today, what we conveyed at the end of Q1 was the provider was hit the most, life sciences was hit the earliest, but recovering -- already showing signs of recovering and that pharmacy and payer were substantively unchanged. Those played through in second quarter as expected, so provider was definitely hit worse as expected, but they have started to come back pretty rapidly, certainly not back to normal, but they've been coming back pretty rapidly. And life sciences came back -- or is coming back very nicely as well. Pharmacy continues to be incredibly strong, and payer is strong.

The other dynamic you're seeing is that the payer space, because they're not burning through their MLRs, their access to care by patients through ordinary channels has been decreased during COVID, that the payer world is looking for increased ways to bring value to their patients, and a lot of our tool sets and platforms give them an ability to do that.

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Operator [19]

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Our next question comes from Donald Hooker of KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [20]

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Great. So you guys have launched a bunch of new products over the past, I guess, year, the data lake, the extraction tools, telehealth, obviously, you've been highlighting specialty pharmacy. I'd love to hear -- I know you guys don't like to break out revenues by product area, and I'm not going to ask you to do that, but would you be willing to maybe kind of rank order kind of where you might suggest we focus on kind of areas of growth for you across some of the newer products that have come up?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [21]

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Don, good to hear from you. Look, we're having growth in a lot of areas. This is not concentrated in one place, so one of our elements in the release earlier today, as we said, we saw nice growth in all of our business units. If we have to focus it down the -- say, the two strongest areas are, certainly, pharmacy is incredibly strong and then also so is quality measurement and improvement. Clinical quality outcomes impacts, obviously, value-based contracting, it impacts shared risk agreements, it impacts outcomes-based contracting, it impacts Star and it impacts -- it impacts a lot of the performance-based contracts that states and employers and federal government has in place. So that is a key that's informed by our real-world data sets, both the analytics are informed by the machine learning that, that data enables, and that's a huge differentiator of the company. And because of the cloud platform nature of it, we can run that at multiple different speeds. So our clients have different preferences for how rapidly they want to run the analytics, and we have the ability to dial up and dial down to those speed preference, which obviously affects their performance. It affects, obviously, the price point that we can offer those services at -- those are selling extremely, extremely well.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

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Okay. And maybe a bunch of questions here, I'll just maybe ask one other kind of follow up. I know kind of in the past, you guys have talked about sort of public cloud and sort of using public cloud to get maybe some incremental scale and compute power. Where would you think -- where are you in that -- in sort of optimizing your use of public cloud? I don't know, is it seventh inning, eighth inning, tenth inning? Has that been a material driver of margin?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [23]

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Yes, Don. So first of all, I'll give a shout out for Geoff Charron, he's our Chief Technology Officer. He's incredibly impressive in his ability, and the whole team just continues to rise together with him. We are leveraging the large investments we made for multiple years in building out our private cloud data center environment. And as you appropriately reflected, expanding more and more into commercial cloud environments and being able to choose what is best for which circumstances so that you can optimize for a particular offering or particular clients' needs or speed requirements. That is adding a lot to our flexibility, a lot to our margin improvements that you -- that John walked through, and also to the speed with which we can get clients turned on. It is a huge, huge benefit for us to be able to go to multiple different cloud environments and implement extremely quickly, and they'll point out remotely, right? So all of our systems being cloud-based at this point, we're able to implement from our proverbial living rooms, and we are now 99-point something percent remote as far as how we are operating the entire company, and that is only possible because everything is cloud and not just cloud, but cloud native, which allows for the enormous cost efficiency on scaling as well.

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Operator [24]

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Our next question comes from the line of Ryan Daniels of William Blair.

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Jared Phillip Haase, William Blair & Company L.L.C., Research Division - Research Analyst [25]

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Yes. This is Jared Haase for Ryan. Congrats on a nice quarter in a tough environment. I wanted to maybe just touch on the ACV again, maybe just a slightly different flavor. So I know last update, we talked a bit about sort of the elongation of the sales cycle that you were seeing, I think particularly with providers as they were kind of focused on other priorities in the short run. So of the record ACV booked in the quarter, how much of that should we think of as maybe conversion of those elongated opportunities that maybe otherwise would have fell in a different period? And how much of it was really just kind of success in sort of the core selling activities? Any comments there would be great.

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [26]

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Hey, Jared. Thanks for the question. Thanks for being on the call. Look, we're seeing a really healthy pipeline and frankly, pretty healthy conversion of it. In the provider space elongation for our offerings, that's a really fast sales cycle process anyway. I don't have the exact numbers with me. Jason might recall them. But for provider, on average, that sales cycle is under 30 days anyway. So elongation of it, maybe that means 45 days. So that wasn't a huge a factor than what we saw in the tail end of Q1 and certainly, the beginning of Q2 was more distraction and tough time getting the attention of the providers. They were dealing with either their hospital being in a tough spot or their office being literally just closed because of state restrictions. As that has reopened, that pipeline has reasserted itself quite nicely. And Bud Meadows, who oversees that provider space, has really seen some phenomenal performance. He's doing a terrific job, and we're seeing reawakening quite a bit there.

So I wouldn't see this as much as stuff that got delayed in Q1, ended up in Q2. We're just seeing health in the pipeline and success in the sales process. Jason, do you want to add anything?

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Jason B. Capitel, Inovalon Holdings, Inc. - COO [27]

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No. The key is what are the absolute numbers that we're generating, what does the pipeline look like and then how fast can you implement so that you get that nice even spread of recognition over a period of time. And we're pretty excited about what the team's accomplished in the first half of the year, and we're pretty excited about what we see in the second half.

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Operator [28]

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Our next question comes from Stephanie Davis of SVB Leerink.

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Yueli Zhang, SVB Leerink LLC, Research Division - Research Analyst [29]

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This is Joy on for Stephanie. Congrats on the quarter. Could you give us more color -- can you give us more color on the new Walmart contract, maybe in terms of how the win came about and what kind of revenue impact we can expect from it?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [30]

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Well, thanks for the question, Joy. First of all, we're really excited about our new relationship with Walmart. They are terrific. They have been fantastic throughout the sales cycle on that and the process of getting to where we are with them, and we're excited about doing a lot of very neat things with them. Unfortunately, we don't go into the economics. Joy, I apologize, anymore than is in our release with them last week, except to say that it's obviously public knowledge that Walmart has a lot of ambitions in this space and has a lot of announced plans to invest heavily in this area and build extensively in this area, and we're very pleased to be seen by them as a really important platform and partner to build that on. So we're sure we'll be talking a lot about Walmart going forward.

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Yueli Zhang, SVB Leerink LLC, Research Division - Research Analyst [31]

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Got you. That's great to hear. And as for my follow-up, between the Walmart win and your contract with Cardinal for their DME business, you're seeing a lot of new wins in the pharmacy space. Can you talk to what is causing you this acceleration in adoption?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [32]

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Joy, that -- the whole space of specialty pharmacy, first of all, itself is growing terrifically quickly, so different industry analysts in that space have that growing in the 20s percent per year. And obviously, our relationships then grow similarly as our subscription-based structure is tied to that expansion. But there has not been significant innovation in the pharmacy space as far as the ERP capabilities that are the platform that we offer for them. So there has been a drought, if you will, a decade-plus drought of innovation in that space. And our cloud-based approach to this is really the only cloud-based solution out there in the marketplace. And the fact that we have so much real-world data in that and so much connectivity in that platform, it allows them to remove otherwise labor-intensive steps in their business process, dramatically shortening the time to fill and the cost to fill as well as increasing the customer satisfaction and connectivity with the rest of their care system. So that is being rapidly seen by the marketplace as just day and night different from the rest of the offerings that are out in the marketplace, so that is why we are on a tear in that space, and we feel safe telling you that you'll see more of that to come.

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Operator [33]

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Our next question comes from Sean Wieland of Piper Sandler.

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Jessica Elizabeth Tassan, Piper Sandler & Co., Research Division - Research Analyst [34]

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It's actually Jess Tassan on for Sean. I think we were just interested to know, if you guys could clarify, are those Cardinal and Walmart deals that you noted having signed in the quarter, are those new customers or kind of renewals or expansions with respect to the scope?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [35]

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Sure, Jess. So Walmart is a completely new everything. They were not a customer before. And Cardinal, we have done other things with Cardinal, but this is a brand new platform by a new contract with them.

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Jessica Elizabeth Tassan, Piper Sandler & Co., Research Division - Research Analyst [36]

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Got it. That's helpful. And then if I could just ask, kind of switching a little bit. On the legacy ability side, can you guys just speak to the health of that provider base, just given, obviously, in offices that are down, and we're hearing that revenues kind of pressured for physicians, so just curious to know about the health of that, of the legacy ability installed base.

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [37]

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Yes, Jess, that's just not the nature of our business model. They're doing tremendously well. This is all subscription-based revenue, not transactional revenue. So the clients that are on there are on there, and they pay monthly. Frankly, even if their office is closed or open, they pay on the software. So we have seen continued strength in there, it's just a matter of the additional sales, right? So additional new sales, obviously, is impacted by whether or not you can get a physician on the phone or their office and business people on the phone more accurately. But as far as the base, really, really healthy and actually, sales are going really well there as well.

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Jessica Elizabeth Tassan, Piper Sandler & Co., Research Division - Research Analyst [38]

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Okay. Got it. So no attrition really in that or nothing notable?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [39]

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As a matter of fact, they're above last year's plan, even in the absence -- as if COVID hadn't occurred.

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Operator [40]

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Our next question comes from Daniel Grosslight of Citi.

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Daniel R. Grosslight, Citigroup Inc. Exchange Research - Research Analyst [41]

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Congrats on the quarter. Just want to touch a little bit on the consumer market. As you grow into that market, do you expect to employ more of a build strategy or a buy strategy? And then within that market, it's obviously a huge opportunity, are there specific areas that interest you the most?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [42]

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Daniel, thanks for being on the call. Appreciate it. Look, we're really excited about consumer. You're right, it's a massive area, and we are well on our way in several initiatives in that space. You'll be hearing a fair amount more about that in the second half of this year. Because of the differentiator that we have, which is the breadth of the data, the real-world data sets that we have, remember, we have data now. I guess, as of today, it's 319 million, 319 million Americans. That is an enormous ability to serve that many consumers. And that is a build, therefore, right? There's not anybody out there that has it for us to buy. That's a build. We've been working on that for some time. And we are -- the numbers we have, we've been employing a number of different marketing and go-to-market strategy companies that have been doing a fair amount of work on this. And even they are excited about the metrics that they are seeing. The -- and I'm going to mess up some of the marketing terms, but the uptake that they see on -- we've been actually in market in different markets, they usually pick Ohio and Atlanta and other cities around the country to do these test programs on. The uptake has been pretty phenomenal. So we're excited about that. You'll hear more about it later in the second half, but I'll leave it there for now.

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Daniel R. Grosslight, Citigroup Inc. Exchange Research - Research Analyst [43]

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Got it. And maybe just as a follow up, going more to the payer side of the business, obviously, this year, it's going to be a bit difficult to get an accurate read on risk adjustment in MA for plan year 2021. I'm curious what the impact on your business, if any, of reduced claims volume and telehealth in determining risk adjustment in MA and what you're hearing from your payer clients in that regard?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [44]

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Well, to the degree that they're doing that, remember, risk is a small portion of our -- a relatively small portion of our business at this point. Our capabilities are really that much more important to them today, right, because, as you're correct, the encounter, rate is down, therefore, the value of each encounter is that much more important to them. Their ability to determine which patients need to be seen, what they need to be seen for, which physicians they should be seeing, that's a lot of what our software tells them, and that is quite important to them. And as their MLRs have been so much lower than they want them to be, frankly, they are that much more eager to apply tools that help them play catch up in here in the second half.

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Operator [45]

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Our next question comes from David Larsen of Verity.

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David Larsen, [46]

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Congrats on a good quarter. With Walmart, it's my understanding that you won the specialty piece of the pharma business. Can you maybe -- is that accurate? And then can you talk about the differences in use cases between specialty and traditional retail? And I mean why -- like what would prevent you to like in sell into the retail piece, traditional retail piece of all of Walmart?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [47]

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Hey, David, thanks for your question. And I'm going to answer your question independent of the Walmart name, right? So I'm just going to answer it as a general industry question. This applies to all pharmacy clients, all pharmacy environment. So specialty pharmacy, the definition of it is high-contact, high-complexity, high-cost conditions and medications. And on average, these cases, these are like chemotherapeutics, antiviral medications, rheumatoid arthritis, autoimmune, specialized high-cost conditions. And the number of coordinated elements of care and data and coordination are in the neighborhood of, on average, around 20, right? So verifying the health plan has coverage for, verifying the genetic markers of the tumor, verifying that the kidney functions normal, verifying that the doctor saw them, right, so on and so forth. We've automated all of that, so the cloud allows us through our connectivity and access to the data and the application of clinical paradigm that all their real-world data sets inform, this all can happen in seconds instead of, in some cases, days, right? So it shaves off somewhere in the neighborhood of around 13% to 17% of OpEx expense in that marketplace, which is a huge value driver for our clients, and their patients do better because of all the coordination removal, fat finger data entry errors that the marketplace normally has. So what's the difference between that and retail? Your point is a really great one, there's very little, right? The reason why historically, the marketplace separated them is because the higher cost of doing everything I just described made it only feasible for the high-cost drug situations. But as our platform dramatically brings down that cost, it allows the line between specialty pharmacy and traditional retail pharmacy and for that matter, home infusion and mail order pharmacy, that line moves to the left pretty dramatically to the point where a pharmacy, you might expect would say, well, gosh, don't I want my patient taking care on one system, why do I have different systems? So as you see us move so rapidly into the specialty pharmacy, it is a very on point to expect us to then move that, that much further across the board for the rest of the ecosystem.

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David Larsen, [48]

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Okay. Great. And then just one quick follow-up. Your system can be installed remotely, I would imagine, right? So with the whole pandemic, I mean, have you -- has restricted access been a headwind at all or not really?

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [49]

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It has now been built into how we go to market, right? So definitely, during the opening weeks, we had to put a lot of heads to this, thinking through -- even back then, implementation was predominantly remote but did have some aspects of coordination with sites. The -- what we've done now over subsequent several months is we have worked through those solutionings, and we are now able to do implementation fully remote. So that is not a hamper, and it's built into our implementation time lines at this point. And yes, that's the way things are now set up.

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Operator [50]

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Our next question comes from Sandy Draper of SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [51]

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Just maybe one follow up since Jason is on the line, and a lot of questions have been asked sort of around this. But just thinking about -- especially some of these larger wins, Jason, when I think about the competitive dynamics, I know you guys don't give specifically who you competed against, but when I think about, again, competition being internal, we're going to do it ourselves from, hey, we're going to partner with some big tech companies to point solutions, is there any consistent -- I mean, a little bit different markets you have payer, specialty pharmacy, is there any consistent trend around what's happening competitively? And anything -- and Keith just hit on this a little bit, but about why you guys think you're doing so well right now, but just would love any more color about the way the competitive landscape is shaping up since we've got you on the call.

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Jason B. Capitel, Inovalon Holdings, Inc. - COO [52]

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Yes. Thanks, Sandy. So look, we certainly focus on our strengths, right, and real-world data, and the data assets that we have are an absolute differentiator. But I will tell you that we are laser-focused, and you've heard me say this many times, Sandy, on value realization for our clients, whether that's in the provider space, the payer space, the life sciences, specialty pharmacy, it's really about what are the value drivers of our clients. And if we do that well and we listen and we learn and we apply all of the advantages that we have to the marketplace, we win. And that's what our teams are focused on. I can't say it more simply than that, Sandy.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [53]

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Great. That's it, that's really helpful. And that was my follow up.

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Keith R. Dunleavy, Inovalon Holdings, Inc. - Founder, Chairman & CEO [54]

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Well, first of all, thank you, Ratif, for handling this call. Before we close, I just want to leave you all with a few salient points. First of all, the second quarter really demonstrated the expanding leadership position, empowering the marketplace for its transition to data-driven healthcare, not just in the breadth of our sales but in the marquee nature of the industry leader wins that we had, and we continue to expand in to. Secondly, the expanding capabilities, the industry-leading real-world data assets, the high efficiency of the platform is not only driving value for the clients, as Jason was speaking to, and the strong sales and the accelerating growth, but really impressive operating leverage, cash flows and increasing profitability as well, as John has spoken to. And then third is we are really just in the early innings of this whole process and are quite excited about what we're seeing going forward.

So thank you very much for giving us time this evening, and we look forward to updating you on our next quarter, and we appreciate your interest in Inovalon. Thank you.

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Operator [55]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.