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Inovalon Reports Fourth Quarter and Full Year 2019 Results

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Fourth Quarter 2019 Highlights

  • Q4 revenue of $173.5 million, up 27% year-over-year (fully organic)

  • Q4 net income of $4.7 million, resulting in diluted net income of $0.03 per share

  • Q4 Non-GAAP net income of $21.9 million, resulting in Non-GAAP diluted net income of $0.15 per share

  • Q4 Adjusted EBITDA of $57.6 million, up 48% year-over-year

  • Q4 Adjusted EBITDA margin of 33.2%, up 470 basis points year-over-year

  • Q4 new sales ACV1 totaled $73.5 million, up 60% year-over-year

Full Year 2019 Highlights

  • Full year revenue of $642.4 million, up 22% year-over-year, and up 14% organically

  • Full year net income of $7.8 million, resulting in diluted net income of $0.05 per share

  • Full year Non-GAAP net income of $77.5 million, resulting in Non-GAAP diluted net income of $0.52 per share

  • Full year Adjusted EBITDA of $210.7 million, up 39% year-over-year

  • Full year Adjusted EBITDA margin of 32.8%, up 400 basis points year-over-year

Full Year 2019 Platform Dataset Highlights

  • MORE2 Registry® unique patient counts of 314 million, up 19% year-over-year

  • MORE2 Registry® medical event counts of 53 billion, up 24% year-over-year

2020 Guidance Highlights

  • Reaffirmed 2020 revenue guidance of $698 million to $718 million, reflecting 9% to 12% growth

  • Reaffirmed 2020 Adjusted EBITDA guidance of $231 million to $241 million, reflecting 10% to 14% growth

  • Raised 2020 guidance ranges for net income, non-GAAP net income, net income and non-GAAP income per share, and cash flow from operations

  • Providing first quarter 2020 guidance, including revenue of $158.5 million to $163 million, reflecting 9% to 12% growth

Subsequent Event Debt Repricing Highlight

  • Executed repricing of credit facility on February 11, 2020, decreasing applicable interest rate margin

Please refer to our Fourth Quarter & Full Year 2019 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. 19, 2020 (GLOBE NEWSWIRE) -- Inovalon (INOV), a leading provider of cloud-based platforms empowering data-driven healthcare, today announced financial results for the fourth quarter and full year of 2019, reaffirmed and raised guidance ranges for the full year 2020, and issued guidance for the first quarter of 2020.

“The fourth quarter was another period of strong execution across the Company,” said Keith Dunleavy, M.D., Inovalon’s chief executive officer and chairman of the board. “The quarter and year were hallmarked by many positives, with strong advances in our platform capabilities, the reach of our connectivity, breadth of our datasets, performance of our salesforce, and implementation capabilities. I am extremely pleased with the strong performance that the Inovalon team achieved in 2019 and am looking forward to another great year ahead.”

Fourth Quarter 2019 Financial Results

  • Revenue for the fourth quarter of 2019 was $173.5 million, a year-over-year fully organic increase of 27%, compared with $136.3 million for the fourth quarter of 2018.

  • Cost of revenue for the fourth quarter of 2019 was $46.6 million, or 26.8% of revenue, compared with $35.9 million, or 26.3% of revenue, for the fourth quarter of 2018.

  • Net income for the fourth quarter of 2019 was $4.7 million, resulting in diluted net income of $0.03 per share, compared with net loss of $11.0 million and diluted net loss of $0.07 per share, for the fourth quarter of 2018.

  • Adjusted EBITDA for the fourth quarter of 2019 was $57.6 million, a year-over-year increase of 48%, compared with $38.8 million for the fourth quarter of 2018. Adjusted EBITDA margin for the fourth quarter of 2019 was 33.2%, a year-over-year increase of 470 basis points, compared with 28.5% for the fourth quarter of 2018.

  • Non-GAAP net income for the fourth quarter of 2019 was $21.9 million, resulting in Non-GAAP diluted net income of $0.15 per share, compared with $7.6 million and $0.05 per share, respectively, for the fourth quarter of 2018.

  • Net cash provided by operating activities for the fourth quarter of 2019 was $34.2 million, a year-over-year increase of 25%, compared with $27.4 million for the fourth quarter of 2018.

  • Free cash flow2 was $15.3 million for the fourth quarter of 2019, a year-over-year increase of 20%, compared with $12.7 million for the fourth quarter of 2018.

Full Year 2019 Financial Results

  • Revenue for 2019 was $642.4 million, a year-over-year increase of 22%, compared with $527.7 million for 2018.

  • Cost of revenue for 2019 was $167.8 million, or 26.1% of revenue, compared with $144.8 million, or 27.4% of revenue, for 2018.

  • Net income for 2019 was $7.8 million resulting in diluted net income of $0.05 per share, compared with a net loss of $39.2 million and net loss of $0.27 per share, respectively, for 2018.

  • Adjusted EBITDA for 2019 was $210.7 million, a year-over-year increase of 39%, compared with $151.9 million for 2018. Adjusted EBITDA margin for 2019 was 32.8%, an increase of 400 basis points, compared with 28.8% for 2018.

  • Non-GAAP net income for 2019 was $77.5 million, resulting in Non-GAAP diluted net income of $0.52 per share, compared with $39.3 million and $0.27 per share, respectively, for 2018.

  • Net cash provided by operating activities was $106.5 million for 2019, a year-over-year increase of 18%, compared with $90.4 million for 2018, representing 16.6% of revenue.

  • Free cash flow was $47.5 million for 2019, a year-over-year increase of 87%, compared with $25.4 million for 2018, representing 7.4% of revenue.

“The fourth quarter played out very nicely, capping a strong year across many metrics for the Company,” said Jonathan R. Boldt, Inovalon’s chief financial officer. “Across metrics tracking revenue expansion, gross margin performance, overhead discipline, profitability, connectivity reach, dataset size, compute scalability, platform performance, recruiting effectiveness, voluntary turnover, headcount efficiency, and countless other metrics that we follow closely, we are pleased with what we are seeing and look forward to continuing our focus on execution and always improving as we grow further in 2020 and beyond.”

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

Key Highlights

  • Strong Sales and Revenue Growth. The combination of strong demand for the Company’s cloud-based platform capabilities and significant increases in the Company’s sophistication and scale of sales capabilities continued to drive significant contract signings in the fourth quarter. Q4 2019 total new sales Annual Contract Value (ACV) was a record $73.5 million, or an increase of 60% year-over-year and up 67% sequentially, and platform new sales ACV, excluding Services, was $52.7 million, or an increase of 96% year-over-year. Each of the Company’s four business units (empowering payers, providers, pharmacy, and life sciences) delivered strong double-digit organic revenue growth resulting in fourth quarter revenue of $173.5 million, a fully organic 27% year-over-year increase and a 4% increase sequentially. For the full year 2019, the Company delivered revenue of $642.4 million reflecting a year-over-year increase of 22% with strong year-over-year organic growth of 14%. The strong sales performance during 2019 secured substantive additions to the Company’s new logo list, with sales from new logos contributing 64.4% of the Company’s sales-driven revenue expansion, while positive client experience, value recognition, and successful “land and expand” execution contributed 35.6% during the year.

  • Continued Market-Leading Cloud-Based Innovation. The Company continued to meaningfully advance the capabilities of its cloud-based offerings during the fourth quarter and full-year of 2019. Notable were capability advancements in the Company’s cloud-based pharmacy platform (ScriptMed® Cloud), cloud-based clinical data extraction (CDEaaS®), cloud-based natural language processing (NLPaaS®), and a significantly expanded number of artificial intelligence applications within the Platform. Additionally, during 2019, Inovalon moved into production its FHIR enabled API toolset, providing data and data derivatives on-demand for cloud-based applications, allowing for real-time availability of data and analytics on a transactional basis. Lastly, as announced on January 13, 2020, the Company introduced its cloud-based Healthcare Data Lake offering, providing organizations with an industry-leading single-source-of-truth aggregation of clients’ otherwise disparate datasets, supporting translation of structured and unstructured data, and data supplementation from the industry’s largest healthcare dataset, the MORE2 Registry® of deidentified data, empowering clients to unlock the value of their own data assets and reduce costs from the elimination of their often multiple legacy enterprise data warehouse environments.

  • Significant MORE2 Registry® Dataset Growth. The significant size, extensive breadth of data types, historical duration, recency timeliness, and fully linkable primary-sourced nature of Inovalon’s datasets provides a uniquely rich, longitudinally matched real-world dataset able to empower highly differentiated and highly valued capabilities within the Inovalon ONE® Platform. These capabilities can be broadly viewed in four key differentiating strengths: 1) enabling superior training and refining of artificial intelligence, machine learning, and deep learning algorithms; 2) enabling of advanced outcomes-based and relative performance analytics; 3) informing highly detailed patient-specific and consumerism-focused solutions; and 4) supporting large-scale real world evidence (RWE) research and insights. Throughout 2019, and notably during the fourth quarter, Inovalon’s client base, connectivity, and reach of the Inovalon ONE® Platform resulted in significant expansion of the Company’s primary-source datasets. As of December 31, 2019, the MORE2 Registry® dataset contains more than 314 million unique patient counts and 53 billion medical event counts, representing an increase of 19% and 24% year-over-year, respectively.

  • Term Loan Repricing. On February 11, 2020, Inovalon completed a repricing of its Term Loan B Credit Facility, resulting in a 50 basis point decrease to the applicable interest rate margin to 3.00% with an additional 25 basis point reduction upon achievement of a senior secured net leverage ratio of 3.45:1.00. The repricing is expected to substantively reduce annual cash interest payments. The term loan maturity date of April 2, 2025 and other material provisions, including covenants, under the Credit Agreement, along with the amount of outstanding debt, all remained unchanged by the repricing.

Other Financial Data and Key Metrics

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

  • Growth of Datasets: At December 31, 2019, the MORE2 Registry® dataset contained more than 314 million unique patient counts and 53 billion medical event counts, increases of 19% and 24%, respectively, compared with December 31, 2018.

  • Investment in Innovation: For the quarter ended December 31, 2019, Inovalon’s ongoing investment supporting innovations in advanced, cloud-based platforms empowering data-driven healthcare was $18.6 million, or 10.7% of revenue. For the full year 2019, Inovalon’s investment in innovation was $71.9 million, or 11.2% of revenue.

  • Analytical Process Count Growth: Inovalon’s trailing twelve-month Patient Analytics Months (“PAM”) count, which the Company believes is indicative of the Company’s overall level of analytical activity, grew to 65 billion as of December 31, 2019, an increase of 35% compared with December 31, 2018.

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, 2020, the Company had 75.7 million shares of Class A common stock outstanding and 79.4 million shares of Class B common stock outstanding.

Financial Guidance

The Company is updating its full-year 2020 guidance to raise its expected net income range, raise its diluted net income per share range, raise its non-GAAP net income range, raise its non-GAAP diluted net income per share range, and raise its net cash provided by operating activities range. Additionally, the Company is reiterating its previously provided full-year 2020 guidance for revenue, Adjusted EBITDA, and capital expenditures.

Financial Metric

Previous 2020 Guidance
Originally Provided
October 30, 2019

Updated 2020 Guidance
Provided
February 19, 2020

Change from
Full Year 2019

Revenue

$698 million to $718 million

$698 million to $718 million

9% to 12%

Net income

$22 million to $28 million

$25 million to $31 million

221% to 297%

Non-GAAP net income

$86 million to $91 million

$89 million to $94 million

15% to 21%

Adjusted EBITDA

$231 million to $241 million

$231 million to $241 million

10% to 14%

Net cash provided by operating activities

$145 million to $160 million

$170 million to $185 million

60% to 74%

Capital expenditures

$52 million to $58 million

$52 million to $58 million

Diluted net income per share

$0.15 to $0.19

$0.17 to $0.21

240% to 320%

Non-GAAP diluted net income per share

$0.57 to $0.61

$0.59 to $0.63

13% to 21%

The Company is providing first quarter 2020 guidance below, indicating 9% to 12% year-over-year organic revenue growth.

Financial Metric

First Quarter 2020
Guidance
Provided February 19, 2020

Change from
First Quarter 2019

Revenue

$158.5 million to $163 million

9% to 12%

Net income

$0 million to $2 million

Non-GAAP net income

$17 million to $19 million

16% to 29%

Adjusted EBITDA

$48 million to $51 million

8% to 15%

Diluted net income per share

$0.00 to $0.01

Non-GAAP diluted net income per share

$0.11 to $0.13

10% to 30%

Additional assumptions made within the Company’s 2020 guidance are as follows:

  • While changes in the stock price could change the fully diluted share count, under the treasury stock method, 2020 guidance assumes 150 million weighted average diluted shares.

  • 2020 guidance assumes an effective tax rate of approximately 28% for the full year.

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 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 and full year 2019 results at 5:00 p.m. Eastern Time today. To participate in Inovalon’s conference call, please dial (855) 783-2604, conference ID 4674798; 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 2019 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 nearly 100 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, referred to as a Module, is informed by the data of billions of medical events within Inovalon’s proprietary datasets. Combinations of 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 provider of 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 datasets, 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, 22 of the top 25 global pharma companies, 19 of the top 25 U.S. healthcare provider systems, and many of the leading pharmacy organizations, device manufacturers, and other healthcare industry constituents, Inovalon’s technology platforms and analytics are informed by data pertaining to more than 988,000 physicians, 552,000 clinical facilities, 314 million Americans, and 53 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,” “promise,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this press release include, but are not limited to, expectations about future business plans, prospective performance and opportunities, strategies and business plans, expectations regarding future results, expectations regarding the size of our datasets, expectations regarding implementation timeframes, our ability to meet financial guidance for the first quarter and full year 2020, our ability to pay down outstanding indebtedness, expectations regarding interest payments, expectations regarding tax rates, 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, 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, 2019, filed with the SEC on February 19, 2020, 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 a metric reflecting the sum of the first 12 months of revenue expected from contracts signed during a specific period (such as a quarter or year). New sales ACV refers to the sum of the first 12 months of revenue expected from new sales contracts signed during a specific period (such as a quarter or year).

2 Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment and less investment in capitalized software.



Inovalon Holdings, Inc.
Consolidated Statements of Operations

(In thousands, except per-share amounts)

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2019

2018

2019

2018

Revenue

$

173,489

$

136,314

$

642,410

$

527,676

Expenses:

Cost of revenue(1)

46,553

35,898

167,814

144,826

Sales and marketing(1)

18,407

13,802

62,411

45,534

Research and development(1)

8,527

7,092

33,686

28,638

General and administrative(1)

52,139

48,265

200,762

205,038

Depreciation and amortization

26,880

26,868

108,250

96,725

Restructuring expense

36

9,500

Total operating expenses

152,506

131,961

572,923

530,261

Income (Loss) from operations

20,983

4,353

69,487

(2,585

)

Other income and (expenses):

Interest income

349

307

2,242

2,181

Interest expense

(15,940

)

(16,624

)

(65,831

)

(50,898

)

Other expense, net

(2

)

(414

)

(20

)

(2,255

)

Income (Loss) before taxes

5,390

(12,378

)

5,878

(53,557

)

Provision for (Benefit from) income taxes

672

(1,358

)

(1,897

)

(14,393

)

Net income (loss)

$

4,718

$

(11,020

)

$

7,775

$

(39,164

)

Net income (loss) attributable to common stockholders, basic and diluted

$

4,563

$

(11,020

)

$

7,538

$

(39,164

)

Net income (loss) per share attributable to common stockholders, basic and diluted:

Basic net income (loss) per share

$

0.03

$

(0.07

)

$

0.05

$

(0.27

)

Diluted net income (loss) per share

$

0.03

$

(0.07

)

$

0.05

$

(0.27

)

Weighted average shares of common stock outstanding:

Basic

148,836

147,547

148,304

145,389

Diluted

149,075

147,547

148,633

145,389


_______________________________________________________

(1

)

Includes stock-based compensation expense as follows:

Cost of revenue

$

77

$

83

$

348

$

237

Sales and marketing

501

359

1,675

735

Research and development

483

336

1,707

1,937

General and administrative

5,363

4,238

16,500

13,253

Total stock-based compensation expense

$

6,424

$

5,016

$

20,230

$

16,162


Inovalon Holdings, Inc.
Consolidated Balance Sheets

(In thousands, except share and par value amounts)

December 31,
2019

December 31,
2018

ASSETS

Current assets:

Cash and cash equivalents

$

93,094

$

115,591

Short-term investments

7,000

Accounts receivable (net of allowances of $3,351 and $3,350 at December 31, 2019 and 2018, respectively)

139,514

104,405

Prepaid expenses and other current assets

20,141

34,801

Income tax receivable

4,488

10,330

Total current assets

257,237

272,127

Non-current assets:

Property, equipment and capitalized software, net

147,741

141,758

Operating lease right-of-use assets

45,053

Goodwill

955,881

956,029

Intangible assets, net

483,041

535,343

Other assets

19,681

16,158

Total assets

$

1,908,634

$

1,921,415

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

34,845

$

31,295

Accrued compensation

35,135

25,298

Other current liabilities

26,298

51,384

Deferred revenue

13,664

20,628

Credit facilities

9,800

9,800

Operating lease liabilities

8,085

Finance lease liabilities

2,533

2,905

Total current liabilities

130,360

141,310

Non-current liabilities:

Credit facilities, less current portion

883,937

939,514

Operating lease liabilities, less current portion

49,690

Finance lease liabilities, less current portion

12,266

13,927

Other liabilities

46,529

33,406

Deferred income taxes

97,693

110,669

Total liabilities

1,220,475

1,238,826

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, 2019 and 2018, respectively

Class A common stock, $0.000005 par value, 750,000,000 shares authorized; 90,327,728 shares issued and 75,707,553 shares outstanding at December 31, 2019; 86,679,575 shares issued and 72,059,400 shares outstanding at December 31, 2018

1

Class B common stock, $0.000005 par value, 150,000,000 shares authorized; 79,369,411 shares issued and outstanding at December 31, 2019; 80,608,685 shares issued and outstanding at December 31, 2018

1

Preferred stock, $0.0001 par value, 100,000,000 shares authorized, zero shares issued and outstanding at December 31, 2019 and 2018, respectively

Additional paid-in-capital

636,461

618,674

Retained earnings

278,246

270,471

Treasury stock, at cost, 14,620,175 shares at December 31, 2019 and 2018

(199,817

)

(199,817

)

Other comprehensive loss, net of tax

(26,732

)

(6,740

)

Total stockholders’ equity

688,159

682,589

Total liabilities and stockholders’ equity

$

1,908,634

$

1,921,415


Inovalon Holdings, Inc.
Consolidated Statements of Cash Flows

Year Ended December 31,

(In thousands)

2019

2018

Cash flows from operating activities:

Net income (loss)

$

7,775

$

(39,164

)

Adjustments to reconcile net income to net cash provided by operating activities:

Stock-based compensation expense

20,230

16,162

Depreciation

55,948

52,742

Amortization of intangibles

52,302

43,983

Amortization of debt issuance costs and debt discount

4,598

3,138

Deferred income taxes

(3,276

)

(12,495

)

Restructuring expense, non-cash

7,075

Change in fair value of contingent consideration

115

7,212

Other

(877

)

621

Changes in assets and liabilities:

Accounts receivable

(35,109

)

3,280

Prepaid expenses and other current assets

(489

)

(20,002

)

Income taxes receivable

5,979

2,208

Other assets

(5,096

)

(4,209

)

Accounts payable and accrued expenses

10,608

(6,007

)

Accrued compensation

9,329

9,292

Other current and non-current liabilities

(6,044

)

19,891

Deferred revenue

(6,964

)

6,674

Payment for acquisition-related contingent consideration

(2,549

)

Net cash provided by operating activities

106,480

90,401

Cash flows from investing activities:

Maturities of short-term investments

6,964

96,588

Sales of short-term investments

161,772

Purchases of property and equipment

(22,809

)

(25,505

)

Investment in capitalized software

(36,130

)

(39,469

)

Acquisition, net of cash acquired of $0 and $23,850, respectively

(1,082,740

)

Net cash used in investing activities

(51,975

)

(889,354

)

Cash flows from financing activities:

Proceeds from credit facility borrowings, net of discount

965,300

Repayment of credit facility borrowings

(59,800

)

(238,700

)

Payments for debt issuance costs

(18,269

)

Proceeds from exercise of stock options

3,669

1,833

Finance lease liabilities paid

(2,393

)

(1,201

)

Tax payments for equity award issuances

(5,878

)

(3,363

)

Payment for acquisition-related contingent consideration

(12,600

)

Net cash (used in) provided by financing activities

(77,002

)

705,600

Decrease in cash and cash equivalents

(22,497

)

(93,353

)

Cash and cash equivalents, beginning of period

115,591

208,944

Cash and cash equivalents, end of period

$

93,094

$

115,591

Supplemental cash flow disclosure:

Income taxes received, net

$

(4,588

)

$

(4,136

)

Interest paid

62,768

43,573

Non-cash transactions:

Accruals of purchases of property, equipment

3,156

12,097

Accruals for investment in capitalized software

1,948

1,495

Leasehold improvement paid by lessor

2,906

Acquisition consideration

84,156


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

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, interest income, interest expense, other expense, net, 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,

2019

2018

2019

2018

Net income (loss)

$

4,718

$

(11,020

)

$

7,775

$

(39,164

)

Depreciation and amortization

26,880

26,868

108,250

96,725

Interest income

(349

)

(307

)

(2,242

)

(2,181

)

Interest expense

15,940

16,624

65,831

50,898

Other expense, net

2

414

20

2,255

Provision for (Benefit from) income taxes

672

(1,358

)

(1,897

)

(14,393

)

EBITDA

47,863

31,221

177,737

94,140

Stock-based compensation

6,424

5,016

20,230

16,162

Acquisition costs:

Transaction costs

1,127

898

6,654

Integration costs

1,259

1,293

6,160

6,788

Contingent consideration accretion

(244

)

(1,794

)

(255

)

7,306

Compensatory contingent consideration

291

(358

)

66

1,674

Restructuring expense

36

9,500

Other non-comparable items(1)

2,055

2,304

5,835

9,721

Adjusted EBITDA

$

57,648

$

38,845

$

210,671

$

151,945

Adjusted EBITDA margin

33.2

%

28.5

%

32.8

%

28.8

%


_______________________________________________________

(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

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,

2019

2018

2019

2018

Net income (loss)

$

4,718

$

(11,020

)

$

7,775

$

(39,164

)

Stock-based compensation

6,424

5,016

20,230

16,162

Acquisition costs:

Transaction costs

1,127

898

6,654

Integration costs

1,259

1,293

6,160

6,788

Contingent consideration accretion

(244

)

(1,794

)

(255

)

7,306

Compensatory contingent consideration

291

(358

)

66

1,674

Amortization of acquired intangible assets

12,953

13,366

52,302

43,983

Amortization of debt issuance costs and debt discount

1,347

1,062

4,598

3,138

Restructuring expense

36

9,500

Other non-comparable items(1)

2,055

2,304

5,835

9,721

Tax impact of add-back items

(6,908

)

(3,402

)

(20,123

)

(26,441

)

Non-GAAP net income

$

21,895

$

7,630

$

77,486

$

39,321

GAAP basic net income (loss) per share

$

0.03

$

(0.07

)

$

0.05

$

(0.27

)

GAAP diluted net income (loss) per share

$

0.03

$

(0.07

)

$

0.05

$

(0.27

)

Non-GAAP basic net income per share

$

0.15

$

0.05

$

0.52

$

0.27

Non-GAAP diluted net income per share

$

0.15

$

0.05

$

0.52

$

0.27

Weighted average shares of common stock outstanding:

Basic

148,836

147,547

148,304

145,389

Diluted

149,075

147,775

148,633

145,611


_______________________________________________________

(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.
Free Cash Flow

Inovalon defines free cash flow as net cash provided by operating activities less purchases of property and equipment and less investment in capitalized software. A reconciliation of net cash provided by operating activities to free cash flow follows:

(In thousands)

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2019

2018

2019

2018

Net cash provided by operating activities

$

34,228

$

27,386

$

106,480

$

90,401

Less: Purchases of property and equipment

(8,787

)

(5,562

)

(22,809

)

(25,505

)

Less: Investment in capitalized software

(10,158

)

(9,100

)

(36,130

)

(39,469

)

Free cash flow

$

15,283

$

12,724

$

47,541

$

25,427

Inovalon Holdings, Inc.
Key Metrics

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.

December 31,

(In thousands)

2019

2018

MORE2 Registry® dataset metrics

Unique patient count(1)

314,788

264,220

Medical event count(2)

53,363,411

42,898,600

Trailing twelve-month Patient Analytics Months (PAM)(3)

65,088,648

48,099,042


_______________________________________________________

(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

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 toolsets 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 toolset capabilities are deployed as summarized below.

Three Months Ended
December 31,

Twelve Months Ended
December 31,

(In thousands, except percentages)

2019

2018

2019

2018

Investment in Innovation:

Research and development(1)

$

8,527

$

7,092

$

33,686

$

28,638

Capitalized software development(2)

10,088

8,145

36,583

38,253

Research and development infrastructure investments(3)

2,260

1,581

12,748

Total investment in innovation

$

18,615

$

17,497

$

71,850

$

79,639

As a percentage of revenue

Research and development(1)

5

%

5

%

5

%

5

%

Capitalized software development(2)

6

%

6

%

6

%

7

%

Research and development infrastructure investments(3)

%

2

%

%

3

%

Total investment in innovation

11

%

13

%

11

%

15

%


_______________________________________________________

(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

Guidance Range

Three Months Ending
March 31, 2020

Year Ending
December 31, 2020

(In millions)

Low

High

Low

High

Net income

$

$

2

$

25

$

31

Depreciation and amortization

27

27

108

108

Interest expense

14

14

59

60

Interest income

(1

)

(2

)

(2

)

Provision for income taxes(1)

10

12

EBITDA

40

43

200

209

Stock-based compensation

6

6

27

28

Other non-comparable items(2)

2

2

4

4

Adjusted EBITDA

$

48

$

51

$

231

$

241

Adjusted EBITDA margin

30.3

%

31.3

%

33.1

%

33.6

%


_______________________________________________________

(1

)

A 28% 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

Guidance Range

Three Months Ending
March 31, 2020

Year Ending
December 31, 2020

(In millions, except per-share amounts)

Low

High

Low

High

Net income

$

$

2

$

25

$

31

Stock-based compensation

6

6

27

28

Amortization of acquired intangible assets

13

13

52

52

Amortization of debt issuance costs and debt discount

1

1

4

4

Other non-comparable items(1)

2

2

4

4

Tax impact of add-back items(2)

(5

)

(5

)

(23

)

(25

)

Non-GAAP net income

$

17

$

19

$

89

$

94

GAAP diluted net income per share

$

$

0.01

$

0.17

$

0.21

Non-GAAP diluted net income per share

$

0.11

$

0.13

$

0.59

$

0.63

Weighted average shares of common stock outstanding - diluted

150

150

150

150


_______________________________________________________

(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 28% 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 free cash flow 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.

Free cash flow

The Company defines free cash flow as net cash provided by operating activities calculated in accordance with GAAP less purchases of property and equipment and less investments in capitalized software. The Company uses free cash flow 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. However, use of free cash flow 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 free cash flow or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Contacts:

Inovalon
Kim E. Collins, Senior Vice President. Corporate Communications
Phone: 301-809-4000 x1473
kcollins@inovalon.com

Hulus Alpay, Vice President, Investor Relations
Phone: 301-809-4000 x1237
halpay@inovalon.com