Inovalon Reports Third Quarter 2016 Results

November 3, 2016 |

16 min read

BOWIE, Md., Nov. 2, 2016 /PRNewswire/ --

Third Quarter 2016 Highlights

Third quarter revenue of $105.0 million
Third quarter net income of $7.8 million, resulting in diluted net income of $0.05 per share
Third quarter Non-GAAP net income of $15.4 million, resulting in Non-GAAP diluted net income of $0.10 per share
Third quarter Adjusted EBITDA of $26.3 million
MORE² Registry^® dataset medical event count expanded to more than 11.9 billion
Share repurchase program expanded to $200 million

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

“Third quarter results demonstrate further progress against our long-term strategic plan. We continued the expansion of our platform capabilities, our connectivity reach, and our engagements in the adjacent pharmaceutical and provider markets. Additionally, our ongoing achievements in interoperability, automation, and cloud-based architectures enabled increasing flexibility and efficiencies within our platform, which translated into further value for our clients and increased gross margins for our business,” said Keith Dunleavy, M.D., Inovalon’s Chief Executive Officer and Chairman of the Board. “Further, we saw good progress within the initiative to transition our core payor retrospective risk score accuracy product to a more modular offering. Finally, the continued expansion of our data, analytics, and product offerings, combined with a growing addressable client base and our ongoing investments in sales and marketing, resulted in continued strong expansion in our sales pipeline.”

Management Transition

The Company also announced the promotion of Chris Greiner from Chief Product and Operations Officer to Chief Financial and Operating Officer. Prior to his role as Chief Product and Operations Officer for Inovalon, Mr. Greiner served as a Vice President at Computer Sciences Corporation, where he was responsible for management of that company’s commercial portfolio, as well as the combined Chief Operations Officer and Chief Financial Officer of IBM’s Business Analytics Division, among other roles. Mr. Greiner has been with Inovalon since May of 2013. His promotion to his new role is effective as of November 1, 2016. Tom Kloster, Inovalon’s Chief Financial Officer since March of 2014, will be leaving the Company to pursue other opportunities.

Commenting on the executive appointment, Dr. Dunleavy said, “We are very pleased to announce the promotion of Chris Greiner to the new role of Chief Financial and Operating Officer. Chris is a strong leader who has repeatedly demonstrated an impressive prowess for achieving not only product and operations scale and efficiency, but also strong financial and strategic goals. We would also like to recognize Tom Kloster for his greatly appreciated role in supporting Inovalon through the process of becoming a publicly traded company and implementing the infrastructure required to do so successfully. All of us at Inovalon wish Tom the very best in his new endeavors.”

Third Quarter 2016 Financial Results

Revenue for the third quarter of 2016 was $105.0 million, compared with $105.5 million for the third quarter of 2015.

Cost of revenue for the third quarter of 2016 was $35.4 million, or 33.7% of revenue, compared with 36.4% of revenue for the third quarter of 2015, an improvement of 270 basis points.

Net income for the third quarter of 2016 was $7.8 million resulting in diluted net income per share of $0.05, compared with $10.1 million and $0.07 per share, respectively, for the third quarter of 2015.

Adjusted EBITDA was $26.3 million for the third quarter of 2016, compared with $29.0 million for the third quarter of 2015. Adjusted EBITDA margin was 25.0% in the third quarter of 2016, compared with 27.5% for the third quarter of 2015.

Non-GAAP net income for the third quarter of 2016 was $15.4 million, resulting in Non-GAAP diluted net income per share of $0.10, compared with $13.0 million and $0.09 per share, respectively, for the third quarter of 2015.

Net cash provided by operating activities was $68.6 million for the first nine months of 2016, an increase of 55% from $44.2 million in the year-ago period.

Of note, during the quarter, the Company completed the 2015 federal and state tax returns of Avalere, which was acquired on September 1, 2015, for the pre-acquisition period of January 1, 2015 through August 31, 2015. Through this process, the Company identified additional tax benefits and, as a result, the effective tax rate for the three and nine months ended September 30, 2016 is 15.0% and 34.4%, respectively. The lower tax rate in the third quarter of 2016 represented a $0.01 benefit to diluted net income per share and a $0.02 benefit to Non-GAAP diluted net income per share.

“Third quarter revenue, Adjusted EBITDA, and Non-GAAP diluted income per share, exclusive of tax benefits realized from the acquisition of Avalere in 2015, were at the higher end of our expectations, and we again generated solid free cash flow,” said Chris Greiner, Chief Operating and Financial Officer of Inovalon. “In parallel with delivering these results, the Company executed well on several key fronts. We realized improved gross margin operating leverage as a result of advancements in several product and service delivery technology platforms, closed on a number of deals from our expanding sales pipeline, rolled out new organically-developed offerings to adjacent markets, and, subsequent to quarter end, completed the acquisition of Creehan & Company, with integration activities well underway. Lastly, we are pleased to report that our share repurchase program was underway during the quarter, resulting in the purchase of approximately 3.4 million shares of Class A common stock with $49 million remaining in the initial program by quarter-end, now expanded to a total of $200 million under the program with a strong balance sheet continuing to be in place.”

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

Key Highlights

Addition of Specialty Pharmacy Platform Capabilities: During the quarter, Inovalon entered into a definitive agreement to acquire Creehan & Company, the industry’s leading independent provider of specialty pharmacy software-as-a-service (SaaS) platforms, supporting approximately 30% of the nation’s specialty pharmacy marketplace. The acquisition closed effective October 1, 2016. Specialty pharmacy is a high-value sub-segment of the healthcare ecosystem that is of increasing importance to payors, pharmaceutical companies, and patients alike. Total specialty pharmacy spending in the U.S. is expected to increase from $178 billion in 2015 to $282 billion by 2020, approaching half of total U.S. pharma spend over the next few years. The integration of Creehan & Company’s strong client base, industry expertise, and data-driven technology platforms strategically expands the reach and capability of Inovalon’s data-driven healthcare vision.

Expansion into Virtual Medicine: During the quarter, Inovalon announced a multi-year agreement with MDLIVE, a leading telehealth platform provider, to provide on-demand, real-time patient insights and analytics for virtual clinical encounters. The new capability will enable MDLIVE and its clients (health systems, ACOs, health plans, and employers) to deliver a more personal and differentiated encounter while also facilitating better clinical outcomes, quality score improvements, risk adjustment accuracy, and utilization efficiency across a wide variety of patient populations. By leveraging Inovalon’s extensive capabilities, clinicians in this rapidly-growing segment can improve the care delivered, yielding a better experience for patients and improved financial performance for the underlying health systems, ACOs, health plans, and employers. Adding to Inovalon’s partnership with Quest Diagnostics to provide Data Diagnostics^®, the agreement with MDLIVE is the latest example of how Inovalon is bringing advanced cloud-based analytics, proprietary data sets, and deep subject matter expertise to drive meaningful impact at the point-of-care in real-time.

Further Expansions in Pharma: Inovalon is seeing increased success in the leveraging of its data and analytical platforms for the pharmaceutical marketplace. The advancement of Inovalon’s capabilities, highlighted at the Company’s 2016 Client Congress in Washington D.C. on September 25^th and 26^th, have witnessed the introduction of an integrated “stack” of subject matter expertise, an extensive cloud-based platform suite of data technologies, and proprietary data assets customized for the pharmaceutical and life sciences marketplace. Inovalon has also introduced an integrated value-based / outcomes-based contracting platform which provides for advanced capabilities in data integration, analytics, intervention, reporting and administration for pharmaceutical companies and partnered payors. Over the recent several months, the Company has entered into a number of additional engagements with leading global pharmaceutical companies to support and empower real-world data (RWD), value-based and outcomes-based contracting, and medication compliance tracking and improvement initiatives.

Advancements in Provider / Post-Acute Care Capabilities: During the quarter, Inovalon materially advanced analytical research and associated resulting capabilities designed for the post-acute care provider marketplace. The results, presented together with Kindred Healthcare at Inovalon’s Client Congress in Washington D.C. on September 25^th and 26^th, allow for highly sophisticated applications of predictive analytics to identify ideal facility-type placement and inter-facility-type transfers, predicted costs, and predicted length of stay for patients in need of post-acute care. The capabilities will empower significant advancements in quality of care, reductions in readmission rates, and improvements in financial efficiency for post-acute care providers.

Continued Expansion of Pipeline: During the third quarter, the Company’s continuing investments in product innovation, product-line expansion, and sales and marketing capacity expansion drove sale closures across all lines of business and further significant pipeline expansion. Inovalon’s sales pipeline grew by over 20% from the close of the second quarter and at quarter-end represented approximately 4x the level at the beginning of the year.

Share Repurchase Program Expanded: Today the Company is announcing that the Board of Directors has authorized the expansion of the Company’s share repurchase program to repurchase up to an additional $100 million of shares of Inovalon’s Class A common stock (bringing the total to $200 million). The additional $100 million of shares can be repurchased between the completion of the first $100 million program and the end of 2017. During the third quarter of 2016 the Company repurchased 3,364,531 shares of Class A common stock for $51.1 million at an average share price of $15.19 per share. Since the close of the third quarter, through Monday, October 31, 2016, the Company had repurchased 2,813,603 shares of Class A common stock for approximately $40.2 million at an average share price of $14.28 per share. Repurchases under the Company’s share repurchase program are made in open-market or privately negotiated transactions in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other relevant factors. The share repurchase program does not obligate the Company to acquire any particular amount of Class A common stock.

Other Financial Data and Key Metrics

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

Growth of Datasets: At September 30, 2016, the MORE² Registry^® dataset contained more than 139.5 million unique patient counts and 11.9 billion medical event counts, increases of 9% and 15%, respectively, compared with September 30, 2015.

Investment in Innovation: For the quarter ended September 30, 2016, Inovalon’s ongoing investment supporting innovations in advanced, cloudbased data analytics and datadriven intervention platforms was $13.2 million, or 13% of revenue.

Analytical Process Count Growth: Inovalon’s trailing 12-month Patient Analytical Month (PAM) count, which the Company believes is indicative of the Company’s overall level of analytical activity, grew to more than 25.2 billion as of September 30, 2016, an increase of 24% as compared with September 30, 2015.

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 October 31, 2016, the Company had 63,056,269 million shares of Class A common stock outstanding and 83,970,518 million shares of Class B common stock outstanding.

2016 Financial Guidance

Inovalon is affirming the full-year 2016 guidance issued by the Company on August 3, 2016. As previously conveyed, full year guidance for 2016 is summarized as follows:

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

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

While implementation of the share repurchase program or changes in the stock price could change the fully diluted share count, under the treasury stock method, the Company is assuming 151.0 million shares for the full year 2016.

Conference Call

Inovalon will host a conference call to discuss its third quarter 2016 results at 5:00 pm Eastern Daylight Time today. To participate in Inovalon’s conference call, please dial (855) 783-2604, conference ID 85355328; 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).

About Inovalon

Inovalon is a leading technology company that combines advanced, cloud-based data analytics, and data-driven intervention platforms, to achieve meaningful insight and impact in clinical and quality outcomes, utilization, and financial performance across the healthcare landscape. Inovalon’s unique achievement of value is delivered through the effective progression of Turning Data into Insight, and Insight into Action®. Large proprietary datasets, advanced integration technologies, sophisticated predictive analytics, data-driven intervention platforms, and deep subject matter expertise deliver a seamless, end-to-end capability that brings the benefits of big data and large-scale analytics to the point of care. Driven by data, Inovalon uniquely identifies gaps in care, quality, data integrity, and financial performance while bringing to bear the unique capabilities to resolve them. Providing technology that supports hundreds of healthcare organizations in 98.7% of U.S. counties and Puerto Rico, Inovalon’s cloud-based analytical and data-driven intervention platforms are informed by data pertaining to more than 837,000 physicians, 354,000 clinical facilities, and more than 139 million Americans. Through these capabilities, Inovalon is able to drive high-value impact, improving quality and economics for health plans, ACOs, hospitals, physicians, consumers and pharma/life-sciences researchers. 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,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this press release include, but are not limited to, strategies and business plans, expectations regarding future results, plans to repurchase shares of Class A Common Stock, and financial guidance for the full-year 2016. 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. 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 Data Diagnostics^®; 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 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 ability to protect the privacy of clients’ data and prevent security breaches; the effect of competition on the business; and the efficacy of the Company’s platforms and toolsets.

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