Inovalon Reports Fourth Quarter and Full Year 2019 Results


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.”

“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.

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

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.

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.

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.

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

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.

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

 



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