Inovalon Holdings (INOV) Q2 2019 Earnings Call Transcript

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Inovalon Holdings (INOV)
Q2 2019 Earnings Call
Jul 31, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Inovalon's second-quarter 2019 earnings call. [Operator instructions] As a reminder, this conference is being recorded. And now, I'll turn the conference over to your host, Kim Collins. Please begin.

Kim Collins -- Senior Vice President of Communications

Good afternoon. This is Kim Collins, senior vice president of communications at Inovalon. I'm here today with Dr. Keith Dunleavy, Inovalon's chief executive officer and chairman of the board; and Jonathan Boldt, Inovalon's chief financial officer.

I'd like to welcome you to our second-quarter 2019 earnings call. The press release announcing our financial results for the second quarter was distributed this afternoon, and a replay of today's call will be available shortly, posted on the Investor Relations page on Inovalon's website. For those of you listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, July 31, 2019, and will not be updated subsequent to this initial earnings call. I'll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995, including statements related to future results of operations and financial position, our business strategy and plans, market growth and our objectives for future operations.

Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's earnings release and filings with the SEC. In an effort to provide additional information to investors, this conference call and webcast is accompanied by a presentation, which is available on the IR section of our website. You're encouraged to download a copy of this presentation to follow along with our prepared remarks.

Our presentation also includes certain non-GAAP financial measures. You'll find definitions of these non-GAAP measures and reconciliation charts at the end of the company's earnings release and on the company's website. Now it is my pleasure to turn the call over to Dr. Keith Dunleavy.

Keith Dunleavy -- Chief Executive Officer and Chairman of the Board

Thank you, Kim. Good afternoon, everyone, and thank you for joining our call. As 2019 progresses, we are pleased with what we are seeing. Demand for the data, connectivity, analytics and impacts that our platform delivers is strong.

Our clients are realizing meaningful value and are increasingly recognizing the differentiated nature of the platforms capabilities. These dynamics are exciting and are translating into a continued strong momentum in new sales and robust client retention rates. As the multiple successive quarters of meaningful sales build upon each other, our organic revenue growth is building as well. And this is not only occurring in just one corner of the company, but across our business units.

You see this in the sequential increases in annual contract value of new sales, which were up 39% sequentially from the first quarter of 2019. This, together with the multiple successive preceding quarters of strong sales, fueled the sequential organic growth revenue of 8%. And this growth is notably profitable. With meaningful value being realized by clients, the sales we're securing are at a strong price point.

Together, with the growing benefits of our scale and the efficiency benefits of our platform, this is translating into further extension of our profitability. We see this momentum and resulting growth and profitability continuing. As the headline numbers show the positive momentum of the company, behind the scenes, there's a lot going on. While the number of initiatives are too numerous to convey here, I'll mention a few.

From a people perspective, our associates are doing a tremendous job, and we are deepening our bench in a meaningful way, adding wonderful talent and valuable industry experience and connections. Together, this is helping us raise the bar, strength, and effectiveness of our teams. Inovalon is attracting great people and a snowballing domino effect of positive recruitment, retention, and motivation across the company. I'm nothing short of thrilled about the people that are joining Inovalon today.

From the process and infrastructure perspective, we are tightening up how the company is run, improving the backbone to support even greater scale and efficiency as we move forward. The granularity of detail behind our daily, weekly, and monthly KPI tracking has been widely expanded. The maturity of housekeeping functions, such as procurement, CRM and ERP functions are all seeing meaningful maturation. And we're listening more to our clients and fellow employees, focusing on what they need and want, investing in how we deliver great client success and positive employee development and excitement.

And from the technology perspective, the second quarter witnessed a continuation of innovations and advancements, which has been the backbone of our value delivery and leadership in our space. We have introduced multiple new platform capabilities. We began offering a population health configuration of the Inovalon ONE Platform that incorporates the combined analysis of clinical, treatment, outcome, social determinant and sociodemographic data elements. We introduced new predictive tools, leveraging our artificial intelligence initiatives, predicting high-value matters, such as patient fall risks, length of stay, post-acute care staffing levels, and disease identification and chronic disease progression, just to name a few.

We added biomarkers and genetic testing results to our analytics. And forming high-value areas of healthcare, such as immuno-oncological therapies. And these capabilities are driving meaningful demand already. During the quarter, we signed new engagements with leading health plans and pharmaceutical companies from these new capabilities across populations of nearly three million patients for implementations to start in the second half of this year.

And it's important to point out that we're doing all of this investment in strengthening, deepening and accelerating the growth and success of the company, while also expanding our financial efficiency and resulting profitability. Concurrent with the many investments in our people, processes, infrastructure and technology, we have driven down our G&A and increased our adjusted EBITDA margins and cash flow significantly. The tempo of data-driven healthcare is accelerating. I'm pleased with what we accomplished during the second quarter, and I'm excited by what lies ahead.

I'd like to close my remarks by conveying my appreciation to our clients, to our many truly amazing associates, and to our shareholders for the continued interest and great support of Inovalon. We are humbled by how positive this has been. We are on a great journey and there is great momentum. With that, please allow me to turn the call over to Jonathan to review the results of the quarter and our outlook for the balance of the year.

Jonathan?

Jonathan Boldt -- Chief Financial Officer

Thank you, Keith, and good afternoon, everyone. I want to begin by highlighting a few key points building on Keith's comments. First, our second-quarter financial results were strong, with revenue delivering toward the high end of our guidance range, profitability above our guidance range, and our strong cash flow growth continued. Second, we are excited by the momentum of our sales and the building organic growth in area that we remain focused on as it accelerates, investing in innovation and driving continued strong profitability and associated cash flow.

And third, we are updating our full-year 2019 guidance. For the second consecutive quarter, we are revising upward our GAAP and non-GAAP earnings guidance range, we are increasing our adjusted EBITDA range, and we are narrowing our revenue guidance initially provided on November 7, 2018. Turning to our second-quarter results. Second-quarter 2019 revenue was $157 million, an increase of 3% year over year and 8% sequentially.

Subscription-based platform revenue grew to 80% of second-quarter revenue, compared to 78% in the second quarter of 2018. On a trailing 12-month basis, second-quarter 2019 revenue was $584.6 million, an increase of 23% compared to the second quarter of 2018 trailing 12-month period. Trailing 12-month revenue growth was driven by continued strong new sales growth and the previously reported strong client contract renewal retention. The annual contract value, or ACV, platform new sales came in for the second quarter at $38.7 million, up 39% sequentially as demand for our platform capabilities was robust.

This marks yet another quarter of strong sales with the trailing 12-month total ACV new sales coming in at $156.3 million, up 69% when compared to the prior 12 months. Turning to gross margin. Second-quarter 2019 gross margin was strong at 73.8%, which was in line sequentially and year over year. Strong gross margin continues to be driven by our scale and increasing mix of higher-value, higher-margin and more technologically sophisticated platform module adoption, automation, connectivity and realization of our technology-enabled efficiencies we have previously discussed.

The company's platform offerings and gross margin profile position the company well for continued, scalable, profitable growth. General and administrative expenses for the second-quarter 2019 was $45.7 million, a decrease of $14.5 million or 24% year over year and $7.9 million sequentially. G&A expenses as a percentage of revenue was 29.1% in the second quarter of 2019, as compared to 39.4% in the second quarter of 2018. On a year-over-year basis, the decrease in G&A was driven by a reduction of contingent consideration of $9.6 million, a decrease in professional third-party cost of $3.8 million, and a reduction in transaction and integration cost of $1.6 million.

Adjusting for the $11.2 million in non-comparable or one-time expenses in the second quarter of 2018, normalized second-quarter 2018 G&A was $49 million. Importantly, when compared to the second-quarter 2018 normalized expense, second-quarter 2019 G&A expense decreased by $3.3 million or 6.7%, signifying tremendous realized operating leverage efficiencies. Additional details are provided on Slide 11 of our Q2 earnings supplement deck. Increased revenue, strong gross margins, and significant operating expense efficiency drove strong profitability.

Adjusted EBITDA in the second quarter came in at $52.2 million, in line year over year. 2019 non-GAAP net income per share was $0.13, which was also consistent year over year. On a trailing 12-month basis, second-quarter 2019 adjusted EBITDA was $188 million, an increase of 61% when compared to $117 million during the preceding 12-month period. Second-quarter 2019 trailing 12-month adjusted EBITDA margin was 32.2%, which represents a 760-basis-point increase when compared to the preceding 12-month period.

Adjusted EBITDA margin for the second quarter alone was an impressive 33.3%. Finally, second-quarter 2019 trailing 12-month non-GAAP net income per share was $0.39, an increase of 63% when compared to $0.24 during the preceding 12-month period. Turning to the balance sheet. Inovalon's financial position remains strong.

As of June 30, 2019, cash, cash equivalents, and short-term investments were $130.4 million. Total outstanding debt was $972.7 million. Reported balance sheet debt was $946.4 million, net of issuance discounts and deferred financing fees. And the company had not drawn any amount from the $100 million revolving credit facility.

Bringing this all together, as of the end of the second quarter, the company's net debt position was $842.3 million and the net debt ratio as defined within our debt agreement was approximately 4.32:1. Turning to cash flow, net cash provided by operating activities in the second quarter of 2019 increased 90% year over year to $25.2 million, which is net of our debt service interest payments of $15.9 million. Second-quarter capex was $13.9 million or 9% of revenue. Compared to the second quarter of 2018, capex was down $4.4 million or 24%.

For the trailing 12 months ended June 30, 2019, Inovalon generated $58.9 million in positive free cash flow, an increase of $62.2 million from the negative $3.3 million of free cash flow for the trailing 12 months ended June 30, 2018. Notably, this free cash flow was after net incremental cash outflows of $49.6 million in cash interest payments, signifying the very strong cash flow generation of the business model. Additionally, over the same trailing 12-month basis, capex decreased $28.7 million, or 36%, as we continue to see capex decrease as a percentage of revenue from full-year 2018 levels and after the launch of the Inovalon ONE platform. Additional details on our trailing 12-month results and capex can be found on Slides 10 and 19 of our earnings supplement deck.

Looking forward, the company is providing the following guidance. For the full-year 2019, we are narrowing our revenue range initially provided on November 7, 2018, to be $638 million to $648 million reflecting year over year as reported revenue growth of 21% to 23% and organic revenue growth of 13% to 15%. We are increasing our guidance for GAAP and non-GAAP net income, GAAP and non-GAAP net income per share and adjusted EBITDA. And finally, we are reaffirming our prior guidance ranges for capital expenditure and net cash provided by operating activities.

For the third quarter of 2019, we expect $162.5 million to $167.5 million in revenue, we expect adjusted EBITDA to be between $53 million to $57 million, and we expect non-GAAP net income diluted per share of $0.11 to $0.13. Please refer to today's earnings release and our second-quarter supplemental earnings deck for details on our 2019 guidance ranges. With that, let me turn the call back over to our operator to conduct our Q&A session with Keith; Jason Capitel, Inovalon's chief operating officer, who is responsible for sales, client success, and implementation; and myself. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Sandy Draper with SunTrust. Your line is now open.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

Thanks very much. I guess, the first question maybe for both Jason and Keith. If you could talk a little bit about -- I know you don't break out revenue growth by segments, but maybe just some qualitative commentary about the payer market versus provider market versus pharmacy market. Just sort of how things are going different, if they are notably stronger in one area than other.

That would be helpful. Thanks.

Jason Capitel -- Chief Operating Officer

Yeah. Hi, Sandy. Thanks for the question. This is Jason.

So we don't break it out by business unit, but I can tell you that the strength that we're seeing is really across all segments, payer, provider, pharmacy, and life sciences. We're really excited with the momentum that we have going and that's -- those would be my comments. Keith, do you have anything to add?

Keith Dunleavy -- Chief Executive Officer and Chairman of the Board

No. No, I agree.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

OK. Great. Thanks. And then the follow-up.

If I heard you right, Jonathan, I think you said the SaaS platform offering was 80% of revenue in the quarter.

Jonathan Boldt -- Chief Financial Officer

Yes, Sandy, that's correct.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

OK. So if I do that math and back into it, it looks like the legacy revenue actually was up a fair amount sequentially if I sort of back out the services revenue. I'm just trying to understand what drove notable sequential increase in that revenue. Thanks.

Jonathan Boldt -- Chief Financial Officer

Yeah, Sandy. So the legacy business still has seasonality into it. So in this second quarter of 2019, it represented approximately 8.9% of total revenue.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

OK. And so you still assume, you reiterated in the slides, that SaaS is going to be about 83%. So you would expect the mix to shift back the other way in the back half of the year, SaaS revenue to be up -- moving back up more toward 83% or potentially even a little bit higher?

Jonathan Boldt -- Chief Financial Officer

Yes, that's correct, Sandy.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

OK. Great. I'll jump back in queue. Thanks.

Operator

Thank you. [Operator instructions] Our next question comes from Frank Sparacino with First Analysis. Frank, please check your mute button. Your line is now open.

Once again, Frank, your line is now open, please check your mute button. [Operator instructions]

Keith Dunleavy -- Chief Executive Officer and Chairman of the Board

Daniel, this is Keith. Seeing no further questions in the queue, our shortest comments or prepared remarks that we've ever had on a call -- on a quarter that we're quite pleased with. But before we close our call, I just want to leave with a few salient points. Number one, Inovalon is increasingly being seen as a leading provider of capabilities and powering data-driven healthcare, and you're seeing that in our strong sales across multiple areas of the business.

Number two, the effects of the client value delivery, the high-retention rates and the amounting successive quarters of sale are resulting in double-digit organic revenue growth that is building quite nicely. And number three, the scale of the company, the efficiency of the platform is further expanding the company's already significant profitability and cash flow generation. We're excited about performance and expansion we're seeing in '19, and moreover, we're very excited as it comes into the view the momentum and implications for 2020 and beyond. I want to thank finally, our clients, our great associates and you, our shareholders.

We continue to be focused on delivering value for all of our constituents. We thank you for your time this evening. We thank you for your interest in Inovalon. Good night.

Operator

[Operator signoff]

Duration: 23 minutes

Call participants:

Kim Collins -- Senior Vice President of Communications

Keith Dunleavy -- Chief Executive Officer and Chairman of the Board

Jonathan Boldt -- Chief Financial Officer

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

Jason Capitel -- Chief Operating Officer

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