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Inovalon Holdings (NASDAQ:INOV)
Q1 2020 Earnings Call
Apr 29, 2020, 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 first-quarter 2020 earnings conference call. [Operator instructions] And now, I'd like to turn the conference over to your host, Kim Collins. Please begin.

Kim Collins -- Senior Vice President, Marketing and Communication

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 would like to welcome you all to our first-quarter 2020 earnings call. The press release announcing our financial results for the first quarter of 2020 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, April 29, 2020, and will not be updated subsequent to this initial earnings call. I'll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995 including statements related to future results of operations and financial position, our business strategy and plans, market growth and our objectives for future operations.

Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained on 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 this presentation to follow along with our prepared remarks.

Our presentation also includes certain non-GAAP financial measures. You'll find definitions of those 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, everybody, and thank you for joining our call. Before we speak about the first-quarter's results, I would like to take a moment to express my deep gratitude and tremendous pride regarding all the Inovalon employees who've truly done an incredible job supporting our clients, each other and the company during this COVID-19 pandemic. We entered 2020 in a position of strength, and we are navigating the COVID-19 situation well.

The COVID-19 crisis is bringing challenges of course but it is also demonstrating many beneficial aspects of Inovalon's business model, clarifying differentiation of the company and its capabilities within the marketplace, and driving an increased depreciation for many of the strengths that define Inovalon's capabilities, cloud-based solution architectures, extensive marketplace connectivity, deep data assets and impactful analytics, all empowering meaningful aspects of today's healthcare needs, both with respect to improving clinical outcomes and economics. In 2017, the company put into place a pandemic crisis plan. During February, we activated this plan and transitioned quickly to remote operations. Nearly the entirety of the company's operations from sales, software development and platform operations to client support and administrative functions are cloud-based into their design, thus supporting strong and effective business continuity of Inovalon's platforms and operations.

For years now, you've heard us speak about the investments and the capabilities of the Inovalon ONE platform. And our focus on becoming the enablement layer empowering data-driven healthcare for our clients. Every computational process that Inovalon has moved into cloud environments, every piece of software that the company is designed to allow for our associates or our clients to do their jobs and achieve value impact from remote locations, and every EHR to which the company is connected, have all been investments in our ability to seamlessly operate and deliver meaningful value through a myriad of operating environments for our clients. Not only have these multiyear advancements allowed us to operate remotely during this crisis, but they have also served as investments in our differentiation and value impact in the marketplace.

Since Inovalon began its transformation to a cloud-based platform model in 2016, subscription-based platform revenue has grown to be the vast majority of our business. In the first quarter of 2020, subscription-based platform revenue grew year-over-year at more than 13%, coming in at $137.1 million or 89% of total revenue compared to 83% of total revenue in 2019. The innovations that have driven our connectivity, data assets, analytical capabilities and intervention toolsets of the platform are translating into business model strength, financial flexibility and strong demand for the company's offerings. During the first quarter, Inovalon continued its innovative processes.

In response to the pandemic and changes in telehealth guidelines from the government, we accelerated our existing strategic plans to launch data-driven and analytically informed telehealth capabilities within a number of Inovalon's platform offerings empowering virtual data-driven visits with clinicians for clients across the country. The implementation of several telehealth capabilities within the Inovalon ONE platform brings the power of advanced analytics and data-driven encounters to the telehealth landscape. Unlike other telehealth capabilities offered within the marketplace which typically begin each encounter with little or no knowledge of the patient or of potential factors contributing to a patient's element or needs, Inovalon's telehealth offering is informed by the available primary source data and the analytical insights of each respective patient. This insight increases the call time efficiency, effectiveness and value impact of engagements, while also improving the patient experience.

Demand for telehealth offerings have been strong with multiple top 10 national health plans and regional health plans executing contracts within days of its announced availability, many more since and even more within our pipeline. I am pleased to report that telehealth encounters on the platform began in early April and we are rapidly ramping the platform offering capacity as we speak. Additionally, demand for remote connectivity capabilities, such as the company's cloud-based clinical data extraction as a service, have also significantly increased with multiple expansions of existing client relationships and higher volume utilization. We are seeing continued strong demand from existing and new clients.

While the subscription-based platform nature of the majority of our business continued to show its strength during the first quarter, as you know, there are other parts of our business, namely, services and legacy offerings which made up approximately 10% and 7% of the company's revenue in 2019, respectively. And as the impact of COVID-19 intensified in March, and the majority of the U.S. was ordered to shelter-in-place, our services business and some segments of our legacy offerings experienced softness. The impact to services and legacy offerings were approximately $2.5 million and $4.5 million, respectively, compared to internal budget expectations.

We currently expect this dynamic which affected the latter half of the first quarter to continue through the fullness of the second quarter of 2020 and to begin resolving thereafter. We believe that the softness is temporary due to the COVID-19 crisis and a significant portion of the softness represents what we would characterize as demand delay and not demand loss. We are already engaged in discussions regarding planning for the reacceleration of these aspects of our business and are optimistic regarding their contribution to the second half of the year. Now, let me turn to our sales pipeline and bring you up-to-date with what we're seeing.

As you might expect, we are seeing somewhat of different dynamics play out in different end markets. The provider and life sciences markets saw early change in dynamics with elongation in their sales cycle starting in mid-February. Payer and pharmacy sales cycles however have shown no substantive change in their sales cycles and remain very strong. Importantly, we are not seeing any substantive changes to close loss rates.

In fact, we are seeing a rather healthy set of dynamics. The strength and success of our sales team continues to increase the number of offerings we have available within the market continues to expand and the differentiation and value impact of our capabilities are resonating well within the market. Bringing this all together, our pipeline is showing significant strength, increasing each of the many recent weeks, standing at a record high since the company started offering the Inovalon ONE platform in 2016. While pipeline dynamics remain an important variable which we don't want to be overly cavalier about, we are very positive about the implications of our current pipeline for the quarters ahead.

In summary, I'm pleased to report that Inovalon was well prepared to handle and operate within the construct of the COVID-19 crisis for all the reasons I just mentioned. Inovalon is clearly benefiting from the scalability of its business model, its financial flexibility and its strong base of recurring subscription-based platform revenue. Concurrently, the company continues to benefit from the several positive secular demands that are being further emphasized during the current crisis and has been able to introduce new, highly relevant capabilities which are being well received within the marketplace. While we are indeed experiencing some softness in specific areas of our business due to COVID-19, we see this as short-term, and more of demand delay and not demand loss.

Furthermore, while other organizations within the marketplace may be forced to decrease their investments in innovation and their investments in expansion because of the challenges brought on by the crisis, we continue to be focused on investing in additional platform offerings, maintaining and even accelerating new product development and launch investments. Altogether, while appreciating the number of variables and risks surrounding, we are rather optimistic about our ability to navigate the COVID-19 period and even more optimistic about the company's performance and growth prospects following the resolution of the COVID-19 crisis. With that, allow me to turn the call over to Jonathan to walk you through our numbers and revised expectations for the next several quarters and full year. Jon?

Jon Boldt -- Chief Financial Officer

Thank you Keith, and good afternoon everyone. I'd like to begin by thanking my team for doing a stellar job closing out the quarter and allowing us to report on schedule, while fully operating seamlessly in remote environments for the first time. The focus, dedication and teamwork at this moment in history is a testament to the great team we have put together. I'd also echo Keith's sentiment about the performance and focus of all the employees at Inovalon across the country on serving our clients without missing a beat.

Now, let me highlight a few key points building on Keith's opening remarks. First, the company entered the year and exited the quarter from a position of financial strength with a strong balance sheet, healthy cash flows and is well capitalized to navigate the current environment, while also being well positioned to maximize opportunities in the marketplace as they arise. Second, the first-quarter's financial results reflect another solid year-over-year growth across revenue, adjusted EBITDA and non-GAAP EPS. And third, we are updating our 2020 financial outlook to reflect what we believe to be the short-term impacts of the COVID-19 crisis.

Now turning to our first-quarter results. First-quarter 2020 revenue was $154.2 million, an organic increase of $8.7 million or 6% year-over-year. This increase was primarily attributable to an increase of $10.4 million in revenue contributed from new clients signed reflecting continued adoption of subscription-based platform offerings. This growth was partially offset by a $1.7 million decrease in revenue from existing clients due to decreased utilization of services and legacy platform offerings attributable to the COVID-19 pandemic.

As Keith mentioned, and was further outlined in our release, the impact of COVID-19 on our services and legacy offerings in the first quarter was approximately $2.5 million and $4.5 million, respectively, compared to our internal model expectations. Focusing on our revenue streams, subscription-based platform revenue in the first quarter was $137.1 million, an organic increase of 13.1% year-over-year, equating to 89% of first-quarter revenue compared to 83% in the first quarter of 2019. First-quarter 2020 trailing 12-month subscription-based platform revenue was $547.4 million, an increase of 15.9% compared to $472.1 million for the first-quarter 2019 trailing 12-month period. Services revenue in the first quarter represented 9% of first-quarter 2020 revenue with legacy revenue contributing the remaining 2%.

Regarding the company's new sales ACV, the global pandemic did have an unfavorable impact on our Q1 2020 sales activity. As Keith mentioned primarily seen in the provider and life sciences pipeline. Inovalon's new sales ACV during the quarter came in at $45.5 million, a decrease of 5% year-over-year due to the COVID-19-related factors. Of note, new platform sales ACV excluding services was $29 million or an increase of 4.3% year-over-year, while the overall sales pipeline has expanded to a record high since the introduction of the Inovalon ONE platform in 2016.

Even after accounting for the elongation of sales cycles within subsegments of the pipeline, we are seeing very healthy demand and resulting pipeline strength. Turning to gross margin. First-quarter 2020 gross margin was a solid 73.4%. Gross margin decreased by 1% year-over-year primarily as a result of increased investments in data connectivity and employee investments.

Gross margin increased 20 basis points sequentially from Q4 2019 to Q1 2020 primarily driven by an improvement in revenue mix to predominantly subscription-based platform revenue. Sales and marketing expense for the first quarter was $15.2 million, an increase of $1.6 million year-over-year. Sales and marketing as a percentage of revenue was 9.8% in the first quarter of 2020 which was an increase from 9.3% in the year-ago period. As we discussed in our fourth-quarter 2019 conference call, there has been no change to our view on our sales and marketing investments.

We continue to see strong near-term and long-term demand from the healthcare marketplace for our data-driven technology platforms that drive increased revenue and operational cost efficiencies for its users. The returns on our investments in our sales and marketing engine remain attractive, and we continue to be focused on driving increasing organic revenue growth. First-quarter 2020 adjusted EBITDA was $47.5 million, an increase of $3 million or 7% year-over-year. Adjusted EBITDA margin for the first quarter was 30.8%, representing an increase of 20 basis points compared to the year-ago period.

First-quarter 2020 non-GAAP net income per share was $0.11, an increase of 10% compared to Q1 2019. Turning to cash flow. Net cash provided by operating activities in the first quarter was $14.1 million which is after interest payments of $13.1 million and after $20.9 million outflows associated with the company's 2019 annual discretionary incentive bonus payments. On a trailing 12-month basis, net cash provided by operating activities was $105.8 million, an increase of 8% compared to $98.3 million during the preceding 12-month period.

First-quarter capex came in at $16.5 million. Moving to the balance sheet. Inovalon's financial position and liquidity remains solid. Inovalon's cash and cash equivalent as of March 31, 2020, was $182.9 million.

Total outstanding debt was $1 billion. Reported balance sheet debt was $990.4 million, net of issuance discounts and deferred financing fees and our net debt position was $831.4 million. Our net debt leverage ratio, as defined within our debt agreement continued to improve to 3.79 to 1 as of Q1 2020 compared to 4.29 to 1 as of Q1 2019 and 3.83 to 1 as of Q4 2019. As outlined in our earnings release, the company proactively drew down $99 million from its revolving credit facility in the first quarter.

The drawdown had no impact on the company's net debt leverage ratio, increases the company's financial flexibility and provides the availability of additional capital to potentially deploy opportunistically. With the revolving credit facility drawn, the company has one financial covenant that requires the company to maintain a net debt leverage ratio of 7 to 1 or lower. At the end of Q1 2020, the company had trailing 12-month adjusted EBITDA of $213.6 million, providing a significant excess of trailing 12-month adjusted EBITDA totaling $99.4 million over the adjusted EBITDA required to be within the net debt leverage ratio covenant. Said another way, the company is generating nearly twice the required adjusted EBITDA to be within its one financial covenant.

Now, let me conclude by sharing updates to the company's 2020 financial outlook. We are updating our prior guidance ranges based on expected impacts from COVID-19 as we see them today. As part of this, we have updated our expectations on the quarterly cadence as we expect it to progress through 2020. To be clear, we see Q2 2020 as the trough quarter of our revenue growth due to the impact of COVID-19, and we see a reacceleration in the second half of 2020, allowing the upper bounds of our third quarter and fourth-quarter growth to return to that which we originally outlined in October 2019.

We encourage you to refer to our supplemental deck on Slide 22, where we have laid out expectations for each quarter. Bringing this all together, for the full year, we see a full year revenue range of $672 million to $698 million, representing organic growth of 5% to 9% with subscription-based platform offerings contributing to 85% of total 2020 revenue. We see adjusted EBITDA of $221 million to $231 million with an adjusted EBITDA margin remaining at 33% of revenue. Non-GAAP net income per share, we see at $0.53 to $0.57, net cash provided by operating activities to range between $160 million to $175 million and we see capex at $54 million to $60 million as we continue to see and invest in near and long-term opportunities.

Now let me go back and provide additional insights into the second quarter of 2020. While we saw an impact of $2.5 million in services, and $4.5 million in legacy offerings in Q1 2020, we expect a full quarter impact from COVID-19 to be approximately two times this amount in Q2 of 2020, while demand for new offerings and capabilities are ramping. This results in the following guidance of revenue of $157 million to $163 million reflecting year-over-year organic growth of flat to 4%, adjusted EBITDA of $50 million to $52 million and non-GAAP diluted net income per share of $0.11 to $0.12. Again, we encourage you to refer to today's earnings release and our first-quarter supplemental earnings deck for more details on our 2020 guidance range and our quarterly revenue cadence for the rest of the year based on our views today.

Before going to Q&A, I will close by reemphasizing Keith's comments. The company's pandemic plan multiyear move to a subscription-based revenue model and investments in modernizing the company's cloud-based architecture as well as investments in cloud-based productivity and collaboration software has enabled business operations to seamlessly continue to support our clients and enable a safe and efficient work setting for our team members. While our current COVID-19 expectations do have an impact on the 2020 financial outlook, we are optimistic about what we are seeing in our operations, the marketplace demand for our capabilities and our sales pipeline. We continue to be very well positioned to maximize on the secular demand of data-driven healthcare and continue to focus our activities and investments prudently during this time to support our clients progress through in a fiscally strong manner and to emerge as an even stronger and larger leader within the marketplace post the COVID-19 pandemic.

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

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Donald Hooker with KeyBanc. Your line is now open.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Great. Good afternoon. I wanted to hear if you might elaborate a bit on the provider and life sciences headwinds at the end of Q1 and into Q2. I'm just trying to sort of picture in my mind, what specific -- you guys do a lot of things in those areas.

And I just -- maybe can you just review and elaborate a bit on what specific activities might have been deferred? And in terms of -- so we can sort of get a sense of what the -- to the extent there might be a bounce back in the coming quarters?

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

Hey, Don. Good afternoon. Thanks for joining the call. So let me look -- to answer your question, let me make sure I'm answering it properly.

Are you talking about pipeline and sales closure characteristics? Are you talking about revenue-generating characteristics?

Donald Hooker -- KeyBanc Capital Markets -- Analyst

The revenue-generating downside in Q1 and Q2 to your guidance?

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

OK. So there's slightly two different things. Let's talk about them separately. By the revenue side of things was in services and in our legacy offering areas.

So services started to show softness pretty quickly in mid-February and progressed through the end of the quarter impacting about $2.5 million. A lot of that is time and materials, as you'd expect, that requires face-to-face meetings. It requires people to be on-site. It requires teams to be collaborating with clients, and that was pretty quickly impacted during that period.

And then legacy offerings, the $4.5 million during that period that's where clients of ours are using our software, but at their discretion. They're able to direct how a doctor is using the software, how an intervention is using the software and as those regions of our country started being put under lockdown orders, they have less opportunity to use those unit-based fee-generating aspects of our software platform. Remember, the legacy offerings side of our business being different than subscription-based, does have a vulnerability to a client's preference of timing of when they do things. So that is the revenue aspect.

We're presuming that those continue at a similar clip during the fullness of Q2, although we're already seeing some positive turns there which we can come back to. The second part of your -- or interpreting your question from the pipeline standpoint, pipeline in Q1 definitely had a different characteristic, depending on who the end audience was. The end audience of the provider and the life sciences space, we did see changes in the characteristics of those pipeline treatments, whereas we did not see substantive changes in pipeline characteristics for a payer and a pharmacy. So the -- on the provider side, you can imagine the customer that they are calling to became very rapidly preoccupied during the COVID situation.

And was, as you would expect, a little less interested in handling a sales discussion or sales call. On the life sciences arena, life sciences, we would say, in the marketplace, was the fastest to notice the COVID issue on a global basis. And had the fastest change in characteristic in February as the pharmaceutical marketplace seem to be rather attentive to the potential impacts, I'm using the word potential back when the world that there were potential in February, very rapidly becoming clear that they were impacts. But we saw a change in their availability to go through sales processes most quickly.

But also, we're seeing that in a similar way, turn pretty quickly back. So I'll stop there. Let me know if I answered your question, Don.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

No, that's wonderful. Thank you for that. And maybe more on the positive side, the -- you seem particularly excited about the telehealth offering, and you provided some interesting discussion there, but wanted to see if I could squeeze out of you any sort of more quantification of that. How broadly -- the uptake there, I'm sure, was very rapid.

Can you share with us any kind of sort of sense as to how broadly that's now penetrated through your client base? Is that going to -- is that sort of a spike in Q1, Q2 and then level out or is that going to be kind of a gradual ramp? I don't know if you can -- willing to elaborate on that. I know you don't like talking about specific clients, but just more broadly.

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

Let me see what I can do to help you out. So first of all, just to touch on the nontelehealth portions first. I just think important for us to point out that even in those provider and life sciences arenas, it is rather evident to us that this is a demand delay and not a demand loss. These were not phone call saying we're no longer interested.

These were phone calls saying hey, can you give us a little bit of time, if you will? And we're seeing already a change in character to the positive. But this was not a -- us losing out to somebody else or somebody deciding they didn't need things. So we do see a demand catch-up characteristic ahead of us which were obviously, quite positive on. On the payer side and the pharmacy side, there really was no change even in Q1, and we're not seeing any change in Q2.

And in fact, as we messaged on our prepared materials today, we're seeing more than strength, really strong pipeline expansion, size of deals and counts of deals and we're pretty excited about that. But to get to the telehealth, the offering of telehealth and also connectivity differences or connectivity demand in the marketplace is strong as well. As you might imagine organizations are kind of rethinking how they get their jobs done. And it's not just through telehealth which I'll talk about more to your question.

But it's also through remote connectivity capabilities, things like our clinical data extraction as a service and Natural Language Processing as a Service, those are seeing strong upticks here. On the telehealth, that is going very nicely. We launched it in early April. We saw multiple national health plans sign on within days.

We saw many regionals and local health plans sign on within days. We've had many more come on since, and we have many in pipeline. That telehealth offering is quite differentiated in the marketplace. So unlike other offerings in the marketplace where the clinician and the patient get and encounter together and the clinician doesn't know anything about the patient, their needs, their concerns or any special interest that the health plan might have to try to conquer during that encounter as well.

In our situation, all of those encounters are data-driven, analytically driven. It leads to a more efficient encounter. It leads to a better a patient experience. It leads to a higher value impact, both for the patient and for the client.

We launched in early April. It's ramping very quickly. We're very pleased with it. I actually received today the first patients tied feedback on it.

The surveys that we run there. They're very strong. So it's not only are we seeing a rapid ramping across the country, but we're also seeing a strong positive feedback from users of the software, both from a user side and from a patient side. So you're right, we're not giving out numbers on that expansion.

But multiple top 10 national systems have signed on and many more large regional and many household name companies are now on this platform. We do not expect it to be a spike in Q2, if you will, but we expect this to be a long-standing substantive expansion of our capabilities that's ramping very nicely here in Q2, and we expect to ramp strongly through the rest of the year.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Thank you very much.

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

Thanks Don.

Operator

Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Yeah. Good afternoon. When we think about the provider of marketplace, providers are about 35% of your book of business. How have providers' priorities are changing? How the conversations with them are changing? And I think previously, you discussed implementation time lines for new contracts to run into one to nine months range for providers.

How do you think this is going to be affected as a result of COVID? And really the question is, like, how do you think about things being pushed out or do you think things are going to be pushed out to 2021?

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

Hey. Ricky, thanks for the question. A few different questions in there. Let me see if I can hit them all.

First of all, we are not seeing a -- across-the-board shutdown and provider by any stretch. We're just seeing some softness in the elongation of the sales cycle in provider. But they are still very much in the game, very much interested, very much engaged. We're selling still every day to providers.

And they are interested in what they were interested in yesterday to run their business more efficiently, but they're also interested in new additional capabilities. We're seeing a greater appreciation of revenue-generating tools, things like chronic care management capabilities. And obviously, we're seeing a strong interest in telehealth, right? So not only did the regulatory world make a number of changes to allow telehealth to be more broadly used, but it also increased reimbursement for the providers benefit to use telehealth tools. A lot of providers out there are looking to take advantage of that.

They are doing a lot of inbound demand generation on that. One of the reasons obviously we're hurrying to provide and ramp those capabilities. But definitely not seeing, Ricky, a push out to 2021 or any kind of phenomena like that. The provider world is as eager -- if I can broadly describe, there is eager to get back to -- they're making a living and they're running their practices and they're running their hospital systems, as you and I might be.

So definitely, we're not talking a full year pushout. We're already seeing nice positive things there. Now on a revenue basis for us, because so much of -- our provider business is 99% platform, 99% subscription-based. So you're not seeing a revenue impact on the provider side.

It's really just a sales elongation in the provider side, and they're eager to get started. Did I answer your questions Ricky?

Ricky Goldwasser -- Morgan Stanley -- Analyst

You did. And if I can have just one follow-up. When you think about 2021, right, and kind of you think about the changes because you alluded to other changes in regulation are pretty meaningful. How do you think you're more positive in 2021 now than versus where you were a quarter ago?

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

I would say that that's right. And in our guidance, Ricky, for Q3 and Q4, you'll notice that the upper range of that growth, the 12% on the upper end of those two guidance numbers are right back where we had them originally, and we have a number of new product capabilities in our pocket that we're able to be selling into the marketplace, as well as we see ourselves pushing forward during this period where a number of the competitors in the marketplace are a little bit more on the defensive having to rein in spending, having to do layoffs, having to not innovate as much, having -- we're hearing of client services support challenges. We're hearing of technology outages. We're hearing of challenges in the marketplace that we are definitely not experiencing.

So our clients are also seeing that, and we're getting calls to switch from solution a to an Inovalon solution. So we're seeing a marketplace that is paying attention to how well we're marketing through this process. And we've got some great new capabilities in the marketplace that were instigated by the COVID-19 crisis. So yes, we feel quite positive about the period going forward.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from Ryan Daniels with William Blair. Your line is now open.

Jared Haase -- William Blair and Company -- Analyst

Hi. Good evening. This is Jared Haase in for Ryan. Thanks for taking the question.

Maybe just actually to follow-up on those last comments there, Keith, I think I noticed in the press release, you had mentioned obviously some of the positive dynamics with the sales pipeline and specifically you mentioned that win rates remain strong across the board with an upward bias. And so I'm curious, aside from some of those comments you just made of maybe some issues you're seeing with some competitors that's maybe helping you take some share. I'm curious, what specifically is resonating in the market in terms of the value proposition, specifically in light of kind of the current uncertainty that we're seeing right now?

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

Jared, thanks for being on the call. It's all about value achievement, right? So as Jason could comment on, and I'll -- perhaps you'll want to add to this. Our clients, hospital systems, health plan systems, pharmacy systems, pharmaceutical systems are all recognizing the need to use technology more because they feel handcuffed in the current environment like you and I probably do. And so the ability of our platform to add value to their business is being dramatically appreciated.

And the larger technology plays in the marketplace, and I don't want to go into too much detail as to those audiences. They are appreciating cloud-based solutions to them bringing new capabilities to the marketplace, and they're looking to Inovalon to do that with them and for them. So for all of those reasons and the absence of many of those capabilities and our competitors, we are seeing upticks in win rates, upticks in size of deals, upticks in numbers of deals. Jason, do you want to add to that?

Jason Capitel -- Chief Operating Officer

Yes. Thanks, Keith. I think you answered it pretty well. The only thing that I would add is in this world where you can't be face-to-face with clients, it's -- the focus automatically goes toward value realization.

And I think one of our strengths is not just the value proposition as you put it, Jared, but the actual realization of that value and the demonstrable realization of that value and people in the marketplace are knowing, and that's where we're focused on. We don't get deals because we took somebody out to dinner and have a great social relationship. We'd like those things, but we win business because we deliver value for our clients.

Jared Haase -- William Blair and Company -- Analyst

Great. That's really helpful color. Thank you. And maybe I'll just sneak in a quick follow-up.

On the second-quarter guidance, it looks like adjusted EBITDA implies a margin that's up about 100 basis points or so from Q1, just based on the midpoint. Should we think about that as kind of more sort of mix with the sort of strength in the subscription revenues or maybe some cost control initiatives in place there?

Jon Boldt -- Chief Financial Officer

Hey, Jared. It's Jon. What you're seeing there is really the scalability and the leverage model of the business as we add additional revenue, that just continues to fall very nicely to the bottom line.

Jared Haase -- William Blair and Company -- Analyst

Right, Jon. I guess I was thinking with relatively more muted growth in the second quarter still seeing nice margin expansion there. But -- so it sounds like that's really more just leverage in general versus any sort of specific cost control measures or anything like that?

Jon Boldt -- Chief Financial Officer

That's right, Jared. The benefit really you're seeing is just the benefit of the predominantly subscription-based revenue and that profitability profile are really benefiting the adjusted EBITDA line.

Jason Capitel -- Chief Operating Officer

And Jared, I would just maybe add on that certainly, while we're being thoughtful about our costs, we're really building for growth. I mean, we're seeing a lot of demand increase. So we're not in a cost-cutting mode. We're obviously always in a cost prudent mode, but we are investing to take best advantage of this opportunity and expand our capabilities.

Jared Haase -- William Blair and Company -- Analyst

Got it. Thanks a lot.

Operator

Our next question comes from Jessica Tassan with Piper Sandler. Your line is now open.

Jessica Tassan -- Piper Sandler -- Analyst

Hi. Thanks for taking the question. First, just interested to know in the services revenue guide down for the second quarter. Just to what extent can some of the services that you spoke to be moved online, both with respect to the second quarter and then also in the event of the potential or in the event of a potential resurgence of COVID in the fall or winter of 2021?

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

Hey Jessica, thanks for the question. So these services are not typically online-provided services. There's some of them obviously because you didn't see a drop of the fullness of the service you saw a $2.5 million of impact, and we see that a bit higher in Q2. We were already having the discussions of people -- of clients of ours reopening those services, right? They have work, they need to get done.

They have projects, they need to get done. They have initiatives, they need to get done. They're eager to get them done. We have built in some aspect of not expecting things to magically go back to normal on July 1, if you will.

So we believe we have already prudently factored in a degree of tolerance for reasonable expectation on second, third, fourth waves, if they were to occur. But we're not looking to move our services into an entirely different environment. But -- and then closing point on that again these are not lost services opportunities, but really things are paused or pushed out until people can get their work done.

Jessica Tassan -- Piper Sandler -- Analyst

Thank you. And then one sort of switching gears. I think you mentioned chronic disease or a remote patient monitoring chronic disease management capabilities alongside telehealth. So just interested if you could talk a little bit about your chronic disease management offering? And then any gaps you might see in the market or where you think it might be interesting to develop?

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

Yeah. That's an interesting area. The government has put a lot of dollars out there available for the provider marketplace to take care of what's called CCM. It was a program introduced by the federal government a couple of years back.

It reimburses the provider marketplace more significantly in the setting of a patient having a higher number of chronic conditions. The challenge, as you, I'm sure, appreciate, is that most doctors actually don't know how many chronic conditions a patient might have, especially if they're in the fee-for-service world. The benefit that Inovalon's platform provides is that we actually do have that data. We have the largest access to fee-for-service data in the country, combined with all of our other data.

We've developed tools that allow for the provider marketplace to not only see which patients are in need of that care, but see which patients can most significantly assist the provider in reimbursement optimization. So that gap is present in the rest of the marketplace because that data is typically not available in other solutions in the marketplace. We're seeing nice demand for that. Providers are very hungry to play catch-up to the challenges they've experienced in Q1 and Q2 and presumably a little bit afterwards.

So we definitely have an advantage there, and we're pleased that we can help.

Jessica Tassan -- Piper Sandler -- Analyst

Great. Thank you.

Operator

Our next question comes from Sandy Draper with SunTrust. Your line is now open.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

Thank you very much and good afternoon. A lot of questions have been asked. But maybe coming back to the SaaS revenue, obviously again leasing against my model, strong results in the first quarter beat the numbers. But if I look at the guidance, the -- at the 85% of the lower guidance, it's down from the midpoint of the old one.

I'm thinking that's the -- that it's not lost revenue from our existing clients is a slower ramp-up of new sales. But I'm just trying to think, is that primarily in the provider market? Because as you mentioned, Keith, that's all pretty recurring. But just maybe what we're seeing is the impact of lower sales is causing a slower ramp-up than you would have expected or are there any other dynamics there to take what was originally a pretty, in my view, a strong first quarter, but to then see the numbers coming down at the midpoint? Thanks.

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

Thanks for the question, Sandy, and thanks for seeing that in Q1. Look, our platform is really strong, and we continue to see that strength persisting and a large number of clients wanting to come onto that platform. So we think it's prudent to build in a little bit of caution around implementation of all the new clients that we have coming online. And one to just have a little bit of thoughtfulness in that.

But there's no other dynamic than the things you're already thinking, Sandy.

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

OK. Great. That's really my only question. Otherwise, all the other ones have been asked and answered.

So thanks.

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

Thanks Sandy.

Operator

Our next question comes from Stephanie Davis Demko with SVB Leerink. Your line is now open.

Stephanie Davis Demko -- SVB Leerink -- Analyst

Hey guys. Thank you for taking my question. So obviously, the sales environment is pretty unique at the moment. But cutting through that noise, can you talk to where you are seeing pockets of demand within your broader analytics suite? And then looking forward, are you seeing any potential for resurgence in the data exchange business to HIE, just as that becomes a bit more important for pandemic?

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

Stephanie, first of all, great to have you on the call. Thanks for the question.

Stephanie Davis Demko -- SVB Leerink -- Analyst

Glad to be back.

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

We're happy to have you back. So on the sales, for clarity, we're really only seeing sales elongation in provider and life sciences. And we're already starting to see some movement of that improving. And we saw no change to the negative on the pharmacy and the payer side.

In fact, those sales pipelines look pretty tremendous. So this is not a sales world where we would use the word weakness. We're seeing the pieces that I mentioned is taking a little bit longer, but not leading to a no. And then we're seeing the really strong growing areas, payer and pharmacy as looking really, really positive for the year.

And then you asked about the data exchange and catch-up there. We're seeing data being more broadly demanded wanted sought after in the marketplace, the capabilities that we can deliver through the analytics on it. And we're using it to every advantage for our clients' benefit as we can. Things like the Data Lake offering is being very well received, combining COVID-19 data together with risk data to help our clients as well as other members of jurisdictions and government capabilities to better plan for where risk is and where they need to be planning.

We're also wrapping all of that data into the analytics that are supporting our telehealth capabilities, operational, logistical planning for where those demands are. So we're seeing a greater appreciation in the marketplace for the value of data. And we're increasingly getting the inbound phone call from people that are appreciating that we have that holistic view of the marketplace. Did I answer your question, Stephanie?

Stephanie Davis Demko -- SVB Leerink -- Analyst

Yes, that helped. That helps a lot. Just thinking about the market or demand. And I guess then just one follow-up on the guidance in the context of that demand.

So you have higher visibility in your range as you move toward a subscription model. How should we think about where your visibility stands today? And what's baked into the low end and the high end of the new guidance?

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

Well, I think any prudent operator of a company today would say it's smart to think that there are things that you may not understand, right? I think we want to be humble. We want to be thoughtful. We want to be good stewards of the business and deserve credibility in the marketplace. So we don't want to be arrogant about thinking we know every variable that might be ahead of us.

But that said, we are very fortunate to have a very strong business model that is predominantly platform-based and platforms that drive value for our clients and we're hearing from our clients as they too, are sensitive about their financial performance. Very often, we're hearing they actually want more. They want to catch up. They want to get back in the game.

They want to get their annual goals achieved. That's obviously music to our ears to both help our client and help our performance. So we want to be prudent. We want to be careful.

We want to be thoughtful about our guidance. But we're feeling pretty good about what we have out there. Great. Well, with that, I want to thank everybody.

Before we end the call, I want to just close with a few salient points. First, I want to thank the incredible employees of the company and the executive leadership of Inovalon for achieving the strong business continuity, operations, capabilities, both the platforms, the client support sales, legal, finance, technology, engineering, really an incredible job across the board. Second, the beneficial characteristics of our cloud platform approach and our subscription-based capabilities and business model we believe are really shining through. They're supporting differentiated capabilities, rapid, large-scale innovations and implementations, strong value delivery for our clients and a highly effective, flexible and as I hope you all agree, a profitable financial performance of the company.

And then third, while appreciating the variables and risks that abound, as I was just mentioning to Stephanie, we are strongly optimistic about what we're seeing, with respect to our ability to navigate the COVID-19 period, and even more optimistically about what we're seeing in the strong demand, the differentiation of the company and the strong capabilities that we're being recognized as having for the period ahead as COVID-19 recedes. I look forward to speaking to all of you on the next call. Of course, thank you for your time this evening, and really thank you for your interest in Inovalon. Good night everybody.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Kim Collins -- Senior Vice President, Marketing and Communication

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

Jon Boldt -- Chief Financial Officer

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

Jared Haase -- William Blair and Company -- Analyst

Jason Capitel -- Chief Operating Officer

Jessica Tassan -- Piper Sandler -- Analyst

Sandy Draper -- SunTrust Robinson Humphrey -- Analyst

Stephanie Davis Demko -- SVB Leerink -- Analyst

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