Inovalon Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inovalon First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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:]

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, our Vice President of Finance and Interim Chief Financial Officer. I’d like to welcome you all to our first quarter 2018 earnings call. The press release announcing our financial results for the first quarter was distributed this afternoon, and a replay of today’s call will be available in a few hours and 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, May 8, 2018, 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 are 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:]

Thank you, Kim. Good afternoon, everyone, and thank you for joining our call. I would like to comment on our results for the first quarter of 2018, and then highlight in more detail the continuing important progress we’re making in our business. After that, Jonathan will join us to discuss the results of the quarter and our financial outlook for the year in more detail. Our first quarter results were in line with our internal expectations and reflects several factors that we have previously discussed. First, last year, during a period of heightened uncertainty around the ACA enrollment, decisions were made by a limited number of health plans in our client base to withdraw from certain ACA markets. These decisions were unrelated to Inovalon’s capabilities or value delivery, but nevertheless resulted in a headwind of approximately 8% to the company’s growth rate in 2018, predominantly in the first-half of the year. Second, Inovalon continues to successfully transition its platform solution portfolio from legacy platform solutions to newer and more modular subscription-based cloud-based platform offerings. Over time, these subscription-based cloud-based platform offerings provide more advance capabilities, higher value and greater visibility to our clients, as well as improved visibility, market differentiation and financial performance for Inovalon, though this transition has a short-term negative impact to our revenue. We’re pleased with the continued progress we’re making with this transition, with subscription-based cloud-based platform offerings, representing 74% of revenue in the first quarter of 2018, up 600 basis points on a year-over-year basis. Positively, excluding the impact of the ACA, we drove a sequential increase in revenue from these offerings of $4.4 million, representing an annualized rate of 27%, which served to move us more quickly towards our platform business being nearly entirely cloud-based subscription-based engagements. The offset, however, is that this conversion along with the preparations we were making to transition additional revenue in the second quarter had a disproportionate impact on our revenue in the first quarter of 2018, which we outlined in more detail on Slide 19 of our first quarter earnings supplement. The numbers played out as we anticipated under the circumstances we discussed. We continue to work through the transitions with our clients who are our top priority and we remain steadfast in managing our business for long-term success and the achievement of our vision. Part and parcel with this transition, Inovalon has made important significant progress in pursuing our vision of being the leading technology enabler of data-driven value-based care initiatives across the entire ecosystem. Key to this pursuit is our leveraging of existing technology, data and capital to expand our capabilities across our markets. In this vein, let me discuss two important accomplishments. First, of course, is our acquisition of ABILITY Network, which we announced in March and closed April 2, 2018. ABILITY is a leading cloud-based Software-as-a-Services technology company that helps simplify many administrative and clinical complexities of healthcare. Through the myABILITY software platform, which is an integrated set of cloud-based applications for providers, ABILITY provides core connectivity, administrative, clinical and quality analysis, management and performance improvement capabilities to more than 44,000 acute, post-acute and ambulatory point-of-care provider facilities, representing a significant footprint across the increasingly important provider landscape. Healthcare participants across the ecosystem, including health plans, pharmaceutical companies, medical device manufacturers and diagnostic companies are increasingly interested in achieving timely and seamless access to the relevant data and being able to drive impact directly with providers and their patients. Concurrently, providers are also increasingly interested in access to more advanced analytical tools to support and improve their performance under value-based care arrangements. The combination of Inovalon and ABILITY creates the markets largest vertically integrated cloud-based platform, empowering real-time, value-based care from payers, pharmaceutical companies, device manufacturers and diagnostic companies, all the way to the patient’s point-of-care. The combination leverages and enhances the existing data assets of Inovalon, expands our efficiencies gained through connectivity, increases the overall reach of the Inovalon data-driven intervention capabilities to over 50,000 provider sites across the country, and enhances our ability to capture an increasing share of our large and growing total addressable market. Further, the transaction diversifies Inovalon’s customer base, customer segments and customer concentration, increases our sales capabilities and subscription-based revenue mix and materially increases our margins. The integration of ABILITY and the realization of the cost synergies we discussed in March are very well underway and progressing as expected. More significantly, however, is the capturing of revenue synergies, developing and taking to market new platform-based offerings that leverage the combined company’s capabilities. When we announced the transaction, we provided a presentation with a number of examples of such offerings. The presentation is available on our Investor Relations website, and I encourage you to review it. To further assist in articulating the categories of revenue synergy gained through the combination with ABILITY, we have provided an illustration on Slide 11 of our first quarter 2018 earnings supplement deck. Category one, infusing Inovalon’s data and analytical capabilities into the myABILITY platform to create new offerings, targeting ABILITY’s existing client base. In fact, this is the first targeted synergy effort, and we currently expect the first such revenue-generating offering to be introduced before the end of this year. Category two, applying ABILITY’s high velocity sales techniques to Inovalon’s existing platform capabilities to accelerate sales into the medium scale customer market. Put another way, leveraging Inovalon’s increasingly modular platform capabilities to take to market tightly defined limited configuration, easily deployed offerings via a faster and more efficient sales process. And category three, combining the capabilities of both companies to develop new, more vertically integrated offerings that appeal to both organizations traditional client bases. Moving beyond the acquisition of ABILITY, I want to highlight the further expansion of capabilities within the Inovalon ONE Platform. The first is our development of the industry’s most advanced specialty pharmacy platform, ScriptMed Cloud. ScriptMed Cloud leverages a wide array of existing components of the Inovalon ONE Platform and also comprises eight new components on the platform together referred to as a specialty pharmacy module. ScriptMed Cloud leverages the Inovalon’s broad data assets, ecosystem connectivity, real-time compute capabilities and clinical analytics to dramatically decrease prescription processing time, increase value, impact achievement, streamline inventory management and fulfillment logistics, accelerate the start of patient therapy and optimize the patient’s overall treatment experience, all enabling highly differentiated and integrated business processes, patient engagement and clinical insights empowering improved outcomes for the patient served and lowering operating and processing cost and time consumed. Recall that in late 2016, Inovalon acquired Creehan & Company, a leading software company developing and supporting platforms for standalone specially pharmacies, drug manufacturers and other players in the specialty pharmacy industry. ScriptMed Enterprise, its flagship offering is the most widely used third-party software within the specialty pharmacy market, with approximately 30% market share. ScriptMed Cloud leverage the many advanced and innovative capabilities of the Inovalon One Platform introduces Cloud-Native Microservices Architecture to the Specialty Pharmacy market, bringing the next generation of our industry-leading specialty pharmacy software to benefit our clients and the patients that they serve. For those not entirely familiar with the segment of the healthcare industry, specialty pharmacy is generally defined as the segment of pharmacological treatments, focused on high-cost and high-complexity conditions, such as cancers, autoimmune disorders, HIV, viral hepatitis and other such conditions. To put this into broader context, the specialty pharmacy market is large and growing and is expected to represent approximately 50% of the total U.S. pharma spend within the next few years, reaching approximately $282 billion by 2020. Given its size and growth, as well the complexity of patient care, the Specialty Pharmacy segment is an increasingly significant area of focus for virtually every player across the healthcare ecosystem. Technology, connectivity, and data analytics capabilities have high value in the specialty pharmacy market, as they enable significant improvements in quality and patient care, operational efficiency and financial performance. The pharmaceutical life sciences companies developing an increasing number of specialty treatments, providers having to care for patients with complex treatment regimens and payers having to deal with the high-cost of treatment, hopefully, you can appreciate how ScriptMed Cloud and ABILITY together focus on the significant opportunity to execute our strategy and achievement of our vision. The second capability expansion within the Inovalon ONE Platform that I’d like to highlight is our launch of two new cloud-based offerings, Clinical Data Extraction as a Service and Natural Language Processing as a Service, two highly important tools in the cloud-based arena. The Clinical Data Extraction as a Service offering identifies and extracts patient data within the healthcare ecosystem and aggregates it autonomous into a digital medical record format that’s both CMS compliant and NCQA compliant in real-time. The new Natural Language Processing as a Service enables clients to convert the myriad of non-structured healthcare data within the clinical medical record into structured data and that analyze it in real-time and at massive scale. This allows for previously non-structured medical record data to be captured through the Clinical Data Extraction as a Service process and then converted to structured data and analyzed for initiatives such as clinical quality, diagnosis, disease progression, outcomes, treatments, risk, compliance, waste and a host of other complex initiatives. We began applying these technologies within our internal operations during 2017, achieving an annual run rate reduction in operating costs of more than $15 million by the year-end. The Clinical Data Extraction as a Service and Natural Language Processing as a Service offerings are among the previously discussed technology-enabled efficiencies that we invested in to speed both time to value for our clients and margin expansion for the company. Inovalon is now offering these solutions directly to clients to help them reduce their own labor expenses and the time required to obtain clinical data, while also improving accuracy and consistency. The benefit to the company includes further monetizing our investments, further differentiating Inovalon in the marketplace and providing our sales team with significant incremental cross-sell opportunities. Before I turn the call over to Jonathan, it’s important to note that putting aside the ACA-related and other impacts in the first quarter, Inovalon’s key data and technology metrics continue to demonstrate the important progress in the adoption of our technologies, as witnessed in the continued expansion of our data assets, connectivity and compute utilization. First, in the first quarter of 2018, Inovalon achieved direct electronic health record systems connectivity with more than 130,000 physicians, representing growth of 23% year-over-year and number which has already expanded significantly in the second quarter. Second, Inovalon’s MORE2 Registries, dataset unique patient count increased to over $243 million and the medical event count expanded to nearly $39 billion, increases of 54% and 177%, respectively, on a year-over-year basis. Neither of these metrics yet include the contributions from ABILITY, which we expect to be substantial. And finally, our trailing 12-month Patient Analytics Months metric, or PAM, which represents the sum of analytical processes performed on a unique patient for clients under contract with Inovalon grew by 60% year-over-year. In our view, these metrics reflect the strong market demand and expanding consumption of the advanced capabilities of Inovalon ONE Platform. We expect to see further organic expansion of these metrics in 2018, as it progresses, and even more so as we incorporate the connectivity, data and analytical contributions from ABILITY. In conclusion, before I hand over to Jonathan, we appreciate that the quarter was a complex one. We are executing on the important projects that we have described to you and we are pleased with the progress we are achieving. The combination with ABILITY and the expansion of the Inovalon ONE Platform offerings into Specialty Pharmacy, Clinical Data Extraction as a Service, Natural Language Processing as a Service, are important ones. We’re making good progress in transitioning clients to these platforms and this is the right thing to do. And we’re confident in our ability to execute on our goals, not just for 2018, but also beyond. With this, let me ask Jonathan to review our first quarter financial results and discuss our 2018 financial outlook in more detail. Jon?

[Jonathan Boldt:]

Thank you, Keith, and good afternoon, everyone. I want to hit on three important points that I will discuss in more detail. First, during the quarter, we crossed an important inflection point in achieving significant cost efficiencies that bare out through the rest of the year; two, we see the high-level of investment in the Inovalon ONE Platform now materially behind us; and three, we are reaffirming our full-year revenue and adjusted EBITDA guidance. First quarter revenue was $92.8 million, in line with our internal expectations. As Keith mentioned, we continue to see momentum in transitioning clients to subscription-based, cloud-based platform offerings, which expanded to represent 74% of revenue in the first quarter of 2018 from 63% in the fourth quarter of 2017. Excluding the impact from ACA withdrawals, this represents sequential subscription-based revenue growth of 6% in the quarter, or 27% on an annualized basis. We have provided additional details on these factors in a bridge on Slide 19 of our Q1 2018 earnings supplement deck. This growth in Inovalon’s subscription-based, cloud-based platform offerings was offset by the sequential decline in revenue from the fourth quarter of 2017, principally driven by a number of factors, which we have previously disclosed. These factors include the impact of certain client ACA withdraws, Inovalon continued transition from legacy platform solutions to subscription-based platform offerings, typical client churn and normal seasonality in our service revenue between the fourth quarter and the subsequent first quarter. Turning to margins. First quarter 2018 gross margin was 63.9%, down only 80 basis points versus the first quarter of 2017 despite lower revenue. We continue to see strong leverage from technology-enabled efficiencies, including our expanding connectivity and increasing use of our technology platforms and capabilities, but these benefits were offset by lower revenue against the existing fixed cost base. As we discussed in our presentation announcing the ABILITY acquisition, we expect gross margin to expand 470 basis points in 2018 to approximately 70% for the full-year, given the strong expected contribution from ABILITY, as well as further benefit from our increasing connectivity and automation and revenue growth. For the quarter, 2018 sales and marketing expense was $7.9 million and was up modestly year-over-year from $7.6 million in 2017, reflecting our continued investment in our go-to-market capacity and capabilities. Q1 2018 R&D expense was $6.4 million and was down from $7.8 million in the first quarter of 2017. G&A expense for the period was $49.4 million and was up from $35.8 million in the first quarter of 2017. It’s important to point out that Q1 2018 G&A includes $4.8 million of non-comparable expenses. Additionally Q1 2018 G&A expense included $4.4 million attributable to the CCS business acquired in July 2017, which was not present in the year-ago period, as well as a $4.3 million increase in combined employee-related expenses and professional fees associated with the development and launch of the Inovalon ONE Platform. As I mentioned in my initial comments, Q1 was an important inflection point. Going forward, we expect G&A will be an estimated $40 million to $44 million per quarter, before we add an approximately $9 million in G&A from ABILITY. For the combined business, we see quarterly G&A expense for the rest of the year in the range of $49 million to $53 million. We have provided additional details on our G&A expense on Slide 20 of our Q1 2018 earnings supplement deck. Adjusted EBITDA in the first quarter of 2018 was $7.9 million, compared with $25 million for the first quarter of 2017. The year-over-year decline of adjusted EBITDA was driven primarily by the lower revenue in the first quarter, as well as higher G&A expense. Finally, the first quarter 2018 non-GAAP net income per share was a loss of $0.04, compared to non-GAAP diluted net income per share of $0.07 in the first quarter of 2017, driven by the factors that I have discussed. Investment in the innovation, which includes R&D expense, capitalized software investment and research and development infrastructure investments was $25.5 million in the first quarter of 2018, up from the $17.7 million in the first quarter of 2017, although down slightly from the $26.4 million in the fourth quarter of 2017. We continue to invest in new and enhanced cloud-based, platform-based offerings and related infrastructure, including our launch of the ScriptMed Cloud and our recent announcement of Clinical Data Extraction as a Service and Natural Language Processing as a Service on the Inovalon ONE Platform. That said, you can expect us to increasing harvest the significant investments we have made. I will comment further on this when I discuss cash flow and our 2018 guidance. Turning to the balance sheet. Inovalon ended the first quarter of 2018 with $450 million in cash, cash equivalents and short-term investments. It is important to note that our balance sheet does not yet reflect the ABILITY transaction and will change in the second quarter as a result of the acquisition and the related debt capital we successfully raised. As we have discussed previously, following the close of our new credit facility, Inovalon had $980 million in debt through a senior secured term loan B and retained strong liquidity with cash of approximately $90 million and an untapped $100 million senior secured revolving credit facility. In terms of collections, we are pleased with our days sales outstanding or DSO of 65 days in the first quarter of 2018, down 6 days on a sequential basis and down 19 days from a year-ago period. Turning to cash flow. Net cash provided by operating activities was $6.9 million in the first quarter of 2018, an increase of $4.5 million on a year-over-year basis. Keep in mind that cash flow from operations is typically seasonally low in the first quarter of the year due to several factors, including annual bonus and prepaid expense payments. Capital expenditures were $20.8 million in the first quarter of 2018, compared with $8.6 million from the first quarter in 2017, and was down $5.5 million sequentially from the fourth quarter of 2017. As you heard Keith mentioned, investing in the implementation of the Inovalon ONE Platform in 2016 and 2017 has been a significant focus, both in software and infrastructure. You can see this on Slide 21 of our supplemental deck. These investments took our CapEx as a percentage of revenue to 15% in 2017 above the historical level of 6% as seen in 2013, 2014 and 2015. With much of this investments done, we see these high levels of investment behind us and that CapEx as a percentage of revenue returning back towards these historical levels coming in an estimated $50 million to $55 million for the full-year of 2018 or approximately 8 to 9 percentage points of revenue inclusive of ABILITY. Now let me turn to our outlook for 2018. The integration of ABILITY in our pursuit of both revenue and cost synergies are both progressing well. In addition, as Keith mentioned, we are launching the industry’s most advanced specialty pharmacy platform, ScriptMed Cloud, as well as introducing new cloud-based platform offerings that are differentiated in the marketplace, including Clinical Data Extraction as a Service and Natural Language Processing as a Service on the Inovalon ONE platform. With these important drivers and the progress we are seeing in the rest of our business, we are reaffirming our revenue and adjusted EBITDA guidance for 2018 and updating our other guidance to reflect the interest rate expense associated with the ABILITY transaction. We are also providing additional guidance for our expected cash from operations and capital expenditure for 2018. Please refer to today’s earnings release and Slide 29 of our supplemental earnings deck for the details of our 2018 guidance. With that, let me expand on several key elements and assumptions underlying our financial guidance. First, while we are not giving quarterly guidance, we do expect to see a significant sequential improvement in revenue, particularly in the second quarter of 2018, driven by the contribution from the ABILITY acquisition, as well as organic growth. We also expect operating leverage as a result of higher revenue contribution, as well as our cost synergy initiatives. Second, our net income, non-GAAP net income and related per share guidance for 2018 has been updated to account for the interest expense associated with the ABILITY transaction, as well as the company’s progress in fixing $600 million of our term B credit facility. We now expect pre-tax interest expense to be approximately $48 million to $49 million in 2018, inclusive of $4 million in original issuance discounts and debt issuance fee amortization. The third key element of our 2018 guidance I would like to comment on is our strong cash flow. On a GAAP basis, we expect net cash provided by operating activities to be between $90 million and $100 million for 2018. Adjusting for the $14 million to $15 million of expected transaction in integrating costs related to ABILITY, that puts our non-GAAP net cash provided by operating activities to be between $104 million and $115 million for 2018, which is more comparable and representative of the company’s ongoing performance. With that, let me turn the call back over to the operator to conduct our Q&A session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from line of Donald Hooker of KeyBanc. Your line is now open.

[Donald Hooker:]

Great. Good afternoon.

[Keith Dunleavy:]

Hey, Don.

[Donald Hooker:]

Over – in late 2017, I guess, you guys had won a number of large deals with the big health plans, including United, I think, four of the top five, I think, you mentioned. Are those rolling into revenues now, or do we – is that kind of how do we think about the phasing of that into your revenue base?

[Keith Dunleavy:]

Well, first of all, Don, thanks for being on the call. Thanks for the question. Your memory is correct. We did announce a number of large health plan contracts on the platform in four of the top five. And you’re also thinking about right that they have a tendency to phase-in over time. On the short-end, some of them are phase-in over or start to phase-in kind of 90 to 120 days in. Some of them are on the larger side and take a full-year to go through the phasing-in process.

[Donald Hooker:]

Okay. And then as a follow-up, in terms of some of the headwinds around the exchanges that you guys have call out, I guess, last quarter, in this quarter. Do you see a scenario that revenue potentially coming back, or where does that stand now with those clients?

[Keith Dunleavy:]

Don, we do see that scenario. The membership in the ACA market, as you know, decreased relatively small amount about 3% year-over-year. But we disproportionately realized a greater downdraft, obviously, 8% for us. A number of our clients, as they did their pullout, as we’ve talked about before, poured out in select areas of the country leaving a portion in various different states making it easy for them to reenter being that those memberships have not moved away and we’ve gained clients in the marketplace that are now positioned to be able to take advantage of that membership. We do see it as an upside opportunity going forward.

[Donald Hooker:]

And then maybe just one real last quick one and I’ll jump off. I think, you mentioned the exchanges were about 10% of revenues in the past. Is that still the case, I guess, with the wind down of those like where are you in terms of exchanges as percentage of revenue?

[Keith Dunleavy:]

That – that’s exactly right, Don, 10% is the right number.

[Donald Hooker:]

Okay. Thank you.

[Keith Dunleavy:]

Great. Thanks, Don.

[Operator:]

Thank you. Our next question comes from the line of Jamie Stockton of Wells Fargo. Your line is now open.

[Jamie Stockton:]

Hey, good evening, and thanks for taking my questions. I guess, maybe the first one, Jonathan, I’m not sure if I got your right. But I think, you said, you expect the second quarter revenue to be up year-over-year organically. Is that off of the kind of one $10.6 millionbase last year, is that accurate?

[Jonathan Boldt:]

Yes, that is accurate.

[Jamie Stockton:]

Okay. And just if we – what’s – let’s set ABILITY aside for a second and think about these buckets that you’re laying out for [standard][ph] subscription, legacy and services. If I think about what’s going to get you up to a number kind of 111 or higher sequentially, is it going to be that the subscription bucket ramps that materially, or is it going to be maybe a little bit of snapback in that legacy bucket that that had just the light contribution in Q1?

[Keith Dunleavy:]

Hey, Jamie, it’s Keith. Thanks for the question. We’re going to see a little bit of both in Q2. So we are seeing expanding subscription-based elements, as well as new contracts in subscription-based elements. But we also have a growth in legacy solutions. We’ve got some great solutions. And if a client wants to go with that, we will certainly provide that. So you’re going to see both in Q2.

[Jamie Stockton:]

Is there a component – in years past, Q2 had been seasonally strong because of a lot of work that you guys were doing with health plans. And then there was a seasonal comp fall off in Q3 after that. Is there some dynamic of the view that Q2 would be up organically year-over-year that stems from just maybe more traditional seasonality that maybe you didn’t see last year?

[Keith Dunleavy:]

Jamie, we do have a lessening amount of seasonality in our business going forward. You’re – there’s still a little bit there, so it would be premature to call it gone. We do have a – as you correctly point out, historically a little bit of a seasonal lift in Q2, but you’re also going to see just a good old-fashion organic lift in Q2 from new business signed. So, yes, you’re getting a little bit of both of those benefits factoring into Q2 and less of the downside factors that we’ve walked through during our prepared remarks.

[Jamie Stockton:]

All right, that’s great, thank you.

[Keith Dunleavy:]

Thanks, Jamie.

[Operator:]

Thank you. Our next question comes from the line of Sean Wieland of Piper Jaffray. Your line is now open.

[Sean Wieland:]

Hi thank you, so last quarter you said at the – or you said at the start of this call that results were in line with your expectations. Last quarter, when you were asked about the cadence of the top line, you said it will look similar to the first half of 2017 with an acceleration in the second half of the year. So there’s a few different ways to interpret that, but none that get me to $92.8 million. So, my question is, how were these results in line with your expectations and how did we get that signal wrong?

[Keith Dunleavy:]

Hey Sean, good to talk to you, thanks for the question. So, a number of different factors, we laid out in our Q4 call, which was earlier this year, how we solved the negative factors that we’ve talked about here on this call, most notably the 8% impact of the ACA. We walked through how that would occur. We also walked through how the transition from subscription or from legacy subscriptions impacts us. We did not give our guidance on when in the year that transition from the remaining legacy pieces would transition to the subscription piece. And actually here in Q1 it became quickly evident to us in a positive way except for the concentration of it that we were making faster progress on that transition. So we internally knew that that would become concentrated here in the first quarter, that’s actually a heavily dominant element in the first quarter. So that was playing out precisely as we expected to do. Remember we knew that by the time we gave that call about Q4. We were able to see those things happening in Q1 and we already have those budgets build out, so it did play out as we expected to, we gave full year numbers of course, but we had really good insight into how Q1 was going to play out.

[Sean Wieland:]

So, tell me again why you don’t provide quarterly guidance because we’re not very good at picking up these signals to model this if these were in line with your expectations.

[Keith Dunleavy:]

Well, I appreciate it and certainly we look forward to a time that we nail exactly what the analyst community would like from us and we execute on everything precisely in a 90-day cadence. I think the most important thing for us is, we are operating on a, call it, a bigger picture, a longer-term view. We feel positive about how we’re executing on that. The 90-day to 90-day cadence can make a company make some short-term decisions and some of those can fail to put the client first. And we think that putting the client first is really important than the flexibility it gives us to allow something to fall a few days this way or a few days that way, something which we would hope our shareholders would want us to do for the benefit of our client. That, we think that that’s a very important aspect to growing this company the right way. So we try to give more visibility. You’ll notice in today’s call we’ve given quite a few insights into how our G&A is evolving, how our CapEx is evolving into our cash flows. What you can expect on a quarterly basis for G&A for both of pre-ABILITY and with ABILITY, so we really do want to give more and more visibility, that’s our desire. And we’re just trying to also balance that with being able to do the right thing for our customers and the company over the longer-term, it’s certainly not meant to frustrate.

[Sean Wieland:]

Okay, thanks so much.

[Keith Dunleavy:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ricky Goldwasser of Morgan Stanley. Your line is now open.

[Ricky Goldwasser:]

Yes, hi good afternoon. So Keith, just coming back to the ACA, given that this is really kind of like the biggest impact. You mentioned earlier that you expect the ACA actually, I think if I heard you right to be a benefit. Can you explain us again how is the benefit, that’s first. And then second of all, when we think about ACA revenue still being 10% of your business, we’re still hearing about contract premium increasing for next year. How do you think about that business from a longer-term perspective? I mean, [Technical Difficulty] model or not, they are kind of headwind in 2019 if the market transitions?

[Keith Dunleavy:]

Well, first of all Ricky thanks for joining us, thanks for the question. So let me first clarify, you are making reference to an answer to a question earlier today. We see ACA as a possible upside next year right, so the way the ACA works, it works in annual cycles. We have assigned expanding client base, that client base does utilize the ACA and as members go, move back to the health plans that pulled out of regions or more specifically as those health plans reopen coverage in some of the counties they pulled out of. That is an upside for us in 2019. That is not factored in, it wouldn’t be an upside in 2018 and is not factored into be an upside in 2018. The question I believe was about, do we see that as an upside in the out projection and the answer to that was, yes, we do. So the reason it’s a potential upside in the out projection. We have not given 2019 guidance, but directionally we see that one element of our business one amongst others of upside opportunities because our health plans that pulled back in 2017 for the 2018 calendar year are reevaluating their decisions and potentially moving back into regions where the ACA has stabilized here in 2018, which would expand business back to us without us even needing to go out and get new contracts. So that’s a clarification just to make sure it’s clear on the question previously asked. The 10% number is correct pre-ABILITY, so we were expecting that prior to the acquisition of ABILITY, the ACA would be approximately 10% of our revenue for 2018 with ABILITY factored in, it’s going to be a lower proportion because the total company size is larger. So it’s going to be more just really a proportional adjustment where there’s been no change in that business, so call it 7%-ish because of the addition of ABILITY. So and then to the latter part of your question, do we see that as a headwind, certainly too early here in the year to call. ACA plans are just now starting to submit the applications for licenses in the various different regions of the country that’s literally just started in the last days to weeks. It really culminates in June and we will get greater insight into that. We’d be starting off of a base of 7%. From where we sit today, it’s too early to make that call. If forced to make that call, it’s directionally likely more a positive than a negative at this point. There is much less pressure on that market today than there was a year ago for both political reasons and economic reasons. If you read some of the reports that are out in the marketplace, Great One is the high mark report released in March earlier this year. Highmark the Blue Cross Blue Shield in Pennsylvania put out a really great report and others have echoed it, saying that the ACA is now turning into a more stable, more profitable area for them to do business. We’re seeing that in a number of different plans as they released their year-end numbers earlier this year and that’s fueling some of the evaluation of their strategy going forward. We don’t want to message that we’re aware of all their strategies or involved in all those discussions, but directionally we’re seeing it more as a positive than a negative, but again that’s an 2019 thing.

[Ricky Goldwasser:]

Okay, thank you for the clarification. And then, when we think about the organic revenue growth, excluding ABILITY, taking into account what you did in the first quarter. Based on our back of the envelop insights around 8% to 14% for remainder of the year. So when we think about the cadence, is it second quarter where you are anticipating a nice step-up. How should we think then about kind of like second-half versus second quarter. Is the majority of the organic growth going to happen in the second quarter, or do you think that it’s going to be more balanced throughout 2Q to 4Q?

[Keith Dunleavy:]

Great, great question, Ricky. So a little bit of both, right? So first of all, we see a nice step-up in Q2 and then that continuing to increase here in three and four. So what adds in Q2, obviously, continues to add in Q3 and Q4. As we signed business in Q1 and as we continue to sign business, we have a very nice pipeline of things expected to come to close here in Q2. Also, those will layer in, some have different implementation timelines than other elements of it. So Q2 should be a nice step-up, but then it will continue to move up from there into the rest of the year.

[Ricky Goldwasser:]

Thank you.

[Keith Dunleavy:]

Great. And Ricky, that was our last question. So with that, I want to thank everybody for joining us on the call this evening and spending time with us. As always, we appreciate it. In closing, I’d just like to touch upon a few key reiterated points. Number one, we made a lot of progress during the quarter on important things. We closed on the acquisition of ABILITY Network. We expanded the Inovalon ONE Platform with very important offerings, the first being ScriptMed Cloud, really an industry-leading transformation in a marketplace that hasn’t had a material advancement of the technologies underpinning it in many years. The second one being Clinical Data Extraction as a Service and Natural Language Processing as a Service. These are services that are applicable. They’re literally the ubiquity of the healthcare marketplace, every health plan, hospital system, regulator, a researcher has applications of those large-scale autonomous data captures and interpretation of them through Natural Language Process. And number three, we transitioned an increasing number of our clients to the subscription-based platform, that takes – that comes at a cost in Q1, as you saw, but we really see that as the right thing for us to do. So putting this altogether, the first quarter played out as we expected it to play out in taking all of these disclosed factors into consideration. We reaffirmed our guidance here today and revenue and adjusted EBITDA really only updating you for the actual cost of interest. As we went through, we think quite prudently fixing $600 million of the $980 million we have doing that in a, I think, really well-orchestrated way. So we’re excited about these meaningful accomplishments. We’re excited about the meaningful opportunities. We look forward to the rest of the year and frankly, the out years as well. We’re grateful for your time. Thank you and a good evening. Take care.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone, have a great day.