Inovalon Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inovalon First Quarter 2017 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 Chris Greiner, our Chief Financial and Operating Officer. I’d like to welcome you all to our first quarter 2017 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 3, 2017, 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 those 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 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:]

Thank you, Kim. Good afternoon, everyone and thank you for joining our call. Chris, and I would like to share with you the results of our first quarter 2017, highlight in more detail, the continuing significant progress we are making in our business, and discuss our financial outlook for the remainder of the year. Let me begin briefly with our first quarter results. As Chris will discuss in more detail shortly, our revenue and profitability in the first quarter came in ahead of our expectations that we discussed with you last quarter. We continue to see the benefits of our investments, driving both top-line and bottom-line performance and our strong financial position continues to be supportive of our ongoing investments in our organic business as well as our capacity to consider strategic acquisitions and opportunistic repurchasing of shares. Our expanding platforms capabilities, analytical sophistication, compute scale, connectivity and proprietary data sets continues to differentiate Inovalon and is positioning us well, as we focus to enable the healthcare industry’s transformation to value-based models. As our platform capabilities expand, we are similarly seeing an expansion in the number of significant opportunities before us. As a result, we have further increased our investments to capture an increasing number of these opportunities. In the first quarter of 2017, we increased our investment in innovation to $17.7 million, an increase of approximately 52% compared to the same period in 2016. We have also continued to increase our investment in sales and marketing. I’ll speak to this in a bit. First, a few comments on our investments in innovation. While, the number of investment initiatives are many, and they can take varying amounts of time to bring to fruition, I wanted to highlight a few to provide color with respect to our areas of focus. Number one, we are increasing the sophistication of our cloud software architecture. We are breaking our complex data processing and analyses stages into discrete components, and containerizing them to allow them to take full advantage of the dynamic provisioning of compute and storage capacity across multiple cloud environments. This gives us the ability to scale in real time, dramatically improving compute performance, enhancing business continuity service levels, and substantially reducing costs. Second, we are enhancing the graphical interfaces used for the development of our analytical algorithms, and the clinical decision support platform components. These graphical interfaces allow non-technical personnel, business owners, product owners, subject matter experts to more easily and rapidly design, build, and test increasingly sophisticated analytics. A third example, we’re enhancing the modulary of our platforms, allowing new components to be applied quickly across many different market applications. This is speeding our time to market for new technology enhancements, increasing flexibility available to our clients, and improving the cost efficiency of our design build processes. And our fourth focus, we are increasing the sophistication of our data model architecture, and the way we store, maintain and leverage data. As the MORE2 Registry continues to increase in size, we are enhancing the structure of the dataset to allow for the integration of new types of data and preparing for even greater expansion in scale and complexity that we’re expecting. These are just a few of the initiatives behind our platform enhancements, that you have seen translate into improved financial performance in the first quarter. These enhancements have supported our wins in the payer and provider value based platforms, outcomes based contracting platforms in the pharmaceutical marketplace, our achievement of predictive modeling platforms for the post-acute care space, our real-time clinical outcomes analytics platforms and are behind the scenes on a number of new technology capabilities planned for later this year. As we have spoken about, we see the transition in the marketplace to value based care models, as requiring superior connectivity, deep comparative data insights, real-time analytics, on-demand transactional processing and distributed highly scalable compute and data storage strategies. We believe, that we are leading in these areas and we believe that the healthcare industry is taking notice. We are seeing this in our pipeline of opportunities, the nature of our contract wins and our financial performance. In addition to our technology investments, we continue to invest in our sales and marketing capability and capacity. In the first quarter, we increased our investments into sales and marketing to approximately $7.6 million, up 16% year-over-year. If we look at the increase in investment over the last two years, we see that, we have increased our investment into sales and marketing by approximately 310% since the first quarter of 2015. This investment has dramatically expanded into sales and marketing organizational resources, specifically increasing the number of FTEs performing sales from 15 in the first quarter of 2015 to 79 in the first quarter of 2017. The number of FTEs performing marketing adds another 20. And these investments are not only in head count, but also in the tools being used, the processes being applied and the coordination across the Company, and the more recently added elements of Avalere and Creehan. We are seeing results from these investments across a number of sales related metrics. Our pipeline has grown significantly over the period in both the number of opportunities and in terms of absolute dollars. And these pipeline opportunities are translating into new client wins as witnessed in our client count rising from just over a 100 two years ago to now approaching 500. In the first quarter specifically, we saw material year-over-year increase in new client count. The annualized revenue associated with new statements of work, the pace of progression of opportunities through the company sales pipeline and the speed to opportunity closure, each of which were significant in their year-over-year changes. Further, our investment in data connectivity and data ingestion capacity, as well as our increasing client base drove strong expansion of the Company’s proprietary datasets. At the end of the first quarter of 2017, Inovalon’s MORE2 Registry dataset contained more than 158 million unique patients, and over 14 billion medical events, representing year-over-year increases of 20% and 24% respectively. These results represent acceleration from the strong growth witnessed last quarter and are the fastest growth rates for these metrics since the third quarter of 2014. As we said last quarter, we don’t see this acceleration abating, but rather continuing in 2017. It is also important to emphasize that this represents what we see as a virtuous cycle for Inovalon. Our increasing success in the marketplace helps drive further expansion of our connectivity and proprietary data sets, which enable more advanced analytics, product innovation, increasing differentiated value for our clients and ultimately translating into further increases in our new business wins for the company. To summarize, our investments are enabling our expansion in the number of high value differentiated products and capabilities that we can take to market, and an increase in our capacity, capability, and efficiency to do so. These are things we’ve been discussing with you, in our calls and conversations, and they are being borne out in our financial results. Altogether, we’re pleased with our execution in the quarter and our performance and progress across many facets of our business, which provides us with an increasing level of confidence in our 2017 outlook as we see a return to double digit organic growth in the second half of the year. With that, let me ask Chris to review our first quarter financial results, and discuss our 2017 financial outlook in more detail. Chris?

[Chris Greiner:]

Thank you, Keith, and good afternoon, everyone. I will discuss our financial results for the first quarter of 2017, highlight key items in our results, discuss our balance sheet and capital allocation, and then provide an update on our financial guidance for 2017. First, let me echo Keith’s comments that we’re pleased with the Company’s execution in the first quarter. We believe that our performance is indicative of the momentum continuing to build in our business, and more clearly demonstrates the returns we have been seeing from our ongoing investments in product development and innovation, sales capacity expansion, and platform efficiency. As Keith mentioned, we had a successful sales quarter, winning new work with new and existing clients across a wide range of business lines and industry verticals, successfully executing our multi-channel sales strategy that combines industry leading subject matter expertise with an expanding direct sales force. We continue to add new logos, which were up more than 20% on a year-over-year basis in the quarter and demonstrate a strong value creation within our existing client portfolio of nearly 500 customers. Turning to our results. First quarter revenue was $108.3 million, an increase of 6% year-over-year on a reported basis. This was just over $5 million ahead of our implied guidance of $102 million to $104 million, which is based on our previously conveyed seasonality expectations applied to our annual revenue guidance. As can sometimes be the case, we saw a small element of favorable timing in the first quarter of approximately $2 million in revenue, that we had originally planned to occur in the second quarter of 2017. Nevertheless, even after adjusting for the timing of this $2 million, first quarter revenue was solidly above our expectations. The Company’s strong execution can also be seen through the lens of sequential improvement with revenue up 13% organically from the fourth quarter of 2016, the highest Q1 sequential improvement since the first quarter of 2014. The Company’s margin performance was also a bright spot in the quarter. We saw strong operating leverage throughout the P&L, with a common thread being increased leverage of platform technologies and connectivity that support both the provisioning of our services internally, as well as the vehicle for how our platform products are consumed by our clients. Gross profit margin was 64.7% in the quarter, representing an increase of 550 basis points on a year-over-year basis, and 490 basis points sequentially. Of the 550 basis points of expansion year-over-year, 430 basis points came from technology-enabled efficiencies, including expanding connectivity and increasing leverage of our technology platforms and capabilities, with the balance of the gross margin expansion coming from favorable platform product mix. Adjusted EBITDA in the first quarter of 2017 was $25 million, up 35% year-over-year and represented an adjusted EBITDA margin of 23%, up 490 basis points, versus the first quarter of 2016, and up 810 basis points versus the fourth quarter of last year. Consistent with our prior comments, we continue to make investments in sales and marketing and R&D, that position Inovalon for increasing growth, profitability and industry leadership. Sales and marketing expense represented 7% of revenue in the first quarter of 2017, up 60 basis points from a year ago. We continue to see returns from these investments in sales and marketing, including an accelerated progression of opportunities, through our sales pipeline, a year-over-year increase in new logos and both a year-over-year and sequential increase in the total annualized revenue from closed deals. We also continue to invest in our platform capabilities, technology infrastructure and product offerings. As Keith mentioned, total first quarter investment in innovation, which includes both R&D expense and capitalized R&D related investment, increased 52% on a year-over-year basis. R&D expense alone represented 7.2% of revenue in the first quarter, up a 140 basis points from a year ago. And as we conveyed today, the returns we are seeing from our R&D investments can be seen in a number of ways, not only in our new business wins and revenue performance, but also in our many new product introductions and the operating leverage from our technology-enabled efficiencies. In addition, we saw good productivity and cost efficiency in G&A, which at 33.1% of revenue in the first quarter was down 250 basis points from a year ago. This is despite the incremental inclusion of the Creehan acquisition. The combination of our higher gross margin and lower G&A enabled us to increase our investments, while still delivering material operating leverage. Finally, non-GAAP earnings per diluted share were $0.07, up 40% on both the year-over-year and sequential basis, driven by the expanded profitability that I discussed as well as our share repurchase activity. Turning to the balance sheet. Inovalon remains in a very strong financial position. We ended the first quarter of 2017 with $533 million in cash, cash equivalents and short-term investments, which includes the impact of $25.4 million for share repurchases in the first quarter. As of March 31, 2017, we had approximately $68.4 million available under our remaining share repurchase authorization through the end of 2017. The strength of our balance sheet, the strong cash flow characteristics of our business and our existing debt capacity continue to position us well to invest in our capabilities, consider additional strategic opportunities and opportunistically repurchase shares. Now, let me wrap-up with our outlook for 2017. The Company’s first quarter results leave us optimistic as to how the year is unfolding, whereby beginning in the third quarter, we see the company returning to double-digit growth. To reiterate our financial guidance for 2017 is as follows. Revenue is expected to be in the range of $440.5 million to $455 million. Net income is expected to be between $19.5 million and $24 million. Adjusted EBTIDA is expected to be between $105.2 million and a $112.5 million. Non-GAAP net income is expected to be between $42.2 million and $46.6 million. Diluted net income per share is expected to be between $0.13 and $0.16. And non-GAAP diluted net income per share is expected to be between $0.29 and $0.32. While our financial guidance for 2017 remains broadly unchanged, we’re making two minor updates to our outlook. First, we’re updating our expected revenue seasonality. As shown on Slide 6 of our Q1 supplemental earnings deck, to reflect our first quarter results and our second quarter expectations; in particular, the timing of the $2 million of revenue that I discussed earlier. Despite this, the first half is running slightly ahead of plan, and positions us well for the second half of the year. Second, we ’re updating our 2017 non-GAAP diluted net income per share guidance to reflect the benefit of share repurchases during the first quarter of 2017. The net effect of the lower expected share count for the full year 2017, now 145 million shares, is a one penny increase to our prior 2017 guidance range for non-GAAP diluted net income per share. We have provided bridges for 2017 revenue and adjusted EBITDA guidance on Slides 7 and 8 respectively of our Q1 supplemental earnings deck, consistent with what we provided and discussed with you last quarter. Finally, before I hand the call over for Q&A, I want to briefly remind you that Inovalon’s 2017 guidance excludes the impact of any acquisitions that have not yet been announced or consummated and does not assume a significant contribution from strategic platform opportunities. With that, let me turn the call back to the operator to conduct our Q&A session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Ryan Daniels with William Blair. You may begin.

[Ryan Daniels:]

Congrats on the strong start to the year. Can you talk a little bit more about the sales force ramp? That was an interesting data point. So I’m hoping maybe you can talk a little bit about how that team is allocated to different end markets, and maybe what portion was organic versus coming via the deals, and maybe a proxy also of where that was at the start of 2016?

[Keith Dunleavy:]

Good evening, Ryan. Thanks for the question. So, this has been an area, as you know that we have been working on for more than two years at this point, and been consistently conveying the investment that’s ongoing there. We do breakdown the sales group into multiple different pieces. We gave you the numbers in the prepared remarks, not just for the FTE's sales personnel, but also for marketing as we broke out about 20 people in marketing, the balance in the sales group. Sales is broken down regionally around the United States, as well as with individual end market specialization. So, mirroring not only the historical place where we came from, which is a depth in the payer space, but building out provider capability, pharma capability, and now the device capability area as well. Indeed we did pick up some fantastic additions to our sales capability through the acquisitions of both Avalere and Creehan. So it’s been a combination of adding that into the mix, but also quite a few additions of head count of specialists in our space. A point of note, Ryan, is that, we have noticed a very significant, over the last six months, shift in market interest to come and work at Inovalon. We have been hiring a significant number of personnel from virtually every one of our competitors, both in subject matter expertise technology, but also in our sales process. So we’ve been building out a very nice expansion of capability, and we’re also building it out in a way that they are already familiar with what it is that we bring to the marketplace, and who are the right doors to go knocking on.

[Ryan Daniels:]

Okay. That’s very helpful. And then, as my follow-up, Chris, one for you. Obviously very good gross margin performance in the quarter. And I’m hoping maybe you could speak a little bit more in depth on -- in regards to what’s driving that? I know you’ve talked a little bit about automation and connectivity and different end market sales and performance mix, but maybe more importantly as we think going forward, should that stabilize at these levels or are there still improvement opportunities to be yielded? And then guess the final part would be, as the product mix continues to shift outside of the payer market, is that going to continue to augment margins as well? So just any outlook there would be helpful? Thanks.

[Chris Greiner:]

Yes, Ryan. In short, yes, it’s certainly sustainable. When you look at what contributed to the gross profit margin expansion of 550 basis points, as you highlighted, four-fifth of that was technology-enabled efficiencies, and you’re correct in pointing out at the interconnectivity, but it's also the natural language processing, it’s also the fact that the same platforms that our products are running across, we’re now using to fulfill operations. What used to be done with labor is now being fully automated. So those are very important levers. They’re actually behaving quite consistent with the adjusted EBITDA margin bridge that we shared with you in February. You might recall where between 200 basis points and 400 basis points of technology-enabled efficiency initiatives was planned for the year. So this is at the upper end of that range. You should actually see the platform mix improve over the second half of the year. Even though it was a solid contributor this quarter, about 120 basis points, that should ramp, as should investments by the way; but we believe it’s sustainable, and we’re excited about the leverage we’re getting from our technology platforms.

[Operator:]

Thank you. Our next question comes from Andre Benjamin with Goldman Sachs. You may begin.

[Andre Benjamin:]

I guess revisit a question I think, some people have asked in the past. Could you remind us the level of the visibility you have at this point into both the second quarter and the rest of the year? I guess how much of a surprise in the first quarter was from new customer wins versus up-selling existing customers, your broadening product mix?

[Keith Dunleavy:]

So we came into this year, as we mentioned on our last call with a greater amount of visibility than we’ve had in the past, and that came from a number of different reasons, if you recall back to that conference call. We mentioned that it was not only the amount of signed business, we were coming into the year with, but also the nature of the processes that the finance department, the sales department, product department really has done a great job at tracking and allowing that visibility for the rest of the business to occur. That trend has continued here through the first quarter. We have not only seen a progression of what was expected. But we're seeing an acceleration in our sales metrics that we talked about. So the number of deals in our pipeline are increasing year-over-year. Chris mentioned the 20% increase in new logos year-over-year. We’re also seeing the time to close decrease. We’re also seeing the average deal size increase. The average deal size closed in the first quarter was up close to a 100% year-over-year, meaning deals closed in Q1, their annualized revenue were close to 2x the annualized revenue seen historically last year. These things are -- led to the quarter beating and as Chris mentioned, we had some execution of what would have otherwise been Q2, but even that aside, we saw really strong acceleration in how our sales are executing and also just fantastic operational execution from the products and operations teams.

[Andre Benjamin:]

Okay. I guess as a follow-up. You walked us through a number of investments you’re making, I guess similar to how we think about this trajectory for revenue. Is there anything that you will call out in terms of how we should think about sequencing your spending on these investments as we move through the year?

[Keith Dunleavy:]

Andre, let me make sure we understand your question. Do you mind posing it...?

[Andre Benjamin:]

I can repose it. I guess as I look at the major line items like cost of revenues and your investment in marketing, I guess how much of those should we assume continue to trend up or down, given timing of when you expect to make certain expenditures versus should just remain at current levels or higher as you continue to invest going forward?

[Keith Dunleavy:]

Well, as we -- we’ve hopefully demonstrated well to in the first quarter, we are demonstrating the ability to expand our gross margin and EBITDA margin, despite increasing our investments in innovation, R&D, and sales and marketing. That is a trend that you should expect to continue. But we will continue to accelerate our investments in these areas, as we’re seeing more and more flow through performance in our margins. We’re seeing, not only margin expansion, meaning bottom line impact, but obviously also top line impact, as we’re seeing more and more differentiation of our capabilities being acknowledged in the marketplace. So we would suggest a view of this in a continued increased intensity, throughout the year. I’ll turn it to Chris to add color to that.

[Chris Greiner:]

No. That’s well said, Keith. I think, a couple -- Andre, what I’ll just -- I'll point you back to Slide 8 in the supplemental deck, where we carve out, if you will, between 200 basis points and 500 basis points, over the course of the year, dedicated to our investment initiatives. That as Keith mentioned, will ramp towards the back end of the year. We don’t see any need to change what we’re devoting to investment. What has been a positive for the company is the amount of G&A productivity that we saw. That will persist. We’re confident in the actions we’re taking as a Company. But as we’ve also made the efforts to smooth the Company’s revenue, it’s also had a resulting impact of smoothing our profit. So largely adjusted EBITDA would follow a similar distribution as our revenue, if that helps you also.

[Operator:]

Thank you. Our next question comes from Steven Valiquette with Bank of America Merrill Lynch. You may begin.

[Steven Valiquette:]

Yes, a couple of things. So I guess, first you had a couple of nice press releases recently with Amgen and Boehringer Ingelheim for Outcomes Based Contracts or OBCs. I guessing these would be pretty material for Avalere on a standalone basis. But just curious, if you are able to provide any color on how critical these types of life science contracts might be -- for just the overall Inovalon revenues, either this year or just longer-term? So if you could just try to size these a little better when thinking about when see this press releases? Thanks.

[Keith Dunleavy:]

Steve, thanks for joining the call. The pharmaceutical marketplace, and you’ll see increased activity in other sectors or adjacencies of the healthcare landscape following suite here in the year. The pharmaceutical space is coming under a lot of pressure to deliver value-based contracting and performance. And our platforms really lend themselves well. So, think of these platforms as far as your -- as part of your question was Avalere versus Inovalon core. We launched these platforms in a three-phased process. Phase one, we call discovery; phase two, we call implementation or configuration, sometimes we call it configuration; and then phase three is operation of the platform. So discovery is a combination of the Avalere subject matter expertise, in really knowing that drug, that drug’s market, that pharmaceutical company's pressures, the FDA aspects of it, really being a subject matter expert in that arena, but then being able to leverage the datasets that we have to run analysis to examine precisely how that drug is operating in the marketplace, and how one would actually construct the value-based contract to the benefit of all involved, the payer, and the pharmaceutical company. Then phase two, and then that first phase is predominantly a fixed -- a fixed cost of discovery contract. Then the second phase is implementation, taking all of those algorithms that have been determined from the analysis in phase 1 and layering them into our platform. We have a system called QSFD, Quality Spectrum Flowchart Designer. We’ve been containerizing that, so that the algorithms we design into that graphic layout system can actually be complied and run in a pure cloud environment. And all that happens in that second phase, which is materially a fixed price part of the contract as well. But then we get into really a pure platform piece, which is a cloud-based platform of data connectivity, data analysis and intervention to maintain the -- achieve and report on the value based aspects of the contract. And these are very exciting, and they are increasing in number. They are going to be a very exciting part of this Company’s future, and they are now starting to line-up very nicely, like planes coming in for the airport. It is -- it will be a nice part of our performance going forward, and they are very positive for the drug company, very positive for the Company.

[Operator:]

Thank you. Our next question comes from Ricky Goldwasser with Morgan Stanley. You may begin.

[Mark Rosenblum:]

It’s Mark Rosenblum on for Ricky. I just had a question, with you guys coming in ahead of schedule and having nice visibility in the year, how are you thinking about performance going forward for the next three quarters, because -- in light of the fact that you maintain guidance?

[Keith Dunleavy:]

Hey Mark, thanks for joining the call. Please give our regards to Ricky. Look, we had a really nice quarter. We came in ahead of expectations. We feel like our first half of the year had a really nice solid start, and things look positive for the second half of the year, but we have a range for the full year. And we’re beat by several million dollars here in the first quarter, but we still have a range for the full year. So, we would rather just convey an increased level of confidence for the year.

[Mark Rosenblum:]

Got you. Okay. That’s helpful. And then on operating cash flows, they were $2.3 million versus about $14 million last year. Looks like most of it was from accounts receivable. Is that something you expect to reverse throughout the rest of the year, and how should we think about cash flows in 2017 relative to 2016?

[Chris Greiner:]

Hey, Mark. It’s Chris. Thanks for picking up on that. A couple of things. First, let me start with the last question. You should expect cash flow from operations for the Company to return back to what I’ll call historical levels; historical levels being in the high-teens as a percentage of revenue. Last year was a pretty high watermark at in the low 20s, but you should expect that to return to the high-teens. With respect to the first quarter what we saw, it’s really two drivers, the first is from time to time, we have a client that gets behind. That client closed their accounts as fully -- shouldn’t say close. They fully resolved their account in the first week of April. So its timing. And the second is, we had a strong finish to the quarter. A strong finish dragged with it obviously invoicing activity that occurred late in the period, that also pulled out deliverables to the second quarter.

[Mark Rosenblum:]

Got you. Okay. And that high-teens number, that’s like the sustainable rate, we should think about going forward. Is that fair?

[Chris Greiner:]

Yes. It’s exactly right, Mark.

[Operator:]

Thank you. Our next question comes from Sean Wieland with Piper Jaffray. You may begin.

[Sean Wieland:]

So just picking up on that; so, what were the DSOs as you measure them in the quarter versus the first quarter of 2016?

[Keith Dunleavy:]

So, let’s see if we have that here with us. I think the important part is -- I think by the second week of April, all of the receivables that were a little bit odd -- out of the line on the end of the quarter, were entirely caught up. So, no real change. So, I don’t even know if we have our DSOs here. They’re always pretty darn impressively tight. But all of that was back to normal by call it the second week of April.

[Sean Wieland:]

Okay. And then was -- Chris, you said two things. It was the -- the bill that was paid first week of April and then what was the second thing?

[Chris Greiner:]

Just a strong end to the quarter. If you look at how the linearity of the first quarter played out, it was a very strong February-March, and as a result of that, just the timing of when invoices are scheduled to be paid based upon the contracts that we have in place for those clients, it just pushed, they are out for the second quarter.

[Sean Wieland:]

Yes. Okay. So, what’s your target DSO level?

[Keith Dunleavy:]

Sean, we have a pretty phenomenal DSO. We can get you those numbers offline. We -- virtually for the last I don’t know, five, six, seven years, have had doubtful accounts well below 1% for the year. You can check all of our audits. So, we’ve never had a DSO issue and we don’t have one now.

[Sean Wieland:]

Okay. What did Creehan contribute in the quarter, or what was the organic growth rate of the business -- of the core business?

[Chris Greiner:]

Yes, sure. Hey, Sean. I think it’s actually implied, if you look at Slide 4 of our supplemental alert shows that the year-over-year organically was about flat. So, you look at the $108.3 million that we produced in the first quarter, compared to last year at $102.7 million, that was right -- just shy of $6 million.

[Sean Wieland:]

Okay, what slide -- that’s on slide 4?

[Chris Greiner:]

Yes, in the supplemental deck you’ll see it.

[Sean Wieland:]

Yes, okay, I got it. All right. And how’s -- how is the [indiscernible] business specifically doing, since you closed the Creehan acquisition? Has -- have you seen attrition, or has there been -- have been happy with the deal, new deal flow there? Has there been new deal flow?

[Keith Dunleavy:]

Hey Sean, we’re going to move on to the next caller, but it’s doing extremely well. The activity you see in the market in the PBM space is really great for that line of business. They have a phenomenal customer base. So, doing very well. But please allow us to move onto the next question.

[Operator:]

Thank you. Our next question comes from Donald Hooker with KeyBanc. You may begin.

[Donald Hooker:]

So, the $2 million revenue pull forward, is that associated with the gross margin? I think there was a 110 basis points of gross margin benefit for mix? Am I associating those two data points or are those different things?

[Chris Greiner:]

Hey, Don, Chris here. No. In fact, you should think of that $2 million as being at average portfolio margins. There was nothing unique about it, at all really.

[Donald Hooker:]

Okay. great. Then maybe a question for Keith, kind of a higher-level question. I’d love your kind of view on -- I guess we’ve had a new president now for six months or so. What is -- with the new head of CMS and hearing some noise at the state level around waivers and interesting things, innovation at the Medicaid state level, what do you think about, kind of the outlook for Managed Medicaid and kind of -- at the state level, and how does Inovalon potentially play into that?

[Keith Dunleavy:]

Yes Don, great question. First of all, we have a huge advantage there, as not only our -- many of the former heads of those various different Medicaid programs are parts of those programs. Now, Inovalon/Avalere employees, which is fantastic, not only because they’re knowledge based but their relationships and connections; you might have seen, I think yesterday, it was on LinkedIn or one -- that Sean Croydon [ph] former Head from CMS just came onboard to the Company, we’re just attracting an enormous amount of talent from those areas. We’re tracking those things very closely. Change bodes well for us historically. The changes in the various different programs, prompts, organizations to want to reach out and involve our analyses to run different considerations through their models, reach out to Avalere to come up with strategies under different considerations. So, what we’re seeing is, a lot of increased activity, a lot of discussions, and discussions lead to business in our experience. So, as I think you would certainly see from the news, there's a lot of moving parts, not as much as all that nailed down, right now. But the change we see, it is boding well for us.

[Operator:]

Thank you. Our next question comes from Matthew Gillmor with Robert W. Baird. You may begin.

[Matthew Gillmor:]

Hey. Thanks for taking the question. I wanted to ask a follow-up on the revenue performance. It sounds like the positive trend was fairly broad-based, but can you maybe give us a sense, either from a product or a business perspective, what drove the upside relative to your expectations? Was it more tied to the legacy risk adjustment quality reporting products or some of the newer innovative products, like diagnostics and the OBC part of it, or maybe some of the acquired businesses? And I know it may be hard to separate that out, but just curious if there is any color you can provide there? Thanks.

[Chris Greiner:]

Hey Matt, Chris here. Let me try to give you some. First it was pretty widespread, and I think that’s the function of a couple of factors. First, just the pretty significant change in the number of clients over the last two years has done a lot to diversify the business. That diversification obviously helps in visibility, because you are not as dependent on primary revenue streams. We now have many of them. And fortunate for us, the activity and the execution that we saw was broad based across not just up sell and cross sell, but as I mentioned in the prepared remarks, the number of new logos that we added up over 20%, and that keeps up with the pace that we saw at the end of 2016. It spans provider, payer, pharma, a device. So, it is very broad based. And as Keith mentioned earlier, the sophistication, not just of the systems, but of the people, the talent that we’ve been bringing in and their development, we’ve seen an acceleration in the amount of the time it takes to close a deal. So, a lot of tailwinds, pretty broad-based across all verticals and product lines.

[Operator:]

Thank you. Our next question comes from Frank Sparacino with First Analysis. You may begin.

[Frank Sparacino:]

Just one question, I guess maybe two parts. First is, it seems there is a heightened level of sensitivity on the risk adjustment side to the audit risk here in 2017. So, I guess, the first question is, would you agree or disagree with that view? And then secondly, sort of, if true, what does that type of environment mean for Inovalon? Is it a positive, is it a negative, is my question? Thanks.

[Keith Dunleavy:]

So, this is an area, in compliance, quality adherence and these sorts of things, really the client base, the marketplace has always had. This is a very regulated industry, and I -- doing this for as many years as I have been doing it now, I would say the clients are always focused on this. I appreciate that. It waxes and wanes in visibility and front of mindness and maybe more the media and Wall Street and other areas for very understandable reasons, but on the client level, this is always top of mind. It has been for years. So, one of the reasons, why we devote so much time, energy, and resource and technology to it, we have been very focused on that. So, while there is perhaps more visibility around the topic, I would actually argue that it is good for us. We have a client arena that knows, how much energy and resource and differentiation we put into this. The technology lends itself well to oversight and consistency of process, and being able to identify when individual personnel might fall outside of acceptable norms, which can be absolutely normal variance, but also technology can allow you to go look at that a second time, if you will and make sure it’s being done right. We have focused a lot of -- on this over the years. So, as any degree of greater attention on it is occurring now, it’s actually driving some nice amount of business to us.

[Operator:]

Thank you. Our final question comes from Jamie Stockton with Wells Fargo. You may begin.

[Jamie Stockton:]

I guess maybe the first one, I don’t know if Keith or Chris wants to take this, but if we look at seasonality this year, versus historical period, the break in trend really seems to happen in Q3. So, can you -- can you refresh us on how confident you are at this point, that that’s actually going to happen, just given you know seasonally that’s been your weakest -- one of your weakest quarters historically, but you’re expecting it to be much stronger this year?

[Keith Dunleavy:]

Hey, Jamie. Good evening. Why don’t I start the one and then I will hand it over to Chris? So, one of the things you -- you’ve -- if you take a lot at our seasonality over the last several years, you’ll see that as we introduce multiple new products and technologies and enter into multiple adjacencies, we have been focally -- you know, putting a focus on dampening that seasonality. I think you see that playing out this year. Chris can speak more to that. Number two, remember this year is a unique year in how its playing out and really the story this year is as much about the absence of the headwinds that are now anniversaring, if you will as we speak, here in the second quarter. So, whereas other years, it might be a story of how much are we going to add in the third quarter; this year, it’s really more of the -- we don’t have some things subtracting from the third quarter. So, we’ve been building the revenue, the client base, the product base. You saw it in 13% organic sequential fourth quarter to first quarter. You’re seeing it build in our client count, our product count and so forth. Now when we remove that headwind here in the second quarter, which is playing out precisely as we saw it playing out, that is very much part of the third and fourth quarter story. Chris, you want to add to that?

[Chris Greiner:]

Yes, Matt. I think, it was very well said. I think Jaimie, if you go back to kind of first half, second half and you look at that through that lens, it’s pretty consistent with what we saw in 2015. Obviously 2016 is pretty unique in how 2016 behaved. We’ve got the stars to prove it. But we think it looks a lot like 2015 and we hopefully -- for your help, we have added Slide 6 to give you the distribution of our revenue. But as you correctly point out, it calls for a slight increase quarter-to-quarter, but again it’s more of the headwind subsiding and the persisting, if not building of the tailwinds that we’ve seen in our business since second half of last year.

[Jamie Stockton:]

Okay, I guess, I’ll put more weight on Keith’s response, that you’ve intentionally tried to manage the business so that it’s smoother, just because, you know historically from Q2 to Q3 revenue has been down sequentially, every single year and even if some of the headwinds may be abating and helping kind of the organic growth rate, that doesn’t totally explain why sequentially revenue would be up in Q3. But I will take that Keith is saying you guys are trying to manage the business to be little smoother, which I think is a good thing. Let’s see, the client count that you said was up 20% year-over-year. Can you talk about what that is, if you exclude the clients from Creehan, just so that we can get a sense for what kind of the underlying organic growth rate is in client count?

[Keith Dunleavy:]

Jamie, first of all, for clarity, that is new client count. So that’s completely organic, new client addition. So, it's not accounting, if you will, flow through of clients from any of the acquisitions. That’s new client count.

[Jamie Stockton:]

The 20% number that I think, Chris quoted, that’s a new client count number.

[Chris Greiner:]

Yes. It is, Jamie. And if you refer back to our Investor Day, when we spoke to the number of new logos that we added, it keeps up with that same rate and pace. So, I think, we ended 2016 with growth around 21% in new logos. So, this keeps up with that. As Keith mentioned, if you look at our total wins in the quarter, while we do not convey the absolute numbers of our total wins, as Keith did share the average deal size and the amount of annualized revenue from those wins was up quite dramatically year-over-year.

[Keith Dunleavy:]

So, to reiterate on it, Jamie, not only a continued expansion in new logos, the time to close those is decreasing. The size of them as they close is increasing, and we’re pleased with those metrics.

[Jamie Stockton:]

Okay. And then maybe just one more. The work that was pulled forward and I apologize if you've somewhat covered this, but could you just give us some more color on what type of work that was, that got pulled forward from Q2 to Q1, just to give us some comfort on kind of visibility in the business for the rest of the year.

[Chris Greiner:]

Yes Jaime, sure. So, I think first, it’s really important right, that we note that even after adjusting for the $2 million in timing, revenue was above the range. I want to be clear in that. It wasn’t as if revenue was pulled in. It’s just we resourced plan with a lot of our clients for how work is going to be performed. Some deals came in sooner frankly, it was up selectivity and it was new sales that came in sooner, in addition to base business work that was completed, that we envisioned happening in the second, happened late in the first quarter, but not in an amount that takes away that as sales for what was achieved in the first quarter and at portfolio margins.

[Jamie Stockton:]

Okay. Well, maybe, could you just be more specific on was it in kind of a core payer business, was this new provider or life science focused business?

[Keith Dunleavy:]

Jaime, I think, why don’t we call it there for the night. We are happy to spend some more time with you on it, but it was really a broad based, no one specific place, no one specific client. We closed a lot of business in the quarter, and some of it closed a little bit early, but really no one standout issue.

[Keith Dunleavy:]

So, with that, I’d like to say thank you, Shannon, for handling the call and I’d like to just take an opportunity, just to conclude with three themes. Number one, our investments and innovation sales and marketing are clearly becoming increasingly visible in our financial performance. Number two, our platform capabilities are increasingly differentiating us in the marketplace being seen as differentiators in the marketplace, and being identified as industry-leading. And number three, we’re really pleased with the execution in the first quarter. The year is unfolding as we expected, providing us increased confidence in the full year 2017, and very importantly, our return to double-digit organic growth here in the second half. I very much appreciate everybody having time for us this evening, and look forward to giving you the next update after the end of the second quarter. Good night to all of you. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day.