Inovalon Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inovalon Fourth Quarter and Full Year 2015 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. And now I would turn the call over to your host, Kim Collins. Please begin.

[Kim Collins:]

This is Kim Collins, Senior Vice President of Corporate Communications at Inovalon. I'm here today with Dr. Keith Dunleavy, Inovalon's Chief Executive Officer and Chairman of the Board; and Tom Kloster, our Chief Financial Officer. I'd like to welcome you to our fourth quarter 2015 earnings presentation. The press release announcing our financial results for the fourth quarter was distributed this afternoon and a replay of today's call will be available in a few hours and posted on Inovalon's Investor Relations page on our web site. For those of you who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are of today February 25, 2016, and will not be updated subsequent to this initial earnings call. I'll remind you that certain statements during this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995, including statements related to our 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 to follow along with our prepared remarks. Our presentation also includes certain non-GAAP financial measures. You will 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's my pleasure to turn the call over to Dr. Keith Dunleavy.

[Keith Dunleavy:]

Thank you, Kim. Good evening everyone and thank you very much for joining our call. Today, we're pleased to present the financial results for the fourth quarter and full fiscal year of 2015. This has been a very busy and exciting year, a year in which we have successfully executed on our long-term strategic initiatives. This execution has resulted in a strong fourth quarter and a record full-year performance. Before I turn the call over to Tom to discuss the details of the period, please allow me to review with you some key accomplishments and more importantly the current industry backdrop and where we see Inovalon going from here. In 2015, much was accomplished. Through consistent investment in our business, we are driving growth and have introduced unique new products to meet the needs of our clients. Each of these leverage our strengths and connectivity, data assets and enterprise scale of cloud-based analytics and said another way each one leverages and contributes to the ongoing expansion of our platform capabilities. For example, QSI-XL, our big data clinical quality analytics platform, this platform reduces processing times for large datasets by a factor of 10X, a critical capability for the marketplace as the market is itself defined by larger and larger populations and datasets and an increasing focus in those markets is now on clinical and quality outcomes. The second example, Data Diagnostics, our collaboration with Quest Diagnostics is a suite of hundreds of real-time patient specific data analyses that clinicians can order individually on-demand at the point of care within their existing workflow to identify and address gaps in quality, risk, utilization, and medical history insights. Additionally in 2015, we expanded our proprietary datasets. We believe them to be rather unique being longitudinally matched, primary sourced in their nature, containing a broad array of data components and being among the largest in the nation, continuing to grow now with more than 11 billion medical events and over 130 million unique patients. This is data which Inovalon uses to turn highly valuable and differentiated actionable insights for our clients to drive high quality outcomes and improve financial results. In September of 2015, we acquired Avalere. With this, we significantly expanded into adjacent marketplaces, pharma and life sciences as well as the provider marketplace, increasing our penetration of all of these markets each of which represent an approximately$30 billion in market opportunity. I can't emphasize enough how impressive this group of people is. For every bit of excitement I had when we finalized the deal to bring Avalere and Inovalon together I have even that much more today. We worked quickly to integrate with Avalere. Today, we're bringing unique platform capability offerings into the pharma and life sciences markets as well as the provider marketplace. You've already seeing the fruits of these efforts with last week's announcement of the significant engagement with Kindred, the largest provider of post-acute care services, the fastest growing segment of the U.S. healthcare market accounting for more than $100 billion in annual spending. The capabilities being brought to bear for Kindred are unique. Our platform stack is being very well received in the marketplace and we are pleased to report that we have a number of significant opportunities within our pipeline, not only in the provider space but in the pharma and life sciences markets as well. Altogether, we've expanded our customer base significantly in 2015 to more than 400 clients nationwide, a several hundred percent increase over the year ending 2014 containing approximately 117 health plans, 105 provider organizations, and 176 pharmaceutical and life sciences companies. As our client count has increased, our client concentration has decreased. In 2015, our top 10 clients represented approximately 68% of revenue. This is down from approximately 76% in 2014. Altogether in 2015, we drove very strong returns for our clients, returns that were often 5% to 7% or sometimes even higher multiples of their investments and our clinical and quality outcomes improvement and risk or accuracy improvement platform programs. The value achieved for our clients also translated into record achievements for the company, record achievements in revenue, and record achievements in earnings for our shareholders. Since our IPO in February of last year, I've met with many of you in person. Over that time frame, we shared with you a number of specific goals for 2015. First, it was about the expansion of our sales and business development capabilities. We have done this through an expansion of our three-pronged approach. The first prong, an expansion and subject matter expertise driven sales as accomplished through the acquisition of Avalere. Second, an expansion in our direct sales capacity reflected in the significant increase in investment of infrastructure and personnel and our sales capability. And third, the leveraging of strategic channels such as Walgreens and Quest, something which we made tremendous headway with in 2015 and with large pipelines now in place and growing as a result. Second specific goal of 2015 was to expand more materially into the adjacent market spaces of pharma life sciences and providers. We're very pleased with how well this is going, not only with the significant number of pharma life-sciences organizations and provider organizations added with the acquisition of Avalere, but also with expansions achieved through new product launches and platform applications such as those announced last week with Kindred and several significant and exciting examples of pharma and life science implementations which are at various stages within our pipeline. A third specific goal of 2015 was driving the transformation of the healthcare marketplace with respect to leveraging of transactional real-time analytics. We are strong believers in the notion that healthcare must and will make a transition to a transactional on-demand real-time marketplace similar to that of the financial services, retail, social media and other segments of the economy. In 2015, we drove significant deployments of the markets highest speed cloud-based quality analytics platform, QSI-XL and the launch of Data Diagnostics something which we and others see as revolutionary. I am very pleased to tell you that the market interest in these is very strong and we are very excited about it. So looking back at 2015, we accomplished some great goals and for that I am thankful to everybody at Inovalon, our newly added Avalere colleagues and our partners at Quest for their exceptional contributions to these successes. Of course all of this is within the backdrop of what is happening in our marketplace. On the positive side, the growth in the underlying applicable U.S. patient base is nothing short of extraordinary as it has effectively doubled from approximately 60 million eligible patients to over 130 million patients in just the past few years. As we are all painfully aware, the per capita cost of healthcare continue to rise as does the complexity of the healthcare system. All of these factors coupled with a shift from volume to value-based paradigms are driving the demand for Inovalon's unique cloud-based platforms that deliver meaningful impact and value improving quality and economics for health plans, value-based organizations, hospital systems physicians, patients, pharmaceutical companies and researchers alike. One of the factors driving growth as we all know is the Affordable Care Act which has brought healthcare coverage to millions of people in just the past two years. As it has been widely reported many healthcare organizations operating under the ACA and in particular several co-ops have faced significant challenge cost-effectively managing their burgeoning appellations. Common characteristics of those who we have seen struggle is that their organizations who are wholly dependent on the ACA many of which literally came into existence simply as a result of the ACA and did not have material operating experience or business diversification. As we had conveyed back on our third-quarter earnings call some of these organizations impacted our business. Both in the fourth quarter and we expect in 2016. Certain clients exiting the ACA marketplace percent a negative top line headwind to us of approximately $20 million from our prior expectations through the full-year of 2016. Nevertheless, we are pleased and excited about the strength in our many growth engines, our foundation of expanding patient population base, our core health plan market solution demand and pipeline, our expanding provider platform capabilities, our expanding pharmaceutical platform capabilities, our new technologies such as QSI-XL and Data Diagnostics and our tuck-in acquisitions all come together to lead us to see 2016 as another strong growth year, achieving a projected revenue growth of approximately 18% through the year. With that, let me conclude my remarks looking beyond 2016. I know that many of you joined us at our Investor Day in December. You will recall that we began and ended that meeting by laying out a five-year view on four very specific objectives. Number one, growth at a rate of more than two times that of our market achieving revenue of more than $1 billion by 2020 that equates to approximately 18% of compounded annual growth for the next five years. Number two, margin expansion at a rate of approximately 100 basis points per year achieving EBITDA margins of more than 40% by 2020. Number three, diversifying our client base achieving customer de-concentration by 2020; and number four innovation to empower healthcare's data-driven transformation from volume to value by 2020. We know that this growth will not be linear, we know that we will have lumpy quarters along the way when some deals close earlier or later than we may have expected. We know that the healthcare marketplace will experience both strength and weakness over time. But what we are most confident about is Inovalon’s platforms will continue to drive the success of our clients and we will continue to innovate and we will continue to be in demand. We are resolute in our strategy to invest in our business, to drive returns for our clients and returns for our shareholders. We look forward to reporting our progress along the way and we appreciate your interest. And your support as shareholders. With the that allow me to turn the call to Tom.

[Tom Kloster:]

Thank you, Keith, and good evening, everyone. My remarks will touch upon the highlights of our financial results for the fourth quarter and the full year. Cover a few items that stand out in our financial results, discuss our cash flow generation and balance sheet position and then wrap up with an overview of our financial guidance for 2016. Throughout my remarks, I will occasionally refer you to the supporting presentation deck on our website. During our December 7 Investor Day, we presented a number of metrics and throughout the presentation deck on our website these metrics are updated for the actual full-year 2015 results. As Keith mentioned the financial results for 2015 were in fact our best ever. Fourth-quarter revenue of $120.6 million, up 34% over the prior year's fourth quarter resulted in closing the year at record $437.3 million in revenue, an increase of 21% year-over-year. Avalere’s revenue contribution in the quarter was $13.3 million resulting in revenue of $17.5 million for the full year. While these are record numbers, as we cautioned in our Q3 earnings release, our Q4 results had a component of negative impact from weakness in certain clients with heavy dependence on ACA business lines including a number of co-op clients. Adjusted EBITDA for the fourth quarter was $37.8 million, resulting in full-year adjusted EBITDA of $151.6 million. This equates to 35% of revenue very consistent with our previously conveyed expectations. This was achieved despite the notable increase in our spend on sales and marketing during the fourth quarter to 5.4% of revenue as compared to 2.0% in the prior-year quarter, part of our frequently conveyed strategy to increase investment in this area of the company. Our full year non-GAAP net income rose to $75 million, resulting in non-GAAP EPS of $0.51. Let’s now discuss clash from operating activities, the company continues to produce significant levels of cash flow from operations, $68 million in 2015. Our cash from operations would have been even higher during 2015 absent an increased level of prepaid taxes on our books of $18 million at year, resulting from corporate tax deductions associated with equity exercises, which occurred during the latter part of the year. This prepaid tax balance will reverse in early 2016 as our prepaid tax balance is utilized. As you can see from our estimates regarding cash flow from operations in 2016, presented on Slide 9 of the supplemental materials, the reversal of the mentioned prepaid tax issue in combination with our continued strong cash generation results in our estimating approximately $130 million to $140 million of cash from operating activities in 2016. We achieved these cash flow results, while consistently investing in innovation. As we have done historically, approximately 11% of our revenue is reinvested into the business, which equated to $48 million in 2015. As we have conveyed previously this figure is the combination of our R&D investment, capitalized software development, and the amounts invested in hardware applied to innovation initiatives. The ongoing reinvestment into the company continues to be a strong part of our innovation strategy. As our balance sheet demonstrates, we remain in a very strong financial position with $728 million of cash, cash equivalents and short-term investments as of December 31, 2015. The combination of our strong balance sheet coupled with our cash flow generation and debt capacity positions us well to consider various strategic investments in acquisition opportunities as part of our growth strategy. Now let's switch our focus to 2016. In our December 7 Investor Day and included on Slide 12 of our supplemental earnings presentation, we have provided insight into our historical and expected revenue seasonality trends. We expect the evolution of our revenue trends of the past few years to continue into 2016 with the movement of a higher percentage of our full year revenue coming in the second half of the year and thus conversely a lower percentage of full year revenue falling in Q1 and Q2 of the year. These revenue trend expectations are inclusive of the Avalere’s contribution and the previously mentioned ACA related headwinds. Additionally, our business is evolving with the sales pipeline of both a greater number of opportunities, as well as several large individual opportunities. As evidenced by our entry into Avalere-related synergy agreements such as that recently announced with Kindred Healthcare. These factors can add a degree of quarterly lumpiness. With these elements in mind we're pleased to provide a full year 2016 financial guidance as follows. First, revenue is expected to be between $510 million and $520 million. Second, adjusted EBITDA is expected to be between $182 million and $188 million. Third, non-GAAP net income of between $88 million and $92 million, and fourth non-GAAP diluted net income per share of between $0.57 and $0.60. With that let me now turn it back to the operator to conduct our question-and-answer session.

[Operator:]

Thank you. [Operator Instructions] First question is from Jeff Garro of William Blair. Your line is open.

[Jeff Garro:]

Good afternoon guys and thank you for taking the questions. First, I want to ask, I think the call out of the co-op opportunity is a little larger in magnitude than I think some of us would expect so can you help describe how big of an impact that had in 2015 and what you saw in Q4 and where that was as a run rate versus how much visibility you had into growth from those types of opportunities in 2016?

[Keith Dunleavy:]

Good evening, Jeff, thanks for the question. Can you hear me okay.

[Jeff Garro:]

Absolutely.

[Keith Dunleavy:]

So, the call out of the 20 million and ACA related, first and foremost let me emphasize that what we are doing here is we're calling out this amount, but wanting to send a strong message that despite that amount we see really good strong growth year in 2016. But in the spirit of calling out where the different ebbs and flows of market activity are, this area of ACA will spend a few minutes on here. So, co-ops is part of it. In the breakout of that $20 million, approximately $8 million of that $20 million is co-op related. So, not the full 20, but $8 million of that 20. The balance is a set of ACA related organizations that predominantly or only had ACA-related business that was the common factor we saw evolve there. Organizations as we said earlier in the call that had either a high dependence or an entire dependence on literally just ACA. And the common factor we saw there is that they didn't have operating experience outside the ACA prior operating experience or diversity in their businesses. We saw those being most hampered. This is not related to the effectiveness of our products. It's not related to the effectiveness of our ROI delivery. It's literally their independent financial situation as I'm sure you’ve tracked in the ACA. Some of which HHS has changed position on during the year most notably the reinsurance factor, but that was a late change that CMS made and therefore a number of organizations were significantly impacted. For we are boxing that at roughly 20 million made up of those two pieces, but nevertheless even with that headwind, which is obviously somewhere around a 4% headwind we still see really good strong growth here in 2016.

[Jeff Garro:]

Great. To follow up, there maybe two parts to it, the non-co-op piece did that have an impact in 2016? Did it have an impact that was different than your expectation of some type of fall off as of the Q3 results? And then again trying to compare what was that book of business in 2015 to where it was in 2016? What were you expecting further growth from those top type of opportunities? Or is it that the run rate disappeared and then I guess I make it a three-part or just can you give us a little more detail on what exactly those types of plans, are they provider sponsored plans? Are they very small regional plans that were entering into business on affordable care to exchange whether the state or federal exchange just a little more description on what the non-co-op businesses look like?

[Tom Kloster:]

Sure Jeff. Let me see if I can hit all of that. So, indeed we made reference to this on the Q3 call. We did have a good eye on the possibility of this. As you will recall, we conveyed a wider range than typical in that Q3 call specifically for two reasons. Reason number one, as you'll recall was because of the sensitivity to this segment that we are talking about right now, and number two is because we had a number of opportunities in our pipeline that had a lumpiness of timeline. We knew they would have a lumpiness of timeline realization and for that reason we gave the wider than typical range in that Q3 call. So, to go back to your question, yes, we did have a sensitivity around these two groups, the co-op group and some of these other very focal business ACA players and they did have some impact on Q4. The bigger issue is our 2016. So we have in effect netted them out of our business expectation, a number that is approximately $20 million for the year. And to give you more color on what types of organizations – really there's no more color than these are ACA organizations that are individual and small group. They don't have additional types of significant business meaning they don't also have Medicare, they don't also have Medicaid, they don’t also have large group or ASO or other types of commercial coverage, and that seem to be the common factor for them. And as I'm sure you're familiar within the space, the evolution of how this market worked its way through the fourth quarter was very rapid. CMS making some rapid changes not soon enough for some of those players. So we kept an eye on them. We were in good communication with them and we wanted to take the conservative approach here in 2016 and net out that $20 million from our expectation.

[Jeff Garro:]

Got it. Thanks so much. I’ll hop back in the queue.

[Keith Dunleavy:]

Sure. Thanks, Jeff.

[Operator:]

Our next question is from Matthew Gilmore of Robert Baird. Your line is open.

[Matthew Gilmore:]

Hi, good evening and thanks for taking the question. I wanted to ask one more kind of question along those same lines which is just trying to make sure I’m kind of understanding the apples-to-apples comparison between your revenue guidance and where Street estimates were and so your range is 510 to 520. Consensus was closer to 525 which I think was based on the 18% to 20% long term growth outlook you discussed at the Analyst Day in December. So, I guess the question is whether that 18% to 20% already contemplated that 4% headwind from co-ops or is this something that was added in after the fact as you got more visibility on it?

[Keith Dunleavy:]

Sure, Matt. First of all, it's difficult for us to know exactly how each analyst comes to their projections of course. It may be that, that 18% was off of the midrange of – the midpoint of the range that we're at and what we have here is approximately 18% off of where we ended the year. So, we don't feel that there's a change in our growth rate projections here. We're consistent that we were targeting $1 billion number by 2020. That math works out to where we continue to see things right now. So, we're 18% of where we actually ended and perhaps the difference in those two numbers Matt and I'm only guessing because I can't know exactly how each person puts forward their sell-side views, would have been off of the midpoint. As far as what we are contemplating headwinds, yes, as we expressed in the third quarter call, we were – we wanted to be sensitive to and vigilant around this potential that we were seeing out there in the marketplace. That's what we messaged at that time. That's why we widened out our range and at this point, we want to sort of remove that variable from our thinking and net out this full $20 million. But strongly message that despite that we are seeing the numbers that we're putting out here is guidance. So does that help, Matt?

[Matthew Gilmore:]

Yes, it does. And maybe just a follow-up I wanted to ask about Avalere’s revenue. I guess it came in a little bit higher than we were thinking at least. So, was there any sort of drivers to the upside there? And then can you also help us understand the seasonality for Avalere’s revenue? Should we think about still a $10 million per quarter run rate or is there any sort of seasonality to that as the year progresses?

[Keith Dunleavy:]

Sure, Matt. First of all, let me take the opportunity to convey just how impressed we continue to be with the Avalere people. Not only are they exceptional of what they do, but they have a fantastic inside into the market and their customers and how the different forces of the marketplace are playing out and therefore how we can best apply our technologies to the benefit of that very large customer base. And in Q4, we saw very quickly a strong cohesiveness between our organizations and very rapid integration between the companies. So I know the tendency is to continue to think of those as separate organizations but I'll tell you the commonality of attention to goals is real positive and that's what really drove a positive effort together. So these end up on somebody’s books one or the other but we are increasingly together at the sites and at the customers and increasingly developing platforms that you're seeing being purchased or engaged-in for long-term contract as the Kindred example demonstrates. And these are large significant long-term implementations of our platform. So to come back and summarize, the Q4 period for Avalere normally does have some seasonality. Yes, it has some year-end seasonality just like ours does for many of the same reasons. But we also saw a very strong already symbiotic relationship between us developing and we're seeing that expand really beautifully. As far as combinations of businesses go, I could not be happier with how this is going.

[Matthew Gilmore:]

Okay, thanks a lot for the color.

[Tom Kloster:]

Sure.

[Operator:]

The next question is from Andre Benjamin of Goldman Sachs. Your line is open.

[Andre Benjamin:]

Thank you. My first question following on the back of Avalere comments, I guess how should we think about the assumption for the growth of that business that is embedded in your guidance versus the rest of the business we will call it legacy for lack of a better description and maybe some color on how you're thinking about new customers versus up-selling to existing customers and [indiscernible].

[Keith Dunleavy:]

Andre, good evening. There is a lot in there, in your question and let me see if I can walk through and give some color. First of all, I want to strongly emphasize how much Avalere and Inovalon are working our opportunities together. We are not only thinking through the strategies of individual opportunities together we are presenting together. We are than engaging together and operating together. So, there is not the line Avalere versus Inovalon that maybe you would more typically see in some other acquisition situations. It's a very positive relationship. The way we look at the pieces of business are as follows. We have a term which we refer to as the synergy opportunities. The synergy opportunities are when the subject matter expertise and the business strategy business insights, policy strategy, policy insight and how we use modeling to achieve and improve those for customers that Avalere has historically done can come together with the technology platforms of Inovalon and the data sets of Inovalon. We are referring to this as a stack of capabilities, a stack that has subject matter expertise melded with the license technology platforms combined with the licensed data benefit that that brings to that combination. That is allowing us to go to the market with a unique set of capabilities into the provider space and into the pharma life sciences space. And that is truly, literally staffed with shoulder to shoulder Avalere Inovalon, Inovalon Avalere, Avalere Inovalon IT teams working together, data set teams working together, legal teams working together in that delivery and that is getting a very positive response. So that is literally in both camps and those are unique in their capabilities and they have financial benefit to our customers that are very consistent with how Inovalon approaches the marketplace meaning very value achievement, ROI achievement focused and also has financial characteristics consistent with Inovalon’s historical performance. So that growth is very strong and so are the underlying core integrated pieces between Inovalon and Avalere. So, we don’t have an internal break-out between them that you are asking about, but hopefully that gives you some color, but for vernacular those synergy opportunities like Kindred they are large, they are multiple and they are being very well received in the marketplace.

[Andre Benjamin:]

I guess a follow up to that, you also made point of re-emphasizing that the 2020 goal you laid at the Analyst Day and the 2016 guidance includes some contribution on a year-over-year basis from including Avalere for the full-year. So, the implied organic number is lower than it has been in years, I guess, how did you envision reaccelerating to that 18% compounded to still hit the billion dollar, what would you think should be the top near term forces that get you there versus what you are going to report in 2016.

[Tom Kloster:]

Sure Andre, at these numbers we don’t need any re-acceleration to hit those numbers. $1 billion in revenue, we hit that at these growth rates. So, we have conveyed that we historically have from time to time done tuck-in strategic investments and we will continue to from time-to-time do tuck-in investments, but we have quite a few growth drivers that are going on here. We have continued expansion of the underlying organic membership or patient base. We have continued underlying growth in the core products of quality improvement risk or accuracy improvement, utilization and compliance improvement. We have new expanding capabilities into the provider space with the platforms like those announced with Kindred. We have new expanding platform applications in pharma and life sciences, which we look forward to conveying to and we have significant expansions in new technologies of QSI-XL and data diagnostics, which are being very well received with significant expansions. So, all of these things together with - from time to time, strategic and tuck-in acquisitions we see as comfortably achieving an 18% top line growth rate. If we did an incremental acquisition, we would update that project, if we did a larger adjacency or scale acquisition we would obviously get to that number sooner and talk about that in a different way, but we see our activities of 2016 being in-line with our 18% projection that gets us to a $1 billion in 2020.

[Operator:]

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

[Zack Sopcak:]

Hey, good evening. This is Zack for Ricky. I wanted to just ask first sticking with the Avalere theme, can you give any color on the operating expense growth in the quarter, how much of that came from Avalere and how much was I guess traditional and historic? Inovalon and how that compares to your comments on investing in the sales and marketing organization?

[Tom Kloster:]

Zack, let me convey first that as we originally conveyed when we acquired Avalere we saw that as being slightly EBITDA positive in its contribution in the year. We did achieve that we do see that obviously not all of their line items match up to our line items and they are being integrated very quickly, but on an EBITDA basis we did hit what we projected and expected to hit with them, which was on an absolute basis, it was accretive just minimally in the year, obviously on a EBITDA margin basis that diluted down our EBITDA margin rate from roughly the 37%, which we were trajectoring at the time to approximately the 35% where we - a message that we would end up for the year, which is right in-line with where we ended up. And Zack, I’m not sure if I caught, did I catch your whole question.

[Zack Sopcak:]

I was just asking about the traditional sales and marketing then from the legacy Inovalon organization they continue to see investments in that as you scale up into new segments.

[Tom Kloster:]

We are rather pleased with the amount of investment we are able to make in Inovalon in 2015 and still achieve these margin numbers. As you might recall going back into the year we have message that we would be making obviously investments in new expenses associated with being public. Those numbers are roughly $3 million, 3.5 million to be public, but then also we said that we would be messaging significant or investing significantly around the increase in sales and marketing. If you look at the fourth quarter, you see that rise from 2% last year to 5.4% reflecting that investment they were talking about. So, and despite that significant increase of 3.5% or 3.4% increase you saw a continuation of the 35% EBITDA margin that we messaged to earlier. So, we do continue to see the EBITDA, I’m sorry the investment at sales and marketing continuing through 2016. We’re very pleased with how that’s progressing. We like the way the pipeline is looking. We like the way that we don’t only have pipeline through our direct sales, but we have pipeline expansion also through our partnership channel such as Quest and we see that progressing very well.

[Zack Sopcak:]

Thanks and just one quick follow-up actually on Quest that you mentioned, which I know you guys are going to be showcasing at HIMS next week, in terms of data diagnostics can you just talk a little bit about the customer and I understand the value to the ACO or value based care organization, but at the point of order is the physician who is ordering the service at that moment, are they empowered by their organization to do that or how do they thing about that person using the resource at that moment versus I guess the sale to the broad organization does that make sense. And does that get charged to that individual case if they are leveraging that tool?

[Tom Kloster:]

Sure. So Zack think of it similar to the physician ordering a laboratory test, so if they ordered a blood test under different circumstances there is a different party picking up the tab for that blood test that varies in capitated arrangements and shared risk arrangements and hospital scenarios and provider network scenarios and health plan scenarios. There is many different scenarios of how the market has and in fact paid for that laboratory result. There is a strong interest by a number of different parts of the ecosystem in achieving quality improvement risk or accuracy improvement have the insight into the medical history of the patient having the ability to identify more cost effective medication combinations being able to determine patient eligibility in programs and data diagnostics provides the clinician, the ability to achieve that in real time at the point of care. So the upstream entities whether it be an health plan, whether it be an ACO, whether it be a hospital, whether it be a provider system, whether it be a state organization or government organization, all of which we are seeing they have interest in that clinician being able to at that point in time be able to understand in patients quality, understand and improve the risk or accuracy, understand and improve their medical history care and so forth. So, it gets build through to the health plan to the ACO to the hospital, sometimes to the patients or to the government entity that has authorized its accessibility for that clinician. That all happens in real time just like the cost attribution and billing is currently handled for labs. Quest has that all set up in their system. Quest has been doing that for years managing the determination of who pays for that chemistry of blood test they just got ordered. In the same way, they manage the coordination of who pays for the data diagnostic.

[Zack Sopcak:]

Thanks. That’s helpful.

[Keith Dunleavy:]

Sure.

[Operator:]

The next question is from Garen Sarafian of Citigroup. Your line is open.

[Garen Sarafian:]

Good afternoon, Keith and Tom. I guess the first is a follow-up and apologize but I’d like to go back to the Affordable Care Act related to headwind. Is there a way to size your exposure to ASPA and its entirety to put things in perspective a bit? So for example if another round of ACA challenges appear, how much more of an impact will it have on Inovalon?

[Keith Dunleavy:]

First of all, Garen, good evening. So the ACA being one of the parts and pieces of Medicare advantage, managed Medicaid, other commercial meaning ASO commercial large group, commercial but also pharma and provider, so all of these make up different pieces of our revenue contribution. Typically though a healthcare organization, a health plan, has Medicare and Medicaid commercial as a blend of different lines of business and very typically we do business with several of those lines in an integrated way meaning we have one data integration with them. Perhaps we do quality analytics across all of their platforms. So we do not have an internal process of breaking out all of the ACA only business from Medicare or Medicaid if you will, no differently than a physician using one of our platforms might see many different types of patients in their practice but they are using one platform of Inovalon. So there is not a single number to provide you. And so what we broken out is what we see as the exposure here in 2016.

[Garen Sarafian:]

Got it, but I guess for 2016 to be clear, is your line of sight now pretty firm? So for the year, with the current set of participants and the enrollment levels to date that there wouldn’t be much further variation. Is that a proper way to think about it?

[Keith Dunleavy:]

That’s a very crisp way of putting it Garen and yes our line of sight is very clear to that point here, very clear.

[Garen Sarafian:]

Got it. And then but my follow-up was a different question which is on M&A which is – recently there has been a recent sale of a competitor that was in one of your investor day slides. So wondering what type of opportunities or threats do you anticipate when there is such an M&A I guess in the near term as a result maybe applying any previous instances that could be comparables? And two is, how big of an acquisition would you be comfortable with? When you recently acquired Avalere, when would you be comfortable reaching those higher limits and that’s out there? Thanks.

[Keith Dunleavy:]

Sure, Garen. So first of all, we of course monitor these things quite a bit and I’m sure it wouldn’t surprise you if we told you that our phone probably rings five times a day and 20 emails a day with opportunities and ideas from many financial institutions and organizations that are out there. Certainly one of the things that the market dynamics is providing us is an enormous set of options to look at at increasing attractive prices. Our dollar continues to go further and further as we consider things that we might want to do. With respect to recent transactions, we’ve been impressed as I’m sure others have and many have brought to our attention the valuations at which those transactions are occurring, valuation multiples that are impressive certainly considering we done at enterprise values. But we do have a significant surveillance and pipeline of assets that are out there in the marketplace of all different types. We spend a fair amount of time in this. We have a team that is dedicated just to this and we are very disciplined around it. We couldn’t be happier with how well the Avalere transaction has gone. The team that handled the process of going through that, the team that handled the integration of that, and the team that is handling the ongoing growth and expansion and leveraging of that really did an exceptional job which gives us and our board very significant comfort around our ability to put our assets to work. So it would be inappropriate for me to give colors into specific pipeline considerations, stages, sizes and numbers, but our balance sheet is an asset that we have that we intend to imply or apply to our strategic growth. And we believe that history shows that we are quite good at that both recent history and longer term history. So you should expect us to do that going forward, but do it very judiciously, thoughtfully as I would argue you’ve seen us do to date.

[Garen Sarafian:]

Thanks again and see you next week.

[Keith Dunleavy:]

Thanks, Garen. We’ll look forward to it.

[Operator:]

Our next question is from Elizabeth Blake of Bank of America Merrill Lynch. Your line is open.

[Elizabeth Blake:]

Hi, good evening. Thanks for taking my question. I have one on just the mix shift of analytics versus intervention services. How should we think about that for 2016? Is it fair to assume the continuing uptick on the analytic side or would that be incorrect?

[Keith Dunleavy:]

Hi, Eliza, it’s good to talk to you. Great to hear from you and I believe this is our last question. We are seeing really strong applications of our platform and we are obviously at the early stages of the year at being still only February and things like the platforms that we have already announced with Kindred, those are rather beautifully leveraging our analytics and platform capabilities and Data Diagnostics are obviously purely platform and vertically driven capabilities. So we are seeing a very strong set of demand or flow of demand for our analytics and platform based capabilities. That said, we also see quite a bit of seasonality and strong demand on the intervention side. So we’re seeing both, it’s probably a little early in the year for us to give a breakdown between the two just because how strong the demand is for those purely analytically driven elements. So the pipeline for these elements of our capabilities is very large and we’ll look forward to giving you a more clear answer to your question as we go through the year. But certainly as we stand now, it’s trending in the very positive way but we feel very comfortable with conveying the 36% EBITDA margins for the year which will be a 100 basis points increase and we will see if we can do better than that. But from where we sit here, the trend is very positive and we’re looking forward to that bearing out.

[Elizabeth Blake:]

Okay, great. Thank you. And then as a quick follow-up on Friday, CMS released the proposed payment policies for Medicare advantage. I guess were there any surprises there relative to your internal expectations?

[Keith Dunleavy:]

Sure. We have – you’re absolutely right. We have a whole group of people that focus on these things. I will tell you that earlier this week to put a point on it earlier meeting I think Tuesday, we provided a webinar to the marketplace and to our clients answering just that question. And we have 568 people registered for that webinar. So the industry really does look to Inovalon and Inovalon in combination with Avalere to address that very question. There weren’t any material surprises in the early or in the final letter with us, so what you saw lot in there was the continued increase in the complexity of the CMS program. And yes there was some increase in overall payment probably in the neighborhood when you all boil it down called one point something percent expansion in payments for Medicare advantage depending on the plan. But moreover that doesn’t affect us so much pro or corn. What affects us is a positive driver of demand for Inovalon is the continued progression of complexity of the system. We are very good at reacting to that. We are very good at supporting the technology evolutions our clients need for that. So no surprises, macro positive for us in what we do for the marketplace.

[Elizabeth Blake:]

Okay, great. Thank you. And I will see you next week.

[Keith Dunleavy:]

Great. Look forward to it Elizabeth.

[Keith Dunleavy:]

So everybody I want to thank everybody for their time tonight and we know that there a lot of calls that you have to spend time on and materials to come out. Please make sure you’re also aware of the fact that in addition to the earnings release, we also posted a set of supplemental slides looking to always take the feedback from the marketplace of things that you found helpful from Investor Day on December 07 which was really a great feedback time both preparing for that and the follow-up to that. So we have posted that as well. We are seeing very strong demand for our product suite and very strong demand for the adjacent spaces that we are expanding into provider space, pharma life sciences are going very well for us as are the expansions into these new technology capabilities demand for. QSI-XL acceleration platform and Data Diagnostics, these are pipelines that are measured in in hundreds of entries. We are looking forward to executing on that this year. We greatly appreciate your time. We appreciate all of the time you spend on understanding our business and we look forward to seeing you and keeping you up to date in the weeks, months and quarters to come. Thank you very much everybody and have a good evening.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.