Inovalon Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inovalon Third Quarter 2016 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 will turn the conference over to your host, Kim Collins. Please begin.

[Kim Collins:]

Good afternoon. 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 Chris Greiner, our Chief Financial and Operating Officer. I'd like to welcome you to our third quarter 2016 earnings call. The press release announcing our financial results for the third 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 remarks made herein are as of today November 2, 2016 and will not be updated subsequent to this initial earnings call. I’ll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995, including statements related to future results of operations and financial position, our business strategy and plans, market growth, and our objectives for future operations. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s earnings release and filings with the SEC. In an effort to provide additional information to investors our presentation also includes certain non-GAAP financial measures. You will find definition of these non-GAAP measures and reconciliation chart 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. And good afternoon, everyone and thank you very much for joining our call. Before we get into our third quarter results, I wanted to discuss the management transaction we announced in our earnings release earlier today. We are pleased to announce the promotion of Chris Greiner to the new role of Chief Financial and Operating Officer, effective November 1. As many of you know Chris has been our Chief Product and Operations Officer since shortly after joining Inovalon 2013. Chris is a strong leader who has repeatedly demonstrated an impressive of ability to achieve not only product and operations scale and efficiency, but also key financial and strategic goals. Over the past several quarters Inovalon has significantly expanded its growth opportunities by introducing many new offering and advancements, expanding into adjacent markets, acquiring industry leaders and forming innovative partnerships. In the context to this back drop, the company recognized the need to expand the roll and responsibility of the CFO position to include more operational and strategic aspects. We concluded that Chris Greiner’s ability experience within Inovalon and his experience with other large technology companies made him the best candidate for the combined CFO, COO role. We’d also like to recognize Tom Kloster for its greatly appreciated role in supporting Inovalon through the process of becoming a publically traded company and implementing the infrastructure required to do so successful. We are great full for Tom’s contribution to Inovalon and we wish Tom the very best in his new endeavors. Now Chris and I would like to share with you the results of our third quarter. Highlight in more detail some of the development in our business and discuss our financial outlook. Let me begin with our third quarter results. As Chris will discuss in more detail shortly our revenue and profitability in the quarter were at the higher end of our expectations. And we continue to generate strong cash flow. As we previously indicated in the setting of a very strong balance sheet we are applying some of that strong cash flow to the repurchasing of our shares, as well as continuing to invest in our business both organically and inorganically to continue to position Inovalon for future success. Allow me to pursue this theme of investment in a little more detail. It’s important to understand that Inovalon is a different company than it was even just a year ago and the key driver of our continued evolution is the significant ongoing investments we have made in our offerings and our business. For years we have invested in ourselves. Enabled by a long history of strong positive cash flow and further accentuated by the resources provided by our going public. Our focus is to be the industry leader in empowering a data driven transition. In the global trend from volume based to value based care. Not just payers but for an increasingly diverse set of constituent across the healthcare ecosystem. And while it may not yet be apparent in our financial results, we are in fact making significant program against this long-term strategic plan and positioning the company for profitable long-term growth and success. First, let me refer back to the investment discussed during our second quarter call. These ongoing investments are aimed at expanding our connectivity within the industry. Our compute capacity, efficiency and flexibility and our product modularity these are all significant differentiators for Inovalon and you are seeing the benefit of these investments in our gross margins. What I mean by expanded connectivity as seen in our accelerating interconnection counts with provider organizations. Electronic healthcare record platforms, health information exchanges and leading national healthcare players such as Quest Diagnostics, Kindred Healthcare, Athena Health, MD Life and many others. All this we look forward to detailing more for you at our Analyst Day in December. This connectivity is allowing us to increase the speed of data access, undertake analytics in real-time and empower impact on demand. This is what we see is the future of healthcare. What I mean by our compute capacity is our significant expansion and sophistication of our cloud environment at Inovalon now expanded in multiple interconnected private clouds with concurrent utilization of clouds such as Amazon’s AWS. During the quarter we brought online a number of additional platform components designed and implemented in pure native cloud code, allowing for the dynamic allocations of capacity and business continuity for highly complex, very large scale real-time analytic processing. And what I mean by product modularity, we’re first to the theme of enabling our clients to more flexibly pick and choose how they want to utilize our platform. While several years ago our clients wanted end-to-end capabilities organizations are increasingly wanting to apply technologies in ways that uniquely leverage their existing or desired in-house resources. Inovalon is focused on partnering with the market in ways that allow Inovalon to be a highly valued component of our client’s business fabric empowering them to achieve their goals, providing for them the unique highest return on their investment and value differentiators that they need and want, while allowing them to be highly fiscally and strategically minded. We are achieving this. In addition to the broad capability investments that I just mentioned, we’ve also been investing and successfully executing on targeted product and market platform capabilities. In the payer space for example, as you know we’ve been investing in the next generation transformation of our risk score accuracy product line. This is going well. We’ve introduced many new features such as modular customization, financial modeling and advanced process results and projected impact data visualization. We’ve had a number of nice contract wins with these new capabilities many of them displacing industry competitors. Additionally we have successfully secured RFP awards, which we had mentioned is pending at the time of our Q2 conference call. Also in the payer space our investments into advanced cloud based clinical and quality outcomes measurement and improvement platforms known as quality spectrum are seeing rising interest. Already a leader in the quality analytic space, the trend within the market is to own faster speeds and more sophisticated reporting and productive analytical capabilities. This is a very positive trend for Inovalon’s platform. Here too, we have seen highly competitive RFP processes result in contract wins for Inovalon’s platform displacing well known industry competitors. And we’re not just seeing the positive in the pair space, but also in the provider space. Our investments into the partnership with Kindred Health have yielded ground breaking capabilities. As some of you may be aware in September at our client Congress in Washington DC we demonstrated a highly advanced predictive analytics platform informed by multi-variant progression analysis algorithms derived from our largest combined dataset analysis today, using the data have not only are more squared registry, but also the D identified data of more than approximately 40 million fee-for-service Medicare patients. The design continues to advance through ongoing machine learning from individual patient events and provide detailed recommendations for highly patient specific, MK specific, predictive modeling of readmission rates, costs and length of stay for patients going into post-acute care facilities. These capabilities are without comparison in the marketplace and are part of our broader vision to transform the post-acute care industry empowering dramatic industry efficiencies, flexibility and both clinical and financial performance improvements. Also in the provider space our investments resulted in launching of analytics and data visualization platforms for the ACL market and foundations for approaching the MACRA and MIPS offerings. In the pharmaceutical space our investments have been significant. And we’re seeing positive results. As we’ve mentioned previously we have brought to the pharmaceutical marketplace a set of offerings enabled by the combined capabilities of the subject matter expertise of Avalere our very large proprietary data sets and our similarly large technology capabilities pertaining to the data integration analytics, intervention and reporting. Here too we are seeing increased activity with a number of industry leading pharmaceutical companies signing engagements with us recently. Focusing on the leveraging of our highly differentiated capabilities, we are excited by what we are seeing with regard to the rising demand for the capabilities enabling outcomes based contracting adherence programs and other data driven programs, which we see as dramatically expanding over the years to come. As examples, combining the Avalere subject matter expertise and Inovalon’s data and analytical platforms we've recently entered into engagements with AMGEN and Otsuka to provide real world data analysis to support initiatives across Medicare advantage, commercial and Medicaid populations. And there are several other industry leading pharmaceutical company deals about which we are rather excited, both ones already signed, as well as ones at various stages of development and negotiation. Related to this is our investment in Creehan & Company, an investment which we believe will be extremely positive for our business over the next several years. Creehan is a leading independent provider of Software-as-a-Service or SaaS platforms, supporting the specialty pharmacy market. The specialty market industry focuses on high cost and complexity pharmacological treatments such as those addressing hepatitis C, rheumatoid arthritis and cancer. The overall specialty pharmacy market is nearly $200 billion in size, growing rapidly and expected to approach half of the total pharma spend in the U.S. over the next few years. Creehan is the largest provider of enabling software to this industry, supporting approximately 30% of the specialty pharmacy space. Creehan’s flagship product ScriptMed is a comprehensive enterprise platform supporting the complete array of specialty pharmacy operational, clinical, financial and regulatory needs. From referral, order and care management to contract administration, inventory management, fulfillment and pharma data management. An analogy to describe the significant position that Creehan occupies in the specialty pharmacy market is a Suez Canal. While perhaps modest in size geographically when one considers the volume and importance of that, which flows through it, its strategic significance becomes clear. However like other parts of the healthcare ecosystem, the specialty pharmacy segment is inhibited by a lack of necessary connectivity data and inside to improve care, quality and financial outcomes. Creehan data driven technology platforms, industry expertise and strong client base strategically complement Inovalon’s continuing expansion into the pharma and life sciences industry and together we will create a powerful combination of deep expertise, extensive data sets and advanced analytical capabilities and interventions to deliver differentiated and valuable insight and impact capabilities. In addition to the strength of the product, Sean Creehan and his team are absolutely fantastic people, and we are very pleased to have them as part of Inovalon, with many of their senior leaders having tenure with the company in access of 10 years, this is a special, talented and highly respected group of people. Finally I'd like to touch on our investment into virtual medicine. Telemedicine or virtual medicine is estimated to be a multibillion dollar market, growing at a compounded annual growth rate in excess of 20% and represent a new point of care as healthcare becomes more consumer driven. On September 12th, we announced our partnership with MD Life, a leading telehealth platform provider. For MD Life clients that signup for the option Inovalon will provide MD Life Clinicians with on demand, real-time patient information and analytics. This new capability will enable MD Life and its clients, which include health systems, ACOs, health plans and employers to identify and close gaps in care as part of telehealth patient consultations. As a result clinicians can provide better care, patients can have a better experience and the payer can improve their financial performance. Our partnership with MD Life is the latest example of how Inovalon is able to leverage its powerful and flexible technology platforms to bring the benefits of advanced cloud based analytics, proprietary data sets and deep subject matter expertise in real-time to the point of care. Turning from the investment and capabilities enabling the expansion of offerings into adjacent market spaces let's talk the investment in expanding sales capabilities and capacity. As you have seen in our numbers, over the past several quarters and again in the third quarter, we are investing significantly in sales and marketing. As part of this, during the quarter we added a Chief Growth Officer, Chris Hand to our executive leadership team. Chris is an accomplished sales executive who has significant experience in the sale of cloud-based proudest offerings having served as Senior Vice President of sales at Dealertrack Technology, a $1 billion cloud-based Software-as-a-Services solution and service provider. And as Vice President in charge of the worldwide enterprise strategic cloud sales campaign at Hewlett Packard Enterprise Services, a $23 billion global division of HP. During the quarter, we saw continued evidence of our investments positive impact. The sales pipeline grew in dollar terms by approximately 20% in comparison to the metric at the end of the second quarter. Now having grown to approximately four times the size of the pipeline at the start of the year. Additionally, we are seeing sales closures in all lines of business. With that, let me ask Chris Greiner to review the third quarter financial results and discuss our 2016 financial outlook in more detail, Chris?

[Christopher Greiner:]

Thank you, Keith and good afternoon, everyone. I will discuss our financial results for the third quarter, highlight a few key items in our results, discuss our balance sheet position and capital allocation and then wrap up with the discussion of our financial guidance for the rest of 2016. As Keith mentioned, the financial results for the third quarter exclusive of tax benefits I will discuss in more details shortly were at the higher end of our expectations, and we again reported strong cash flow. Beginning with revenue for the period, forces previously discussed most namely the downward pressures of ACA related headwinds and our transition of retrospective, risk-adjustment accuracy product CARA masked the benefit of addition of new logos in upsell and cross-sale activity with exciting clients, which occurred during the quarter. The result was third quarter revenue came in essentially flat at $105 million as compared to the prior year's third quarter. The point is that while we had headwinds of approximately $15 million last quarter from factors that we had told you about previously and these have not changed, we are seeing an acceleration in new client contribution along with continued cross-sell and upsell revenue with our existing clients, which offset this headwind. So while on the surface, the net change was only approximately $0.5 million the new revenue we are adding is accelerating. While we believe the wrapping of negative headwinds is on the backhalf of its transition. Taking a closer examination of the nature of our revenue builds a positive benefit from our investments in new products and platform capabilities. Specifically, new product offerings in our previously discussed investments in product and service delivery technology platforms resulted in a decrease of cost-of-goods sold from $38.4 million or 36.4% of revenue during the third quarter of 2015 to $35.4 million or 33.7% of revenue during the third quarter of 2016, reflecting a gross margin improvement of 270 basis points year-over-year. Offsetting this improvement, lower down in the P&L as we discussed with you last quarter, we have chosen to make substantial investments in many areas of our business, including product innovation, infrastructure and network expansion and our sales and marketing organization. These investments are intended to accelerate the pace at which we can capitalize on significant opportunities that we see in our markets. Amongst the larger line item increases are sales and marketing. Similar to the past two quarters, sales and marketing investments expanded significantly increasing 300 basis points as a percentage of revenue from 3.7% in the third quarter of 2015 to 6.7% this quarter. This investment is continue to drive our record pipeline and helped enable our adjacent market penetration. The second expense line item contributor that I want to draw your attention to for the quarter is our G&A. While appearing realize a material increase of approximately $4.8 million year-over-year from $32.4 million to $37.2 million more than the entirety of the increase is primarily attributable to an increase of $4.9 million of post-acquisition contingent consideration expense related to the 2015 acquisition of Avalere. As such despite the increase in the number of product offerings, several senior management additions and increased costs undertaken in association with preparations for planned growth, the company maintained good underlying discipline and efficiency in G&A. Finally, worth reminding all of us, the third quarter of 2016 reflected a full quarter of Avalere versus a partial quarter last year as the acquisition closed on September 1 of 2015. Bringing this all together adjusted EBITDA for the second quarter came in at $26.3 million or 25% of revenue as compared to 27.5% in the prior year quarter. Turning to net income, our non-GAAP net income and diluted non-GAAP net income per share came in at $15.4 million and $0.10 respectively in the third quarter, compared to $13 million and $0.09 per share respectively for the third quarter of 2015. As discussed in our earnings release, during the quarter we completed the 2015 Federal and state tax returns of Avalere for the pre-acquisition period January 1, 2015 through August 31, 2015. Through this process we identified additional tax benefits, which as a result lower the effective tax rate for the three and nine months ended September 30, 2016 to 15% and 34.4% respectively. The lower tax rate in the quarter represented a $0.01 benefit to GAAP diluted net income per share and a $0.02 benefit to non-GAAP diluted net income per share. Going forward however, our incremental effective tax rate should still be thought of as in the range of 40% to 41%. Now let me comment on our balance sheet and cash flow this quarter. As has been the case for many years, Inovalon remains in a very strong financial position. As of September 30, we had $713 million of cash, cash equivalents and short-term investments, which reflects the $51 million in share repurchases during the quarter, but does not yet reflect the $95 million in cash distributed as a result of closing the Creehan acquisition on October 1st subsequent to the end of the quarter. Adding to the balance sheet, for the first nine months of 2016 we generated $68.6 million of cash from operations, up 55% from $44.2 million in the year ago period. As can be seen, our balance sheet, strong cash flow generation and debt capacity continue to position us well to consider additional strategic investments and acquisition opportunities. At the same time we are pleased to have continued financial strength to not only execute the $100 million share repurchase plan authorized by the Board of Directors earlier this year, but also further expanded this program by an additional $100 million through 2017 as announced today, bringing the total authorization now to $200 million in repurchases. Now let me address our outlook for the remainder of 2016. As Keith discussed, our sales pipeline expanded to 4 times the level at the beginning of the year, up 20% sequentially from the close of the second quarter and continuing the trend observed throughout the year. Fueling the growing pipeline is the sustained investment in business development capacity. The introduction of new offerings, leveraging our core data assets and technology platforms and sales and marketing enablement campaigns targeting a broader client base, as we realize synergies from our acquisitions and new product innovations. The makeup of the pipeline is positive, good coverage metrics across the sales stages of progression, a fresh pipeline with many opportunities created in last six months and a positive mix of typically sized transactions along with a number of larger and more complex strategic opportunities. To that end, as it relates to the larger complex pursuits, we are focused on the strategic importance of structuring the right solution for our clients and Inovalon creating the possibility that some deals may close in the first quarter instead of the fourth quarter, something with which we are quite comfortable. Overall however, the key performance predictors indicative of growing sales over the long-term are very encouraging. As such, taking all of our existing business base, recently signed business and business within our pipeline that we project to close would be realized, our 2016 guidance that we provided to you last quarter remains unchanged. And is as follows

[Operator:]

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

[Donald Hooker:]

Great, good evening. I guess just listening to some of earnings reports from other technology companies doing different things in healthcare, it seem like there was some pause in provider buying activity I guess around some of the legislative changes and I guess there is concerns about the election and what not it doesn’t seem like you guys are saying of that I was just wanted to sort of clarify if you saw any kind of changes kind of in sort of appetites particularly from healthcare providers around the analytics.

[Keith Dunleavy:]

Don, good evening this is Keith. No, we are not seeing any material change in any of the buying if you will from anyone of the constituents certainly not taken as a whole.

[Donald Hooker:]

Okay. Can I ask maybe one more question, that was a quick answer? Is also really interested in you had the big deal Bristol-Myers earlier in the year and I guess you kind of highlighted that there were couple of other interesting new relationships on the pharma side, is it possible can you maybe help us think about kind of what those deals look like in terms of there is like bookings or revenue or how they’re structured or they build over time, can you -- what are these things look like, can you help with that?

[Keith Dunleavy:]

Sure Don, good question. This is something we can go into a lot more detail or we anticipate going into lot more detail at our Analyst Day in December. We are excited about these, these are heavily data driven analytically and platform driven offerings that we are seeing as a result of the synergy between us and Avalere there is subject matter expertise our data and analytical platforms. They do build overtime and obviously there are differences between them, but the industry is looking to support a better understanding enabled by real world data and an ability to leverage that data to improve compliance and to improve a value based or outcomes based contract offering capability, these things naturally build as the patients on those drugs, on those medications expand. So they do have a lot of expansion opportunity. We’ll go into more detail on that at our analyst day.

[Donald Hooker:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Matt Gillmor of Robert W. Baird. Your line is not open.

[Matt Gillmor:]

Hey, good evening. Thanks for taking the question and let start by congratulating Chris and offering my best wishes to Tom as well. So I just wanted to make sure understood Chris’s comments on the deals potentially slipping from 4Q to 1Q, does that meant to say that some revenue that’s embedded in the 2016 guide is possible that slips into first quarter of ‘17 and that’s just I guess the point is it’s really just the timing issue? And can you maybe size up what that is if I’ve interpreted that correctly?

[Christopher Greiner:]

Hey Matt, it’s Chris. First thank you for the kind words, let me take this and obviously Keith feel free to jump in. Let’s first think about the pipe and frame it so we talked about the tremendous program we are taking on building our sales capacity and capability, it’s got some good prove points behind it. The is pipe in four time or it was at the beginning of the year; it’s grown at a steady rate. So sequentially up again this quarter 20% and when we look at kind of the qualitative metrics of it we like what we see. As I mentioned in my prepared remarks it’s a relatively fresh pipe when you look at it by age, we like where the coverage metrics are at each stage of progression as they get closer to deal closure. And then I think excitingly and this goes back to the really good progress we’re making on penetrating new adjacent markets it’s made up of what we’ll call our typically sized transactions and then larger more strategically complex opportunities, it’s those in particular that we’re very focused on making sure that we structure the right solution for our clients and by the way with the right economics for Inovalon as well. And I think just the nature of where we are at the calendar year with the holidays, we’re aware that these more strategic larger opportunities they take on a life of their own, right now we see them as closing within a year hence why we provide our guidance as we did. Keith, would you add anything here?

[Keith Dunleavy:]

No, I think you hit it.

[Matt Gillmor:]

Okay. And then maybe one more on the care of re-pricing that was discussed on the last call and then mentioned on this call as well. So just sort of two items around that. So first with the remaining contract that you previously talked about was that finalized in line with your prior expectations? And then second, can you maybe give us some sense for how that will impact revenue and EBITDA in 2017 or is it all really confined to 2016? Just trying to understand if there’s any carryover into next year?

[Keith Dunleavy:]

Yeah Matt, first of all got two parts to that question number one, the opportunity that we spoke off at the end of Q2 that was still hanging out there, I think we referred to it as having received positive comments, but not a formal award. As we mentioned in our prepared remarks we have now received that formal award and we did receive that formal award consistent with what our expectations on it were. So that all came in as we thought it would at that point and are pleased with that. To the degree that it goes forward we have mentioned that this process does fall a bit into 2017. So don’t think of it as being done by Tuesday the 5th or something of some month, but it is moving along well. It is moving along consistent with how we’re seeing it at the end of Q2 and if anything I think it’s moving on a little bit better than we had hoped. But it will trail a little bit into 2017, but as we expected it to and disclose at that time.

[Matt Gillmor:]

Okay, thanks very much for taking the question. I appreciate it.

[Keith Dunleavy:]

Sure, thanks Matt.

[Operator:]

Thank you. Our next question comes from the line of Andre Benjamin of Goldman Sachs. Your line is now open.

[Andre Benjamin:]

Thanks, good evening. As my first question is about the trajectory of cost as we move through the year and you’re rolling out all these products and investments. We actually saw total cost I’d calculate that as the delta between revenue and EBITDA go down in the third quarter despite you were talking last quarter about the need to step up investment. So I guess I'm trying to understand that how should we think about the fact that costs are going to be up in the fourth quarter as we move into next year, should it be flattish like it was for the last four quarters, seasonality in line with the prior year, just trying to sort out some of the moving pieces.

[Christopher Greiner:]

Yeah Andre this is Chris I’ll go ahead and take that. I think first it’s really important to remember the seasonality of our business. So I don’t think the best way to look at it would be sequentially looking at our cost, so let’s look at it kind of on a year-on-year basis and what I’ll do is I’ll hit the cost of goods line and then I’ll hit the investments in overheads and Keith will certainly jump in to talk about some of our investments. So as we shared we’re pretty encouraged by what we saw on the gross profit margin line and the operating leverage we’re seeing in our cost of goods sold. When you think about it and what’s driving that 270 basis points improvement is really made up of two different contributing forces, the first is mix, and mix is both the function of the accelerating rate in which we’re adding new clients. But then also as we roll out these new products through organically developed innovation here at Inovalon they’re coming in at a higher average margin than the rest of the portfolio. So that should persist. But that’s component, frankly the larger component is on the efficiency of the platform and I think kudos to Joe Rostock our Chief Technology Officer and his team the tools that they’re giving the organization and the rate at which we’re moving work across those platforms because of automation, because of our cloud based architecture, because of our interconnectivity we’re able to move more work across that platform at a lower rate that kind of covers the cost of goods and the margin expansion on a year-over-year basis, which is how we view it. With respect to what’s happening kind of deeper into the P&L, I think you’re seeing the investment in sales and the aggressive investment sales that we're making it’s about a 300 basis point improvement as in relation to expense to revenue. And it's not just people, I mean we're adding people and talent and capability, but we're offsetting tools an enablement to make sure that we're capable of selling the new innovations that we're rolling out in the market. And then lastly on the innovation front, that spend on the R&D side was up about 130 basis points on a year-over-year. And again that's the reflection of data diagnostics being introduced to the market post-acute care and then our pharma and life sciences stack. And maybe Keith you're well equipped to talk more deeply about some of the investments we've been making.

[Keith Dunleavy:]

Yeah we certainly can go into more detail Andre, but we have a benefit of what I sometimes maybe dating myself prefer to as a leg of set here. And then more and more modular that we get and the more of our code that's written them through native cloud code allows for the interwalking blocks to be applied more rapidly, more efficiently. And there is a diminishing amount of remaining work to be done to convert over into a full native cloud capability. So as module-after-modules gets put into this kind of arrangement, it allows the launch of new capabilities to go more rapidly and also more cost effectively force as well. So you're just seeing that. We'll obviously have lots of investments still coming down the road. We have at this time of the year we're going through all of the planning for what's rolling forward, but they're executing really well. So we like spending the dollars when they are turning it back to us as quickly as we're seeing it turn back to us.

[Andre Benjamin:]

Thanks and also congrats to Chris on the new role. I guess with the expanded seat is there anything that we should be thinking about as a potential change either the way that Inovalon is allocating capital, managing expenses, commutating with the street or anything else you'd like to address?

[Christopher Greiner:]

Keith allowed me to give myself a raise anytime I want. I don't think so.

[Andre Benjamin:]

Thanks.

[Operator:]

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

[Jamie Stockton:]

Hey, good evening and thanks for taking my questions. I guess maybe the first one just on the guidance, that's a big range. So can you directionally at least give us some indication of where at this point with a couple of months left to go you think things are going to shake out?

[Christopher Greiner:]

Yeah no I appreciate the question Jamie this is Chris again. Yeah no it's a range that we're comfortable with. Again, I don't want to -- it's now like a broken record, but I think when you take into account our normal seasonality, if you look historically at what the company generates in terms of its growth. Fourth quarter has been historically strong quarter for us. As I mentioned the platforms we have the capacity right now linked to being able to search with our clients. And we routinely build that value proposition that shows them that we can move work to close the year strong for them. And then you couple that with where the pipeline stands and where the number of those large opportunities are it leaves us to be comfortable with the range.

[Jamie Stockton:]

Okay. Well I guess maybe even if you can’t pin down when some of these deals close, it sounds like you guys are optimistic that there will be a fair amount of business that converts either in the remainder of the year or early next year. Given that your organic growth has bounced around to fair amount recently because of the issues like the care of transition that you talked about, can you give us any ballpark indication of kind of the trajectory that you would see right now for 2017? I know you guys have talked about seeing kind of an 18% growth rate over a number of years, but also I think that that number include some anticipated M&A. Is there an indication right now of the kind of organic growth that you think next year is possible?

[Christopher Greiner:]

Jamie thanks. I think you characterized 2016 appropriately, so let me start with that. With respect to '17 a bit too early. We're still doing some modeling here as you'd expect and we look forward to sharing that with you in the future.

[Operator:]

Thank you. Our next question comes from the line of Ryan Daniels of William Blair. Your line is now open.

[Ryan Daniels:]

Yeah, good evening, thanks for taking the question. I want to dive into the pipeline in a bit more detail if you're willing to offer some more commentary as I think it's an important metric. Number one, I'm hoping you can confirm that that's kind of a total contract dollar value versus just number of contracts? And then number two, as you look at the different categories such as payer pharma provider in that pipeline, are there a wide variety of profitability metrics depending on who that customer is and also a wide variety of business mix meaning analytics versus intervention and automated versus semi-automated in that mix?

[Keith Dunleavy:]

Hey, Ryan. I'll start off here and Chris may have something to add. So first of all it is measured on a dollar value of first year of the contract. So as you know the length of our contracts are typically many years somewhere in the neighborhood of three years on average and we have some that are longer some that are shorter, but that remains a good way of looking at our average. But the way we refer to the pipeline is really just the first year of revenue of that potential opportunity. The second part is how do we look at the profitability. First of all of our offerings are nicely profitable, they deliver high value to our clients and return a good profit for us and our shareholders. There is though as Chris mentioned earlier an increasing value and profitability of our mix that we're seeing. We're seeing strong synergies with our work with Avalere, we're seeing strong synergies that leverage the expanded product portfolio and data value impact in that portfolio. And one of the results of the care transition and other transitions that we have done over the last year, year and half is as we allow for our clients to take a more modular approach. You might be surprised how often that they're looking to do some of the interventional or operational pieces. So as you see a revenue headwind that's usually the lower margin or very often the lower margin component that we're compromising. So as we expand our product mix and become more modular, the net is an improvement in profitability in many cases. So as we look at the pipeline today, it's a pipeline of very significant number of opportunities. I think it's fair to say Chris it's in the hundreds.

[Christopher Greiner:]

Yeah. And it stands all product lines.

[Keith Dunleavy:]

So it's across payer, pharma, life sciences, provider and many different sub types within those broad market descriptions. And because a lot of them are newer product offerings, they are very often at higher margins than we historically have seen. Does that help Ryan?

[Ryan Daniels:]

Yeah that's great color, I appreciate that. And then maybe switching gears for my follow-up, just any commentary on what's been going on in the MA market in particular? I know some of the bigger providers maybe who you're not working with have had some issues with quality reporting and their star ratings. Do you think that opens up an opportunity for you or any of your customers going forward as we think about the MA products in particular? Thanks.

[Keith Dunleavy:]

Yeah Ryan it sure does. So it's the short story. We're an enormous provider of quality analytics and also quality improvement capabilities. And we're seeing a rise in activity and interest there as you would expect and more as you would want us to. We're going after marketing campaigns of virtually any organization that did not do well in their quality scores. I'll give you one data point that I just heard this afternoon. In fact, tomorrow the company is hosting a Quality Improvement Webinar to health plans. And I heard of that more than 500 are participating in it tomorrow. I don’t think there is another organization in the country that if they offered a webinar on quality improvement platforms would get 500 health plans participating. So just a shout out to our team that does quality improvement, Chris Bullrack [ph] and Jim Clement and Mike Burgin are just fantastic in their work there. So yes the focus on quality recently in the marketplace is a great thing for Inovalon.

[Ryan Daniels:]

All right. Great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Garen Sarifian of Citi Research. Your line is now open.

[GarenSarifian:]

Good afternoon, Keith and also my congratulations to Chris on your new role congrats. So first I wanted to ask the question came along on 2017 in a little bit different way. So last quarter we discussed your investment in CARA also on the level of improvement from your investments in sales that translate into your pipeline to reaccelerate growth. So as of today is that on track all-in versus your expectations? And I ask because I thought that the impression was that success would be measured in quarters starting at least a quarter ago where it should mean that it would tail off say early 2017 at the latest where we would expect growth back to the high teen range. So is there anything you can add to how we should think about that?

[Keith Dunleavy:]

Hey Gary let me take a shot at that. So two separate forces, I think you’re perhaps talking about and you help me out to make sure I'm hitting your question properly. One as we talked about in the second quarter there the call for the second quarter there was A, a headwind caused by the CARA redesign, our desire to redesign that to combat the transition or next generation benefit that we wanted to go after to combat competitive forces in the marketplace that introduced an amount of headwind which we described as lasting into the beginning of 2017, but as we talked about earlier as Chris talked about earlier we feel like we’re in the back half of that headwind. Then the second issue we talked about was that the building of our infrastructure and our capabilities and our personnel and our capacity around our sales and marketing expansion was taking longer than we had wanted it to or we had expected it to. And the combination of those two forces in the end of Q2 is what let us to make the changes in our projections at the end of Q2. So that was a one-time adjustment for how we saw that ramp developing, deal closure wise. So that’s now we’ve already described that there’s no new issue or at this point we’re really quite pleased with how that is progressing. So yes with that adjustment mentioned 90 days ago acknowledged yes, now it is proceeding as we wanted it to or want it to proceed. So -- but if you’re getting at where do we see ‘17 looking I think as Chris mentioned we were just not putting out ‘17 projections yet. Obviously you’re hearing some optimism here, but we’re not putting out ‘17 projections yet.

[GarenSarifian:]

Okay. I guess I was trying to understand would the projections be impacted by last quarter’s -- would you just summarize [indiscernible] and on the sales and investment and it sounds like no, it would not be unfavorably impacted because that headwind have sort of you’ve fixed that problem and now you’re back to where you wanted to be in terms of execution.

[Keith Dunleavy:]

So Garen I want to make sure that I don’t want to accidently have you try and drive me to a conclusion that you’re looking for…

[GarenSarifian:]

And I don’t mean to continue…

[Keith Dunleavy:]

No, things are proceeding well. We’re pleased with them. Some of those forces obviously like I mentioned do roll a little bit into ‘17 we already described the size and scale of those forces at the end of Q2. We described how much we thought the financial impact of the being behind in the build of our sales ramp was behind calendar wise not behind capability wise and but all of that will be factored in as we come up with our ‘17 projection. So of course there are combinations of headwinds and tailwinds maybe which we talked about, clients updating us on what they want to do, new opportunities getting signed, there is hundreds of different factors we’ll take into consideration open enrollment. We -- it's just a little early to give out those projections, but you’re obviously seeing a lot of building positive forces here.

[GarenSarifian:]

Got it, fair enough. And then on quick follow-up on your increased stock buyback, how should we read into your views on M&A, does that sort of mean that in the near-term M&A is less of a focus or is this solely in addition to your M&A strategy, which is still expected to contribute modestly to revenues each year?

[Keith Dunleavy:]

Garen we are just very fortunate to have a really great balance sheet. And so no, this not a change in focus this is an end focus. We have as you can imagine a lot of positive view on where our business is going and we want to buy some stock and -- but we also see great companies out there and our M&A group that’s headed by Levine is really strong and the opportunities we are seeing is strong and the marketplace knows that we have a nice balance sheet so they bring us nice deal to look at. So, we are in a good buyer situation if you will and we have a lot of capacity not just in our cash, but obviously our debt capacity as well. So we are doing a fair amount of end strategy here firing on a bunch of different cylinders. Chris?

[GarenSarifian:]

Got it. Thank you very much for the questions.

[Keith Dunleavy:]

Sure.

[Operator:]

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

[Sean Wieland:]

Hi, thanks. Can you tell us what you think the Creehan contribution is going to be for Q4?

[Keith Dunleavy:]

Sean, hi, good evenings, it’s good to talk to you. We are not breaking out obviously there will be some materials that we’ll have to disclose in our 10-K when that eventually comes out, but we are not breaking out the individual contribution. So at this point we are very rapidly folding that company in, it’s really a product capability addition, it’s a beautifully wrapped up SaaS platform that’s very rapidly getting integrated into our product portfolio. But no we are not breaking up those numbers.

[Christopher Greiner:]

Yeah I just hey Sean it’s Chris. I would just add that as we speak they’re kicking off their Congress and their version of their client council, which is really exciting and having been involved in and will be heavily involved in the integration side of it we are really encourage by their nimbleness and the products they are able to bring to market in addition to using our data.

[Sean Wieland:]

So given that it’s a SaaS model is it safe to assume that it’s the revenue is recognized pretty ratably across over the course of the year? Or is there any kind of seasonality that we should show know about in our business.

[Keith Dunleavy:]

Yeah, Sean, first on it is as you are right it is SaaS you haven’t asked, but happy to volunteer that it’s got a margin profile that’s very nicely like ours and they have some seasonality in their business. So that’s a bit more second half focused a lot of the healthcare industry has that similar seasonality saw a little bit with Avalere you obviously see it with us, you see it a little bit with them as well. And they’re also subject to when they bring on large customers, they have a lot of -- they are 30% of the market, so and the help you with that market really quickly. If you take all of the software platforms that support specialty pharma it really breakdown into four categories. The group number one about 25% of the market is the CVS, CVS has its own in-house software for their specialty former that’s about 25%. So does Express Scripts, they’re also about 25%, they have the own in-house software for their 25%. So you take out Express Scripts, you take out CVS at least about 50% of the market place, 30% or 60% of that half but 30% of the total market uses the Creehan platform and then the rest is kind of in the scattered category of other. So, if you factor through who that must mean that uses Creehan’s software, obviously there we saw some pretty big players as those big players go through transformations or have asked or do others transaction themselves, they call upon Creehan quite nicely to work through those. So seasonality aside they can have some lumpiness themselves as they bring on some large players as the case maybe.

[Sean Wieland:]

Okay, thanks. And did you see any financial benefit in the quarter from downsizing any of your site review consultants?

[Keith Dunleavy:]

I'm sorry Sean could you repeat the question please.

[Sean Wieland:]

Yeah did you see any financial benefit during the quarter from downsizing any of your site review consultants?

[Keith Dunleavy:]

So broadly speaking we have been doing a nice job of automating a lot of that process. So we’ll go in and talk a lot about our EHR integration that has -- it’s a curve that you will really like. It is nearly it’s starting close to vertical at this point. The rate of adding physician groups and clinical sites through our EHR integration is really positive and every time we do that that’s obviously increasing our differentiation in the marketplace, the speed at which we can execute it’s actually opening up a whole bunch of new product offering capabilities that we’ll be rolling out in the future. And it’s allowing as you point out for us to have flexibility on more labor driven components of our business. So the short story is yes, we saw some nice margin improvement from those connectivity successes.

[Sean Wieland:]

Okay, great. And one last if I can squeeze it in, a number you’ve given in past…

[Keith Dunleavy:]

Sean I apologize, Sean please forgive me but we’re going to stick to a question and one follow-up.

[Sean Wieland:]

All right.

[Keith Dunleavy:]

Great, thanks Sean.

[Operator:]

Thank you. And our last question comes from the line of Ricky Goldwasser of Morgan Stanley. Your line is now open.

[Mark Rosenblum:]

Hey guys this is Mark Rosenblum on for Ricky. Could you just give a little bit more detail on how you’re planning to integrate the specialty side into your existing offering and how does that fit into what you’re doing with Avalere on the pharma side?

[Keith Dunleavy:]

Hey Mark thanks. Let me hit that and I'm looking at the clock it’s 6 O’clock I mean told this is going to have to be our last question. So how are we integrating the specialty pharma, specialty pharma is a huge pinpoint in the industry it’s as I described earlier and it really is a Suez Canal in the space. it’s important to the manufacturers, the pharmaceutical manufacturers it’s important to the PBMs, it’s important to the payers, it’s important to the large provider groups, it’s important to employers, it’s really and obviously important to the patient as well. So the integration not sure if you’re thinking integration from the product offering side or from the technological side, technologically these guys have run a really tight house and the technology fits very, very well with ours, that group is very, very tight. So the integration is going and will go phenomenally well, this is a great addition to our capabilities here. But the integration on the product suite is a little bit more elaborate and because for payers they are extremely interested in how they can get greater value out of the specialty pharmacy component of their spend as specialty pharmacy is dealing with their sickest patients often HIV, hepatitis, multiple sclerosis and rheumatoid arthritis and so forth. They want to be able to be involved in that touch point and get greatest value out of it and say they can’t and on a vice versa the manufacturer wants to have as much data they could about that patient and about the other medical history issues, which providers that they are acting with, where they’re actually going for the rest of their care and what co-morbidities and complications they might have. So the ability for us to use all that data that we have available, all that connectivity between all of those players is bringing a whole new suite of capabilities to that space. We’re already getting strong excitement from the major customers of Creehan, which are your top leading healthcare organizations in the U.S. these are not small clients they have these are the largest players in the U.S. healthcare system and they are very excited about some of the analytical capabilities that we’re going to bring into that space. So the integration with us is going to go really quickly, the integration into our products suite is going to be very exciting. I hope that answers your question.

[Mark Rosenblum:]

Yes, that’s helpful. Thank you.

[Keith Dunleavy:]

Great. And so, with that let me just first of all take the opportunity to thank you all for joining us today. We appreciate the time, we know you have a lot of calls that you need to be on. Before we conclude, allow me to leave with the three key themes. Number one, I hope you’re hearing that we are very excited about the rate and pace that we are expanding into adjacent market. Leveraging our data sets, leveraging our platforms to introduce both organically developed offerings and synergistic solutions to a much, much broader clients there. Number two, we are encourage by results that we are seeing in the scale and sophistication our sales and marketing capability that combined with the expanding datasets and platform capabilities, it’s translating into a growing pipeline and increasingly competitive wins and deal closure. And then number three, we have a lot of financial strength and we have financial strength in our balance sheet, our cash flow, our debt capacity and we have increasing financial strength in our margin capability. So, with that we thank you for your interest and we look forward to hopefully seeing and speaking with you on our Investor Day, which is going to be in New York on December 13th at the NASDAQ Building and I wish you all a very good night. Thank you very much.

[Christopher Greiner:]

Thanks everybody, really appreciate your time.

[Operator:]

Ladies and gentlemen thank you for your participation in today’s conference. That does conclude today’s program you all disconnect. Everyone have a good day.