Inovalon Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Inovalon Fourth Quarter and Full Year 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 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 fourth quarter and fiscal year 2016 earnings call. The press release announcing our financial results for the fourth quarter and fiscal year 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 Web site. For those of you who are listening to the rebroadcast of this call, we remind you that remarks made herein are as of today February 22, 2017 and will not be updated subsequent to this initial earnings call. I’ll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995, including statements related to future results of operation and financial position, our business strategy and plans, market growth, and our objectives for future operation. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s earnings release and filings with the SEC. In an effort to provide additional information to investors, this conference call and webcast is accompanied by a presentation which is available on the IR section of our Web site. You are encouraged to download a copy of this presentation to follow along with our prepared remarks. Our presentation also includes certain non-GAAP financial measures. You will find definitions of these non-GAAP measures and reconciliation chart at the end of the company’s earnings release and on the company’s Web site. Now it is my pleasure to turn the call over to Dr. Keith Dunleavy.

[Keith Dunleavy:]

Thank you, Kim. Good afternoon, everyone and thank you for joining our call. Chris and I would like to share with you the results of our fourth quarter and full year 2016, highlight in more detail the continuing significant progress we are making in our business and discuss our financial outlook for 2017. Let me begin briefly with our fourth quarter and full year results. As Chris will discuss in more detail shortly, our revenue and profitability in the fourth quarter and for the year were consistent with our revised expectations. Of note, we continue to generate strong cash flow and maintain a strong balance sheet which continues to be supportive of our ongoing investments in our organic business as well as our capacity to consider strategic acquisitions and opportunistically repurchase shares. This said, we at Inovalon understand that our overall 2016 financial performance was disappointing, not what we or our shareholders originally anticipated. With that in mind, I am pleased to report that our outlook for 2017 is notably more positive. As we discussed on our investor day this past December, our 2016 financial results were impacted by several concurrent headwinds. Number one, one off ACA related impacts from co-ops and other ACA impaired clients. Number two, one of our oldest product platforms, CARA, came under competitive pressure and needed to be transitioned to a more flexible and more modular platform. And number three, we found that we required a longer than anticipated time to hire and ramp additional sales resources, thus putting our sales model behind our original schedule. On top of this, as we discussed with you in December, we did not sign awards platform opportunity that we had anticipated ahead of the year's end. While these forces were indeed negative, they are of finite nature and we see the greatest impact now behind us. With the remaining drag materially winding down in the first half, this leaves the many positive forces that have been gaining momentum to give way to 2017 increasingly more consistent with the historical growth rates and profitability of Inovalon's long history. Allow me to turn to these significant positives and how they are both reflective of our material progress and differentiation as a company and also how they are strengthening our market leadership and success going forward. A commonality of all of our work has been to focus on empowering a data driven transformation from volume based to value based models across the healthcare ecosystem. This requires a number of strong capabilities that you have heard us speak to over the many quarters. As you have been seeing and will continue to see, Inovalon is increasingly the platform inside or the intelligent enablement layer that healthcare organizations are using to empower their strategies, to both navigate from volume to value and succeed within the value environment. We are doing this through the leveraging of cloud native architectures and the intelligence garnered from the analysis of our massive and growing datasets. We are pleased to report that 2016 saw tremendous advancements in the company's vision to being this intelligent enablement layer. To serve as this intelligent layer across healthcare, Inovalon has been developing, building and scaling specific componentry. Agnostic real time data connectivity, large scale date ingestion capabilities, advanced data management and analytics capabilities, massive scale data-link environments, dynamically provisioning cloud based compute architectures and industry-leading subject matter expertise across facets of both technology and healthcare. 2016 witnesses significant advancements across these areas of focus. Our investments in real time connectivity, enterprise scale data ingestion and transactional analytics made great progress during the year. We believe strongly that meaningful data driven healthcare requires these capabilities in massive scale. With this in mind, I am very pleased to report that we executed extremely well on these goals in 2016. Specifically during the year Inovalon saw a 446% expansion in the number of providers whose EHR is connected directly to our platform. The fourth quarter witnessed a 155% expansion alone with more than 100,000 physicians now operating on EHRs directly connected to Inovalon's platforms. These inter-connectivity capabilities are not trivial. Our ability to undertake them in massive scale and in real time with the ability to both aggregate and push data in granular regulatory complaint ways, is a strong capability of the company. This tremendous connectivity expansion is enabling highly differentiated speed and depth of data accessibility and efficiency, which in turn enables more advanced analytics and greater value realization for clients as well as operating efficiencies and competitive differentiation for Inovalon. Adding to the connectivity accomplishments, Inovalon dramatically advanced its data ingestion capabilities in 2016 with the launch of client cloud access versions of iPORT HD. This cloud-based tool enables large scale data ingestion into Inovalon's data lake, which in turn is accessed by Inovalon's cloud native platform products. This was a critical step in transitioning large scale clients such as those using QSI-XL Excel, into more pure, cloud-based platform usage. iPORT HD CCA further leverages the differentiated intelligence enabled by Inovalon's data lake, specifically machine learning from past data ingestion can help to inform the automated ingestion of subsequent data integration and forming data normalization, the identification of errors, omissions, or possible sources of bias within the massive data feeds entering Inovalon. The growing degree of connectivity and automation of data integration is translating into further differentiation of our products and expansion of our client base. As a result, we are seeing an accelerating growth in our differentiating data sets. At the end of the quarter, Inovalon's more squared registry dataset contained more than 150 million unique patients and 13.3 billion medical events, representing a year-over-year increase of 15% and 21% respectively, the fastest growth rate of these metrics since the third quarter of 2014. And importantly, we don’t see this acceleration abating but rather continuing into 2017. With larger datasets landing in ever increasing data lakes, Inovalon has dramatically increased its compute sophistication and scale in 2016. During the period, Inovalon added significant additional data set or capacity and launched transactional analytics. A method of breaking traditional batch processing analytics into individual analyses. By taking this approach, Inovalon was able to achieve several key goals. First, the development of transactional analytics allows for on-demand, real time analytics, so that a doctor can request insight into a specific analytical need exactly when and where they need it and have the answer in real time. Second, the development of transactional analytics allows for less compute capacity than the batch processing because there is no need to waste compute resources recalculating an analysis on a patient where none of the variables have changed since the previous computation. Thirdly, the development of transactional analytics allows for the containerization of the individual compute processes and therefore the most efficient use of the most advanced dynamic provisioning of compute and storage resources possible through cloud native architectures. And finally, with the implementation of transactional analytics and cloud-based computational containers, Inovalon was able to launch a highly sophisticated load balancing of analytics across multiple, disparate cloud environments providing for a highly efficient and highly robust active, active, active compute architecture. These advancements also empower the introduction of multiple new platforms, platforms which are both highly differentiated in the marketplace and expanding us into new market adjacencies. One example is the 2016 push into outcomes based contract platforms for the pharmaceutical marketplace. We launched this capability in early 2016 signing BMS early in the year and several others later in the year. Most recently, we announced an agreement with Boehringer Ingelheim on behalf of their diabetes alliance with Eli Lilly, helping to support their outcomes based contract plans with respect to Jardiance, a medication that has been projected to be a multi-billion dollar opportunity within the pharmaceutical marketplace. Additionally, announced today and detailed in two sections of our release and on Slide 6 of our supplemental earnings deck, we have just launched Inovalon's INDICES Value-Based Provider Platform. This solutions provides a highly flexible cloud-base real time data and analytics visualization platform that empowers value-based care arrangements between at-risk organizations and providers. As we outlined in our earnings release today, we have already signed a significant five-year contract to provide this platform offering to a top five national health plan that will implement this offering across all of its members including Medicare Advantage, Medicaid, commercial and ACA across all of its network physicians in all of its states where it operates. This new platform offering is the latest demonstration of Inovalon's growing portfolio of enterprise scale, cloud-based platform capabilities. Of note, this same client also signed a five-year contract for QSI-XL across its entire membership and product lines. I would like to point out that all of Inovalon's recent platform offerings, data diagnostics announced in late 2015, the post-acute care, patient placement portal platform announced in February of 2016, the outcomes based contract platform for pharmaceuticals, announced in May of 2016, the launch of client-cloud access QSI-XL in July of 2016, the virtual medicine intelligence platform announced in September of 2016, the specialty pharmacy platform brought on board with Creehan in October of 2016, the INDICES Value-Based Platform announced today and the associated toolsets launched during the period, are all pure software platforms with no labor component. This is the execution of the intelligent enablement layer initiative. Empowering data driven, value focused healthcare. This is bringing increasing differentiated value to our clients and increasing operating leverage and financial performance opportunity to the company. With that, let ask Chris to review the fourth quarter and full year of 2016 financial results and discuss our 2017 financial outlook in more detail. Chris?

[Christopher Greiner:]

Thank you, Keith and good afternoon, everyone. I will discuss our financial results for the fourth quarter and fiscal year 2016, highlight key items in our results, discuss our balance sheet position and capital allocation and then share our financial guidance for 2017. As Keith mentioned, our fourth quarter and full year results were at the high end of our revised expectations and we did generate strong cash flow ahead of what we expected. Our fourth quarter revenue was $96.1 million, consistent with the implied guidance range for the quarter. Despite the headwinds we previously discussed, we saw continued benefit from new client sales along with solid up sell and cross-sell activity which continues to be a positive driver for our business entering 2017. Fourth quarter adjusted EBITDA was $14.3 million or 14.9% of revenue. Due to lower than originally expected revenue in the quarter, the margin comparisons are not favorable on a year-over-year basis. However, our margins in the fourth quarter not only reflect the revenue and the cost that we expected to recoup had we signed a large contract we previously discussed, but also reflect the continued strong level of investment in our business that Keith referred to earlier. In fact, sales and marketing expense and R&D expense were both up year-over-year and sequentially, not only as a percentage of revenue but also on an absolute basis. Specifically, sales and marketing expense in the fourth quarter was $7.4 million, or 7.7% of revenue, up from 6.7% of revenue in the prior quarter and 5.4% of revenue in the prior year period. R&D expense was $8.1 million or 8.4% of revenue, up from 7.1% of revenue and 4.3% of revenue on the same basis. When examining our total investment in innovation, the combination of our GAAP R&D, capitalized software development and capital deployments in innovation initiatives, the amount rose significantly in 2016, coming in at $62.4 million or 14.6% of revenue compared with 10.9% in 2015. The ROI for these investments can be seen through the lens of our expanded sales pipeline, increased client count and signed multiyear statements of work and expanded number of new platform products we continue to release. The message here is consistent with the one that we discussed with you at our investor day in December. That while these investments could be used a short term levers to enhance margins, our view is to continue to invest in our business for the long term. As Keith mentioned, those investments are yielding results and we expect these results to be more visible as the previously discussed headwinds wrap up as we exit the first half of 2017. For the full year 2016, revenue was $427.6 million, adjusted EBITDA and adjusted EBITDA margin were $99.9 million and 23.4% respectively, and non-GAAP net income per diluted share was $0.34. Now let me comment on our balance sheet and cash flow. As has been the case for many years, Inovalon remains in a very strong financial position. As of December 31, we had $573 million of cash, cash equivalents and short term investments. As a reminder, this amount reflects the consideration paid for the acquisition of Creehan & Company, as well as our share repurchase program through year-end. Net of our debt of $266 million, that’s net cash of about $307 million or just over $2 per share. Adding to the balance sheet was our continued strong cash flow. For 2016, we generated $92.8 million of cash from operations, up 37% from $67.6 million in 2015, representing 21.7% of revenue compared to 15.8% last year. The strength of our balance sheet and cash flow generation in combination with our debt capacity, continue to position us well to consider additional strategic opportunities. At the same time, we are pleased to have the continued financial strength to opportunistically repurchase shares. As of December 31, 2016, we had repurchased 7.5 million shares for approximately $106 million. That leaves approximately $94 million available under our remaining share repurchase authorization through the end of 2017. Now I will address our outlook for 2017. In fact this is really a tale of two halves which we have illustrated for you on Slide 7 in our supplemental earnings deck. The net effect of our full year guidance obscures the fact that we see Inovalon returning to double digit organic growth in the second half of 2017. Importantly, this is not just the result of growing area under the curb of signed business from 2016 and early 2017, but moreover a resolution of countervailing headwinds which we spoke. Two important points to make. First, we see an acceleration of organic growth from the third to the fourth quarter of 2017 but on a dollar basis, this is more of a gradual improvement not a hockey stick. Second, we have better visibility to our 2017 guidance coming into the year than in prior years. At our investor day in December, we discussed with you the headwinds that impacted our 2016 results. Specifically the one off ACA related headwinds, the transition of our CARA product and the delayed sales and marketing ramp. These headwinds cumulatively had more of an impact in the second half of 2016 and particularly in the fourth quarter of 2016 which we consider the low watermark for our growth, importantly now behind us. While the ACA related headwinds has anniversaried as of the end of 2016, we had previously indicated we expected the impact of other headwinds, particularly our CARA product transition, to continue in the first half of 2017. These headwinds are continuing to play out as we expected. As a result, first half 2017 revenue is expected to decline by approximately 6% year-over-year on a reported basis at the midpoint or by approximately 11% year-over-year on an organic basis. These number reveals the decelerating nature of the headwinds, specially the second half of 2016 saw revenue decline of 11% year-over-year on a reported basis and approximately 18% organically. At the same time, as Keith discussed earlier, we continue to see a number of significant positive forces in our business. Tailwinds that in fact have been building since early 2016, these include our investments in sales and marketing and product innovation driving expanded sales pipeline and client and statements of work base. The successful introduction of new product platforms and our continued successful expansion into adjacent markets. As the headwinds we have discussed diminish, we see revenue growth returning and with that improving profitability in the second half of 2017. More specifically, second half 2017 revenue is expected to grow approximately 17% year-over-year on a reported basis at the midpoint or approximately 11% year-over-year on an organic basis. And driven by our continuing efficiency initiatives including greater automation and interconnectivity as well as our growing mix of higher margin platform offerings with lower or no labor-based components, second half 2017 gross and adjusted EBITDA margins are projected to increase to approximately 67% and 26% respectively. Representing an expansion of 410 basis points and approximately 590 basis points respectively in the second half year to year. Touching briefly on the expected quarterly revenue seasonality in 2017, I refer you to Slide 8 in our supplemental earning deck. Given the introduction of multiple new platform products and our expansion into several market adjacencies as well as timing issues related to the ramp up of new work and the previously discussed CARA transition, we expect seasonality to play out a bit differently than we have seen historically introducing less variability in both revenue and profit. So in light of the factors I have just discussed, the combination of these materially different halves in 2017 yields full year guidance as follows. Revenue is expected to be between $440.5 million and $455 million. Net income is expected to be between $19.5 million and $24 million. Adjusted EBITDA is expected to be between $105.2 million and $112.5 million. Non-GAAP net income is expected to be between $42.2 million and $46.6 million. Diluted net income per share is expected to be between $0.13 and $0.16, and non-GAAP diluted net income per share is expected to be between $0.28 and $0.31. We have provided bridges for 2017 revenue and adjusted EBITDA guidance on slides 9 and 10 of our supplemental earnings deck, consistent with the format we used at investor day. Turning to revenue on Slide 9. As we have previously discussed, we typically see a normal level of client churn each year and the six points we see in 2017 is consistent with historical ranges. The CARA transition impact of 7 points is also consistent with the impact we saw in 2016 as it tapers here in 2017. We expect revenue growth from up sell and cross sell activities to return to historical norms we discussed at investor day. And finally, we have separated out the revenue growth contributions from new client sales and from the acquisition of Creehan in order to better illustrate the inorganic contribution to our revenue growth. On Slide 10, we address our adjusted EBITDA margin expectations based upon our 2017 adjusted EBITDA guidance. Consistent with what we have previously discussed, we see 2017 adjusted EBITDA margin expansion of 50 to 150 basis points over 2016 levels, or approximately 100 basis points at the midpoint. This is achieved despite the first half still being subject to the winding down of headwinds and the launches of a number of new engagements. Driving this improvement is expected gross margin expansion of approximately 450 basis points, driven by technology efficiencies and improving mix of new platform products we discussed earlier as well as some G&A efficiency as we manage our overhead expenses. The gross margin improvement and G&A efficiency will be partially offset by ongoing investment in our business. Specifically in sales and marketing and ongoing innovation also consistent with our prior comments. Finally, before I hand the call over for Q&A, I want to clarify what is included and what is not included in the 2017 guidance I just discussed. First, as I hope was clear on Slide 9, Inovalon's 2017 guidance excludes the impact of any acquisitions that have not yet been announced or consummated. Put simply, Creehan is in and anything else that we have not announced is not in. Second, while our sales pipeline continues to contain a number of potentially significant strategic platform opportunities, which we are very excited about, our 2017 guidance does not assume a significant contribution from these opportunities. With that, let me turn the call back to the operator to conduct our Q&A session.

[Operator:]

[Operator Instructions] Our first question comes from the line of Andre Benjamin from Goldman Sachs.

[Andre Benjamin:]

Two quick ones. First is, how do you think about the impact of your increased EHR connectivity on the revenue growth versus margin, and any insight into how your level of penetration compares to some of your competitors.

[Keith Dunleavy:]

Andre, good evening. Good to hear from you. Thanks for making the time for the call. So two parts to your question. Margin and revenue, if I understand correctly, and our penetration into the marketplace. So connectivity has been growing, as we pointed out quite correctly, up over 400% during the year and we see that continuing to expand here in 2017. We view the connectivity as predominantly being a capabilities expansion, a differentiation expansion, and a speed to calculate and access data expansion. So the connectivity itself is not directly a revenue driver but rather a market differentiator and capabilities enabler as well as an efficiency improvement. So revenue, there is not a significant revenue driver connected to it directly, for clarity. On the efficiency though, there is significant efficiency gains by it. First of all, our products continue to shift towards more platform focused products. As we listed in our prepared remarks, the vast majority of our product rollout over the last 18 months has been pure cloud-based platform offering and the direct connectivity into the marketplace is dramatically enhancing and differentiating those capabilities and decreasing our costs in the marketplace. Decreasing them because we see an acceleration in compute times and therefore an accelerated automated nature of our compute times. Decreased labor component of either contacting or dealing with a provider site, or a hospital system or another directly connected resource. So, hopefully that answers your first part. Directly to the penetration rate, there is a lot of different data out there in the market place as far as how many different EHR types, brands there are, how many providers are on them. We see our penetration at this point in the neighborhood of north of around, it's calculated in two different ways. One is direct connection today and the other is technical capability to connect when requested to buy a client. So slightly two different things. The ability to connect, we now are at approximately or in the neighborhood of 50% to 60% of the marketplace by connectivity type. As far as active connection, we have put the number that we are now over 100,000 providers directly connected as of January 1. That number continues to climb. So the best latest think of the direct connection penetration, meaning active right now and electronic can go back and forth between our systems, at roughly 100,000 of the nation's approximately 700,000 really active providers in the marketplace. So total number of physicians in the marketplace crests over 1 million but the number that see the vast majority of patients are in the roughly 700,000 number. 600,000-700,000 number. So we have a significant amount of penetration but also a significant amount of additional connect capacity when somebody signs or so on. Chris, you want to add anything?

[Christopher Greiner:]

Yes. Hey, Andre, it's Chris. Just kind of put numbers to the interconnectivity. We think of our gross profit margin expansion and specifically the efficiency initiatives that encapsulates our gross profit margin expansion really being driven in three areas. Interconnectivity being one of them and a very important one but also along with automation and integration and when you -- I would just refer you to page 10 in the supplemental. We think of the three of those as driving our efficiency initiatives which would contribute between 200 and 400 basis point of expansion. That coupled with the platform products that bring with it a higher margin profile, contributing between 300 and 600 basis points and the two of those more than covering the unit price changes that we have also laid out here and expect to continue with.

[Andre Benjamin:]

Thanks. And if could, just one last follow up. Any updated thoughts, given you now have formal 2017 guidance, on the ability to hit the $1 billion in revenue and 40% EBITDA margins by 2020? Just how we should think about whether or not that is still achievable and what you'll need to do in terms of accelerating to get there.

[Christopher Greiner:]

Thanks, Andre. Great question. Let me first start off with clarifying within the release as well as in our prepared remarks with what's included and what's not included and just establish a base line first. I think it’s important to note that what's not included in our guidance range of 440 to 455 are announced acquisitions. What's also not included are any large significant platform opportunities and I am happy to cover that as a follow up, but just want to make clear where we are starting from as a base line. That being said, we think about our 2017 and how that revenue builds, we are pretty optimistic and that optimism comes from really three different forces in play. First, is an improved level of clarity and visibility into the business. And I think that’s a testament to the sophistication of the models and the systems that we are driving. Really credit there to our sales operations group and our planning organization. They are giving us better headlights than we have had before. Second, we have done a lot of work. Heavy lifting, heavy investment to rollout and enter into new market adjacencies and with that, obviously it brings with it significant new platform product releases. And that combination of the two really allows us to distribute more of revenue growth across a bigger base. So that takes obviously some risk off of the table and diversifies where growth has to come from across our different revenue streams. But really, I think third and most importantly in this, and we hit this in the prepared remarks, is the resolution of the headwinds that we have been living with now for about four quarters that we see subsiding in the second quarter. So it's as much those going away as it is the tailwinds that we have been trying to highlight that have continued to gain traction and gain momentum that then become more visible in the second half of the year. So the combination of better clarity, more diversification of our revenue stream and the abatement of the headwinds allowing the tailwinds now to be more visible, that really drive the growth over the course of the year. Now in terms of '18, we kind of a have a mantra in the company, every day is like a week, every week is like a month, every month is a quarter end and every quarter end the year end. So it's one day at a time. We are excited about where we see '17, the visibility that we have but we are going to take care of, one put in front of the other first before we cover '18.

[Operator:]

Thank you. And our next question comes from the line of Ricky Goldwasser from Morgan Stanley.

[Ricky Goldwasser:]

Thank you for all the additional details that you provided today. So just as we think about both like longer term and near term, starting with '17, how should we think about the margin expansion in the guide? Like of what's driving it? You talked about sales force, are you still expecting to spend more in sales and marketing now that you have the infrastructure in place? Let me start there and then I have some additional questions.

[Keith Dunleavy:]

Ricky, thanks for the question. Certainly our intention was to really hit on a lot of those things in the prepared remarks and in the supplemental slides but let me hand it to Chris to run through those again.

[Christopher Greiner:]

Thanks, Keith. Ricky, good evening. Let's first start with gross profit margin. So as you can see on Slide 10 of the supplemental, in our view of how we ultimately expand adjusted EBITDA margins at the midpoint of 100 basis points within that, is really solid gross profit margin expansion, driven by two different dynamics. First the efficiency initiatives. Those efficiency initiatives have been present, frankly, throughout 2016. They continue if not slightly accelerate in our models here at between 200 and 400 basis points of contribution. Those efficiency initiatives coupled with the improving mix that we anticipate because the new product platforms that Keith mentioned in his prepared remarks, there is no labor based componentry to those. So with it they drag a significant accretive margin to overall Inovalon margin profile. Those two forces, those two positives cover what we continue to see our unit price changes in our environment. That will contribute to the gross profit margin expansion that we see in the neighborhood of 450 basis points. With respect to our investments in expense areas like sales, like R&D and G&A, I think you should think of it as follows. The general [EDR] [ph] that we have been seeing the sales hit now at about 7%, that will continue. We should continue to expect that in the 7% of revenue range for 2017. Likewise, R&D will continue in that range. But we will get some G&A efficiency next year of around half a basis point, or I should say 50 basis points to 100 basis points in '17. So better efficiency and overhead by continuing level of investment in sales and marketing and R&D.

[Ricky Goldwasser:]

And when we think about this unit price change, is that related to new customers that you are bringing on board or just repricing off the existing core business? How should we think about that?

[Keith Dunleavy:]

So unit pricing is really tale of two different worlds. We typically see the renewal of core business typically goes through a unit based adjustment with each time that a client renews. And then new products that we bring onboard are typically at a more beneficial price point, higher value for the client, higher value for the company as well.

[Ricky Goldwasser:]

Okay. And is 2017 kind of a typical renewal year from your perspective?

[Keith Dunleavy:]

In fact 2017 is a light renewal year for us. So we see fewer renewals in 2017 than we historically have seen.

[Ricky Goldwasser:]

Okay. Great. And then you highlighted, and we talked about that at the beginning of last year, about just the impact from ACAs in the [indiscernible]. Any thoughts of what you're hearing, like feedback, from your customer base as how they think about the potential changes to the Affordable Care Act? Obviously, there's a lot of uncertainty there, so I'm not sure that anybody has the crystal ball but any thoughts there would be helpful.

[Keith Dunleavy:]

Sure, Ricky. We have really seen no change in the purchasing behavior of the marketplace. And I am saying that across really payers, providers, and pharma. We have certainly heard that some other people have made comment to those sort of things. We have not seen that in our client base that is in our existing client base with whom we are in discussion with, obviously, on nearly a daily basis as well as things that are in our pipeline. So we are not seeing any meaningful change and in fact, and this part is more anecdotal really, but if you are looking for the spirit of what we are seeing, we are actually seeing an increase in activity. We have been talking a lot about whether or not that might be in the aftermath of some of the large M&A actions being turned down that has changed some of the behavior within various different tiers of the marketplace. Or whether or not that is the settling down after the election. We can only hypothesize as to what's causing it but we are actually seeing anecdotally an increase in interest and activity from the marketplace.

[Operator:]

Thank you. And our next question comes from the line of Matthew Gillmor from Robert W. Baird.

[Matt Gillmor:]

I wanted to pick up on something Chris mentioned, and I think it was really helpful from a guidance perspective to exclude M&A. But you mentioned that guidance does not assume a significant contribution from pipeline opportunities. So can you just help us understand how you're thinking about that? And I guess the reason I ask is the account growth. I think you had seven points that you're assuming for this year versus three to four from last year. So just understanding about what's included from a pipeline perspective.

[Christopher Greiner:]

Matt, thanks. And thanks for the feedback. So when we say, does not include any significant platform opportunities, it really means something larger than what we typically see. So if it's binary in nature, we have not assumed it in our guidance. So in effect, nothing that really changes the arc of the growth curve. When you think about account growth, traditionally, we shared at investor day, we typically see between 6 points and 8 points of our growth from cross sell and up sell activity. And you could see through what we have presented in our supplemental deck, that landed right in the middle of the range for 2017. So we are comfortable with it.

[Operator:]

Thank you. And our next question comes from the line of Steven Valiquette from Bank of America Merrill Lynch.

[Steve Valiquette:]

Just a couple of quick ones for me here. First, just thinking about your revenue breakdown a little bit differently. You mentioned in the press release that the top ten customers accounted for 68% of revenues in 2015 and obviously only 62% in 2016 but with your overall revenues being down in '16, that obviously means revs from the top ten customers were also down. Just curious if that was tied more to the co-op situation, or was that perhaps more from the CARA transition? Or was there maybe some other factor that was primarily impacting the revenues coming from those top ten customers in 2016? Thanks.

[Keith Dunleavy:]

Steve, thanks. Let me make sure I hit your points here. So first, just to review the customer concentration numbers, let's go back a few years. Something that we have been committed to focus on for some time. Back in 2015, I want to make sure I hit this right, '14 actually. 2014, it was 76%. Then in 2015, we dropped it to 68% I believe and then last year in 2016 down to 62%. Only one client larger than 10% of revenue in 2016. So we have also dramatically increased the client count to 460 something, I believe close to, coming up on 500 here in client count. So increased number of clients, decreased concentration in our top ten. Still have a large top client but we are seeing really nice progress. And that theme is definitely continuing here in to 2017 where, I think you have heard, we are looking at quite a nice number of expansions. One that we added here in the release here today.

[Steve Valiquette:]

Okay. Just one other quick one. You guys have been pretty open about highlighting over the past year that you had some of those ACA related impacts on the business for 2016, which I think was tied to some of the softer enrollment in some of the lower health plan participation in the exchanges for '16. Just curious how some of those same dynamics may impact Inovalon for 2017 since the numbers that we saw, I think unfortunately some of the health plan participation in enrollment exchanges seems to be soft again for 2017. So curious to get more color on that as well. Thanks.

[Keith Dunleavy:]

Yes, Steve. Happy to comment on it. So it's February 22 and the way open enrollment works, certain lines of business, meaning Medicare, Medicaid, commercial and ACA, have different firmness in the numbers because of how some of the regulations work. Easy example being, under the ACA you need to have a certain number of months of premium payments before you are considered squarely into an ACA population. Similarly, some states don’t report on the Medicaid enrollment for a little time into the year, Medicare Advantage. Most of those are ironed out this many years after the modernization act but still you can see some bumpiness. So the numbers I am going to reference here in a moment are preliminary, they are not our final numbers as we won't have final numbers from all sources, federal, state and client for a little while longer here. We will be sure to comment on them after Q1. Across the board we are seeing very dramatic increases in membership. In Medicare we are significantly above national growth levels. Really even we are looking at a multiple of national growth levels. Medicaid, we don’t have enough of those numbers in -- I mean we know what we are looking at but we want to firm it up before we start quoting how much growth we are seeing there. Commercial, huge, huge growth in our membership population. Again, still preliminary so we are not going to put a number on it but dramatically above national growth levels. And ACA, also still preliminary but very significant double digit growth. Very significant double digit growth. So in all of our population types that we care for or provide platforms for, that we can comment on as of this point, Medicare, commercial and ACA, nothing even close to market growth levels, just dramatically higher than market growth levels.

[Operator:]

Thank you. And our next question comes from the line of Sean Wieland from Piper Jaffray.

[Sean Wieland:]

So the whistleblower lawsuit [indiscernible] that was unsealed last week. What's been the reaction by your customers on that? How do you see that impacting the overall risk adjustment market and specifically your positioning?

[Keith Dunleavy:]

Sure. Thanks, Sean. Let met walk through a few points on that. So first of all, the case itself is not a new case. It was filed back in 2011, I believe October of 2011. It's a type of case that’s often found as I am sure we are very familiar, entirely without merit. After having the case for five years or so, the DoJ has unsealed the case and as you know, has indicated that it desires to intervene with only two of the 15 names defendants. Specifically, United and WellMed. And WellMed evidently, I understand, is an affiliate of United. So really it's just one payer organization. For clarity, Inovalon has never provided any services of question in the case to United or WellMed and we have no know affiliation of the whistleblower who drove the case, who we understand is a employee of United. So further, while we can't confirm whether it's related or not, shortly after the dates that we now know are associated with the filing of the case, we were contacted by the DoJ and requested the voluntarily answer your questions and provide information on the topics that were outlined in the case. We, of course, did so with full cooperation and the DoJ has no further questions for us and we haven't heard from them on the case in years. So we don’t expect any significant impact. We have not received any concern from our clients. Our clients are quite used to the risk adjustment marketplace and have been always really focused on compliance and I think very much view Inovalon as a leader in compliance and business ethics. It's enormously important to us, everything about the design of our products, the design of our processes, how we train, how we look at all of our performances, compliances and business ethics are extremely top of mind for us and for our clients. Have been for years. Something we are quite proud of. I would even call us something that we are very much a market leader in those areas. So really we appreciate the importance of the topic. Always have. But we don’t expect any significant impact from our business to result from the case.

[Sean Wieland:]

Okay. Thanks for those comments. Chris, a question on the guidance. I don't think I heard you say this, specific on what percent visibility you have on the '17 revenue out of your existing backlog and contracts today and what was that number in '16?

[Christopher Greiner:]

Hey, Sean. Good to talk to you. I know this is something that you and I chatted about, I think at investor day. It has been something since then that we have dug into and, frankly, have really evolved our thinking and methodology on how to calculate it. What would not be helpful, frankly, is sharing a number because that number with context would be apples to oranges. And that’s important because when you think about the core Inovalon product portfolio, that has a certain backlog profile, if you will. The new platform products that we are rolling out had a different backlog profile as does our recent acquisitions and their unique business model. So it's tough right now from a history perspective to read into a number. It's something that we are going to continue to sharpen our own pencils here internally. We know it's a viable metric, by the way it's viable for us to, but we want to built some history first before we start speaking to that more publicly. But back to, I think the root of your question is, what gives you the clarity, the clarity that we have now is the ability to spread more of revenue across a more diversified portfolio of growth. The improved visibility that we have because of the sophistication in our metrics and systems and processes, those lead us to see '17 as we do. Not a hockey stick, it's something that we have been growing at, if you will, for many quarters now. If you look at second half '16, I think the growth rate was down 11%. First half '17 is down 6% and you come out of it in second half. So not counting on the hockey stock. We know we have lived with that before but we are confident that we have got better visibility than we had in prior years.

[Operator:]

Thank you. And our next question comes from the line of Frank Sparacino from First Analysis.

[Frank Sparacino:]

Just one from me. Just want to go back to CARA for a moment and I guess this follows up on some of the prior questions. But, historically, I assume most of those agreements have been multiyear arrangements, so in any given year you have a certain set of customers coming up for renewal, and I know you stated 2017 was a light year. But what I'm trying to figure out is your confidence that that's not an issue that reappears again at some point here in the future. I'll leave it at that.

[Keith Dunleavy:]

Thanks for the question, Frank. Appreciate it. Thanks for joining the call. So a number of different things. So if you remember back to last year, 2016, in association with the CARA next generation initiative, if you will, migrating that platform to a more modular, more flexible approach for our client. You might remember that we spoke of it as sort of tearing off a band aid on that client base. So that did a nice job of clearing the deck on contract renewals that might otherwise come up because we were proactively in many cases going out to organizations and saying, let's do x, y and z and roll you into a new version of the offering. So we have a very nice line up of clients contracts strength here in 2017 and going forward. So with an average of around three years with 400 and some clients, we always have contracts coming due of course statistically every week we have contracts coming due. But we see ourselves as in really good shape on that topic. We addressed it, we believe in the right way. We are getting nice traction now. We are not only nice and in good shape with our existing client base, that new product offering is selling nicely with good traction into the marketplace. So part of your question was, could we ever see that happening in the future. It's tough for anybody to hypothesize on, can anything ever happen in the future. Of course anything can happen in the future. But you go through and you learn from these processes, that was the only major product that we have that hadn't gone through an ongoing revision. You might remember supplemental materials we gave back then, looked at how frequently we typically upgrade to a new technology or a product offering, QSI being a great example. Having gone through many evolutions in the marketplace and that was contrary to the way we had life cycled the CARA product. So our typical products are very much life cycle advanced. Bring in modularity of cloud based nature and so forth. And CARA hadn't gone through that. And that caused a lot of the trouble that we saw last year. There is not another product sitting out there that has those characteristics to that degree. We don’t see it happening again in the future. Can I see around, three years around the bend, I don’t have that ability but we don’t see anything else there that can cause this.

[Operator:]

Thank you. And that concludes our question-and-answer session for today. I would like to hand things back over to Dr. Dunleavy for any closing comments.

[Keith Dunleavy:]

Thank you, Karen. With that, I will just take the opportunity to thank everybody for being on the call. Before we conclude, I will hit on three themes, if I could. Number one, previously conveyed headwinds are resolving. They are resolving as expected. Number two, we are seeing a lot of strength in our business. Lot of strength in multiple lines of business and they are accelerating. Not just the membership basis that I commented on but the number of products and the number of adjacent spaces. Strong connection capabilities, strong dataset growth and expansion, strong innovation expansion. All of this is supporting a significant expansion in client base count, SOW count and so forth. Number three, we see ourselves returning to those historical growth rates. So, yes, these quarters that we have now put behind us were not enjoyable to see things go in the wrong direction, but we now see us existing 2017 with strong teens growth. And that is without us including additional acquisitions and it's without us including what we see as some very significant platform opportunities that we are not folding into our projection. So we feel very strong as we sit here today, financially. Very strong with our client base. Very strong with our innovation track record and we are looking at what we see as a very positive year ahead of us. With that, I look forward to updating you after the first quarter and we really thank you for your time tonight. Good night.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.