Innovator Intl Developed Power Buffer ETF

Kim Collins - Senior Vice President of Corporate Marketing & Communications Jonathan Boldt - Vice President of Finance and Interim Chief Financial Officer Keith Dunleavy - Chairman and Chief Executive Officer

Donald Hooker - KeyBanc Capital Markets Inc. Sean Wieland - Piper Jaffray & Co.

Rivka Goldwasser - Morgan Stanley James Stockton - Wells Fargo Securities Frank Sparacino - First Analysis Securities Corporation

Good afternoon. This is Kim Collins, Senior Vice President of Communications at Inovalon.

I'm here today with Dr. Keith Dunleavy, Inovalon's Chief Executive Officer and Chairman of the Board; and Jonathan Boldt, our Vice President of Finance and Interim Chief Financial Officer.

I'd like to welcome you to our third quarter 2018 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 the remarks made herein are as of today, November 7, 2018, and will not be updated subsequent to this initial earnings call. I'll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995, including statements related to future results of operations and financial position, our business strategy and plans, market growth and our objectives for future operations.

Those statements involve a number of factors that could cause additional results to differ materially. Additional information concerning these factors is contained on the Company's earnings release and filings with the SEC.

In an effort to provide additional information to investors, this conference call and webcast is accompanied by a presentation, which is available on the IR section of our website. You are encouraged to download a copy of this presentation to follow along with our prepared remarks.

Our presentation also includes certain non-GAAP financial measures. You'll find definitions of these non-GAAP measures and reconciliation charts at the end of the Company's earnings release and on the Company's website.

Now it is my pleasure to turn the call over to Dr. Keith Dunleavy.

Thank you, Kim. Good afternoon, everyone, and thank you for joining our call.

Inovalon is seeing a strong inflection in its business, with the unique data, connectivity, analytics and compute speeds of the Inovalon ONE Platform seeing increased demand in the marketplace, providing differentiation and value for our clients and growth and profitability for Inovalon. While the transition to recognizing the growth that we have now signed for 2019 has taken a somewhat slower ramp than we wanted for 2018, our focus of putting in place the industry's leading platform is paying off.

As part of today's release of information, we are pleased to be introducing a number of new metrics, annualized contract value, or ACV in sales; annual recurring revenue; and annual client retention. We hope that you find these helpful in understanding the inflection that we are achieving and the strength in our business that we are seeing.

We encourage you to download the supplemental deck that we have provided to accompany today's release and prepared remarks. Revenue for the quarter was $145.8 million, an increase of 26% year-over-year.

This revenue was below our previous expectations due principally due to factors: number one, the timing of new and expanded business engagements that are being signed later than we have previously expected; and number two, the impact of our transitioning of substantially the remainder of our legacy business to subscription-based contract structures and the associated decision to no longer pursue legacy contracts. I will go into this more in a few minutes.

During the quarter, the differentiated value of our platforms and the technology-based efficiencies of our business continued to drive the expansion of our margins. Gross margin expanded significantly to 75.0%, an increase of 820 basis points compared to Q3 of 2017 and up 50 basis points from Q2.

Adjusted EBITDA was $52.4 million, up 70% from the year-ago quarter and consistent with Q2 on a dollar basis. And adjusted EBITDA margin of 36.0% also expanded significantly, up 940 basis points from Q3 of last year and up 140 basis points from Q2 this year.

Cash flow from operations during the quarter was a strong $42.9 million, even including the one-time outlays associated with the ABILITY acquisition and recent restructuring. We continue to successfully navigate the transition to a subscription-based model, with subscription-based platform revenue growing organically 2.6% sequentially and 8.6% year-over-year, representing 83% of our total revenue in the quarter.

We saw a strong adoption of the Inovalon ONE Platform during the quarter, evidenced by strong growth in signed annualized contract value, or ACV, and the number of new logos as well as notable progress in renewal performance and client retention. These factors are contributing to significant increases in the visibility and predictability of our business going forward.

This is enabling us to provide 2019 financial guidance much earlier than usual, with higher levels of signed business going into 2019 than any previous period. Now let me discuss in more detail the following areas: number one, the transition to subscription-based contracts; number two, strong increases in client retention; number three, strong increases in new sales; and number four, the resulting visibility into our strong 2019.

First, Inovalon continued to make good progress, transitioning its revenue to subscription-based platform offerings. In the third quarter, we generated 83% of revenue from subscription-based platform offerings, an increase from 78% last quarter and a more notable increase from 66% in the third quarter of 2017.

Excluding the contribution from ABILITY, organic subscription-based platform revenue grew 2.6% sequentially from the second quarter of 2018 and 8.6% year-over-year versus the Q3 period of 2017. This growing base of annual recurring revenue is an important foundation for increased visibility and predictability in Inovalon's business going forward.

As we have noted before, the transition from legacy to subscription-based contracts results in a short-term negative impact to our revenue, which is one of the factors behind our lowering of 2018 revenue expectations. Specifically, during the third quarter, we converted substantially all remaining legacy contracts to subscription-based contracts and also discontinued the pursuit of additional new legacy contracts.

While these decisions had an impact on our third quarter results and our full year 2018 expectations, as mentioned, legacy revenue is now expected to be only approximately 7% of consolidated revenue at year-end, making the conversion of legacy to subscription-based contracts substantially complete. And given that the remaining amount of legacy business is relatively small and essentially with organizations that prefer legacy structure, we see the issue of the associated negative revenue conversion impact as now essentially behind us.

Second, the benefits of our investments in the highly differentiated capabilities of the Inovalon ONE Platform, in conjunction with our technology, client services and sales support teams across the organization, are driving very favorable renewal performances and significant improvements in our annual revenue retention rates as we look into 2019. Specifically, over the past two years of 2017 and 2018, we experienced a negative client churn rate of approximately 5%, translating into an annual revenue retention rate of approximately 95%, reflected in a 5% negative headwind to revenue.

This negative churn has now given way to a positive existing client base expansion. With 10 months of the year completed, we have achieved very positive client renewal rates and organic expansions within our existing client base, such that the annual revenue retention rate for 2019 is now expected to be approximately 103%.

This 8% positive swing from negative churn to positive client base expansion sets a positive rising foundation base to 2019. Third, many of the strengths that are supporting strong contract renewals are also supporting strong sales.

The Inovalon ONE Platform's differentiation in the market, combined with the growing size and sophistication of the Company's sales engine, is translating into meaningful contract signings. Through September 30, Inovalon signed a significant number of engagements with existing clients as well as engagements with 82 new logos, a year-over-year increase in new logo count of 28%.

Translating it to revenue equivalent, the ACV sold during the quarter, excluding ABILITY, was an impressive $62.3 million and $139.9 million year-to-date, amounts that reflect 60% and 50% increases, respectively, when compared to the year-ago periods. Excluding both ABILITY and services, the ACV sold during Q3 was $52.1 million and $96.2 million year-to-date, amounts that reflect 101% and 91% increases, respectively, when compared to the year-ago periods.

The new engagements as well as those with existing clients can sometimes take longer than anticipated to finalize and sign, let alone implement and ramp. Particularly, as we approach year-end, such timing delays can have a meaningful impact on near-term revenue or our current in-year revenue, as the case happens to be, while reliably yielding the full expected revenue run rates once in place.

That is the situation we are experiencing as the third quarter progressed, which along with the impact of the transition of legacy to subscription-based contracts I discussed earlier, led us to lower 2018 financial guidance. Importantly, these engagements have now been signed and are transitioning into implementation, which is the key factor giving us significant visibility into 2019, even at this early date.

In addition, while our lower 2018 revenue outlook has some flow-through impacts to adjusted EBITDA, we are very pleased to continue to deliver strong margin performance as a result of our increasing mix of high-value offerings as well as our technology-based efficiencies and other cost actions. Which brings me to number four, strong positive visibility.

We have spent the greater portion of the past three years investing in the transition of the company to a cloud-based subscription-based platform company. We have navigated through the revenue decrease that accompany such transitions and experienced the margin impact from the invested process and the market competition before having the full differentiated platform in place.

During that time window, we successfully added great capabilities to the company through both innovative technology development and through the acquisition of industry leaders, allowing us to bring to the marketplace the highly differentiated offerings of the Inovalon ONE Platform. We are now substantially through this transformation and are experiencing the benefits of having done so.

The growing base of annual recurring revenue, strong ACV sales, significant improvements in annual revenue retention and absence of abnormal headwinds, supports a strong revenue growth outlook for 2019 with significantly greater visibility than in the past. Specifically, we are providing 2019 guidance for revenue growth of 19% to 23%, including organic growth of 12% to 14%, and with revenue coverage of nearly 95% at the midpoint, well above the 85% level seen at the outset of the prior 2 years when we provided guidance in late February.

And importantly, this higher 2019 revenue coverage comes in the setting of a strong demand environment and healthy pipeline of opportunities for Inovalon. In addition, we also project continued margin expansion and healthy cash flow in 2019.

Finally, I would like to provide an update on ABILITY. Our integration of ABILITY continues to progress very well, both in terms of strong cultural alignment between the organizations as well as the achievement of costs and revenue synergies.

I am very pleased that we continue to have 100% senior management retention from ABILITY and continue to see many benefits from our people working closely together. In addition, we have nearly achieved the entirety of the $8 million in cost synergies that we expected for 2018 and are on track to achieve the full $11 million run rate that we expect for 2019.

Lastly, I'm pleased to report that we have started to realize synergy revenues from the combination. And while it is still early days, we are excited about the synergy product pipeline we see before us as we head into 2019.

Before I hand the call over to Jonathan, I want to emphasize the strong progress we are seeing in our business. We understand our reduced 2018 outlook will be met with disappointment and our 2019 outlook perhaps with some skepticism.

However, we are achieving a meaningfully positive inflection in many metrics across the business: client renewals, client retention, new contract sales to name just a few, indicators that we are now quantifying for you in more detail. These positive metrics are also coming with strong increases in profitability and healthy cash flow.

Inovalon is providing a significantly differentiated platform within the marketplace, one that is empowering the health care ecosystem's leaders in their transformation to data-driven health care. The market is recognizing this, and the financial performance of the company is following suit.

We're very excited about what we are achieving with our technology and with our clients and the translation of this to our financial performance going forward. With that, let me ask Jonathan to review our third quarter financial results and discuss our financial outlook in more detail.

Jon?

Thank you, Keith, and good afternoon, everyone. I want to begin by highlighting a few key points building on Keith's comments.

First, we continue to successfully transition our revenue base to subscription-based contracts and have substantially completed that process as we enter 2019. Second, our ongoing investments in high-value, differentiated platform-based solutions, technology-based efficiencies and other cost actions continue to yield strong profitability expansion and healthy cash flow.

And third, strong performance in renewals, client retention and new contract sales are building on our recurring base of revenue and providing us with significant visibility in 2019, where we see delivering 19% to 23% revenue growth, inclusive of 12% to 14% of organic growth, with nearly 95% coverage already in place. Clearly, 2019 is shaping up to be an impressive year.

Now turning to our third quarter results, third quarter 2018 revenue was $145.8 million, an increase of 26% year-over-year. Acquired revenue, which now only represents ABILITY's contribution, was $37.9 million.

We continue to see growth in our subscription-based platform revenue, which grew 8.6% year-over-year and 2.6% sequentially and now represents 83% of total revenue. As Keith discussed, during the third quarter, we transitioned most of our remaining legacy contracts to subscription-based contracts, which as we have discussed, generally have the short-term impact on our revenue.

To further accelerate and substantially complete this transition and maintain focus on our long-term business strategy, we also discontinued pursuing new legacy opportunities. The net effect of these factors resulted in legacy revenue being only 6% of total revenue in the third quarter and is expected to be only approximately 7% for the year.

We have provided additional details on our third quarter revenue performance on Slide 9 in our Q3 2018 supplemental earnings deck. As Keith mentioned, third quarter 2018 gross margin was again strong at 75.0%, a significant year-over-year increase of 820 basis points and up 50 basis points sequentially.

Excluding ABILITY, gross margin remained over 70% at an impressive 70.9% in Q3 2018. This represents a year-over-year gross margin expansion of 410 basis points and sequential expansion of 70 basis points.

Gross margin expansion continued to be driven by our increasing mix of high-margin subscription-based platform offerings and realization of our technology-enabled efficiencies. Our strong gross margin illustrates the significant leverage opportunity as revenue expands.

General and administrative expenses for the third quarter was $47.2 million, an increase of $10.9 million year-over-year and a decrease of $13.0 million sequentially. On a year-over-year basis, the increase in G&A was driven by $7.5 million of acquired G&A from ABILITY, which is lower than the last quarter, and $5.3 million of other non-comparable expenses, which was partially offset by a $1.9 million reduction in other expenses.

Adjusting for the other non-comparable expenses, normalized third quarter G&A was $41.9 million, well below the guidance range of $49 million to $53 million of normalized quarterly G&A expense that we previously provided. Pointing out the efficiency in another way, normalized G&A increased only 15.4% as compared with the year-over-year revenue increase of 26.1%.

Additional details are provided on Slide 10 of our Q3 earnings supplement deck. Driven by our expanding gross margin and lower G&A expenses, adjusted EBITDA in the third quarter came in at $52.4 million, an increase of $21.6 million or 70.2% year-over-year and sequentially decreased only $400,000 despite lower sequential revenue.

Adjusted EBITDA margin for the third quarter of 2018 was 36.0% compared to 26.6% for the third quarter of 2017 and 34.6% for the second quarter of 2018. The stronger profitability drove third quarter 2018 non-GAAP net income per share of $0.11, up 22% on a year-over-year basis.

Turning to the balance sheet, Inovalon ended the third quarter of 2018 in a strong financial position. As of September 30, 2018, cash, cash equivalents and short-term investments were $115 million.

Total outstanding debt was $980 million. Reported balance sheet debt was $951 million, net of issuance discounts and deferred financing fees.

And the company had not drawn any amount from the $100 million revolving credit facility. Of note, the Company's net debt ratio as defined within our debt agreement, remain under 4:1 as of September 30, 2018.

Turning to cash flow, net cash provided by operating activities was $42.9 million in the third quarter of 2018, up $3.1 million on a year-over-year basis and representing the strongest level of quarterly net cash provided by operating activities since Inovalon went public. For the first nine months of 2018, net cash provided by operating activities was $63.0 million compared with $80.9 million for the first nine months of 2017.

Notably, year-to-date net cash provided by operating activities includes $11.9 million in outflows related to acquisition and restructuring-related payments and $27.6 million in cash interest payments. CapEx was $11.3 million in the third quarter of 2018, down substantially versus the first quarter and second quarter of 2018.

While we will maintain investments in the business to sustain long-term growth, we continue to see a decrease in CapEx as a percentage of revenue from full-year 2017 and 2018 levels and after the launch of the Inovalon ONE Platform. For 2019, we expect CapEx, inclusive of ABILITY, to be $52 million to $58 million and down from 2018s expectations of $55 million to $60 million, and a decrease from approximately 10% to 11% of revenue in 2018 to approximately 8% to 9% of revenue in 2019.

Additional details on our CapEx can be found on Slide 27 of our supplemental earnings deck. Now let me turn to our outlook for 2018.

As Keith mentioned, we are revising our 2018 guidance due to three principal reasons. First, the timing of new business engagements, which were signed later than we had previously estimated; second, the combined conversion of remaining legacy contracts to subscription-based contracts and the discontinued pursuit of new legacy contracts had a 2018 revenue impact of approximately $25 million; and third, the flow-through impact of these factors to adjusted EBITDA as well as GAAP and non-GAAP net income and diluted net income per share.

There are three important points, I would like to make about our revised 2018 guidance. First, the associated flow-through impact to adjusted EBITDA is much less than our change in expected revenue, which illustrates the progress we are making in reducing our delivery and support costs.

Second, our cash flow guidance for 2018 remains unchanged. And third, the later-than-expected signings and conversions to subscription-based contracts, while having a short-term impact in the remainder of 2018, do not impact the contribution of the respective contract growth and expansion in 2019.

With that, let me turn to our outlook for 2019 and provide some key highlights. First, for 2019, we expect revenue of $637 million to $657 million, representing reported revenue growth of 19% to 23%, including organic revenue growth of 12% to 14%.

Second, we expect 2019 adjusted EBITDA of $200 million to $210 million, representing adjusted EBITDA margin expansion of approximately 220 basis points at the midpoint of 2018 and 2019 guidance. And third, we expect net cash provided by operating activities of $130 million to $145 million.

Given our expanding base of recurring revenue, improvement in revenue retention, the strong new contract signings Keith discussed and the absence of additional headwinds, Inovalon had significant visibility into 2019. Specifically, as of today, the sum of our annual recurring revenue base, legacy revenue under contract and expected services revenue provides coverage of approximately 94.5% at the midpoint of our 2019 revenue guidance range even at the early date of November 7.

To achieve our 2019 revenue guidance midpoint, we need to only capture approximately five points of additional revenue growth from new sales, which given the strong demand environment and healthy pipeline of opportunities we see, is reasonable. Please refer to today's earnings release and our third quarter supplemental earnings deck for details on our 2018 and 2019 guidance.

With that, let me turn the call back over to the operator to conduct our Q&A session.

Good afternoon. So I guess maybe my question, so you guys mentioned – I hate to waste my one question on this, but did you guys mentioned what ABILITY contributed in the quarter?

I would guess that's probably near $40 million or so.

Hi, Don. Good afternoon.

It was $37.9 million.

Okay, maybe that's the question.

Don, why don't you go ahead and feel free to ask another question.

Yes, and just it was kind of a quick one, right. So maybe when I think about just getting to the 2018 guidance, I mean there's still a pretty big swing.

Is that just timing of contract signings to get us started going into 2019? It's like from the top to bottom end of the guidance for the fourth quarter?

That's exactly right, Don. Thanks for joining the call by the way, and thanks for the question, but you hit it.

As we've signed a lot of business in the last couple of quarters and that's now in the process of ramping, and literally, at this ramp rate a few weeks, one way or the other way on that ramp, inclination impacts what actually gets recognized in the quarter quite a bit. But as you point out, once ramped, which we expect it to be ramped up by the end of the quarter, really has no significant impact on 2019 performance.

Got it, okay. Thank you.

Thanks Don.

How many questions do I get?

Sean, why don't you go ahead and shoot. We'll do the best we can.

Okay. So let's start with 2018 guidance.

Timing of new engagements signed later than expected and impacted transition for the remainder of legacy business. Those are the two buckets we're talking about for 2018, right?

That's right.

I mean, is that about a 50-50 mix between the two then it looks like?

So on the legacy conversion and the discontinuation of pursuing legacy in our pipeline that we're able to quantify at about $25 million impact through the second half of the year. The remainder and the reason why the range exists is the timing issue and the ramp associated with that.

So exactly when they signed and then a number of different processes need to happen to turn the signed contracts into the actual revenue that is not able to be as precisely nailed as the $25 million, hence the range because of when they actually started how they ramp.

But if you do sign that, you will recognize revenue associated with that?

They've all been signed. So it's all signed and in the process of ramping.

None of our projections there are contingent upon additional signatures, and the coverage or visibility that we've conveyed is solid and already at nearly 95% for next year. But for this year, we're not waiting on any signatures to achieve that range.

Okay. So here's one thing I don't understand, so focusing on the legacy for a minute.

What exactly is the transition away from legacy revenue? I see you're doing about – you did about $8.7 million in legacy revenue, big sequential step down, but a little step down from Q1.

You're still going to have to do more than $10 million in legacy revenue in the fourth quarter and you're going to have to keep doing about $11 million per quarter to hit that legacy revenue guidance. So it seems like the legacy revenue isn't necessarily going away, it's just flattening and what exactly is in that and why isn't it going away?

So a few different things in there, Sean, so first of all, you're right. It's not going away.

For the full-year, we expect it to be around 7%, down to about 7%. The legacy in 2019, those are already signed and in place contracts.

So that's not expectation to go sell. We're not pursuing additional legacy contracts.

So the contracts you see in place for 2019 projection are ones that have already been signed and are in place. So you're correct, there will be some legacy revenue in 2019.

Our estimation at the midpoint is approximately 7%. But again, those are with clients that have declared they want to keep it, they want to have it in place, and they’ve already signed.

It is in place.

Okay. I’ll leave it there.

Thank you.

Thanks Sean.

Yes. Good evening and congratulations guys for the guide.

A couple of questions here. First of all, if you can give us some color on just kind of the customer mix, where are you seeing most accelerated adoption and new wins?

And what's driving that on the client side? And then my next question is going to be on margins.

Ricky, thanks. Thanks for the question, thanks for the congratulations.

We are seeing strength in all areas of the business. Virtually, in every segment we're seeing strong ACVs, up significantly year-over-year.

We've broken them out in a few different places in the prepared remarks as well as in the actual release. Sometimes, we give year-over-year, sometimes 3Q, sometimes we give them with services, without services.

The intention there is that with a little pad of paper, you can see that each segment is growing quite strongly. The strongest two we're seeing a lot – well, really strongest three, I should say, is payer and provider as well as pharmacy.

But some of that is announced. As you know, we don't do that many announcements.

We conveyed that we've signed more than 82 new logos this year, up significantly. But yet do almost no announcements of those.

So strong ACV growth, we're talking 50%, 60%, 100% in some areas across the board in our different areas.

Okay. And then on the margin expansion opportunity, can you talk a little bit about just when you think about the visibilities you have, what's within your control versus depends on other factors?

And how should we think about the cadence of that margin expansion throughout 2019?

So the margin is being driven by a number of different things. So first of all, it's being driven by a mix shift to a higher-value, increasingly pure SaaS-based platform offering.

That higher value is being recognized by the client, meaning the client is achieving higher value, and therefore, we're able to achieve a higher margin profile with that mix shift as well. We're also successfully connecting a broader amount of the health care ecosystem, having greater efficiencies through that process, which is also helping us on the operating side.

We've achieved a lot of synergies with ABILITY, which is helping margins there, as you've seen. And we're on track for [2009] continuation.

In how to spread over the year, we've achieved a rather nice cadence of that. I'll turn to Jonathan to break it down a little bit more for the year.

Yes. As we continue to look through till 2019, we continue to see that margin expansion, continue to build upon it as we progress throughout the year.

Still delivering, obviously, the increased efficiencies we're seeing from our technology investments but continue to see that spreading nicely throughout 2019.

And perhaps, Ricky, the one other thing to throw in, if you look at the margin bridges that we provide in the supplemental deck, you'll notice that we're able to achieve these expansion margins and continue to invest more into strategic areas of the company. Most notably, investing in things like connectivity and the technology, but also our sales and marketing efforts.

So at this point, when you think about how the business is shaping up and the leverage, do you have kind of like margin goals? When we look at the slide that you provided, right, we think if you go back to where you were, treat margins around 35%, 37%.

So how should we think about just kind of that progression from 2019 level?

Great question. As we look at 2019, one of the ways we think about it is, not only are we showing the additional expansion of another 200, 220 basis points throughout the year, but if you think about how much we have layered on in areas to invest, most specifically sales and marketing, the normalized EBITDA, if you will, is about 8% higher than that.

So on a normalized basis, we're operating now at an EBITDA margin that is materially higher than we ever have before. But we continue to see expansion of that going forward.

We continue to see the ability to drive even higher areas of value for our clients, they're recognizing that. Some of the offerings with – synergistic offerings with ABILITY are rather promising.

And the continued application of data and analytics in a pure SaaS way is also being recognized as a really high-value area. So we're not done yet on expanding that margin, but we think for 2019, this is the right way to think about where we see the progression going through the year.

Thank you.

Hey, good evening. Thanks for taking the question.

I'll try to stick to one here. When we think about the 95% coverage, or I think maybe the $612 million number that you guys put in the presentation, from a contract renewal standpoint, what's the exposure there?

I would assume that not 100% of that is already under contract. If you could just give us some color around that, that'd be great.

Sure, Jamie. That is very close to 100% under coverage.

So anything that's not already under coverage has been agreed to in principle and is awaiting a signatory process or in the final stage. To put a number on that, it's about 3% of that is agreed to in principle but still waiting signature.

So that is a really solid, nearly 95%.

Okay. Thank you.

Hi. Just want to go back to an earlier question in terms of the new sales activity and where you're seeing momentum.

And if you could be more specific just from a product perspective, that would be helpful.

Hey, Frank, thanks for the question. So we've broken it out in a number of different ways in the release, giving platform, platform described in the prepared remarks, both the written and what we just delivered as the total minus ABILITY, minus services.

So that's going to break out for you pure platform elements that are going to be payer provider and pharmacy and pharma areas. Then, of course, ABILITY is provider leaving services.

We're not breaking out that ACV in the individual product areas, as increasingly, our clients really view their engagements with us as engagement on a platform and then which componentry or modules are they engaging to achieve the goals that they are looking to achieve. You'll see going forward that the health care marketplace has a mix of what an organization does.

There are some health plans that not only are servicing things like Medicare, Medicaid and commercial, but are also delivering specialty pharmacy services or also working with provider systems that they own. So it's not as much breaking it out by what you and I would call perhaps a branded product offering, but rather an assortment of modules across the Inovalon ONE Platform.

But we're seeing it quite strongly across the board.

Thank you.

So the ABILITY business, I was curious what the implied growth assumption is maybe from a pro forma revenue number in 2018 for that year-over-year in 2019.

So Jamie, thanks for the additional question. We're looking at it as roughly an eight to 10 sort of projection in our 2019 numbers.

Okay, that's great. And then maybe I'll throw one more in here, in case I'm the last one in the queue.

The 3% improvement in contract value year-over-year that I think you guys have talked about, is there a way for us to think about what the moving parts are there between what pricing looks like, which I think has obviously been the biggest issue the last two or three years. And then also kind of the upsell of additional functionality into these clients, if you could just maybe give us some flavor for how those two things are influencing the 3%, that'd be great.

Sure. Let me take a shot at that, and then you see whether or not I've answered it adequately.

That increase, first of all, it's really more than a 3% increase. We're seeing roughly an 8% increase year-over-year.

You might remember both 2017 and 2018, we referred to a term of client churn of roughly about 5% to 6%. That was clients leaving the portfolio and/or not expanding their business with us and the impact that, that had creating, obviously, a 5% to 6% headwind.

So the reversal of that phenomena is the result of multiple different things, each contributing separately. First and foremost, it's because the clients are seeing the products as highly valuable products to their business and they are therefore renewing.

Just plain and simple, our renewal rate was very high, very strong and consistently as such. Second of all, they're buying additional products from us, so we call that obviously cross sell.

And then additionally, you may have seen the press release a few weeks ago, clients that use the Inovalon ONE Platform for quality improvement, for instance, saw a dramatically higher benefit to their quality performance versus the rest of the country. I'd love to encourage people to look at that press release because it is, in our view, knowing how hard it is to move clinical quality performance, impressive.

But that generates a lot of additional financial performance for our clients, allows them to offer more at a lower premium or market more and often in many states or many areas, gives them a marketing advantage over their competitors, and they grow more, and their membership is up strongly. So all these factors, strong renewal strength at the table because they're getting great value, and also they're financially doing well.

Our clients are doing better than the not our clients in the marketplace, which also makes them want to do more with us and makes them grow faster than others. So all these are contributing.

So really, really positive. And I'll point out, Jamie, that that's 100.3% as of November 7.

So all of these coverage numbers are as of November 7. We're obviously selling more.

I signed another contract today. We'll continue to sign contracts as we move along in this year.

And obviously throughout all of next year, that we'll add to that coverage and add to the overall client base. So I'd like to thank everybody for spending time with us this evening.

As always, we really appreciate the time and interest with Inovalon. We recognize that our revision in 2018 guidance is disappointing and our overall 2019 outlook will perhaps be met with some skepticism.

But I'd really like to leave you with and emphasize three important points. Number one, we've achieved a meaningful transformation of the company to a cloud-based platform provider where we now have 83% of our revenue in a subscription-based manner.

The revenue implications of transitioning from legacy contracts to subscription-based contracts are well known in the software industry and they're now behind us. The market demand – the second point, for our data-driven platform is strong and growing, as significantly indicated by our numbers today, demonstrated in annual revenue retention rates that are now up at 103%, an 8% increase year-over-year.

And strength in our ACV sales, even excluding ABILITY and services, year-to-date, up more than 90% year-over-year, with third quarter ACV sales up over 100% year-over-year. And the third point, while we're ramping in the fourth quarter and we've now signed the business that we've been referencing.

The contracts and client base are now in hand. They support that visibility that we're seeing going forward.

Both on a reported basis, we expect 19% to 23%. On an organic basis, we're now seeing 12% to 14%, even at this early date of November 7.

And that's with strong profitability, profitability that's expanding, cash flow that's expanding even beyond what we saw this year. So I just want to emphasize these numbers, our ability to put these out as early as November 7, 2018, and a significance that, that means in our business inflection.

We've really crossed an important line, in our view, an important inflection line, delivering significant value for our clients and benefiting significantly from an industry-leading capability. We're excited about the year ahead and the financial performance that we look forward to demonstrating.

Thank you very much again for your time tonight. Good night.

End of Q&A