Q3 2020 Inovalon Holdings Inc Earnings Call

October 28, 2020

[music].

Good day, ladies and gentlemen, and welcome to the you know the <unk> third quarter 2020 earnings call.

At this time, all participants Arnie listen only mode later.

We will conduct a question and answer session. If you would like to ask a question. Please press Star then one now.

As a reminder, this conference is being recorded and now I'll turn the conference over to your host Kim Collins. Please go ahead.

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

I'm here today with Dr., Keith done Levy, another one's Chief Executive Officer, and Chairman of the board and Jonathan Bolt another one's Chief Financial Officer I'd like to welcome you all to our third quarter Twentytwenty earnings call.

The press release announcing our financial results for the third quarter of 2020 was distributed this afternoon and a replay of today's call will be available shortly posted on the Investor Relations page on another one'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 October 20, Eightth Twentytwenty 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 there.

Statements involve a number of factors that could cause actual results to differ materially I.

Additional information concerning these factors is contained in the company's earnings release and filings with the FCC.

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 will find definitions of these non-GAAP measures and reconciliation charts at the end of the Companys earnings release and on the company's website.

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

Good afternoon, everyone. Thank you for joining our call. Let me begin by saying I continue to be impressed with the unwavering devotion of the entire noble on team during the quarter and year to date together, they're helping bring many new industry, leading innovations online and drive meaningful value for our client.

As well as the millions of patients that they serve.

While we continued to do experienced pockets of COVID-19 related weakness no one's lower margin Nonsubscription legacy offerings and services business we.

Also continued to have very strong metrics in key areas sales renewals innovation profitability and the noble and is firmly on track to go live in the coming months with several substantive multiyear platform implementations that will drive accelerating revenue growth and further profitability expansion.

2021 and beyond.

There is no doubt that the short term topline performance of the third quarter was frustrating for me and for the whole team a steep specific COVID-19 pandemic response patterns impacted our legacy and services offerings, while the rest of our key performance metrics that we track to help guide us for the medium term and longer term.

Term continued to shine a path towards very strong top and bottom line performance is ahead.

I will let John elaborate further on the COVID-19 impact, but first let me provide you with some more insight into our outlook for 2021 as well as our technology innovations during the quarter.

As we continue to move through 2020 and navigate the COVID-19 environment, we have seen a continuous progression of innovation product launches and increased platform engagement by both a broader array of the healthcare ecosystem and larger and larger participants within it.

For several quarters now you've seen the success and momentum reflected in strong ACB growth with the third quarters trailing 12 months, new sales ACB totaling $253.2 million up 31% period over period and the same pattern continued in the third quarter.

Third quarter, New sales ACB totaled 58.5 million up 33% year over year, and new sales ACB per platform totaled 42.5 million up 51% year over year recall that ACB or annual contract value is a metric which reflects.

Only the first 12 months of expected revenue from new contracts signed during a period.

We continue to see steady adoption of the normal on one platform as multiple segments of the marketplace are turning to norbord towards data driven purpose built cloud based SaaS platforms.

As you know we've announced several notable wins so far in 2020, including Walmart one of the world's largest consumer retailers Cardinal health one of the world's largest medical distributors and one of the world's largest payers each of which entered into long term contracts for five to seven year durations with the payer.

Contract alone, resulting in a total contract value greater than a $150 million.

In addition to these announced marquee wins, we have secured multiple meaningful expansions of existing top 10 market clients and are in very positive discussions with several others.

These are industry, leading organizations, who currently have an overland solutions in place are familiar with what the market's alternative options are and are choosing to expand further with an overall.

All of these in hand, I am pleased to report that we are on track and completing the implementations of the multiple substantive long term engagements and are excited to see the layering effect of these large recurring subscription based SaaS revenue streams as they come online in the fourth quarter and early next year.

Being the way for a very strong and exciting 2021 and beyond.

In addition to a growing base of higher margin recurring subscription revenue year over year, and then the setting a strong performances and align coordination from our technology teams clients success teams and product teams I am pleased to report. They were also seeing impressive key performance indicators across.

The business, which include higher total renewal rates year over year, increasing client retention metrics pricing power favorable high value product mix shift longer term client commitments and positive underlying membership growth in Medicare and Medicaid.

As John will outline in our guidance. Shortly the net result of what we are experiencing translates into a strong organic revenue growth outlook in 2021 up 12% to 16% with further continued expansion of our operating leverage and profitability driving our adjusted EBITDA margin in two.

2021 up another 90 basis points to approximately 35.8%, resulting in year over year, adjusted EBITDA growth of approximately 15% to 19%.

Continuing to propel the accelerating growth and continued expansion and profitability as our strong success and innovation.

As key building blocks of the Inovalon one platform become increasingly pressure tested in honed. The addition of new capabilities is unlocking large amounts of opportunity said another way with the very solid foundations in place and a growing arsenal of modular feature sets available the rate of meaningful innovation.

Is accelerating.

That's the terms real world data data, driven and digital health care are increasingly becoming battle cries within the determined strategy plans of more and more companies across the ecosystem Inovalon is increasingly being provided a seat at the table for discussion.

As part of this during the quarter, we announced the availability of the noble on data stream Epi. This offering provides any authorized a cloud based traditional enterprise or mobile app software system to benefit from the power of comprehensive patient specific data and analytical derivation.

And on demand and in real time.

This means that both new rapidly emerging health care technology offerings like consumer focused mobile apps being built around consumer specific health care data and very large otherwise antiquated enterprise platforms that serve as the backbones of many large health care organizations can benefit.

The mobile apps can avoid the need for massive investments around data aggregation access connectivity and analytics and the older larger scale integrated enterprise platforms can avoid a huge rip out and replace decisions need.

Needless to say, we are excited about the future and this capability set.

Separately, you may recall that in the second quarter of 2020, we paused the expansion of our sales team as we focused on honing our processes to be sure to succeed with our sales initiatives and the COVID-19, low travel remote meetings environment.

As we have demonstrated strong success in selling within even this pandemic environment with strong new sales ACB over the past several months and a continued strong pipeline ahead, we have restarted the further expansion of the sales force and expect to continue this through the fourth quarter.

Our sales teams have been an important part of our success story and the deepening alignment with the engineering team product teams and clients success teams are showing very strong results in the sales numbers that you have seen to date and the various metrics, which we look forward to providing you in the quarters to come.

Before I hand, it over to John simply put there is a lot going on here, yes, a frustrating short term COVID-19 related demand delay in the small non subscription part of our overall business, but very strong execution on many fronts from engineering product and sales to administration and how.

Human resources, all translating into market, leading innovations positive client retention rates meaningful existing client expansions, new client sales strong pipelines and many large scale implementations coming online altogether, driving our projected 12% to 16% organic.

Revenue growth and 15% to 21% adjusted EBITDA growth in 2021.

With that allow me to turn the call over to Jonathan Jonathan.

Thank you Keith and good afternoon.

I'd like to begin by having a few key points building and Keith opening remarks.

First no one's exceptional operating leverage margin expansion profitability and cash flow continued to shine through the quarter. Despite some ongoing challenges resulted from the COVID-19 pandemic on parts of our non subscription business.

Second more specifically third quarter 2020, lower margin non subscription based services and legacy offerings were impacted by approximately 13.2 million against our expectations, which should not overshadow that continue underlying growth of the business and third more.

Importantly, the company is excited to provide forward annual guidance for 2021 that reflects the continued strong execution and subscription based platform adoption with.

With continued strong sales momentum large marquee client implementations underway and solid customer retention rates are 2021 guidance calls for organic revenue growth of 12% to 16% net income growth of 87% to 104% adjusted EBITDA growth of 15.

To 19% and non-GAAP diluted net income per share growth of 24% to 27%.

Now turning to our third quarter results.

Third quarter revenue was $161.4 million, a decrease of $5.1 million or 30% year over year. This year over year decrease was primarily driven by a decrease in our legacy revenue stream of $7.5 million.

Compared to our previous expectations, a longer and more states specific response to the COVID-19 pandemic continued in the quarter.

This resulted in actual services and legacy offerings revenue being lower compared to expectations by approximately $2.7 million and 10.5 million respectively.

Subscription based platform revenue was 88% of total third quarter revenue compared to 84% in the third quarter of 2019, representing continued growth in our core cloud based subscription platform business.

Services revenue represented 10% of third quarter 2020 revenue with legacy revenue, representing the remaining 2%.

Trailing 12 month subscription based platform revenue in the third quarter was a total of $565.1 million, an increase of 13% compared to $498.3 million for the preceding 12 month period. This growth was driven by the company's strong new sales ACB wins.

And transition to cloud based platform offerings.

New sales HCV during the quarter came in at $58.5 million, an increase of 33% year over year third.

Third quarter, New platform sales ACB, excluding services was $42.5 million or an increase of 51% year over year.

Looking at gross margin third quarter gross margin was $75.5 million, which represents an increase of 130 basis points year over year.

Our strong gross margin continues to be driven by higher value product mix shifts to our subscription revenue streams as well as the increasing scale and efficiency of the company's platform offerings.

The company's platform offerings business model and delivery structure position the company nicely for continued profitable and scalable growth.

Third quarter, adjusted EBITDA was $58.8 million, an increase of $2.5 million or 4% year over year.

The trailing 12 month adjusted EBITDA was a total of $220.5 million, an increase of 15% compared with $191.9 million for the preceding 12 month period.

Adjusted EBITDA margin was 36.4%, representing an increase of 260 basis points compared to the year ago period.

The third quarter trailing 12 month, adjusted EBITDA margin increased to 33.9% an increase of 220 basis points compared to 31.7% for the preceding 12 month period.

And non-GAAP net income per share was 16 cents, an increase of 7% compared to Q3 2019 and was within our previous guidance range cash flow is very healthy in the third quarter net cash provided by operating activities in the third quarter increased 42%.

Year over year coming in at $46 million, which is after interest expense payments of $12.6 million.

Third quarter Capex was $16 million.

On a trailing 12 month basis net cash provided by operating activities was $143.3 million, an increase of 44% compared to $99.6 million during the preceding 12 month period.

Additionally, trailing 12 month free cash flow was $72.9 million an increase of 62%.

Moving to the balance sheet, a noble and ended the third quarter of 2020 in a strong financial position.

No one's cash cash equivalents as of September Thirtyth 2020 was $120.1 million total.

Total outstanding debt was $910.4 million.

The reported balance sheet debt was 888.7 million net of issuance discount and deferred financing fees and our net debt position was $790.3 million.

The company's net debt leverage ratio as defined within our debt agreement continued to improve to 3.55 to one as of Q3 2020 as compared to 3.69 to one as of the end of the second quarter and down from 4.23 to one at the end of the third quarter.

In 2019.

Now, let me turn to our financial outlook and provide key highlights.

For the full year 2020, we are revising our 2020 guidance as follows we.

We are reducing our revenue range for the full year to 657 million to $668 million and updating our expected revenue stream mix guidance to reflect 87% contribution from subscription based offerings, 10% contribution from services and 3% from last.

Yes, the offerings, we are increasing our GAAP net income and EPS ranges to 19 million to $27 million.13 to 18 cents respectively.

And we are reaffirming our non-GAAP net income and EPS ranges adjusted EBITDA range and net cash provided by operating activities, which all reflect the strong financial profile of the business model and updated revenue stream mix shift.

This results in fourth quarter 2020 guidance of 179 million to 190 million in revenue, reflecting year over year growth of 3% to 10% compared to the fourth quarter of 2019, adjusted EBITDA of 63 million to $73 million a year over year in.

Crease of 9% to 27%.

And non-GAAP diluted net income per share of 16 cents to 20 cents a year over year increase of 7% to 33%.

There are two points I'd like to make about our revised 2020 guidance first 16.8 million of our revenue guidance update is associated with the COVID-19 pandemic softness impact on our lower profit non subscription legacy and services offerings.

Second our profitability and cash flow guidance remains unchanged. Despite the revenue updates.

For 2021, our financial outlook is as follows we expect revenue of 741 million to $768 million, representing organic revenue growth of 12% to 16% weaker.

We expect 2021, adjusted EBITDA of 265 million to $275 million representing growth of 15% to 19%.

We expect non-GAAP diluted net income per share of 73 cents to 75 cents, representing a year over year increase of 24% and 27%.

And we expect capex to be 57 million to $63 million or 8% of expected 2021 revenues.

I encourage you to please refer to today's earnings release, and our third quarter supplemental earnings deck for details on our 2020, and 2021 guidance ranges and expected revenue cadence.

Before we open to queue in a I'd like to reiterate that continues strength that we're seeing in our pace of innovation client retention renewals sales implementation and resulting acceleration in organic revenue growth combined with a strong value driven pricing in.

By Ormat positive product mix shifts and operating leverage driven by continued profitability expansion and expanding cash flows are fueling our outlook for a very strong 2021 and beyond.

With that let me turn the call back over to our operator to conduct our Q and a session.

Thank you as a reminder to ask a question you will need to press star one on your Touchtone telephone again Thats star one on your touched on telephone to ask a question to withdraw your question press. The pound key we ask that you ask one question and one follow up please stand by while we compile the Q and a.

Hey roster.

Our first question comes from the line of Glenn to San Angelo Guggenheim Your line.

Line is open.

Yes, thanks for taking my question.

I wanted to ask.

About three Q1, a little bit more detail you made the comment that the revenue shortfall was primarily due to the lower margin non subscription business, but if I look at your shorter subscription platform rebels Rosie was up only 1%.

It was probably a little lower than we were expecting and I'm kind of curious could you comment on on the growth of the platform business.

Follow up on the guidance.

Hey, Glenn Thanks for the question appreciate you being on the call.

John and I and also Jason are here to answer your question. So.

So as you look at the platform, we don't have and nor do we expect to have even platform expansion every single quarter. It really matters on when things get signed and the implementations associated with them.

In the numbers for the quarter, we had about $1.7 million worth of platform that we.

We could have seen come into this quarter and so that that is the amount of platform that.

Free signing on those.

The.

Weren't in the quarter, okay, but pre signing so really the platform amount of Q3 was very much in line with what we expected we continue to see strong sales in its strong implementations and its strong demand for it really solid pipeline on it and clients seeing strong value and expanding what they're using unit.

So.

For us for what we were expecting and platform really just a very small difference than what we expected.

Okay, maybe if I could just follow up with Johnson on on the Q4 guidance.

Yes.

[noise] platform revenues almost 90% of the total in the third quarter 40 over you kind of have a big range out there on the revenue line for Q4, and so could you maybe comment on the level of visibility you have on these numbers and maybe how that translates into your visibility that you have on 2021 at this point.

Hey, Glenn good afternoon from me.

Visibility standpoint, what we see is the continuing strong HCV sales we have in our implementation timeline. So while we still have a range for Q4, there is still the expectation of legacy and services. So what we've tried to model is just really that that potential range of the the gives and takes as a result.

Eight specific demand and how we see it we continue very strong visibility into that the full range, which we provided Glenn maybe just something to add on to that is something we had in our prepared remarks.

Very nice client renewals very strong client retentions. The platform piece of things is very solid and gives us a lot of visibility. It's the cobot impact elements around legacy and services that we're giving a wider range on.

Okay. Thanks for the comments.

Thank you. Our next question comes from the line of Donald Hooker of Keybanc. Your line is open.

Great good afternoon.

Yes, I understand the focus here is not legacy and services that were.

Moving towards subscription model here, so I understand that but I just I didnt quite understand maybe can you elaborate a bit on even though on the cobot impact on those legacy in services revenues, you referenced sort of state pandemic response patterns.

Maybe can you give a couple of examples so I can visualize it.

Okay done thanks for the question.

So when we were coming out of Q2 and things were looking more positive and consistent across the country and that improvement.

It was a different picture than what started to emerge in Q3 Q3 was for US a world of individual states responding differently to the overall pandemic.

Dynamic a good examples are new York and California.

Where new York, California, a few other states around the country, but those two specifically, Pennsylvania as well have higher concentrations of metropolitan areas and customer headquarters in the pharmaceutical space as well that impacted disproportionately than what we were.

We're seeing on a more national level basis.

Okay.

And then maybe.

Maybe maybe just one follow up to that then I'll I'll jump back in queue.

I guess.

When we're talking on the pharma are we talking mainly about pharma life sciences kind of some of the real world evidence stuff you're working on are.

Are there any other specific or is it more providers I'm just trying to think about the specific.

Yes, so it will be a dimension.

Thanks, Jim or Don be mentioning of life Sciences is because there's a fair amount of concentration of them in New Jersey, Pennsylvania, New York and that is where you see some of our services work done so on a time and materials elements that we would be doing for some of our life sciences companies they were.

Were more they were softer during the quarter disproportionately and what we're seeing in the rest of the country.

Okay. Thank you.

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Thank you. Our next question comes from Ricky Goldwasser of.

Morgan Stanley Your line is open.

Go also please make sure your line is admitted and if you're on a speakerphone lift your handset.

We'll go to the next.

Oh Youre right.

Yes. This is Ryan on for Ricky Thanks for the question.

So I wanted to ask about the 2021 guidance.

Given the kind of puts and takes that we had in the 2020 year wondering if you could walk through what the normalized topline growth would have been.

Absent some of the some of the issues that we're seeing in the third quarter.

So Raymond Thanks for the question, but I want to make sure I understand to do can you take.

Maybe a slightly different wording. Your question, let me see if I can understand that.

Yeah sure so like.

If you were to remove some of the impact to the services in legacy portions of your business what is the true topline growth rate for 2021.

I'm just trying to so if we remove that from third quarter.

If we then also remove elements from it from next year right. Because obviously for next year you see that we have in the full year guidance.

Legacy only around 3% right. So we have.

It's decreased and it was obviously decreased in third quarter, we've obviously decreased it in fourth quarter and Weve decreased it as part of our projection for next year, so that wasnt not in here, but then replace back because you might remember that was that it would have been more like six or 7% or something like that so weve.

Taking that down.

Presuming that there continues to be a coded going into 2021. So were predominantly now looking at a growth rate of platform.

And we don't sell legacy anymore. So that is.

I think there is sort of a net neutral if you will if you on Q3 versus next year on your question because we've taken it down in both does that mean.

Makes sense.

Got it got it Okay go ahead.

No just to add on to that is as we normalize out the $13.2 million or non subscription in Q3. Raymond will you then of getting on the normalized basis puts us in line with the.

The previous guidance, we gave us 5% to 9%. So obviously, that's how you we think about it when you kind of normalize out that impact.

Got it that's very helpful. And then if I may a follow up on the margin expansion. So.

Keith I'm wondering if you could help us think through kind of the puts and takes on the expand expansion on your EBITDA margin.

Given that you are looking to invest more in your sales force.

I guess is there maybe.

Maybe had gross margin expansion number that you can point us to.

To kind of think about where the organic.

Like how much you might want to expand and grow organically.

Sure sure in sum this all just hand over to Jonathan to comment on but we're getting margin expansion in multiple different places. So first of all we have a nice amount of operational leverage by the business model overall.

As we continue to expand our topline, but we're also seeing very nice.

Strength in the marketplace for our product offerings, as we deliver more and more value for our clients the price point for our products continue to be a positive.

We're also seeing very nice client retention and extends the extensions of contracts, which also makes for a nice efficiency gains in the offering as well because you are not going through multiple rounds of implementations, which is typically a lower margin a period of time.

We're also seeing the mix shift in what they are actually buying to more and more of pure.

Yes platform.

Platform offerings of those obviously have a very nice a profile of profitability for the company and then also you can see in our supplemental deck, we continue to reduce head count proportional to the company size and operations and we are gaining efficiencies there as we do more automation and the types of products we have.

Or more purely cloud based so multiple different things operationally or business model wise that are adding to the profit expansion and ill, let Jonathan comment specifically on the gross margin breakdown yen is we think gross margins keypad, obviously, what you're seeing in Q3 is really the.

The business model and the operating leverage that we have in our subscription based platform. So in the third quarter, we witnessed the 74.5% gross margin trailing 12 months were at 74.8, so from our perspective Raymond every dollar we sell in topline to 75 cents worth of profit that we have.

Decide where it goes and where we continue to invest in growth and what you are seeing us as is really continue to invest in our sales engine, our product and research and development engine to continue to drive that so we're obviously very fortunate to have a very very healthy gross margin, allowing us to not only invest in the business, but also to further expand.

And adjusted EBITDA margins.

Got it I think I asked that question incorrectly.

The EBITDA margins, but the gross impact to the margins there I know that like I'll jump back into queue and I'll ask again later thank you.

Thanks Ruth.

Thank you. Our next question comes from the line of Sandy Draper of Trust Securities. Your line is open.

[music].

Thanks very much.

So going back a little bit to the questions and ask about the.

The SaaS recurring revenue if I look at sort of whats implied in the fourth quarter guide to get to your full year number and keep your range. It looks like you're expecting a pretty nice step up there. So when I think about and Keith you mentioned that it's not going to be predictable sequential dollars every call.

After but it looks like going from maybe up.

A million dollar sequentially to maybe more like nine or 10 or is that just timing of implementations or is there anything else that that's driving that nice sequential increase.

No sandy that it's really as simple as it is just timing of the implementations or with the implementations in fact wrap up if you will.

Okay got it and then you touched on this a little bit.

The the the.

The legacy revenue as you said guiding to 3% for the next couple of years is there is that for next year is that reflective of continued uncertainty around cove. It or is that really a reflection of just the continued focus to drive business to the SaaS platform.

It's more the former sandy.

We saw less of the cobot impact that that 3% would become a tailwind but.

But we want to factor in a continuation of co bid in our 2021 expectations. So we're not selling legacy.

Legacy products, but we do still have long term contracts in place with clients that are using it were just toning down how much we would expect them to use next year. So if we did see let's say vaccines rollout and things.

Substantially returned to a better situation that 3% could become a tailwind, but we would rather have it reflect a presumption of continued coated.

Okay, great. Thanks, so much.

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

Yeah. Good afternoon. This is Jared in for Ryan I, just wanted to kind of stick on the 2021 guidance here, obviously, the implied growth rates and show quite a bit of an acceleration of growth and can understand some of that is just a factor hopefully normalizing business conditions over the course of the next year.

In relatively easier comps to 2020, I am curious, though I guess can you talk a little bit about are there any specific investments that you're looking to make organically to achieve that accelerated growth rates. I think you may have mentioned continuing investment sales and marketing and that sort of thing, but just curious if there's any things specific.

Ladies and cost as far as investment that maybe needed to kind of drive that accelerated growth profile.

Yes. Thanks, Thanks, Jerry Thanks for the question. So we've got a bunch of things going on that we've been investing in and we're going to continue.

Two investments so first of all that acceleration in growth that we're seeing is really now all that HCV that we've been reporting is now starting to hit as those implementations come due so.

We hit on a trailing 12 month basis, we've done.

31% ish.

Of platform expansion or platform HCV sales. So now you're just seeing that large amount of 250 something million dollars worth of sales over the last 12 months in platform. You are now seeing that layering into deliver our growth. We're also seeing nice numbers in a Medicare growth.

And Medicaid growth that also have.

Positives for us, we're seeing great client retention rates and we're seeing nice year over year increases in the coal or price adjustments as well. So a lot of things layering into give us that now what are we additionally, investing in.

We have been continuing to work on bringing direct to consumer and consumerism focus products that investment has been ongoing and will continue to be a going forward in 2021, we have re.

Started the process of growing our sales force further as we mentioned in our prepared remarks in Q2, we pause that for a period wanting to make sure that we had things figured out to sell into this kind of environment. We.

We certainly saw that in Q3 with nice strength in Q3 sales. So now we have started towards the tail end of Q3 re expanding that sales for us sales team expansion process really Jason and a number of other people have brought in some top talent to continue to expand that team.

Really across the company, we're seeing expansions in industry, leading talent, that's an investment in our future. It's obviously been a something.

Something that has been facilitated by our strong success and our profitability expansion to just be constantly bring in better and better people to help us grow faster and over a larger set of opportunities. So the places you've seen us investing we're continuing to invest and we're very fortunate to have the profitability to drive that which is part of the growth.

Laurie.

And upside risk if you will on on our future.

Right, Yes that makes sense and then if I may I'll just talk on one quick follow ups here looking at the supplemental deck. It looks like the guidance for cash flow from operations for 2021.

It looks like that's implying essentially flat relative to 2020 guidance on that with the kind of the assumption for about 90 basis points of EBITDA margin expansion in Canada operating leverage in the business. So could you maybe comment briefly on some of the dynamics around the cash flow expectations for next year.

Jared Yes, it's John so.

What we have previously announced when we gave our cash flow guidance for 2021 was we did increase it for $25 million worth of receivables that were collected in 2020, which were originally expecting to collect in 2021. So if you take a look on slide 22 of our earnings supplement we kind of show you what the adjusted.

Good piece looks like but thats whats driving kind of that dynamic there.

Got it okay thats helpful. Thanks.

Thank you. Our next question comes from the line of Stephanie Davis of SVB Leerink. Your line is open.

Yes.

Given what we've seen this quarter legacy.

Their own role Paul.

Maybe just lied down before Baskin mix shift.

Let me explain kind of the pain of the Mets legacy business.

Thank you Stephanie good.

Great to hear you and thanks for the question.

We are absolutely talking to those clients regularly to get them to move over onto the platform.

Frankly, we're making some nice progress on that but we still want to for next year kind of presumed that their activity level will be kind of a co bid activity level and if we if we see it as going one of two ways right or I guess one of three okay were correct on that and activity level is similar to this kobin.

For all of 2020, and then we have those numbers correct in our projections.

We convert them over to platform and we see them expand and grow just like the rest of our platform.

Or cove, it improves next year and that legacy could be some additional tailwind, but we're thinking the same way we are working to convince those clients that the benefit the platform is to their advantage.

And have you ever thought of him equipment option, there will be some settings on the legacy work or just no longer recording it.

Oh, absolutely Stephanie we we definitely deal with that and every time, we've taken a capability from an enterprise approach to a cloud approach we've had to go through that process at the 7% where it was last year. So.

Certainly was nothing to sneeze at we Didnt want to.

Treat those clients like we didn't want their business, we had to make some.

Judgment decisions on on how to message to them, our willingness to support them and appreciate their business. We obviously appreciate all all of our clients but.

We just try to you.

You do.

Do do judgment calls on that on our legacy our enterprise platform QSR as an example.

That has moved over to a few OSI XL cloud based and we have sunsetted that process meeting put that all into sequenced to sunset. So we often do take that approach, but in this particular legacy business, we want to treat our clients the right way and support them and ultimately see them come over onto the.

Got form.

Understood and then one quick one on modeling can you just give us a refreshed I know.

The ramp on timeline for them here recently.

Looking to next year.

Sorry, Stephanie do you mind repeating that again forgive me.

Let there be fresh at the recent long timeline for implementation ramp up.

Just one on one.

Yes, Stephanie so I'll always a good question, how do we view the layering in of the CV into our models.

We signed a lot of very large business in 2020, and those are very nicely on schedule for their implementations as originally planned on them a rule of thumb, we're starting to see if it helps the analyst community a little bit is on a trailing 12 month base.

This by the time, if you look at each period back.

Back 12 months.

As you look at the platform components of used to be because obviously the service components of HCV those have to replace themselves each year, because they're almost all one year or shorter engagements, but on the platform piece of HCV by the time, you get to a 12 month period about a third of that.

CV has become part of the revenue that you saw during that 12 month, leaving the two thirds to layer in.

Growth going forward. So we're continuing to see that pattern just the clients are getting a little bit larger and larger.

We are seeing very strong progression of signings and pipeline refilling of the pipeline as we sign those.

But we're still going to see from time to time.

The.

Quarters, not being exactly the same because of what happened to sign in the implementation pipeline that preceded it.

That's super helpful. Thank you.

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

Hi, This is Jeff on for Sean. Thank you for taking my question.

I think first off we are just interested to know so I think.

If we look at the total revenue less description, we get to something like 18 point.

9 million of revenue in the quarter, that's attributable to the legacy in services.

And I guess that was pretty consistent with the first two quarters of the year. So just.

But I guess the covert headwinds like in legacy in services, So where are you expecting it to come in much stronger than that I got asked in a call that headwind and why.

Hey, Jeff its John Yes, so you're absolutely right. So the non subscription business represented $18.9 million worth of revenue in the quarter.

And when we gave our guidance in the second quarter, we were expecting a different mix.

From our revenue streams and what we've we've done for this quarter and for the remaining part of 2020 is really reflected the impact of the non subscription based coded headwinds that we witness.

Not only for what we experienced in the quarter, but what we see continuing throughout 2020.

When you do all those you now have a at an expected revenue mix for 2020 of 87% from our subscription based platform only 3% from legacy and then the remaining 10% coming from our service. The stream. So when you kind of add all those pieces up and think about the change in our guidance.

The total impact on our guidance reduction 16.8 million of that is coming from those non subscription.

Engine.

So just to be clear there was something seasonally that made you guys think that and legacy in services.

And.

Essentially double what it was in Q2 and Q3.

The midpoint of guidance.

So yes. The one we expect there to be returned to what we had experienced in 2019 size. We gave our Q2 guidance, we were expecting that catch up phenomenon because the work still has to happen and really what we saw for the remaining part of 2020 was the same revenue that we had experienced in 2019.

Unfortunately, we did see those state specific responses go a different way than what we were originally thinking and that's how it ended up.

Got it.

Okay.

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I think just secondly, if we could lever on interested just just to understand and heading into 2022 I think for right.

First the Jack that CMS.

CMS is changing some of the guidelines or the transition from Rhapsody EBIAT does that impact you guys is that it.

A tailwind or an opportunity for you or can you just help us understand what's being proposed that Michael.

You know, obviously thinks justice Keith.

Our contracting at this point is well past 2022.

In our typical contracts it hasn't had much of an effect frankly, we've done a fair amount of work.

Two I guess you call it the advisory or strategy work on with some of those clients to make sure they understand how the transition will affect their financials.

But we.

We keep on.

All the underlying capabilities that are necessary to support their accuracy in the risk score those are unchanged the methodologies through which some of that data flows rafts DDS that is different you're absolutely right but.

But we actually get to do a little bit more work than usual because of that.

Got it and if I could attack wanting more quickly.

And on the launch of the the Npis solution, what's factored into 2021 and guidance revenue guidance, if anything and from the sale of that product and is that primarily being pulled into your payer right.

Hey, Jess we forgive me.

We just want to keep it to two or three we get through everybody happy to have you do absolutely. Thanks for taking the question. So thank you very much Jess.

Thank you. Our next question comes on line of Daniel Gross light of Citi. Your line is open.

Hey, guys. Thanks for taking the question and actually at that same question I guess on the data stream. So maybe I can ramp [laughter].

Question I want to kind of go back to that he CB conversion into revenue that you.

That you noted before maybe.

Maybe if I can tackle it in a little bit of a different way.

I think last quarter, if you look at Walmart cards and that large health plan that Jack net you I had nice wins on is there any way to dimensionalize not necessarily on HCV, but on a TCV basis what percent of.

Of those contracts.

Included in your 2020 guidance versus 2021, and I'm just looking at a very narrow.

When but they're obviously pretty large so anything you can give us on on that specifically it would be very helpful.

And then I guess this question what is from the data stream.

Factored into 2021.

Sure.

First of all thanks for the question questions.

So we don't we don't comment on TCV, obviously, those are pretty large and some of the ones. We've announced this year have some very significant multi year ramping aspects of them.

But we have not gone into color on TCV and forgive me, we can't start going into that on this call.

But you will I think the point that is very important as while we did name three nice ones in press releases and announcements. This year, we have quite a few others that we have been doing during the year.

As well as we mentioned several top 10 clients.

Of ours have been doing significant expansions with us we don't typically press release, those or even request a press release on them as those kinds of consumers those sorts of endeavors part of their strategic processes, but we are seeing very positive.

Expansion and in fact, not only showing us nice growth, but we see that business coming away from other alternatives in the marketplace some of the other.

Competitors in this space. So we have a number of implementations that are layering quite nicely and then the other dynamics, we talked about the client retention rates renewal rates pocket.

Population expansions are also all quite strong right now.

To your second question about data stream.

We were being really thoughtful about how we put into guidance products that are young in their early stages. So.

We don't have.

We are avoiding putting in expectations of newer products into our guidance. So as we come out with them, we like to see how they behave in the market for a while.

Before we go layering them into guidance, but we are very excited about that product.

And we.

We see that being a significant growth driver for quite some time in the market, but we are we are not.

We we would rather not put those into guidance is at this point.

Understood. Thanks, and then maybe just one for John on the quarterly cadence of the 2021 guidance in the supplemental.

Can you qualitatively comment on how you factored cobiz into into that quarterly guidance are you assuming most of that is in in one Q or you pretty.

Pretty much spreading throughout.

The year.

Hey, Daniel we currently have it really kind of more impacting the first part of the year. So the first half and then getting back to our return to normal and that's based on all the data metrics, we're looking at today.

Great. Thank you.

Great.

Thank you, Daniel and that being or last question us being at the top of the hour here I just want to thank everybody for taking the time on tonight's call, but before I. Let you go I just want to close with a few salient points.

First while we're all dealing with the impact of Covance Inovalon is experiencing really strong metrics in key areas as you heard tonight in the HCV sales client retention and new product innovations real world data set expansion and a lot of industry, leading talent additions to the company second we are firmly on track to go live with the multiple.

So a large implementations we've been speaking to throughout this year driving the accelerated valuation realization for our clients and significant revenue growth for us in 2021 and beyond third.

Third profitability as you have seen is strong and getting even stronger with operating leveraged value based pricing power product mix shift and platform efficiencies all driving a very nice gross margin adjusted EBITDA margins and cash flows to new highs and finally, putting this all together as we talked about Tonight as well.

We're seeing this drive a really strong 2021 with revenue up 12% to 16%.

Adjusted EBITDA up 15% to 19% and non-GAAP EPS up 24% to 27%.

So with that I'd like to thank again unbelievably our committed associates, who are doing a fantastic job everyday throughout this year I want to thank our clients and you our shareholders. We really appreciate your time your attention and your continued interest in an over one thank you and good night.

Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

[music].

Good day, ladies and gentlemen, and welcome to bring in all the long third quarter 2020 earnings call.

At this time all participants are in listen only mode. Later, we'll conduct a question and answer session. If you would like to ask a question. Please press Star then one now.

As a reminder, this conference is being recorded and now I'll turn the conference over to your host Kim Collins. Please go ahead.

Good afternoon. This is Kim Collins senior Vice President of Communications at Inovalon I'm here today with Dr., Keith done Levy Inovalons, Chief Executive Officer, and Chairman of the board and Jonathan Bolt another one's Chief Financial Officer.

I'd like to welcome you all to our third quarter Twentytwenty earnings call.

The press release announcing our financial results for the third quarter up 2020 was distributed this afternoon and a replay of today's call will be available shortly posted on the Investor Relations page on another <unk> website.

For those of you listening to the rebroadcast of this call. We remind you that remarks made herein are as of today October 28, 2020 and will not be updated subsequent to this initial earnings call.

These statements involve a number of factors that could cause actual results to differ materially I.

Additional information concerning these factors is contained in the company's earnings release and filings with the FCC.

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

Good afternoon, everyone and thank you for joining our call. Let me begin by saying I continue to be impressed with the unwavering devotion of the entire noble on team during the quarter and year to date together they are helping bring many new industry, leading innovations online and drive meaningful value for our client.

As well as the millions of patients that they serve.

While we continue to do experienced pockets of COVID-19 related weakness in a no one's lower margin Nonsubscription legacy offerings and services business. We also continue to have very strong metrics in key areas of sales renewals innovation profitability and the noble on is firmly.

You're on track to go live in the coming months with several substantive multiyear platform implementations that will drive accelerating revenue growth and further profitability expansion in 2021 and beyond.

There is no doubt that the short term topline performance of the third quarter was frustrating for me and for the whole team a state specific COVID-19 pandemic response patterns impacted our legacy and services offerings, while the rest of our key performance metrics that we track to help guide us for the medium term and longer term.

From continued to shine Uh huh towards very strong top and bottom line performance is ahead.

I will let John elaborate further on the COVID-19 impact, but first let me provide you with some more insight into our outlook for 2021 as well as our technology innovations during the quarter.

For several quarters now you've seen the success and momentum reflected in strong ACB growth with the third quarters trailing 12 months, new sales ACB totaling 253.2 million up 31% period over period.

And the same pattern continued in the third quarter third quarter, New sales ACB totaled 58.5 million up 33% year over year, and new sales HCV per platform totaled 42.5 million up 51% year over year.

Recall that ACB or annual contract value is a metric which reflects only the first 12 months of expected revenue from new contract signed during a period.

We continue to see steady adoption of the noble in one platform as multiple segments of the marketplace are turning to noble on sports data driven purpose built cloud based SaaS platforms. As you know we've announced several notable wins so far in 2020.

Putting Walmart one of the world's largest consumer retailers Cardinal health one of the world's largest medical distributors and one of the world's largest payers each of which entered into long term contracts for five to seven year durations with the payer contract alone, resulting in a total contract value greater than 150 million.

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In addition to these announced marquee wins, we have secured multiple meaningful expansions of existing top 10 market clients and are in very positive discussions with several others do.

Moving the way for a very strong unexciting 2021 and beyond.

In addition to a growing base of higher margin recurring subscription revenue year over year, and then a setting a strong performances and align coordination from our technology teams client success teams and product teams I am pleased to report that we're also seeing impressive key performance indicators across.

The business, which include higher total renewal rates year over year, increasing client retention metrics.

Using power favorable high value product mix shift longer term client commitments and positive underlying membership growth in Medicare and Medicaid.

John will outline in our guidance shortly the net result of what we are experiencing translates into a strong organic revenue growth outlook in 2021 up 12% to 16% with further continued expansion of our operating leverage and profitability driving our adjusted EBITDA margin in 2012.

Anyone up another 90 basis points to approximately 35.8%, resulting in year over year, adjusted EBITDA growth of approximately 15% to 19%.

Continuing to propel the accelerating growth and continued expansion and profitability as our strong success and innovation.

As key building blocks of the Inovalon one platform become increasingly pressure tested in hone. The addition of new capabilities is unlocking large amounts of opportunity said another way with the very solid foundations in place and the growing Arsenal of modular feature sets available the rate of meaningful innovation.

Is accelerating.

The terms of real World data data, driven and digital health care are increasingly becoming battle cries within the determent strategy plans of more and more companies across the ecosystem Inovalon is increasingly being provided a seat at the table for discussion.

As part of this during the quarter, we announced the availability of the Inovalon data stream Epi. This offering provides any authorized to cloud based traditional enterprise or mobile app software system to benefit from the power of comprehensive patient specific data and analytical database.

And on demand and in real time.

This means that both new rapidly emerging health care technology offerings like consumer focused mobile apps being built around consumer specific health care data.

And very large otherwise antiquated enterprise platforms that serve as the backbone of many large health care organizations can benefit the.

As we have demonstrated strong success in selling within even this pandemic environment with strong new sales ACB over the past several months and the continued strong pipeline ahead, we have restarted the further expansion of the sales force and expect to continue this through the fourth quarter. Our sales teams have been an import.

Part of our success story and the deepening alignment with the engineering team product teams and clients success teams are showing very strong results in the sales numbers that you have seen to date and the various metrics, which we look forward to providing you in the quarters to come.

Before I hand, it over to John simply put there is a lot going on here, yes, a frustrating short term COVID-19 related demand delay and the small non subscription part of our overall business, but very strong execution on many fronts from engineering products and sales to administration and the huge.

When resources, all translating into market, leading innovations positive client retention rates, meaning for existing client expansions, new client sales strong pipelines and many large scale implementations coming online altogether, driving our projected 12% to 16% organic.

Revenue growth and 15% to 21% adjusted EBITDA growth in 2021, well.

With that allow me to turn the call over to Jonathan Jonathan.

Thank you Keith and good afternoon.

I'd like to begin by highlighting a few key points building and Keith opening remarks.

Second more specifically third quarter 2020, lower margin non subscription based services and legacy offerings were impacted by approximately 13.2 million against our expectations, what should not overshadow that continue underlying growth of the business and third more.

Importantly, the company is excited to provide forward annual guidance for 2021 that reflects the continued strong execution and subscription based platform adoption.

Continued strong sales momentum large marquee client implementations underway and solid customer retention rates are 2021 guidance calls for organic revenue growth of 12% to 16% net income growth of 87% to 104% adjusted EBITDA growth of 15.

19% and non-GAAP diluted net income per share growth of 24% to 27%.

Now turning to our third quarter results third.

Compared to our previous expectations, a longer and more states specific response, the COVID-19 pandemic continued in the quarter. This resulted in an actual services and legacy offerings revenue being lower compared to expectations by approximately $2.7 million and 10.5.

Million respectively.

Services revenue represented 10% of third quarter 2020 revenue with legacy revenue, representing the remaining 2%.

And transition to cloud based platform offerings.

New sales HCV during the quarter came in at 58.5 million, an increase of 33% year over year.