Q2 2019 Earnings Supplement July 31, 2019
Cautionary Note Regarding Forward-Looking Statement Certain statements contained in this presentation constitute forward-looking statements within the meaning of, and are intended to be covered by the safe harbor provisions of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this presentation other than statements of historical fact, including but not limited to statements regarding the roll-out of any product or capability, the timing, performance characteristics and utility of any such product or capability, and the impact of any such product or capability on the healthcare industry, future results of operations and financial position, business strategy and plans, market growth, and objectives for future operations, are forward- looking statements. The words “believe,” “may,” “see,” “will,” “estimate,” “continue,” “anticipate,” “assume,” “intend,” “expect,” “project,” “look forward,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this presentation include, but are not limited to, statements regarding the expected benefits and impact of the combination of Inovalon and ABILITY, including the expected accretive effect of the merger on Inovalon’s financial results, expectations about future business plans, prospective performance and opportunities, strategies and business plans, expectations regarding future results, expectations regarding the size of our datasets, expectations regarding implementation timeframes, our ability to meet financial guidance for the third quarter and full year 2019, expectations regarding tax rates, and statements with respect to visibility, revenue retention, and recurring revenue, including ACV. Inovalon has based these forward- looking statements largely on current expectations and projections about future events and trends that may affect financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs as of the date of this presentation. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, which could cause the future events and trends discussed in this presentation not to occur and could cause actual results to differ materially and adversely from those anticipated or implied in the forward- looking statements. These risks, uncertainties, and assumptions include, among others: the Company’s ability to continue and manage growth, including successfully integrating acquisitions, including ABILITY; ability to grow the client base, retain and renew the existing client base and maintain or increase the fees and activity with existing clients; the effect of the concentration of revenue among top clients; the ability to innovate new services and adapt platforms and toolsets; the ability to successfully implement growth strategies, including the ability to expand into adjacent verticals, such as direct to consumer, growing channel partnerships, expanding internationally and successfully pursuing acquisitions; the ability to successfully integrate our acquisitions and the ability of the acquired business to perform as expected; the successful implementation and adoption of new platforms and solutions, including the Inovalon ONE® Platform, ScriptMed ® Cloud, Clinical Data Extraction as a Service (CDEaaS™), Natural Language Processing as a Service (NLPaaS™); and Elastic Container Technology (ECT™); the possibility of technical, logistical or planning issues in connection with the Company’s investment in and successful deployment of the Company’s products, services and technological advancements; the ability to enter into new agreements with existing or new platforms, products and solutions in the timeframes expected, or at all; the impact of pending M&A activity in the managed care industry, including potential positive or negative impact on existing contracts or the demand for new contracts; the effects of and costs associated with compliance with regulations applicable to the Company, including regulations relating to data protection and data privacy; the effects of changes in tax laws in the jurisdictions in which we operate; the ability to protect the privacy of clients’ data and prevent security breaches; the effect of competition on the business; the timing, size and effect of business realignment and restructuring charges; and the efficacy of the Company’s platforms and toolsets. Additional information is also set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 20, 2019, included under the heading Item 1A, “Risk Factors,” and in subsequent filings with the SEC. In addition, graphics, images or illustrations pertaining to or demonstrating our products, data, services and/or technology that may be used herein are intended for illustrative purposes only unless otherwise noted. The Company is under no duty to, and disclaims any obligation to, update any of these forward-looking statements after the date of this presentation or conform these statements to actual results or revised expectations, except as required by law. Non-GAAP Financial Measures This presentation contains certain non-GAAP measures. These non-GAAP measures are in addition to, not a substitute for or necessarily superior to, measures of financial performance in accordance with U.S. GAAP. The GAAP measure most closely comparable to each non-GAAP measure used or discussed, and a reconciliation of the differences between each non-GAAP measure and the comparable GAAP measure, is available herein and within our public filings with the SEC. All data provided is as of June 30, 2019 unless stated otherwise. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 2
Contents 1 Overview 2 2019 Q2 and TTM Financial This presentation serves as a Results supplement to the Inovalon announcement on July 31, 2019 pertaining to second quarter (Q2) of 3 2019 Financial Guidance 2019 results and guidance. 4 Appendix 1: Reconciliations INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 3
Payers Pharmacies Pharmaceuticals Devices Diagnostics The Inovalon ONE® Platform Inovalon is a leading provider of cloud- based platforms empowering data-driven healthcare. Inovalon provides cloud-based, real-time Massive Advanced Intervention Data connectivity, analytics, intervention, and Data Assets Analytics Toolsets Visualization data visualization solutions for hundreds of the nation’s leading health plans, pharmacy organizations, life sciences companies, and more than 50,000 acute, post-acute, and ambulatory provider sites with capabilities informed by the data of more than 278 million patients and nearly 46 billion medical events. Home Care SNF Hospice Acute Providers Post-Acute Providers Ambulatory Providers Patients Note: Patient and medical event counts do not yet fully include data from ABILITY. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 4
Empowering Data-Driven Healthcare In Scale The reach of Inovalon’s platform has grown to touch the vast majority of the United States, able to empower the market’s largest data-driven healthcare initiatives. 100s Health Plans, Providers, Life Sciences, Pharmacy, and Diagnostics Organizations 278M+ Patients* 50K+ Provider Sites Note: Patient count does not yet fully include data from ABILITY. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 5
MORE2 Registry® 46 2 ® 45 MORE REGISTRY DATASET GROWTH Dataset 44 43 42 41 40 39 Expansion 38 37 36 35 34 Inovalon’s primary-source datasets continue to 33 Patient Count Medical Event Count 32 expand rapidly. As of Q2 2019, the MORE2 31 30 ® 29 Registry dataset contains more than 278 million 28 280 (millions) Count Patient 27 270 unique patient counts and nearly 46 billion 26 260 25 250 medical event counts. 24 240 23 230 22 220 21 210 One of the industry’s largest independent 20 200 19 190 healthcare datasets, with more than 278M 18 180 17 170 patients and nearly 46B medical events 16 160 15 150 14 140 Primary-sourced, fully linkable, longitudinally- 13 130 Medical Event CountEvent Medical (billions) 12 120 matched, data from all major U.S. healthcare 11 110 10 100 programs 9 90 8 80 7 70 Contains EHR, claims, scripts, labs, provider, 6 60 5 50 demographic data & more 4 40 3 30 Qualified Entity (QE) containing CMS’ Fee for 2 20 1 10 Service Medicare Data 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2Q19 Empowers and informs our industry-leading analytics and artificial intelligence, creating meaningful differentiation and client value Data resulting from the integration with ABILITY Network is not yet reflected within the MORE2 Registry® dataset and is therefore not reflected within the aforementioned data metrics as of this date. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 6
Contents 1 Overview 2 2019 Q2 and TTM Financial This presentation serves as a Results supplement to the Inovalon announcement on July 31, 2019 pertaining to second quarter (Q2) of 3 2019 Financial Guidance 2019 results and guidance. 4 Appendix 1: Reconciliations INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 7
Q2 2019 Highlights Following an important period of meaningful transformation, Inovalon’s cloud-based platform capabilities are increasingly being recognized for their market leadership and differentiation, driving strong value-delivery for clients, and resulting in significant sales expansion, revenue growth, operating leverage, and financial performance for the Company. 1. Continued Strong Annual Recurring Revenue Base: SaaS-enabled subscription-based revenue representing 80% of Q2 2019 revenue, up from 78% in Q2 2018. 2. Continued Strong Organic Sales ACV Metrics: Strong market adoption with Q2 2019 new and expanded contracts sales Annualized Contract Value (ACV), excluding Services, of $38.7 million, up 39% sequentially from Q1 2019, with Q2 2019 Trailing Twelve Months (TTM) new sales ACV of $156.3 million (up 69% YoY). 3. Continued Strong Margins: Strong Q2 2019 gross margin of 74%, and Adjusted EBITDA margin of 33.3% 4. Continued Strong Cash Flow: Strong Q2 2019 net cash from operating activities of $25.2 million (inclusive of $15.9 million in interest payments), a year-over-year increase of 90%. 5. Strong Q2 2019 TTM Results: “Inovalon 2.0” transformation initiatives continued to drive strong TTM financial performance with Q2 2019 TTM revenue of $584.6 million (up 23% from TTM Q2 2018), Adj. EBITDA of $188.0 million (up 61% from TTM Q2 2018), Non-GAAP net income per share of $0.39 (up 63% from TTM Q2 2018), and Free Cash Flow1 of $58.9 million (up $62.2 million from TTM Q2 2018). Note: Please see slide 25 for definitions of the footnoted terms above. 1Free Cash Flow is defined as net cash provided by operating activities less purchases of property and equipment and less investment in capitalized software INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 8
Continued Strong Sales Growth The combination of strong demand for the Company’s cloud-based platform capabilities and significant increases in the Company’s sophistication and scale of sales capabilities is resulting in significant increases in contract signings. New platform sales was $38.7 million in Annual Contract Value1 (ACV), excluding Services, in Q2 2019 (up 39% sequentially) and was $156.3 million for the Q2 2019 trailing twelve months (TTM) (up 69% from Q2 2018 TTM). Total new sales ACV Q2 2019 was $54.8 million (up 14% sequentially) and $221.9 million for Q2 2019 TTM (up 40% from Q2 2018 TTM). Excluding Services ACV Total ACV $156.3 $54.8 $221.9 $38.7 14% 39% 69% $47.9 40% $27.8 $158.1 $92.3 Q1 2019 Q2 2019 Q2 2018 Q2 2019 Q1 2019 Q2 2019 Q2 2018 Q2 2019 TTM TTM TTM TTM Note: Please see appendix for definitions of the footnoted terms above. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 9
Continued Strong Growth Inflection The transformation to the more modular cloud-based Inovalon ONE® Platform offering, its strong marketplace adoption and the transition from legacy to subscription-based platform contract structures has been driving increasing momentum and continued strong financial performance. The below graphics compare the resulting Q2 2019 TTM to Q2 2018 TTM for revenue, Adjusted EBITDA, Non-GAAP net income per share (EPS) and Free Cash Flow generation (inclusive of cash interest, ABILITY transaction and integration spend, and CAPEX outflows). Revenue Adj. EBITDA Non-GAAP EPS Free Cash Flow1 $188.0 $0.39 $584.6 $58.9 23% 61% 63% $62.2M $476.0 $117.0 $0.24 ($3.3) Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 Q2 2018 Q2 2019 TTM TTM TTM TTM TTM TTM TTM TTM 1Free Cash Flow is defined as net cash provided by operating activities less purchases of property and equipment and less investment in capitalized software. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 10
Continued G&A Operating Leverage General and administrative expenses decreased $14.5M in Q2 2019 as compared to Q2 2018. Q2 2019 G&A as a percentage of revenue was 29.1% as compared to 39.4% in Q2 2018. The decrease was driven by a reduction of $11.2M in non-comparable or one-time expenses in Q2 2018, as well as a reduction of $1.6M in transaction and integration expenses and a reduction of $1.7M in employee-related & professional expenses in comparison to the year-ago-period. ($11.2) ($1.6) ($1.7) $60.2 $49.0 $45.7 39.4% 32.1% 29.1% As a Percentage As a Percentage As a Percentage of Revenue of Revenue of Revenue Q2 2018 Non-Comparable Normalized Q2 2018 Transaction & Employee-Related Q2 2019 Actual Or Quarterly Expense Integration & Professional Actual One-Time Expenses Expenses Expenses All numbers in millions, subject to rounding. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 11
Contents 1 Overview 2 2019 Q2 and TTM Financial This presentation serves as a Results supplement to the Inovalon announcement on July 31, 2019 pertaining to second quarter (Q2) of 3 2019 Financial Guidance 2019 results and guidance. 4 Appendix 1: Reconciliations INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 12
• Annual Revenue Retention expected to contribute ~3 points in 2019 • New client sales closed prior to 2019 expected to contribute ~3 points of growth in 2019 2019 Revenue • ABILITY acquisition expected to contribute ~8 points of revenue growth in 2019 • New client sales already closed during 2019 expected to contribute ~6 points of growth in 2019 Guidance • New client sales yet-to-be sold during 2019 expected to contribute ~2 points of growth in 2019 Full Year 2018 vs. 2019 Guidance As-Reported Revenue Growth of 22% at the Midpoint Bridge Organic Revenue Growth of 14% at the Midpoint The combination of highly differentiated ~2 pts platform capabilities, an increased client ~6 pts ~8 pts $648.0 success focus, and expanding scale and ~3 pts ~3 pts - sophistication of the Company’s sales $638.0 $527.7 capability is resulting in strong client Coverage in place for 2019 as of retention and meaningful growth. November 7, 2018 As of July 31, 2019, the Company has narrowed its 2019 guidance for revenue Coverage already in place as of June 30, 2019 to $638M to $648M, which reflects revenue expansion of 22% and organic * As of June 30, 2019, the Company’s growth of 14% at the midpoint. revenue guidance has coverage of more than 98%, providing significant visibility into the full year. 2018 Revenue Signed Inorganic New New 2019 Revenue Retention New ABILITY Sales Sales Revenue Contribution Logo Contribution Contribution Contribution Guidance The graphic to the right is for illustrative purposes only. Contribution (Closed) INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 13
• The full gross margin benefit of an increasing mix of higher margin 2019 Adjusted Platform offerings, coupled with continued technology-enabled efficiencies and the ABILITY acquisition, are seen driving continued EBITDA Margin operating leverage improvement in 2019. Bridge ~370 Basis Point Year-to-Year Improvement Inovalon continues to expect operating ~140 bps ~80 bps ~90 bps 32.5% leverage, driven by high-value offerings ~60 bps driving further improvement in mix and 28.8% pricing, benefit from technology-enabled efficiency initiatives, and contribution from ABILITY. As of July 31, 2019, the Company has raised its guidance for Adjusted EBITDA and Adjusted EBITDA margin for 2019. Inovalon now sees the above-mentioned factors driving ~370 basis points of Adjusted EBITDA margin expansion in 2019, and increase of 80 basis points FY 2018 Investment Platform Platform Inorganic FY 2019G above prior guidance. Adj. EBITDA Initiatives / Overhead Mix & Price Efficiencies ABILITY Adj. EBITDA Margin % Efficiencies Changes Contribution Margin % The graphic to the right is for illustrative purposes only. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 14
Strong Subscription-Based Platform Adoption The Company is seeing strong revenue retention and growth of its subscription-based cloud-based platform offerings, providing significant Coverage and resulting revenue visibility of more than 98% towards 2019 guidance. $638- $648 ~10% $527.7 ~7% 11% $449.4 $437.3 $427.6 9% 4% >98% 12% 15% 2019G Revenue 43% 19% Coverage 34% Already in Place ~83% as of 80% June 30, 2019 66% 53% 54% 2015 2016 2017 2018 2019G Subscription-Based Platform Offerings Legacy Solutions Services All numbers in millions. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 15
Revenue The following full-year 2019 revenue guidance is being provided as of July 31, 2019. $638 - $648 2013 – 2019G $528 14% CAGR $449 $437 $428 $362 $296 2013 2014 2015 2016 2017 2018 2019G Note: CAGR calculations undertaken to the mid-point of 2019 Guidance. All numbers in millions. Graphic drawn at midpoint of guidance range. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 16
Adjusted EBITDA The following full-year 2019 Adjusted EBITDA guidance is being provided as of July 31, 2019. $205 - $214 2013 – 2019G 19% CAGR $152 $152 $134 $109 $100 $72 37% 35% 33% 29% 24% 23% 24% 2013 2014 2015 2016 2017 2018 2019G % of Revenue Note: CAGR calculations undertaken to the mid-point of 2019 Guidance. All numbers in millions. Graphic drawn at midpoint of guidance range. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 17
Cash Flow From Operations The following full-year 2019 Cash Flow from Operations guidance is being reaffirmed as of July 31, 2019. $130 - $145 2013 – 2019G 1 CAGR $104 13% $98 $93 $90 $86 $66 $68 ~22% 24% 22% 22% 22% ~20% 15% 17% 2013 2014 2015 2016 2017 20181 2019G % of Revenue Note: CAGR calculations undertaken to the mid-point of 2019 Guidance. All numbers in millions. Graphic drawn at midpoint of guidance range. 1 Net cash provided by operating activities was $90.4M in 2018. Incorporated within this number was the negative impact of acquisition-related transaction cash outflows of $6.6M and integration cash outflows of $6.8M. Normalizing for these one-time items, the non-GAAP cash flow from operations would have been $104 million as represented by the green dotted line. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 18
CAPEX Returning Towards Historical Levels During the period Q3 2016 through Q1 2018, the Company elected to invest more than $40M into incremental development towards the launch of the Inovalon ONE® Platform. The period of this disproportional investment is now substantially complete and is increasingly being harvested through the successful engagement of clients for highly-differentiated platform offerings. As a result, the Company sees the capital investments of the Company returning towards historical levels (as a percentage of revenue) in 2019. $65.5 $65.0 $6.4 $52 - $58 $28.1 15% $45.8 $39.1 $7.8 12% $39 - $44 $26.4 9% 8% - 9% $18.8 $22.7 $28.5 6% 6% 6% $23.2 $13.2 $20.2 $25.2 $12.8 $13 - $14 $8.1 $8.9 $5.6 $2.5 $1.2 2013 2014 2015 2016 2017 2018 2019G Maintenance Capital Expenditure Innovation Capital Expenditure (incl. Cap. Software) Inovalon ONE® Platform Buildout Capital Expenditure % Of Revenue Capital Expenditure (CAPEX) is defined as the sum of Purchases of property and equipment and Investment in capitalized software. All numbers in millions. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 19
Full Year 2019 Financial Guidance The Company is updating its full-year 2019 guidance to narrow its expected revenue range, raise its expected net income range, raise its diluted net income per share range, raise its Adjusted EBITDA range, raise its non-GAAP net income range, and raise its non-GAAP diluted net income per share range. Additionally, the Company is reiterating its previously provided full-year 2019 guidance originally provided ranges on May 1, 2019 for net cash provided by operating activities and capital expenditures. Previous 2019 Financial Updated 2019 Financial YoY Financial Metric Guidance Guidance Change Originally Provided May 1, 2019 Updated July 31, 2019 Revenue1 $637 million to $657 million $638 million to $648 million 21% to 23% Net Income2 $2 million to $6 million $4 million to $9 million Non-GAAP net income2 $63 million to $71 million $67 million to $73 million 70% to 86% Adjusted EBITDA $200 million to $210 million $205 million to $214 million 35% to 41% Net Cash Provided By Operating Activities $130 million to $145 million $130 million to $145 million 44% to 60% Capital Expenditure $52 million to $58 million $52 million to $58 million Diluted Net Income Per Share2 $0.01 to $0.04 $0.03 to $0.05 Non-GAAP diluted net income per share2 $0.42 to $0.48 $0.45 to $0.49 67% to 81% (1) Organic revenue growth expected to be 13% to 15%. (2) The Company is assuming 149 million weighted average diluted shares and an effective tax rate of approximately 28% for the full year 2019. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 20
Q3 2019 Financial Guidance In the setting of a now predominantly subscription-based contract portfolio, significantly increased client Annual Revenue Retention performance, expanded Annual Recurring Revenue base, and strong YTD new ACV sales, Inovalon is providing for Q3 2019 guidance as provided below, indicating 11% to 15% year-over-year organic revenue growth. Q3 2019 Financial Financial Metric Guidance Revenue $162.5 million to $167.5 million Net Income 1 $3 million to $4 million Non-GAAP net income1 $17 million to $19 million Adjusted EBITDA $53 million to $57 million Diluted Net Income Per Share1 $0.02 to $0.03 Non-GAAP diluted net income per share1 $0.11 to $0.13 (1) The Company is assuming 149 million weighted average diluted shares and an effective tax rate of approximately 28% for the full year 2019. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 21
Contents 1 Overview 2 2019 Q2 and TTM Financial This presentation serves as a Results supplement to the Inovalon announcement on July 31, 2019 pertaining to second quarter (Q2) of 3 2019 Financial Guidance 2019 results and guidance. 4 Appendix 1: Reconciliations INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 22
Reconciliation of Forward-Looking Guidance Adjusted EBITDA Inovalon defines Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA) as net income or loss calculated in accordance with GAAP, adjusted for the impact of depreciation and amortization, other expense, net, interest income, interest expense, provision for income taxes, stock-based compensation, acquisition costs, restructuring expense, tax on equity exercises, and other non-comparable items. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of revenue. A reconciliation of net income to Adjusted EBITDA follows: Guidance Range Three Months Ending Year Ending September 30, 2019 December 31, 2019 (In millions) Low High Low High Reconciliation of Forward-Looking Guidance Net (loss) income to Adjusted EBITDA: Net (loss) income $ 3 $ 4 $ 4 $ 9 Depreciation and amortization 27 27 107 107 Interest expense 17 17 66 66 Interest income (1) (1) (2) (2) Provision for income taxes (1) 1 1 1 3 EBITDA 47 48 176 183 Stock‑based compensation 6 6 20 20 Acquisition costs: Transaction costs — — 1 1 Integration costs — 1 3 4 Contingent consideration — 1 1 2 Other non-comparable items (2) — 1 4 4 Adjusted EBITDA $ 53 $ 57 $ 205 $ 214 Adjusted EBITDA margin 32.6% 34.0% 32.1% 33.0% (1) A 28% statutory tax rate is assumed in order to approximate the Company's effective corporate tax rate. (2) Other “non-comparable items” include items that are not comparable across reporting periods or items that do not otherwise relate to the Company’s ongoing financial results, such as certain employee related expenses attributable to advancements in automation and operational efficiencies, and legal expenses beyond those in the normal course of business. Non-comparable items are excluded from Adjusted EBITDA in order to more effectively assess the Company’s period over period and ongoing operating performance. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 23
Reconciliation of Forward-Looking Guidance Non-GAAP Net Income Inovalon defines Non-GAAP net income as net income or loss calculated in accordance with GAAP, adjusted to exclude tax-affected stock-based compensation expense, acquisition costs, restructuring expense, amortization of acquired intangible assets, amortization of debt issuance costs and debt discount, tax on equity exercises, and other non-comparable items. The Company defines Non-GAAP diluted net income per share as Non-GAAP net income divided by diluted weighted average shares outstanding. A reconciliation of net income to Non-GAAP net income follows: Guidance Range Three Months Ending Year Ending September 30, 2019 December 31, 2019 (In millions, except per share amounts) Low High Low High Reconciliation of Forward-Looking Guidance Net (loss) income to Non-GAAP net income: Net (loss) income $ 3 $ 4 $ 4 $ 9 Stock‑based compensation 6 6 20 20 Acquisition costs: Transaction costs — — 1 1 Integration costs — 1 3 4 Contingent consideration — 1 1 2 Amortization of acquired intangible assets 13 13 53 53 Amortization of debt issuance costs and debt discount 1 1 4 4 Other non-comparable items (1) — 1 4 4 Tax impact of add-back items (2) (6) (8) (23) (24) Non-GAAP net income $ 17 $ 19 $ 67 $ 73 GAAP diluted net income per share $ 0.02 $ 0.03 $ 0.03 $ 0.06 Non-GAAP diluted net income per share $ 0.11 $ 0.13 $ 0.45 $ 0.49 Weighted average shares of common stock outstanding - diluted 149 149 149 149 (1) Other “non-comparable items” include items that are not comparable across reporting periods or items that do not otherwise relate to the Company’s ongoing financial results, such as certain employee related expenses attributable to advancements in automation and operational efficiencies, and legal expenses beyond those in the normal course of business. Non-comparable items are excluded from Non-GAAP net income in order to more effectively assess the Company’s period over period and ongoing operating performance. (2) 28% statutory tax rate is assumed in order to approximate the Company's effective corporate tax rate. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 24
Definitions 1 Annual Recurring Revenue is defined as subscription-based revenue from existing clients plus outstanding intra-year renewals valued at an amount agreed upon in principal. 2 Annual Revenue Retention is defined as the percentage of revenue from engagements with existing clients in the prior year present in the current year. For example, Annual Revenue Retention would be less than 100% if there was a net loss of revenue from existing clients who either downsized or exited existing engagements, and would be more than 100% if on a net basis existing clients expanded existing engagements. 3 Annualized Contract Value (ACV) is defined as a metric reflecting the sum of the first 12 months of revenue expected from contracts signed during a specific period (such as a quarter or year). 4 Coverage is defined as the sum of Annual Recurring Revenue, Legacy revenue under contract, and expected Services revenue, divided by the specified year's revenue guidance. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 25
ACV, TCV and Bookings Inovalon’s sales have significantly expanded and accelerated, supporting strong growth going forward. The Company started reporting its sales performance in 2018 by providing Annual Contract Value (ACV) data for new sales, a metric reflecting the sum of the first 12 months of revenue expected from new contracts signed during a specific period (such as a quarter or year). Inovalon first reported this metric with the release of Inovalon’s Q3 2018 results on November 7, 2018. Of note, due to the fact that the bulk of the Company’s contracts (also referred to as a “Statements of Work” or “SOWs”) are multi-year in their contracted term (or contracted duration), the “bookings” or “Total Contract Value” (TCV) pertaining to the ACV is significantly larger than the ACV. For example, if the ACV for a period was $X, the corresponding total Bookings or TCV of the underlying sales would be perhaps $2X to $3X, depending on the average contract term signed within the group of underlying sales in the period. Importantly, while the Company is providing ACV sales data to provide insight into the accelerated nature of the Company’s sales in a comparable (e.g., year-over-year) fashion, the corresponding total sales, bookings, or TCV is even more significant. ACV * Contracts depicted are Illustrative only to support discussion of ACV Executed SOWs Executed Illustrative Dollar Equivalency 12 Months 24 Months 36 Months Etc. Initial Contract / SOW Term Illustrative only. Please see definitions on slide 25. INOV Q2 2019 Earnings Supplement (7.31.19) v1.0.0 26
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