July 31, 2019, 4:21 p.m. EDT


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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (the "SEC") on February 20, 2019 (the "2018 Form 10-K"). Unless we otherwise indicate or the context requires, references to the "Company," "Inovalon," "we," "our," and "us" refer to Inovalon Holdings, Inc. and its consolidated subsidiaries. Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this Quarterly Report other than statements of historical fact, including but not limited to statements regarding our future results of operations and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "see," "will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Factors that may cause actual results to differ from expected results include, among others: our future financial performance, including our ability to continue and manage our growth;

our ability to retain our client base and sell additional services to them;

the effect of the concentration of our revenue among our top clients;

our ability to innovate and adapt our platforms and toolsets;

the effects of regulations applicable to us, including regulations relating to data protection and data privacy;

the effects of consolidation in the healthcare industry;

                  the ability to successfully integrate our acquisitions, including
                  ABILITY, and the ability of the acquired business to perform as
                  the ability to enter into new agreements with existing or new
                  platforms, products, and solutions in the timeframes expected, or at
                  the successful implementation and adoption of new platforms, products
                  and solutions;
                  the effects of changes in tax legislation for jurisdictions within
                  which we operate, including recent changes in U.S. tax laws;
                  the ability to protect the privacy of our clients' data and prevent
                  security breaches;

the effect of current or future litigation;

the effect of competition on our business;

the efficacy of our platforms and toolsets; and

the timing and size of business realignment and restructuring charges.

Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, among other factors, those set forth in our 2018 Form 10-K, under the heading Part I, Item 1A, "Risk Factors." You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are

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under no duty to, and we disclaim any obligation to, update any of these forward- looking statements after the date of this Quarterly Report or to conform these statements to actual results or revised expectations. Overview

                                                                           June 30,
                                                                      2019          2018
                                                                        (in thousands)
        MORE2 Registry� dataset metrics(1)
        Unique patient count(2)                                       278,629       252,603
        Medical event count(3)                                     45,776,969    39,333,463

(2) Unique patient count is defined as each unique, longitudinally matched, de-identified natural person represented in our MORE2 Registry(R) as of the end of the period presented.

(3) Medical event count is defined as the total number of discrete medical events as of the end of the period presented (for example, a discrete medical event typically results from the presentation of a patient to a physician for the diagnosis of diabetes and congestive heart failure in a single visit, the presentation of a patient to an emergency department for chest pain, etc.).

(4) PAM is defined as the sum of the analytical processes performed on each respective patient within patient populations covered by clients under contract. As used in the metric, an "analytical process" is a distinct set of data calculations undertaken by us which is initiated and completed within our platform solutions to examine a specific question such as whether a patient is believed to have a condition such as diabetes, or worsening of the disease, during a specific time period.

Trends and Factors Affecting Our Future Performance A number of factors influence our growth and performance. We see many of these factors as being more quantitatively driven, such as the rate of growth of the underlying data counts within our datasets, the ongoing investment in innovation, and our revenue

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mix of subscription-based platform offerings. Additionally, there are several factors that influence our growth and performance that are less quantitatively driven, including seasonality, macro-economic forces, and trends within healthcare (such as payment models, incentivization, and regulatory oversight) that can be driven by changes in federal and state laws and regulations, as well as private sector market forces.

                                                      Three Months Ended           Six Months Ended
                                                           June 30,                    June 30,
                                                      2019          2018          2019          2018
        Investment in Innovation:
        Research and development(1)               $    7,898     $   7,545     $  16,099     $  13,966
        Capitalized software development(2)            8,801        11,366        16,708        21,662
        Research and development infrastructure
        investments(3)                                   411           727         1,581         9,492
        Total investment in innovation            $   17,110     $  19,638     $  34,388     $  45,120
        As a percentage of revenue
        Research and development(1)                        5 %           5 %           5 %           6 %
        Capitalized software development(2)                6 %           7 %           6 %           9 %
        Research and development infrastructure
        investments(3)                                     - %           - %           1 %           4 %
        Total investment in innovation                    11 %          12 %          12 %          19 %

(2) Capitalized software development includes capitalized costs incurred to develop and enhance functionality for our platform solutions.

(3) Research and development infrastructure investments include strategic capital expenditures related to hardware and software platforms under development or enhancement.

Mix of Subscription-Based Platform Offerings and Legacy Solutions. In 2018, we executed an intentional transition in our offering portfolio from legacy platform solutions to subscription-based cloud-based platform offerings with add-on advisory services. Subscription-based cloud-based platform offerings are generally defined as modular, cloud-based solutions that utilize dynamic, high-speed cloud-based compute and storage, offer enhanced data visualization capabilities, and are tied to subscription-based contract structures where revenue is predominantly based on factors such as the number of patients under contract or similar relevant metrics (e.g., the number of prescriptions issued), the size of the client, and/or a specific period of time. Additionally, we expanded our offerings of cloud-based SaaS solutions enabled by the Inovalon ONE(R) Platform which utilize Artificial Intelligence and machine learning application. Legacy platform solutions are generally defined as solutions historically not cloud-based in nature and not tied to subscription-based contract structures. We believe subscription-based cloud-based platform offerings provide more advanced capabilities, higher value, and greater visibility to clients, as well as improved visibility, market differentiation,

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and financial performance for us. Over time, we expect that subscription-based cloud-based platform offerings will continue to represent an increasing share of our total revenue, contributing to an increasing base of recurring revenue. Additionally, through the ABILITY acquisition, we have expanded our subscription-based cloud-based platform offering revenues and we continue to achieve revenue synergies realized through i) the infusion of Inovalon's data and analytics into ABILITY's existing offerings, ii) the combination of the Inovalon ONE(R) Platform and myABILITY(R) Platform capabilities to introduce new and more vertically integrated offerings which appeal to both organizations' traditional market base, iii) the enhancement of Inovalon's offerings from ABILITY's provider point-of-care data, connectivity, and workflow presence, and

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as our operating environment changes. On a regular basis, we review the accounting policies, assumptions, and evaluate and update our assumptions, estimates, and judgments to ensure that our unaudited consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Jul 31, 2019

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