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Inovalon Holdings Inc (NASDAQ:INOV)Q4 2018 Earnings Conference CallFeb. 20, 2019, 5:00 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:
Operator
Good day ladies and gentlemen and welcome to the Inovalon Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded.
And now, I'll turn the conference over to your host, Kim Collins. Please begin.
Kim Collins -- Senior Vice President of Corporate Marketing & Communications
Good afternoon. This is Kim Collins, Senior Vice President of Communications at Inovalon. I'm here today with Dr. Keith Dunleavy, Inovalon's Chief Executive Officer and Chairman of the Board; and Jonathan Boldt, Inovalon's Chief Financial Officer. I would like to welcome you to our fourth quarter and full year 2018 earnings call.
The press release announcing our financial results for the fourth quarter and full year 2018 was distributed this afternoon and a replay of today's call will be available in a few hours and posted on the Investor Relations' page on Inovalon's website.
For those of you listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, February 20th, 2019 and will not be updated subsequent to this initial earnings call.
I'll remind you that certain statements made during this call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995 including statements related to future results of operations and financial position, our business strategy and plans, market growth, and our objectives for future operations.
Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's earnings release and filings with the SEC.
In an effort to provide additional information to investors, this conference call and webcast is accompanied by a presentation which is available on the IR section of our website. You are encouraged to download a copy of this presentation and follow along with our prepared remarks.
Our presentation also includes certain non-GAAP financial measures. You'll find definition of these non-GAAP measures and reconciliation charts at the end of the company's earnings release and on the company's website.
Now, it is my pleasure to turn the call over to Dr. Keith Dunleavy.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Thank you, Kim. Good afternoon everyone and thank you for joining our call. Inovalon continues to achieve strong positive inflection in its business performance. The differentiated capabilities of the company are increasingly resonating with existing clients and resulting in the securing of new clients. We are seeing this across all of the company's business verticals with strong sales being realized by each.
By the end of the fourth quarter, we had achieved a 77% year-over-year increase in annual contract value sales of our Inovalon ONE Platform solutions excluding ABILITY and Services both of which also had very strong sales increases.
Our sales success is not only broad based among our existing clients, but it is also resulting with new clients. We added an impressive 108 new logos to the Inovalon client portfolio in 2018, a 29% increase over the prior year each representing additional incremental opportunity to demonstrate value, land, and expand.
And all of these sales are not being swallowed by client churn or client losses. In fact it's quite the contrary. By year end 2018, we had successfully secured all of our significant client contract renewals for all of 2019. And given the fact that these renewals are typically multiyear in nature, this also bodes very well for several years to come.
With the delivery of our strong value to our clients, we are also able to positively support our solution pricing in the market. These aspects combined with greater than 80% of our business, now being subscription-based resulted in our entering 2019 with a client revenue retention rate that is greater than 100%, in fact coming into the year at 103%.
As a result, our accelerating sales growth is incrementally adding on top of a solid client revenue foundation, resulting in a significant positive inflection in our topline growth. Our resulting projections for 2019 reflect these strong dynamics with a forecasted 21% to 25% increase in revenue, inclusive of an organic expansion of 13% to 17%.
And the nature of the growth for all the reasons I've just walked through predominant of subscription-based contribution, strong client contract renewal rates, strong client retention rates, broad-based diversity of strong sales have provided us strong visibility into the growth guidance numbers.
As of today we now have visibility into 96% of the full year guidance for revenue. And this growth is notably profitable. The solutions delivered through the Inovalon ONE Platform are delivering meaningful value to our clients and are doing so with significant operating leverage for the company.
As Jonathan will touch on in more detail, the leverage efficiencies we are seeing in our cost of revenue and G&A are resulting in notable expansions in our profitability allowing us to both increase our bottom line profitability, as well as invest in initiatives designed to further accelerate our growth.
At the same time now that we have the past heavy build period of the Inovalon ONE Platform behind us, we are seeing a return to more historical CapEx expenditure rates, thus resulting in strong cash flow. Our growing efficiency and leverage is not only evident in our 2018 performance, but also in our full year 2019 guidance. While we see top line revenue expansion of 21% to 25% year-over-year, we see adjusted EBITDA expanding even more strongly at 32% to 38% year-over-year.
Net cash provided by operating activities expanding at an even stronger rate of 44% to 61% year-over-year; and non-GAAP diluted net income per share expanding at 52% to 74% year-over-year. I think that it's important for me to note that it is not only the pace and sum total of new sales and their profitability, but also the breadth of clients, the expanding market penetration and the types of solutions that we are introducing to the market and selling that has us so excited.
As testament to this, I am pleased to convey that Inovalon now supports 24 of the top 25 health plans in the United States. We continued our market penetration expansion into the specialty pharmacy marketplace, which now stand at approximately 40% and we continue to add providers and life sciences clients as well.
As we announced a few weeks ago, we executed 14 engagements in our newly launched Clinical Data Extraction as a Service and Natural Language Processing solutions over just a 10-week period at the end of 2018 and the beginning of 2019. And we have continued to add engagements since that announcement.
The strength we are seeing is the result of multiple factors. Together, they have driven the transformation and the inflection that we have seen: significant investments in sales leadership and overall sales team headcount; investments in our go-to-market strategy; simplifying the message; streamlining the price quote and contracting process; and changing to a technology-led sale instead of a healthcare subject matter expertise-led sale.
We executed on several cost takeout initiatives during 2018 leaning heavily on the increased automation and connectivity that our technology investments have availed as well as capabilities brought through our acquisition of ABILITY. We have transitioned our technology platform and business contract structure to a cloud-based subscription-based business.
We've continued to integrate and hone the business capabilities, fantastic personnel, technologies and data streams of our business units including ABILITY increasing the beneficial network effect of our being together and bringing to life synergy revenue generation opportunities.
We have continued to innovate, develop and expand our data assets and cloud platform increasing both our MORE2 Registry and the number of modules and sophistication offered within the configurations of the Inovalon ONE Platform. Inovalon is delivering high-value solutions to a marketplace that is undergoing an important transformation to data-driven healthcare.
Our vision is to be the data-driven enablement layer within this ecosystem, the proverbial Intel Inside, the trusted partner able to empower our clients achievement of clinical quality and financial performance improvement across the healthcare ecosystem. We are seeing this play out in the positive resulting inflection in our business. And this has us excited about what lies ahead.
With that, I would like to now turn the call over to Jonathan to discuss financial results and our financial outlook in more detail. Jon?
Jonathan Boldt -- Chief Financial Officer
Thank you, Keith, and good afternoon, everyone. I want to begin by highlighting a few key points building on Keith's comments. First, we are pleased with the transformation that we achieved in 2018, the increased pace of our sales growth, the transitioning of our revenue base to subscription-based contracts and our strong cash flow generation. Second, we are focused on accelerating organic revenue growth, expanding technology-based efficiencies and strong profitability with the associated cash flow delivery.
And third our strong client focus and subscription-based platform offerings gives us increased confidence and visibility into 2019 when we expect to deliver 21% to 25% top line revenue growth inclusive of 13% to 17% organic revenue growth with 96% coverage already in place.
Now turning to our fourth quarter results. Fourth quarter 2018 revenue was $136.3 million, an increase of 19% year-over-year. ABILITY's acquired revenue contribution was $38.2 million. Fourth quarter subscription-based platform revenue was 81% of total revenue which grew 53% year-over-year.
Sequentially, subscription-based platform revenue as a percentage of total revenue declined 2% from 83% in the third quarter of 2018, primarily due to normal revenue churn as well as the timing of certain next-generation client software implementations, where revenue recognition criteria under ASC 606 was not achieved during the fourth quarter, but will contribute to revenue during the first quarter of 2019.
Full year 2018 revenue was $527.7 million, an increase of 17% year-over-year and within our revised revenue guidance range. Subscription-based platform revenue grew by $124.6 million or 42% as compared to the full year 2017. For 2018 subscription-based revenue was 80% of total revenue in 2018. Legacy revenue represented only 9% of total revenue and service revenue was 11% of total revenue.
For 2018 the company significantly diversified its client base with client concentration dropping significantly. The top 10 clients of the company contributed 42% of our total revenue in 2018, down from 53% in 2017. We have provided additional detail on our fourth quarter revenue performance on slide 9 in our Q4 2018 supplemental earnings deck.
As Keith mentioned, fourth quarter 2018 gross margin was strong at 73.7%, a significant year-over-year increase of 610 basis points. Excluding ABILITY, gross margin in Q4 2018 was 68.5%, which represents a year-over-year gross margin expansion of 90 basis points.
Consolidated gross margin expansion was driven by our increased mix of high-value higher-margin subscription-based platform offerings and realization of our technology-enabled efficiencies. Our strong gross margin illustrates the significant leverage opportunity as revenues expand.
General and administrative expenses for the fourth quarter was $48.3 million, an increase of $6.3 million year-over-year and $1 million sequentially. On a year-over-year basis, the increase in G&A was driven by $7 million of acquired G&A from ABILITY, which is lower than last quarter; and $2 million of non-comparable expenses, which was partially offset by $2.6 million reduction in other expenses.
Adjusting for the non-comparable expenses, normalized fourth quarter G&A was $46.3 million and remained well below the guidance range of $49 million to $53 million of normalized quarterly G&A expense. To make a point of it, reflecting our increased operating efficiencies, normalized G&A increased only 10.5% as compared with the year-over-year revenue increase of 19%. Additional details are provided on slide 13 of our Q4 earnings supplement deck.
Adjusted EBITDA in the fourth quarter came in at $38.8 million, an increase of $13.3 million or 52% year-over-year. Adjusted EBITDA margin for the fourth quarter of 2018 was 28.5% compared to 22.3% for the fourth quarter of 2017. 2018 non-GAAP net income per share was $0.05 which decreased $0.01 on a year-over-year basis, primarily driven by an increased weighted number of shares outstanding.
Turning to the balance sheet. Inovalon ended 2018 in a strong financial position. As of December 31, 2018, cash, cash equivalents and short-term investments were $122.6 million; total outstanding debt was $977.6 million.
Reported balance sheet debt was $949.3 million, net of issuance discounts and deferred financing fees; and the company had not drawn any amount from the $100 million revolving credit facility. The company's net debt ratio as defined with our debt agreement was approximately 4.2:1 as of December 31 2018.
Turning to cash flow. Net cash provided by operating activities in the fourth quarter 2018 was $27.4 million, which even after our debt service interest payments of $16 million represents the strongest fourth quarter of cash generation since Inovalon went public in 2015.
Compared to our fourth quarter of 2017, net cash from operations increased $10.6 million or an increase of 63%. For the full year of 2018, net cash provided by operating activities was $90.4 million. Notably 2018, net cash provided by operating activities includes $13.4 million in outflows related to acquisition and integration payments and $43.6 million in cash interest payments, which together represent incremental cash outflows of $51.1 million when compared to the prior year further highlighting the strength of our 2018 cash flow generation.
CapEx was $14.7 million in the fourth quarter of 2018, down $11.6 million versus the fourth quarter of 2017. Full year 2018 CapEx was $5 million over our guidance range, which was the result of maximizing favorable payment terms and leveraging the strong cash flow generation in the quarter.
While we will maintain investments in the business to sustain long-term growth, we continue to see a decrease in CapEx as a percentage of revenue from full year 2017 and 2018 levels and after the launch of the Inovalon ONE Platform.
For 2019, we reaffirm our expected CapEx spend inclusive of ABILITY to be $52 million to $58 million, down from 2018 spend of $65 million, which represents approximately 8% to 9% of 2019 revenue. Additional details on our CapEx can be found on slide 26 of our earnings supplement deck.
Now, let me turn to our outlook for 2019 and provide some key highlights. First for 2019, we expect revenue of $637 million to $657 million, representing reported revenue growth of 21% to 25% including organic revenue growth of 13% to 17%.
Second, we expect 2019 adjusted EBITDA of $200 million to $210 million, representing adjusted EBITDA margin expansion of approximately 290 basis points at the midpoint of 2019 guidance.
And third, we expect net cash provided by operating activities of $130 million to $145 million. Finally, in the setting of the strong transformation we have achieved and the increased visibility we have into 2019, we are providing first quarter 2019 guidance as follows. We expect revenue of $143 million to $146 million, representing reported revenue growth of 54% to 57%, and organic revenue growth of 12% to 15%; we expect adjusted EBITDA to be $42 million to $44 million; and we expect non-GAAP diluted net income per share of $0.07. Please refer to today's earnings release and our fourth quarter supplemental earnings deck for details of our 2019 guidance ranges.
With that, let me turn the call back over to the operator to conduct our Q&A session.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser -- Morgan Stanley -- Analyst
Yeah. Hi. Good morning -- sorry, good afternoon. So it was a long day. So my question is really focused -- when we think about guidance and we think about the acceleration in organic revenue growth compared you did -- what you did in 2018, but also what you did in 4Q this fourth quarter. I know Keith that you talked about the visibility that you have. But can you maybe help us understand kind of like how to think about the cadence.
You gave us now the first quarter and obviously the organic growth rate is expected to accelerate quite nicely in the second half of the year. But do you have kind of like a good sense of that progression or can we see a year where some of that organic growth is really going to be pushed out to the fourth quarter similar to the trends that we've seen in 2018?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Hey, good evening, Ricky. Thanks for the question and thanks for taking the time. Great question. So this is one of the key reasons we wanted to give Q1 guidance. We're seeing first as you mentioned very strong visibility throughout the year, 96% at this point. We saw that business getting signed at various different points during -- toward 2018. And now that's all layering in and went through a lot of implementation processes and stand up.
As you saw in our numbers there in Q4, this is now in place, which is why we wanted to give Q1. You'll notice the narrow range on our Q1. There's a lot of degree of confidence in that in those numbers. But also because we have these clients layering in, we have a nice cadence of how that comes into the year.
ABILITY is extremely predictable as they roll through. That's the only inorganic piece of our business. It's only in first Q of 2019. All the rest of it is organic rolling through in 2019 starting with Q2 and going forward.
So a lot of visibility, a lot of subscription base, a lot of the implementations now in place, a lot of confidence, and quite frankly, a lot of momentum.
Ricky Goldwasser -- Morgan Stanley -- Analyst
Okay. And when we think about to your point the guidance is very tight into fourth quarter when you basically guided us to an EPS of $0.07. How should we think about also just the contribution from kind of like below the line and your ability to control some of the SG&A and the expense spend?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
I think we're seeing great strength there as well. So if we look on our cost lines, our cost contributors here taking a look at the Q4 period, we saw an increase in our G&A in only something like 10% on top of a roughly 17% increase in revenue over the period, so a lot of control there. And you saw a similar pattern in the second half of last year.
So once we had ABILITY in place Q1, Q2 had a lot of work to get done in preparation for and in execution of that combination. But once we have that in place in Q2, if you take a look at Q3 and Q4 of last year they showed really strong cost discipline and a lot of operating leverage going forward.
So if you look at slide 13 in our deck today, you'll see that our employee-related expenses and professional fees actually decreased $2.6 million in the Q4 period. We only went up $7 million from the acquired G&A component and then we had a non-comparable element of $2 million.
It's -- good for me to maybe take a moment to explain what that $2 million was? We put out an 8-K today, settling the former IPO lawsuit. Obviously, the company strongly believes in its position on that suit. We settled it and the company will pay $1.7 million. The 8-K explains the full details. It still needs to be accepted by the court but that is expected. And $1.7 million is already reflected in our 2018 numbers.
So take that all out and we were up approximately 10.5% compared to an 18.9% year-over-year revenue increase. And also I think important Ricky our gross margins are showing good strength as well as we show value to our clients. So we're renewing and initiating new coverage or new contracts at strong and appropriate value ratios in the marketplace.
Ricky Goldwasser -- Morgan Stanley -- Analyst
Okay. Thank you.
Operator
Thank you. Our next question comes from Sean Wieland with Piper Jaffray.
Sean Wieland -- Piper Jaffray -- Analyst
Hi, thanks so much. I'm trying to back into some of your -- the line items on revenue and maybe you can just give them to us subscription legacy services? You gave us ABILITY?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Yes. Hey Sean, good evening. Hold on a second while we grab those for you.
Jonathan Boldt -- Chief Financial Officer
Sean, so for full year our subscription based revenue was $420 million. Legacy revenue was $46.6 million and service revenue was $61.1 million.
Sean Wieland -- Piper Jaffray -- Analyst
Okay. So I can't do the calculations on a fly to get to the quarter, but it sounds like you mentioned subscription I think and you referenced it in your comment subscription revenue was down sequentially. Quick math looks like that maybe was down about $10 million sequentially. So help me understand how the recurring subscription revenue line could be down sequentially into Q4 like that?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Sean let me start then I'll hand it over to Jon for any additional color. So that was the last portion of a little bit of churn in our client base. Remember the forces that acted upon us in 2018 were a mix of legacy and also some client base that was on subscription based. So, we had the wrap-up of that piece in Q4. We also had the initiation of a new generation of software in Q4 that because of how the client implemented that software and so Jonathan made reference to because of how they made reference -- how they turned it on, some of the delivery on that didn't qualify for 606 recognition. So, therefore, we had a gap in that time period of that particular client. And that revenue now starts in Q1 under 606.
So, a combination of that churning out that last bit of the forces that were on us on 2018 and transitioning to a new piece of software, a large piece of software led to the numbers you're referring to. Jonathan any additional color?
Jonathan Boldt -- Chief Financial Officer
No, that's it Keith.
Sean Wieland -- Piper Jaffray -- Analyst
Okay. Thank you for that. And then ABILITY, should we just plan for 2019 that this is roughly a $39 million, $40 million business for each quarter in 2019?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
That's the right way of looking at it.
Sean Wieland -- Piper Jaffray -- Analyst
Okay. Thanks so much for taking the question.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Absolutely.
Operator
Thank you. Our next question comes from Donald Hooker with KeyBanc.
Donald Hooker -- KeyBanc -- Analyst
Great. Good evening.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Hey Don.
Donald Hooker -- KeyBanc -- Analyst
I just would love to hear your -- any updated commentary from you around some of the interoperability efforts some of the Cures Act that I guess were out with the information blocking and opening, is that meaningful to you? I know we personally chatted about that at the Investor Day, but just wanted to hear your updates there, that's a big focus for you.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Yes, Don thanks for the question. Huge amount of updated information as you're familiar -- really two principal documents one of them over 700 pages in length. This is very positive stuff for us. We have the introduction of a lot of new interoperability capabilities driving toward -- two principal ones are obviously the fire standards.
I'll point out that the laboratory where fire came from was actually under Zak Kohane, Dr. Kohane who joined our Board just about a month and a half ago. And then a very big push for those who aren't familiar with it to API-driven interoperability. Both of these things are big positives for Inovalon. We've already been operating that space. The fact that these are now going to be driving payers to interoperate this way will drive we see an additional demand for these capabilities as well as an additional ability for us to support those participants in the marketplace who don't have those technology ecological capabilities.
So, for clarity, a lot of this has to do with organizations in the healthcare ecosystem being required now by federal standards to offer data connectivity and data availability through systems that they typically don't have and we do have. So, we can do it on their behalf, so they can be in fulfillment of those criteria.
So, positive for us in a number of ways. Many hundreds of pages working through with many of our teams and partners in the marketplace and looking forward to seeing the benefits of those.
Donald Hooker -- KeyBanc -- Analyst
Great. And then the business has changed a lot over the past year in terms of how you approach clients, particularly with the SaaS percentage up so high now and you commented that there's a lot of renewals and you alluded to the fact that they're multiyear contracts.
What is the average -- how has the average duration of your contracts changed, I guess, with this transition in your business? Is it different from prior years? I mean is it -- what's sort of the average duration now versus maybe a year ago? Is it longer shorter?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
So our core large classic contracts are still -- think of them as around three years in duration. We have some that are now going out five-plus years. We have some going out notably longer than five years. And then also, we have the blended-in aspects of ABILITY which starts with a one-year agreement and then goes to these auto-renew structures. So we now have an increasing blend of different ones. So our average on a contract count basis is going to be coming down from three years, but our core stuff is still typically hitting closer to the three-year aspect.
Donald Hooker -- KeyBanc -- Analyst
Okay. Thank you very much.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from Jamie Stockton with Wells Fargo.
James Stockton -- Wells Fargo -- Analyst
Hey. Good evening. Thanks for taking my questions. I guess, maybe, first, the subscription revenue ramp that you guys seem to be expecting, kind of, throughout the year, can talk about the implementation work that needs to be done to achieve that? Is the cadence of that implementation work kind of in concert with the ramp that you expect? Is it going to be very kind of first half weighted? If we can start with that, that will be great.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Sure, Jamie. Thanks for taking the time. Good to talk to you. So I think you're getting to what's our conversion rates on our contracts and we have a number of different types of platform implementations that are rolling out.
Things like the CDE-as-a-service and NLP-as-a-service can be a very rapid implementations. And then some of the specialty pharmacy solutions out of ScriptMed take more time. And then we have a lot of stuff in between.
I think an important -- a very important takeaway is that, the profile of the conversions of the business we have signed, that 96% visibility, that is already factored into our year, right? So we're not worried, if you will, about conversion of stuff we've signed. We're in a good place on that.
Obviously, the yet to be signed to fill in that 4%, we'll have to see exactly what it is that we fill it in with and how that progresses through the year. But we are not expecting a story of a disproportionate back-ended year. That's really why we gave the Q1 numbers, so that people could see the progressional cadence throughout the year.
James Stockton -- Wells Fargo -- Analyst
Okay. And they maybe just a follow-up on that. If the vast majority of the renewal work that you needed to do for kind of 2019 has been done, how do you approach the effort to cross-sell? It seems like a lot of companies' renewals are when a lot of kind of up-sell happens. So if you could just talk about, how you guys approach that from a sales standpoint, that will be great?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Sure. And Jamie, I would say, we approach that a little differently than it sounds like your other cases. We have moved to a more of a dedicated account management model as we transitioned away from our historical healthcare subject matter expertise approach to a more technology subject matter expertise or technology-led sale. So now we have these teams that on an ongoing basis are caring for the client.
Our cross-sell and up-sells really come throughout the year. We have a really good historical track record of being successful there. We don't see a predominance of that associated with the renewal period. We see some occur through a renewal period, but I would describe -- I'm conveying anecdotally. I don't have numbers in front of me here for you. But we really see a fair amount of cross-sell and up-sell throughout the year and we're seeing very strong performance in that area this year.
James Stockton -- Wells Fargo -- Analyst
Okay. Thank you.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from Sandy Draper with SunTrust Robinson.
Jack Wallace -- SunTrust Robinson -- Analyst
Hi, guys. This is Jack Wallace on for Sandy. Just to follow-up on Sean's question with the call it roughly $10 million sequential decline in the fourth quarter. I guess, how much of that was from these larger clients? Was that a transition to a 606-based contract that got pushed out? How much of the revenue decline was just due to some normal churn? And I guess, going forward and maybe this is a question for Jason I guess, what's your -- I guess your confidence in the pipeline for adding that last 4% of revenue?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Great. Jack thanks for the question. So first of all our churn throughout 2018 the forces that impacted our 2018 that was pretty consistent throughout the whole year. So if you map that negative contribution component, you'll get a consistent number there in Q4 as well. So it's a chunk of that subscription number that Sean was talking about earlier $8 million to $10 million range. That -- if you think back to the ACA elements pulling out, some of those clients were on subscription-based platforms and you saw that -- tail of the effect in Q4. The rest of it was exactly as you said transition to a 606-subjected software platform as we came off of a previous one. 606 has certain abilities to demonstrate -- what's the right word I'm looking for Jonathan?
Jonathan Boldt -- Chief Financial Officer
Benefit from the clients perspective.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Benefit from the clients perspective meeds to able to be documented and demonstrated. And that occurred in Q1 as opposed to Q4. So we created a little bit of an air gap for that but that started up here in first quarter. So that's already baked into our full year numbers. So now the second part of your question was what's our confidence on the 4%. Very, very strong confidence. We're seeing strong ACV momentum through 2018 77% total excluding services and ABILITY. ABILITY and services were both very strong. ABILITY's we don't have into our Oracle system yet, so we didn't want to put those numbers in with our core numbers that are now on the new Oracle system.
A little commercial there for Oracle I guess. And then the services piece, because that has a different nature to it it's a different type of ACV growth number. But very strong momentum. And as we did say in our -- little earlier, we're seeing that very much continue here in Q1. So we're -- obviously really strong foundation coming in with a really strong ACV momentum. We don't see either of those things changing here in 2019. So good confidence.
Jack Wallace -- SunTrust Robinson -- Analyst
Great. Thanks for the answers.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Thanks, Jack.
Operator
Thank you. And our next question comes from Matthew Gillmor with Robert Baird.
Matthew Gillmor -- Robert Baird -- Analyst
Hi, thanks for the question. Following up on at the 606 issue you've talked about. Is there any change you can make from an implementation standpoint so you get better predictability around that in the future? Was that just sort of a one-off issue this quarter? Just trying to understand if that's something that could impact you in the future?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Well, I think a lot of people are worrying on 606 a little frankly. I think we saw some of that as we were trying to get clarity on wrapping up the year and wrapping up all the books.
So, yes, the answer to your question is yes, we can design the contracts in such a way as to not have that be an issue. And then there's also an aspect of 606 where it -- there's a difference in the handling of the very first one you put in on 606, but we do have the ability to change some of that contract structure and take care of that. And that's now built into our range. So all of those that were a possible sensitivity here in 2019, we've now built that into our cadence for the year.
Matthew Gillmor -- Robert Baird -- Analyst
Okay. And then asking about the organic growth in 2019. I think you implicitly raised it to 13% to 17% from 12% to 14% previously. Does that just reflect the timing issue around this revenue that slipped into the first quarter? Are there any other dynamics at play?
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Yeah, Matt. So that's just the math. We didn't change the full year guidance for this year, but because of the way 2018 ended, the way the math works out is -- it's 13% to 17%. But for us it's the exact same delivery that we had previously projected.
Matthew Gillmor -- Robert Baird -- Analyst
Okay. Thanks very much.
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Absolutely. So with that being the last question, I just wanted to close for a moment and thank everybody for taking the time for us this evening and you all have incredibly busy days.
Before I wrap up, I just wanted to hit three points that we believe are really important. Number one is increasing differentiation. So our data sets, our cloud platform capabilities are being increasingly recognized in the industry, as industry leading, as differentiated. You're seeing this in now 24 of 25 health plans now being serviced by Inovalon. We think that that really shows the market is recognizing this and we're seeing that in our ACV growth and our outlook.
Number two is just that the increasing growth. We're seeing an acceleration of demand, an acceleration of our ability to sell to that demand and an acceleration of our ability to implement to that sale. And that's progressing very nicely for us.
And then number three, because of the nature of our platform, because of a lot of work we've done on cost management and efficiency initiatives and technology, we're seeing a lot of operating leverage, which is an increasing profitability. So we're seeing not only the margins expand but also in the setting of our CapEx returning more toward a historical level. We're seeing a really nice cash flow profile progress in a positive way.
So we're excited about the year ahead. We're excited about the financial performance. We're looking forward to bringing you Q1 and all of those numbers, and we thank you for your time. Thanks everybody. Good night.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.
Duration: 44 minutes
Call participants:
Kim Collins -- Senior Vice President of Corporate Marketing & Communications
Keith Dunleavy -- Chairman of the Board, Chief Executive Officer
Jonathan Boldt -- Chief Financial Officer
Ricky Goldwasser -- Morgan Stanley -- Analyst
Sean Wieland -- Piper Jaffray -- Analyst
Donald Hooker -- KeyBanc -- Analyst
James Stockton -- Wells Fargo -- Analyst
Jack Wallace -- SunTrust Robinson -- Analyst
Matthew Gillmor -- Robert Baird -- Analyst
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Pecaut & CO. boosted its stake in shares of Alphabet Inc (NASDAQ:GOOG) by 1.0% during the third quarter, Holdings Channel reports. The institutional investor owned 7,257 shares of the information services provider’s stock after purchasing an additional 71 shares during the quarter. Alphabet accounts for 6.0% of Pecaut & CO.’s investment portfolio, making the stock its 3rd largest position. Pecaut & CO.’s holdings in Alphabet were worth $8,661,000 as of its most recent filing with the SEC.