Performant Healthcare Inc (PHLT) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Performant Financial Corporation third-quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for question. (Operator Instructions). This conference is being recorded today, Monday, November 5, 2012.

I would now like to turn the conference over to Richard Zubek with Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. By now you should have received a copy of the earnings release that accompanies third-quarter 2012 results. If you have not, a copy is available on our website, www.PerformantCorp.com under investors.

Today's speakers are Lisa Im, Chief Executive Officer; Hakan Orvell, Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call including our financial guidance are forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's filings with the SEC. Actual results may differ materially from those described during the call.

In addition, all forward-looking statements are made as of today. The Company undertakes no obligation to update any forward-looking statements based on new circumstances or revised expectations.

Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measure in the table attached to our press release.

I would now like to turn the call over to Lisa Im.

Thank you, Rich. Good afternoon, everyone, and thank you for joining us today for our first earnings call as a public company where we will discuss our third-quarter 2012 results.

Before we get into our financial results, I would like to acknowledge and thank all the people who participated and helped us through the IPO process including our employees, who without their hard work and dedication we would not be the Company we are today; our clients who trust us with the opportunity to partner with them in critical audit and recovery processes; our principal investors, bankers, analysts, attorneys, accountants, and other advisers who provided advice throughout the process. And a very special thank you for many new investors who spent the time learning the Performant story and making an initial investment in our Company.

Our IPO in August is the latest step for our Company and we are excited about our future prospects in the public market.

As this is our first public call, I wanted to take some time this afternoon to provide a brief Company introduction. Performant is a leading provider of technology-powered recovery and related analytics services in the US. Through our robust purpose built technology platform, we help identify and recover delinquent or defaulted assets and improper payments for both government and private clients. Our clients typically operate in complex and regulated environments and outsource their recovery needs in order to reduce losses on billions of dollars of defaulted student loans, improper healthcare payments and delinquent state tax and Federal Treasury receivables.

We provide our services primarily in two markets, Student Lending and Healthcare, but we also work with various Federal and state government clients as well as private clients in the recovery of other defaulted assets. It is important to note that we have a differentiated operating model and technology platform as compared to accounts receivable management for collections companies. We do not buy debt or compete on labor costs arbitrage. We leverage our technology platform and workflow processes to drive efficiencies throughout our organization across industry verticals.

Our revenue model is success-based and we earn fees on the aggregate amount of funds that we recover for our clients. Because our business objectives are so closely aligned with our clients, we are viewed by our clients as a revenue or cash driver, not a cost or expense line item.

We have very long-term relationships with the majority of our clients with the average tenure being 10 plus years and we are the only vendor that has been awarded four consecutive contracts by the Department of Education since 1990. In addition, we are one of four first to market providers on the current CMS Medicare RAC contract with coverage of Region A, which is the Northeast region of the United States.

Hakan will discuss our Q3 results in greater detail but at a high level, we are very pleased with our continued strong financial performance. In Q3, we reported revenues of $53.4 million, a 27.2% increase year over year. We delivered adjusted EBITDA of $18.3 million and adjusted EBITDA margins of 34.3%. Adjusted net income grew 16.3% to $8.1 million and translated into adjusted net income per diluted share of $0.17.

Performance business began in the recovery of defaulted student loans and student lending represented 62% of revenues in Q3. There are over $700 billion in government-supported student loans outstanding with new loan originations increasing at 14% per year since 2007. We expect that the net industry default inventory, which was approximately $60 billion in 2011, will continue to rise as it has been growing 11% annually since 2007.

We view higher education as a core value in our country and outside the Federal Government; there are few alternatives to finance the millions of students seeking loans each year. Irrespective of which political party is in power after tomorrow's election, we have an equally positive view of our prospects.

Our revenues are driven by placements of these defaulted loans with performance by both channels of the Federal programs, the Department of Education and the Guaranty Agencies. As a reminder, the majority of our revenues on the Student Lending side come from rehabilitating defaulted loans, a process by which a borrower makes nine consecutive payments, thereby making the loan a performing asset. Performant receives a success fee on each payment and on the remaining principal of the loan once rehabilitated.

Our experience with this process provides us with significant revenue visibility looking nine months out. As many of you know, since September of last year the Department of Education has been implementing a technology upgrade, which has temporarily decreased the placement volume of student loans to all of their recovery vendors. Based on the progress made to date, we received in excess of $600 million of placements from the Department of Education in the month of October alone which compares to total placements to all vendors of $1.3 billion for the third quarter. We expect the upgrade to be fully resolved by year-end and as a result, expect to see increased placements in Q4 and into 2013.

Our other major focus is Healthcare. Total dollars spent on Healthcare in the US is roughly $2.7 trillion which is expected to increase to about $3.4 trillion by 2015. We entered the healthcare market about seven years ago in a trial program with CMS. Based on our success in that program, we bid on the initial CMS Medicare RAC contract in 2009 and we are one of four vendors to be awarded a region.

In two months following being awarded that contract, we leveraged our existing technology platform and created a purpose built portal for our Healthcare business. We have continued to report strong performance and after only two years, our Healthcare business accounted for over 25% of our revenues in the first nine months of 2012.

We are the prime contractor responsible for detecting improperly paid Part A and Part B Medicare claims in Region A, which consists of 12 states in the northeastern United States. Over the past three years, approximately $250 billion has been spent on Medicare in Region A. When you apply the CMS defined average nationwide error rate, the CERT rate of 9%, you get around $23 billion of potential improperly paid claims which we view as our current market opportunity.

Under the RAC contract, once we receive the claims data, we have the ability to audit improper payments over a three-year period. We utilize our big data analytics technology platform to identify those areas where there is a high likelihood for error and forward those requests to CMS. Once CMS approves the issues, we can start requesting medical records for our team of auditors. If we identify errors against the CMS care manual or CMS approved local coverage decisions, we submit a claim to a Medicare administrative contractor to confirm the finding before sending a letter to that provider indicating an over or under payment.

As with many of our other contracts, this is a success fee model so we are paid a percentage on the errors we are able to identify and recover. We recognize revenue when the provider pays CMS or incurs an offset against future Medicare claims.

The revenues we recognize are net of our estimate of claims that will be overturned by appeal following payment by the provider.

We faced a highly competitive bidding process to become one of the four prime RAC contractors during the initial RFP process in 2009. As you likely know, our contract expires in 2014 and we expect again to face a competitive contract renewal process to retain or increase our position in this market. We expect the RFP for this contract to be put out for bid later this year with an award decision from CMS in early 2013. We are confident that our current performance and experience puts Performant in a very strong position heading into the contract renewal process.

Our growth strategy includes developing channel partners who add to our own capability. We recently announced a joint marketing agreement with Grant Thornton to assist with the growing number of improper payments by Federal and State governments. This kind of partnership strategically aligns our growth strategy to pursue new opportunities in the growing government's improper payment market. We're excited about this partnership and the savings that we can deliver to clients and more importantly, the significant long-term growth potential by providing a solution that our clients have been seeking in order to improve the overall fiscal integrity of their program.

We have demonstrated the ability to cross complex markets with our strong value proposition and leverage our technological advantage across both the private and public sectors and across industry verticals.

With that, I would like to turn the call over to Hakan who will now walk you through the financials. Hakan?

Thank you, Lisa, and good afternoon, everyone. As Lisa mentioned, we are very pleased with our financial results for the third quarter as revenues increased 27.2% year-over-year to $53.4 million. The largest component of our revenue mix is Student Lending, which increased $0.8 million or 2.5% to $33 million compared to the prior-year period. The increase in student loan recovery revenues is partially due to recognition of student loan rehabilitation revenue from the Department of Education that had not been previously processed during prior periods due to the Department's technology system upgrade.

Third-quarter placements where $1.3 billion, down 16.9% year-over-year but an increase of 1.2% sequentially due to the fact that Lisa discussed earlier. As a result, deferred revenue being recognized in Q3, combined with a lower placement volumes, revenues as a percentage of placement volumes was 2.52% compared to 2.04% in the prior-year period.

As placement volumes increase to normalized levels, we expect to see revenues as a percentage of placement volume to return to more normalized levels as well.

The second largest component of our revenue mix, Healthcare, which increased $8.5 million or 170.8% to $13.5 million compared to the prior-year period. The increase in Healthcare revenues was due to higher claim recovery volumes from our RAC contract with CMS.

Net claim recovery volume increased by $75.5 million or 172.7% to $119.2 million. Our claim recovery fee rate was 11.3% compared to 11.4% in the prior-year period.

In Q3, our recovery to CMS was $119 million representing revenues of $13.5 million. The revenues we've been able to recognize under the RAC contract to date do not include our audit and recovery work involving periodic interim payment providers or PIP providers in our region in the Northeast. PIP providers are reimbursed through different processes and as such our clients are still in process of making certain system adjustments in order to have these claims processed. This system issue has had a more significant impact on us because we have a disproportionate concentration of PIP providers in our regions estimated to account for approximately 20% of the Medicare spend in our regions and we were unable to begin auditing these providers until April of this year.

Since April, we have identified a significant amount of improper payments to PIP providers but these payments have not yet been processed by CMS. As a result we have not recognized any revenues from identified improper payments to PIP providers in our regions that have incurred expenses relating to the claims. We estimate that this delayed our recognition of more than $2 million in revenues in Q3.

CMS is currently implementing the necessary changes to the system that would allow these claims to be processed efficiently. This current delay is temporary and we fully anticipate that our work with PIP providers will further contribute to our growth opportunities in 2013 and beyond.

During the third quarter, we reserved 15% of gross revenues to account for the potential that some claims could be overturned by the appeals process. For the nine months ending September 2012, we have reserved 13% of gross revenues. We've gotten some questions about the appeal reserve based on what some of the providers have said and you can see we have increased our reserve slightly in the quarter but we continue to feel comfortable with our reserve levels based on what we are seeing in the market.

Revenues from other markets increased $2.1 million or 42.9% to $6.9 million. This performance was primarily due to a new default diversion service contract that commenced in May of this year.

Moving to our expenses, salaries and benefit expense for the third quarter was $21 million, an increase of $4.5 million or 27.6% over the prior year. This increase is primarily due to hiring of new [SEs] to provide service under our RAC contract with CMS. An increase in expense associated with the engagement of additional software engineers to assist in the integration of the recently acquired software license and an increase in expense associated with the hiring of additional administrative employees.

Other operating expense for the quarter was $18.2 million, an increase of $4.6 million or 34%. This increase is primarily due to an additional $3.4 million of subcontractor expense incurred in connection with the increased services provided under the RAC and MSA contracts and $0.9 million paid upon the successful closing of our initial public offering as the result of the termination of an advisory service agreement with our affiliates.

For the third quarter of 2012, our reported net income was $6.4 million and net income per diluted share was $0.13 compared to $5.1 million and net income per diluted share of $0.08. Adjusted net income was $8.1 million or $0.17 net income per diluted share compared to $7 million or $0.16 net income per diluted share.

Fully diluted average outstanding shares increased to 48.7 million shares in the third quarter of 2012 reflecting the exercise of stock options along with an increase in the Company's share price, making the unexercised options more dilutive.

Our adjusted EBITDA grew 15% to $18.3 million compared to $15.9 million in the 2011 period while the adjusted EBITDA margin was 34.2% compared to 37.8% in the 2011 period.

On a year-to-date basis, our overall revenue grew 28.1% to $154.1 million, which is driven by student lending growth of 6.9% to $98.2 million; our healthcare growth of 171.4% to $39.1 million; and other revenue growth of 19.2% to $16.8 million. Net income grew by 15.1% to $16.9 million or $0.32 per diluted share. Adjusted net income grew 27.7% to $23.5 million or $0.50 per diluted share. Finally, adjusted EBITDA grew 20.6% to $52.2 million and our adjusted EBITDA margin was 33.9%.

Cash flow provided by operations for the quarter was $5.9 million compared to $5.3 million in the same quarter in 2011.

Turning to the balance sheet categories as of September 30, 2012, we had cash and cash equivalent of $32.2 million; our total outstanding debts as of September 30, 2012 was $150.5 million; the decrease in outstanding debt in the third quarter of 2012 was $2.8 million, which reflects scheduled payments in our term debt.

As of September 30, 2012, net accounts receivable totaled $24.1 million compared to $19.4 million as of December 31, 2011. Overall days in accounts receivable were 40.7 days compared to 37.5 days at December 31, 2011.

Let me now turn the call back to Lisa for some concluding remarks. Lisa?

Thanks, Hakan. Again, we are very pleased with our third-quarter results and we remain excited about our strategic outlook and our avenues for future growth. As we think about future results in our guidance, we want to provide some additional detail on our thoughts for our top line and adjusted EBITDA for 2012.

We are seeing strong momentum in all areas of our business. We believe that the technology system issue with one of our large clients in Student Lending is now really behind us and we continue to ramp up our activities in Healthcare.

With respect to our Healthcare business as mentioned in our prior remarks that we had anticipated recognizing revenue from our efforts on the periodic internal payment hospitals, with CMS experiencing delays in processing these claims, we are being conservative in our assessment of the potential timing of this revenue being recognized and project that this revenue backlog will mostly be pushed out into 2013. As a result, this guidance only assumes a small portion of PIP revenue but does assume recognition of all of the deferred revenue from the Department of Education by the end of 2012.

As such, overall we expect full year 2012 revenue to be in the range of $206 million up to $209 million and adjusted EBITDA to be in the range of at least $68 million to $70 million. We will be providing our 2013 annual outlook on our Q4 call but want to reiterate our confidence in the long-term guidance that we provided at the time of our IPO of annual revenue growth in excess of 20% and EBITDA margins in the low to mid 30%.

With that I would like to open the call up for questions.

Julio Quinteros, Goldman Sachs.

So just a quick follow-up on the EBITDA margin outperformance, I am assuming some of that came from the payments from the Department of Education. Is there a way to sort of strip that out from the EBITDA numbers and just kind of get a sense for what the EBITDA results I guess would have been excluding that benefit? I guess in other words, how much margin expansion would there have been excluding that payment there?

Julio, one thing you can do on that is we do reflect our -- the deferred revenues. You can see a decrease in deferred revenue as you can see (inaudible) education went down by $2.8 million in Q3.

Let me just make one other comment on that. One thing to keep in mind as well is that as Lisa mentioned, we did not recognize any revenue on PIP activity during the third quarter and that revenue was in excess of $2 million. So again, we think -- we incurred the expense and we did not recognize revenue. So there shouldn't be that much movement on the margin side.

Got it, so then just probably a cleaner feed on the operating side. Okay, maybe just in terms of the catch-up from the payment from the Department of Education, I was toggling back-and-forth between another call, so I apologize, but we saw that the $600 million was the catch-up in the fourth quarter but that's not the same formula that we would use going forward, right? It is like -- it is not 600 times 3 I guess in terms of how do we think about the catch-up going forward from here?

The $600 million number was just the placement that we received in the month of October alone from the Department of Education, so again it's an indication of the catch-up that they are doing in this area as well.

Okay, so do we take that run rate I guess is my question -- I apologize -- in October and multiply it times 3 for the full year? Or is it -- could it be more variable than that?

It will be more variable than that. But we expect that they are going to continue to provide placements but I wouldn't take it times 3 at this point.

Just as you think about Department of Education longer-term, still expecting the upgrade to be complete by the end of the year or is there some other way to think about the timing on that and maybe a normalized placement rate with the $600 million already arriving in October?

We expect the Department of Education to have everything resolved by the end of the year.

Okay, okay. Just maybe on the longer-term view, Healthcare looks like it's doing really nicely and that's a big part of the thesis in terms of the growth expectations. Any puts and takes to think about longer term there especially with the elections on the heels of the elections coming up over the next day or so here, how are you guys thinking about impacting if sort of Obama continues or maybe he doesn't continue, what would be the risks associated with your healthcare business at this point relative to the kind of the political backdrop? Would you be able to comment on that?

Julio, the programs that we participate in have incredibly strong bipartisan support, so the recovery audit program for example is well supported by both Democrats and Republicans as well as the current administration. So regardless of who wins tomorrow, we do see very strong opportunities for continued growth both in Healthcare and in Student Lending.

Great. All right, guys. Congratulations.

Suzi Stein, Morgan Stanley.

Can you comment on your ability to hire nurses to support the growth in Healthcare? Has there been any change to this?

We are not having any issues hiring nurses. We have a very strong program that we put in place as we ramped up the contract, Suzi, so at this point we are ahead of the curve on nurse hiring and we fully anticipate being able to staff to our needs.

Okay, then as far as the Healthcare contract, can you just review the process and your understanding as far as the timing of the rate procurement of the RAC contract and also just maybe give us an update on any other revenue opportunities that you are pursuing in the Healthcare space?

Sure, we have no indication from CMS yet as to timing of the rebids. Our view is they were likely to reprocure in early 2013 but we have not heard anything definitive. With regard to growth in other Healthcare opportunity, as we mentioned in our IPO roadshow, we are working on growing in other areas of public sector healthcare, where private players interface with public sector programs. So both on CMS type programs as well other Federal agency type healthcare programs.

Okay, maybe just one more. In the other bucket, is the $6.9 million a good run rate or was there anything about the start of that contract that would have inflated the number temporarily?

There was a slight inflation in the number and then we accelerated some revenue although not significant from Q4. So I would say that it's going to be slightly less than the $6.9 million on the run rate going forward absent any new contract wins.

Okay, great. Thank you, guys.

Edward Caso, Wells Fargo.

On the CMS contract, I was wondering if you could talk about the efforts of the American Hospital Association to sort of slow down the RAC effort and what you are seeing. Are they still as aggressive as ever?

Yes, they are aggressive but the program itself is a very strong program in terms of return on investment accountability. As you may have seen, there are some recent activities but at this point, we believe that the RAC work is continuing to drive significant dollars back into the CMS program and all of the results that we find we believe we should be paid a fee and I believe our clients -- our client would agree as well.

Hakan, can you review the reserving on that program that you went through the numbers? I'm not sure I heard them all.

Sure, so during the third quarter, we reserved 15%, of gross revenues and as at this point we currently have a total of $4.8 million in reserve in our balance sheets, of which we have $3.7 million of that is reflected underestimated liability for appeals. And again, this is where payment has been received. And then we have an additional $1.1 million as an allowance under accounts receivable and again, as we look at our reserve methodology, we are very comfortable with the reserve that we currently have on our books based on the experience that we have.

Can you repeat what the DSO was? I missed that. I'm sorry.

Sure, the DSO for Q3 came in at 41 days or 40.7 days. And as that compares to last quarter at the end of 2011, we were at 37.5 days.

Can you just make -- help us with the tax rate or what you are thinking is? Has it changed at all? I think we've talked 40% before. Is that still a good number?

For the third quarter, our tax rate came in at 41% and that's due to a change in our permanent differences, which incorporates in the termination of the advisory agreement, so that is not deductible for tax. So for this quarter, we had 41%. We expect to be at 41% for Q4 as well and then to revert back to around 40%.

Okay, great. Thank you. Congrats.

Kelly Flynn, Credit Suisse.

Thanks for taking my questions. I have a few of them. First question relates to the EBITDA target for the year. I think that the combination of the adjusted EBITDA upside you just announced and then kind of the guidance for the year suggests that you expect a pretty significant decline sequentially in the fourth quarter. I just want make sure that A, that's correct. And B, is that all explained by this PIP issue or are there other factors that play there? Thanks.

We do expect as far as the outlook that we are giving for the year a slight decline in margins for Q4 and the PIP activity is definitely a factor in that. And as Lisa mentioned, we are being very conservative and only assuming that it's more portion of the revenue that will be recognized in Q4 that we are incurring the cost for all the activities during the quarter.

Okay, I guess related to that given this PIP issue, it would be helpful if you could give us a sense of what you think the Healthcare sequential change will be in revenue for the fourth quarter? And I guess you mentioned $2 million in PIP revenue that you forego -- or that you didn't have in the third quarter. I'm wondering what that PIP revenue is that you are foregoing in the fourth quarter? Thanks.

At this point we're not giving any -- disclosing any breakdown by the different line items. So I am unable to discuss anything on that at this point.

Okay, can you give us a sense of what type of PIP issue we are looking at in the fourth quarter? You talked about the $2 million for third. Is it a similar amount or was there more expected in the fourth quarter?

We would have expected more in Q4. As I was -- it would be in excess of $4 million that we would expect during the fourth quarter.

You are saying that you're not going to take much of that at all?

That is correct.

Okay, great. Last one just a quick one, can you give us the accurate share count we should use at this point for the fourth quarter?

Give me a second there. I have the 9-month number. Let me get back to you on what to use for year-end. At this point it's 47,133 but let me get back to you on that as far as the year-end number.

Could I just ask one more on this PIP issue, I just want make sure -- when did this issue pop up exactly? Is it a technology problem or what's the exact sort of catalyst for this issue?

It's a processing issue, so this is something -- as we mentioned, we started auditing PIP providers. CMS gave us the go-ahead to audit PIP providers in April of this year and we have since then identified a significant amount of improper payments. CMS needs to make some system enhancements to be able to process these claims and so there's been a hold up in making these software changes to be able to effectively process all these claims. So that's what we are waiting for at this point.

But when did it come about? It seems like sort of a new issue on the scene. I'm just wondering kind of when you guys found out about it?

This is -- we knew that we could not audit PIP providers from the beginning of the contract, Kelly, so when we were given the go-ahead to start auditing in April, that was the time that we actually got off the starting blocks. So it would have been a few months after that that CMS was working on the system upgrade just to be able to process these because they are paid differently, they have a different arrangement with CMS. So this is an issue that we did expect to have a flow in Q3 starting to flow in Q3 into Q4. This is a -- it is a priority, so they are working on it.

You basically sound like you expected they would be ready by now and they are not. That is pretty much what happened?

Yes.

Okay, sounds good. Thank you.

(Operator Instructions). Bob Napoli, William Blair.

Thank you, I guess maybe to be clear on the PIP, Lisa, can you just explain a little bit more clearly what that is? Are they -- processing PIP payments for the other Medicare RAC providers or is this somewhat new across the whole sector? Maybe just define a little bit more what it is.

This is a larger issue for us, Bob, because about 20% of our providers are PIP providers. The next largest region we believe is Region C at about 3%, so this was a more of a prevalent concern for us.

Okay, now just to be clear, $2 million in revenue in the third quarter that will not be recognized? Then you are saying that incrementally you will generate an additional $4 million of revenue from your PIP providers?

The way to look at it, Bob, is that based on the recovery work that we have done, we would normally have expected revenues of more than $2 million based on our activities and what we have found during Q3 and then in Q4 just based on again similarly all the manner of recovery work that we have done and what we have identified, we would expect in excess of $4 million of additional revenue during Q4.

(multiple speakers) So $6 million total?

Exactly, in excess of $6 million in total based on again on what we have identified as improper payments. So should everything have been working property from a system perspective, that's the revenue that we would have recognized in Q3 and in Q4.

In the guidance that you have given, you've included the expenses associated with that $6 million. What is the margin on PIP revenue? How much -- what I am getting to is what are the expenses?

The expenses are incurred just in the normal course of business, so we have again fully expensed all the expenses have been incurred by quarter and again the revenue is to be recognized.

So when this revenue comes through, say it's in the first quarter, you are going to have $6 million of mature profit revenue coming through all at one time. Is that -- when this -- you would imagine that CMS would be caught up on the PIP issue by the first quarter of next year? But at some point whenever they are caught up, virtually you are taking all of the expenses, none of the revenue but that obviously --

That's absolutely correct, yes.

Okay. And the run rate of the PIP, $2 million, $4 million, I mean is that -- you are just getting started. Are we at the early -- I guess what we've all been looking for 50% growth of the Medicare RAC revenue was kind of what we were looking for is what our model is and as you can see publicly, do you feel very comfortable with the growth of the Medicare RAC business into next year that 50% growth rate including the -- does the PIP give upside to that kind of a growth into 2013?

Again, we're not giving guidance today on 2013. What we can say and as Lisa mentioned earlier, 20% of the Medicare spend in our region is represented by PIP providers.

Right, okay, and the recovery on PIP should be similar to the rest of the business on PIP providers? Is that the amount of improper payments is similar to you would think?

It's similar, yes.

Okay, on the Student Lending piece of the business, when you talk about placement, the placement you had this quarter of $1.3 billion, how much of that was Department of Ed, and how much of that was from the [TAs]?

Department of Education was a small portion of that amount. It was in -- it was less than $200 million.

Wow, less than $200 million of -- from Education in the third quarter. TAs were $1.1 million. Is that $1.1 million a reasonable run rate for the [GAs] or is that -- I know that over time that will decline but I think you'd probably grow before declines -- it's a business you get annually anyway.

As we look at the fourth quarter, that run rate on the TAs is still applicable, yes.

Okay. So you have approximately what you did this quarter in GA, maybe some growth, maybe some shrinkage but on top of that, you have the Department of Ed is $600 million that you did in October plus whatever else you get in November, December?

That's correct, yes.

Okay, thank you. That's very helpful. The AHA losses was filed on Thursday, the American -- talking about hospital stays, inpatient versus outpatient revenues. How big of a portion of that revenue -- if they were to be successful in that lawsuit, what does that do to the revenues or the Medicare RAC business? How much of --? How meaningful was that?

Bob, the lawsuit doesn't suggest that CMS throw out these corrections. What it does request is that CMS make an exception and allow hospitals to rebuild at the outpatient level. Regardless of how the lawsuit comes out with CMS, that adjustment is appropriate because the original payment was made incorrectly according to CMS care manual guidelines, which are well known. So regardless of how the outcome -- what the outcome is, the issue would not have been found unless we did the work around the incorrect payment.

So we believe that we should be paid the fee for finding the error and the expense that we put in to locate the error. I believe our client would agree as well.

Okay, but there would not be an offset for -- so the error you found, the difference between the inpatient, outpatient you think you will be paid for the whole amount of the error that was found and not the difference between the two?

We believe that that is correct, yes.

Okay. This last question, the new -- the default aversion services contract that you got in May, what is that? How long does that last? Is that a short-term process or is this a long-term new contract?

It's not a short-term contract. It represents a new contract that again as we mentioned, that went into effect in May and it's a business that we are performing very well on and we do expect to continue to have that going forward.

I'm sorry, what is it though?

It's a default aversion contract that again we landed in May of this year.

All right, is it for the students, the education market or --?

Student Lending, yes, in the Student Lending space.

Then the procurement, the re-procurement, so you think, Lisa, that you will hear that it will be put out before the end of the year and then a decision will be made in early 2013 that is -- but you're not sure? Is that what you think is the most likely?

We think that may be likely but again, Bob, we actually haven't heard from our client indication of timing on rebid, so we think that but it's a soft think.

Okay.

As you know, the contract runs through 2014.

Right so you would not expect a change to the program until 2014, is that correct? Whatever they decide, whatever -- if they adjust the regions or the pricing, you would not expect that to take effect until 2014?

We would expect changes to occur with a new contract, yes.

Okay, thank you very much. Nice job.

Thank you. At this time there are no further questions in the queue. I would like to pass the call back to management for closing remarks.

Thank you. We just want to thank you for being with us on this call today. It was a pleasure for us to be with you and we look forward to speaking with you again in the future. Thanks again.

Ladies and gentlemen, this does conclude the Performant Financial Corporation third-quarter 2012 earnings conference call. We'd like to thank you for your participation. You may now disconnect.