Performant Healthcare Inc (PHLT) 2012 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Performant Financial Corporation's fourth quarter and full year 2012 earnings conference call. (Operator Instructions).

As a reminder, this conference is being recorded today, Thursday the 28th of February, 2013. I would now like to turn the conference over to Jeff Grossman with Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon everyone. By now, you should have received a copy of the earnings release for the Company's fourth quarter and full year 2012 results. If you have not, a copy is available on our website www.performantcorp.com. Today' speakers are Lisa Im, Chief Executive Officer, and 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, and the Company does not undertake 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 measures in the table attached to our press release. I would now like to turn the call over to Lisa Im.

Thank you, Jeff. Good afternoon, everyone and thank you for joining us for our earnings call today. Before discussing our results for the fourth quarter and full year, I would like to review a recent and notable event.

In January, we completed an equity offering of 9.2 million shares which has allowed us to expand the quality and breadth of our institutional shareholder base and has enhanced the daily trading volume and liquidity of our stock. Hakan will discuss our results in greater detail, but at a high level, we are very pleased to report our continued strong financial performance both in Q4 and for the full year 2012.

Today we are reporting revenues of approximately $56 million in the fourth quarter and $210 million for the full year, increases of 31% and 29% respectively year-over-year. Adjusted EBITDA in the fourth quarter was approximately $17 million and $70 million for the year.

Adjusted EBITDA margin for the fourth quarter was 31% and 33% for the full year. Adjusted earnings per diluted share were $0.15 in the fourth quarter and $0.64 for the full year.

Starting with our student lending business, during the fourth quarter student lending represented over 60% of our total revenues and continues to be driven by placements of defaulted loans from both channel of the federal program, the Department of Education and the guaranty agencies. We have a long history of working with borrowers, and as a percentage of defaulted student loans continues to rise now 9.1% as of the latest two-year cohort data, we are well-positioned to work with these borrowers to help them regain current status.

As most of you know, the majority of our student lending revenues come from rehabilitating defaulted loans. A process by which a borrower makes nine consecutive monthly payments, thereby making the loan a performing asset. Performant receives a success fee on each payment and on the remaining balance of the loan once rehabilitated.

As we discussed on our third quarter earnings call, the Department of Education has been dealing with a technology upgrade that's significantly reduced student loan placements through the first nine months of 2012. The Department of Education appears to have made significant progress in resolving this issue which is evidenced by more than $1.1 billion in loan placements that we received from the Department of Education during the fourth quarter compared to less than $200 million during the third quarter.

In addition to the improved loan placement volume, the progress on their technology upgrade allowed us to recognize $2.5 million in deferred revenues that we reported on our balance sheet at September 30th, 2012. Another recent development on the student lending side of our business relates to income-based rehabilitation for IBR programs.

The Department of Education has recently encouraged all of its current vendors to work with borrowers and get them into IBR programs. These programs reduce the burden of the monthly payment by modifying the repayment schedule based on the borrower's discretionary income.

We view this trend as a growth opportunity for Performant as we expect that there will be an increase in the number of defaulted student loans that will become eligible for rehabilitation because more borrowers will be able to make qualified payments. As part of this trend, we have been advised that the Department of Education is contemplating changes to its contractual arrangements with its recovery vendors, although the specific nature of these changes remains uncertain.

For example, the Department of Education may call on its vendors to do additional work tracking down documents related to income verification. It could also elect to modify the contingency fees related to rehabilitated loans as a response to the expected increase in overall volume. While the scope of any changes remains unclear, we are cautiously optimistic that IBR will have a net positive effect on our business.

We anticipate that the Department of Education will issue its RFP for the new recovery contract in the near-term. While we are not in a position to speculate on the details, we are confident that our strong performance on each and every one of those past four contracts over the past 22 years will serve us well in being re-selected as one of the vendors on the new contract.

Finally, and I will talk about there more in a moment, but in addition to working with the Department of Education on student loan recovery, we were also recently awarded a new payment recovery contract with the Department. This highlights our strong institutional relationship with the Department of Education, leverageable technology platform, and our ability to expand and diversify our business via new contract wins.

Turning to our Healthcare business. We had a very strong fourth quarter and saw total claim recovery volume grow 120% compared to the fourth quarter of 2011. This represents our fifth consecutive quarter of both volume and revenue growth and reflects the significant progress we have made ramping up on the contract. Since 2009, we have grown our Healthcare revenues from less than 1% to over 25% of total revenues in 2012.

This growth is a testament to our robust and versatile technology platform. During 2012, our total recovery to CMS was approximately $0.5 billion. Total Healthcare revenues were $54.7 million.

Overall, we have now recovered a total of approximately $700 million for CMS since we started on the contract in 2009. As a reminder, our contract with CMS is a success-based fee model. So we are paid based on the dollar amount that the proper payments that we are able to identify and recover.

We recognize revenues when the provider pays CMS or incurs an offset against future Medicare claims. The revenues recognized are net of our estimate of claims that will be overturned by appeals following recovery from the provider.

Similarly to the third quarter, our results in the fourth quarter do not reflect any revenues associated with recovery activities involving periodic interim payment providers or PIP providers, as CMS is working on a technology solution to automate the processing of claims involving these providers. We estimate that this issue has delayed our recognition of approximately $6 million in revenues in 2012.

Overall, PIP hospitals account for approximately 20% of the hospitals in region A. When we look at the audit results of these hospitals, we find that our results in these hospitals are very similar to the audit findings across our non-PIP hospitals in region A. As such, we expect our results at PIP hospitals to be essentially the same as those of standard hospitals.

In January of 2013, CMS began processing a small portion of these PIP claims manually and as a result, we will recognize only a small portion of revenues associated with these manually processed claims in the first quarter of 2013. However, we expect the issue will be resolved and that we will be able to recognize the entire $6 million in delayed PIP revenue during 2013.

CMS is in the process of implementing the necessary changes to its system that would allow these claims to be processed automatically and allow us to recognize the bulk of these 2012 revenues. While we believe that this delay is temporary, we do not expect automated processing of these claims to begin during the first quarter of 2013.

We have continued to receive a number of questions regarding the CMS contract renewal process and timing of the upcoming RFP. Although we do not have a specific time frame regarding the RFP for the contract renewal, CMS has indicated that an RFP will be forthcoming in the near-term, and that they expect to follow up with a final decision shortly thereafter. We are confident that our performance in the current contract and our prior recovery experience places Performant in a strong position heading into the contract renewal process.

Finally, with respect to our activities in other markets, we continue to look for opportunities to expand within our current markets while seeking new opportunities to employ our technology-enabled services platform and recovery experience to new markets.

Recently we announced the strategic relationship with Magellan Health Services to offer Payment Integrity Recovery Services to Magellan's Commercial Specialty Pharmacy customers. During 2012, we worked with Magellan on a pilot program involving select customers, and we received very positive feedback. As a result of this program, Magellan and Performant elected to roll out the offering to the entire specialty pharmacy customer base in 2013.

We're very enthusiastic about expanding our relationship with Magellan and serving the specialty pharmacy market. We have refined our recovery services over many years and multiple industries. So meeting this unmet market demand is a natural fit with our long-term growth strategy.

As I mentioned earlier, Performant was recently awarded a contract by the Department of Education to serve as its payment recapture contractor. Under the terms of this contract, we will leverage our proprietary data mining technology to conduct a payment recapture audit of goods and services contracted by the Department over fiscal years 2007 through 2012. The total value of this portfolio, which excludes student loans, totals approximately $9 billion for the entire period or about $1.5 billion annually.

To be clear, this contract excludes grants and student loans and is separate from our current longstanding relationship with the Department of Education providing recovery services for defaulted student loans. It represents an ancillary growth opportunity for us. Under the terms of the contract, we will identify, evaluate, and report the root causes for contract overpayment and support the recovery of improper payments.

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 were very pleased with our financial results for the fourth quarter as revenues increased 31.3% year-over-year to $56 million.

The largest component of our revenue mix is Student Lending which grew by $3.5 million or 11.4% compared to the fourth quarter of last year.

The increase in student loan recovery revenues is largely due to our recognition of $2.5 million in deferred student loan revenues outstanding from the third quarter from the Department of Education that had not been previously processed during prior periods due to the Department's technology system upgrade.

Fourth quarter placements were $2.2 billion, up 45.1% year-over-year and a sequential increase of 65.9%.

This significant increase is the result of receiving in excess of $1.1 billion in loan placements from the Department of Education during the quarter. We expect to begin to recognize benefits from the improved placement volumes in the second half of 2013.

As a result of the increased placement volumes, revenues as a percentage of placement volumes was 1.58% compared to 2.05% 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, increased $8.5 million or 119.1% to $15.7 million compared to the fourth quarter of last year. The increase in Healthcare revenues was due to higher claim recovery volumes from our RAC contract with CMS. Net claim recovery volume increased by $75.6 million or 120.5% to $138.4 million.

Our claim recovery fee rate was 11.3% compared to 11.4% in the prior-year period.

Similar to the third quarter, the revenues we have been able to recognize under the RAC contract to date do not include our orders 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 client is still in process for 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 region estimated to account for approximately 20% of the Medicare spend in our region, and we were unable to begin ordering these providers until April of 2012. Since April we 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 region, but have incurred expenses relating to the claims. We estimate that this delayed our recognition of more than $2 million in revenues in Q3 and approximately $4 million in revenues in Q4. This brings the total delayed revenues from PIP providers to over $6 million at year-end.

It's important to remember that because we have already incurred expenses related to this delayed revenue, when we are able to recognize these revenues we estimate that over 70% will drop to our pre-tax earnings. CMS is currently employing a manual system to process these claims as we do not expect to recognize the majority of these revenues until at least the second quarter of 2013. We are confident that this delay is only temporary, and we fully anticipate that our work with PIP providers will further contribute to our growth opportunities in 2013 and beyond.

Revenues from other markets. Other revenues grew by 27.4% primarily due to a new default aversion services contract which started in May of 2012. Revenues from this contract were slightly lower than Q3, 2012 primarily due to having worked through the initial loan placements. With that, we also expect future quarters to be at a lower run rate than booked in the third quarter as we continue to just work the ongoing loan placements.

Moving to our expenses, salaries and benefits expense was $23.6 million, an increase of 41.6% as compared to $16.6 million. This increase was primarily due to hiring of new employees to provide services under our RAC contract with CMS, an increase in expenses associated with the engagement of additional software engineers to assist in the integration of a recently acquired software license, and an increase in expense is associated with the hiring of additional administrative employees.

Other operating expense for the quarter was $18.3 million, an increase of $4.2 million. This was primarily due to an additional $1.5 million of subcontractor expense incurred in connection with increased services provided under our RAC and MSA contracts. In addition, we have public company costs in Q4 of 2012 of approximately $400,000 and miscellaneous volume related operating expenses.

For the fourth quarter of 2012, our reported net income was $6 million or $0.12 per diluted share compared to net loss of $2.4 million or net loss per diluted share of $0.10 in the prior-year period.

Adjusted net income in the fourth quarter was $7.1 million or $0.15 per diluted share compared to $6.6 million or $0.15 per diluted share in the prior-year period.

Fully diluted average outstanding shares increased to 48.8 million shares in the fourth quarter of 2012, reflecting the increase of stock options along with an increase in the Company's share price, making the under exercised options more diluted.

Our adjusted EBITDA grew 20% to $17.4 million compared to $14.5 million in the 2011 period. Adjusted EBITDA margin was 31.1% compared to 33.1% in the 2011 period.

Turning to the full year, our overall revenue grew 28.9% to $210.1 million driven by student lending growth of 8.1% to $132.4 million, Healthcare growth of 154.1% to $54.7 million and other revenue growth of 21.3% to $22.9 million.

Net income for the full year was $23 million or $0.44 per diluted share while adjusted net income grew 22.7% to $30.6 million or $0.64 per diluted share.

Our adjusted EBITDA grew 20.4% to $69.6 million and our adjusted EBITDA margin was 33.1%.

Our effective tax rate for 2012 was 42.24%. This is slightly higher than what we had expected due to a one-time tax impact of approximately 2% on our effective tax rate related to a non-deductible advisory agreement that was terminated.

Cash flow provided by operations in 2012 was $37.8 million compared to $28 million in 2011. Turning to the balance sheet, as of December 31, 2012, we had cash and cash equivalents of $37.8 million.

Our total outstanding debt as of December 31, 2012 was $147.8 million. The sequential decrease in our spending debt of $2.8 million reflected scheduled payments on our current debts.

As of December 31, 2012 net Accounts Receivable totaled $23 million compared to $19.4 million as of December 31, 2011. Overall days in the Accounts Receivable were approximately 43 days compared to 38 days at December 31, 2011. Let me turn the call back to Lisa for some concluding remarks.

Thanks, Hakan. As we look ahead, we feel very good about the trends in our business. We are seeing strong growth and normalized loan placement volumes from the Department of Education, and we continue to ramp up and demonstrate improved results on the Medicare RAC contracts. Additionally, we have been able to expand the use of our technology platform to win new contracts as demonstrated by our recent contracts win with the Department of Education.

Overall we expect to build on our positive momentum and for 2013 to be another strong year. As such, we anticipate revenues for the full year 2013 to be in the range of $252 million to $265 million or 20% to 26% revenue growth, and adjusted EBITDA to be in the range of $81 million to $85 million, implying an adjusted EBITDA margin in the low to mid 30% range.

While we are confident in achieving these results, we do expect the timing of our financial results to be more heavily weighted to Q2 and beyond for a number of reasons, given the impact of these one-time timing issues that we're going to provide you with some additional clarity on our expected first quarter results. However, it is not our intention to continue to provide quarterly guidance on a regular basis going forward.

First, as we have discussed, the majority of our student lending revenues are achieved via loan rehabilitation, which is a nine-month process. Although student loan placement volumes increased from Q1 to Q2 in 2012, we received a significant portion of those loan placements in late quarter 2 of 2012.

Given this timing, we anticipate recognizing the bulk of the revenues from those placements during Q2 of 2013. Moreover, as the Department of Education caught up on placements doing Q4 of 2012, we will not see the related rehabilitation revenues until Q3 and Q4 of 2013. Second, our fourth quarter student lending revenue results included $2.5 million from the recognition of high margin deferred revenue which will not be repeated in the first quarter.

Third, as a result of Hurricane Sandy, we were unable to submit requests for medical records from Healthcare providers in the states of New York, New Jersey and Connecticut for 30 days, or 60 days if a provider was located in a federally designated disaster area. We are no longer subject to these delays and have since returned to normal operation in all of our states in region A. However, we expect that this will delay a portion of the revenues that we would normally have recognized in Q1 of 2013 into Q2 of 2013.

As a result of these timing considerations, we expect Q1 revenues to be sequentially down in the mid-teens as compared to Q4 of 2012. While these issues will impact our first quarter 2013 results, these are delays in revenue recognition from the first quarter to subsequent quarters and not lost revenues. As a result, we expect many of these timing differences impacting Q1 revenues to be resolved in Q2 and Q3 yielding significant revenue and EBITDA growth in these quarters.

We remain confident in our ability to execute our plan in 2013 and generate full year annual revenues and adjusted EBITDA in the ranges previously described. With that, I would like to open the call up for questions.

Thank you. (Operator Instructions). Our first question is from the line of Suzi Stein with Morgan Stanley. Please go ahead.

Hi. You mentioned significant progress on improving the technology issue with the Department of Education, but I was under the impression that was supposed to be resolved by the end of the year. Did that not happen? And I guess what's the expected timing on getting that completely resolved?

Suzi, it's Lisa. As we think about the go forward, the technology platform is fully implemented. We just have a little bit of clunkiness in the sense that it's not operating as smoothly as Department of Education would like. That said, as we saw in Q4 placements are available, ready to go. They are funding rehabilitations.

The remaining item, to be perfectly frank, is all of the previous payments during the conversion have yet to be fully reconciled. So there is some -- there is some -- cleaning up the Department of Education is still doing, and then as we go forward we have some minor issues with reconciliation, but the technology implementation is completed.

Okay. And then thanks for the information on the new Department of Education contract. I guess I'm just trying to understand how big this can be for you from a revenue standpoint and how much of that is embedded in the 2013 guidance. So what's the timing in terms of when you would see revenue from that?

We would anticipate implementing it sometime Q2, Q3. We would start to we think see revenues late Q3 to Q4. We at this point do not know how big the opportunity is on the -- on the total auditable dollar amounts of $9 billion, and as we get into this year a bit more and start the analysis, we will have clearer visibility.

And are you the only one contracted on that?

Yes.

Okay. Thank you.

Thank you. Our next question -- just one moment. Our next question is from the line of Julio Quinteros with Morgan -- excuse me -- with Goldman Sachs. Please go ahead.

Hey, guys. So just maybe to kind of keep picking on some of these other revenues and thinking about the ramp and the potential of some of these. So it sounds like you guys are still going to have work through the modeling and understanding what this is. Any color maybe around the fee rates in this new deal with DOE contract and also on the other contract that you mentioned as well with Magellan. How quickly can you ramp those revenues up relative to kinds of the sort of basic modeling assumptions that I think we're familiar with at this point?

What -- on the Magellan opportunities we're offering the recovery service to their various participants in the specialty pharmacy program. That should be a fairly straightforward process of implementation, but our assumption, Julio, is that we would take a few months to implement these contracts, which is why when we give midterm guidance we -- you know, we talk about margins in the low to mid 30%'s building in, again, a bit of investment upfront before revenue is recognized.

Okay. So I guess just to be explicit, the guidance that you just gave us for revenues in 2013 doesn't have explicit -- built-in assumptions for either Magellan or the new DOE contract or it does?

Generically we have a very small assumption for new business.

Okay.

And you could say that it's included in the range. I mean the range of $250 million to $265 million.

Sure. Understood. And then on the -- on the expense side, Hakan, can you just go back through the levels of expenses that you're carrying through right now from some of the delays as it relates to PIP and any other -- any other kind of special call outs that you can sort of point to that would be kind of sort of extraordinary expenses that eventually would go away as you are able to begin to recognize the revenues?

Sure. As we look at the PIP revenue which now is up to approximately $6 million, $4 million in Q4 alone, we anticipate that once we recognize this revenue will be in excess of 70% that would go to the EBITDA line. So, again, we have incurred the expense for the activities associated with PIP. So that is again a significant item that we would get the benefit for, and the way that we projected right now we'll get that benefit starting in Q2 of this year.

Understood. Okay. Thank you.

Thank you. Our next question is from the line of Edward Caso with Wells Fargo. Please go ahead.

Hello, I apologize; I'm in an airport. Just two quick questions. Guidance on the tax rate for 2013 and the recent secondary offering where you had no proceeds, did the seller pick up all the deal related costs?

Let me take that. First of all, as we look at our tax rate, our effective tax rate, as I stated, was 42.24% in 2012 which includes the one time impact of 2%.

So what we expect absent any other changes that we are going to be just north of 40%, so around 40.25%. And as we look at the secondary the -- there was a small portion that was absorbed by the Company associated with that sale. It was less than $1 million, but all other costs were incurred by the sellers.

Thank you.

Thank you. Our next question is from the line of Kelly Flynn with Credit Suisse. Please go ahead.

Thank you. I have a couple questions. First of all, Lisa, you said the revenue might be down sequentially mid-teens versus Q4. I just want to clarify you're talking in percentage terms, not absolute dollar amounts?

Correct.

Okay. Great. Thanks. And then also on the tax rate the 2% impact, Hakan, that you said related to that advisory agreement, was that in the fourth quarter?

It was not all the in the fourth quarter. It was -- it started in the second quarter.

Okay. For the fourth quarter, I can see your tax rate, I think, of 46%. I mean do you agree that was higher than expected due to the same issue or was there anything else going on?

Yes. I mean the primary issue as we look at the higher tax rate for the year is this 2%. There was also some impact as we did the state tax apportionment work for the year, which typically gets done at the end of the year. And just based on the state mix that drove up our state taxes by about -- I think it was about 0.5% or 1%. So that's one of the impacts that we had during Q4.

Okay. Great. And then for the PIP revenue I think you talked about manual processing going on in the first quarter. You expect a little bit of revenue. How much revenue do you expect roughly in Q1, and do you expect that whole $6 million to come back in Q2 or more gradually for the rest of the year?

As we look at the manual process that started at the beginning of January, we expect a small portion would be recognized -- by small we estimate somewhere around $1 million of PIP revenue during Q1. We are optimistic that CMS is going to be able to put this automatic fix in that would enable us to recognize a significant portion of the remaining part starting in Q2. So Q2, we expect to recognize a big part of that $6 million that is sitting out there from 2012.

Okay. Great. And then, lastly, Lisa, I just wanted to ask you for a little more detail on this new Department of Ed contract. You talked about goods and services. Can you just explain exactly what it is? It sounds like you're auditing their procurement of goods and services kind of totally unrelated to the loan program. Is that right or any more -- (multiple speakers)

Yes. That is correct. That is correct.

Okay.

That is correct, Kelly.

Okay.

Totally unrelated to the student loan program.

Okay. Is this theme of goods and services procurement audits, is this something you think you could take to other parts of the government for lack of a better term?

Yes. One of the opportunities that we discussed last year with the market was the heavy focus from Congress on federal agencies developing and implementing recovery audit programs fashioned after the success of the CMS recovery audit program. So as we looked at 2012, and frankly the focus on payment integrity and avoiding waste and recouping waste in federal government spending has become a much bigger push by congressional folks, to the extent where towards the end of 2012 there was even heavier legislation put in place really accelerating and emphasizing the overall payment integrity process across all federal agencies. So we do expect other federal agencies to come out with RFPs to really focus on, again, developing and implementing a program for recovery and audit.

Okay. That's great. Thanks a lot.

Thank you. Our next question is from the line of Robert Napoli with William Blair. Please go ahead.

Thank you. Good afternoon. Another question on PIP, if I could. You generated $4 million of recoverable revenue in the fourth quarter on PIP.

You expect to collect $1 million through the manual process, but does that mean -- I mean are you guys going to generates another $4 million of revenue, so at the end of the first quarter you're going to have $9 million of recoverable revenue? So my question is I guess what is the trend on the PIP? And then what are you expecting -- when are you expecting PIP revenue to be recognized as earned? What do you have in guidance for 2013 on PIP revenue?

So, Bob, we're going to answer this in two parts. One is I would like to talk -- just refresh on the PIP providers. Our audit findings are very similar to audit findings across non-PIP hospitals.

Uh-huh.

So, as you think about volume metrics and the opportunity for the PIP portion in region A, you can think 20% of hospitals are PIP. We're finding very similar results. So that gives you a sense of how to think about the overall recovery and errors that we are finding, and I will let Hakan actually speak to the accounting piece of it.

Sure. You're correct, Bob, that again we are working into this year with $6 million worth -- in excess of $6 million worth of PIP revenue. We estimate $1 million in Q1. There is additional recovery that we have done on the PIP providers that are continuing during Q1.

So I don't have a number to give you as far as what the estimated additional PIP revenue is that is being generated during Q1 or that we expect to generate during Q1, but as we look at this going forward, again, the -- we estimate that the automatic fix would be put in place here during Q2 and that this would be -- contribute to our overall growth during 2013 as we look at the activities surrounding PIP, which represents again over 20%, or approximately 20% of the Medicare spend in our region.

Okay. So PIP hospitals, if I look at the fourth quarter recoveries that you had, essentially on an ongoing basis that would be 20% higher approximately given that the PIP hospitals are as fruitful if you would for finding improper payments as the other 80% of your market?

Yes. Actually, Bob, the way I would look at it -- I mean as we look at our Healthcare revenues on the RAC contract, it was approximately $15.7 million in Q4 which did not include any PIP revenue at all. So you could -- you know, one of the assumptions you can do is go off that $15.7 million and then grow the number (multiple speakers).

Right. 20% higher.

Yes.

Okay.

That's right.

Okay. And then just on the student loans, of your placement volume, how much of that was from GAs versus Ed?

Ed was about $1.1 billion.

Okay. And do you expect the GAs to continue to grow and are you seeing any consolidation in the GAs? Does that affect you one way or another?

We do anticipate some growth in defaulted volume and we are seeing -- we are not seeing a lot of consolidation in guaranty agencies yet.

Okay.

And that market is one that we think will probably be -- the smaller guaranty agencies which we anticipated would be the ones to consolidate into larger ones, they will hang on, and I think we'll probably start to see some of that this year.

Okay. With regards to the Medicare RAC business, how much of your business are you subcontracting? And do you expect to do more or less -- and I know the contract is up towards the RFP is coming, but if you can give me a feel for the subcontracting portion of your business and how that's trended.

So one of -- our subcontractor is PRGX, and to the extent that they are auditing about 18% of our Medicare spend through one specific Mac, they are -- their contribution is less than that, but that's about the volume of claims that they are reviewing. As we look forward to the new RAC re-compete contract, we do not anticipate having subcontractors of that magnitude on that re-compete.

Okay. And that's less profitable, correct? I mean subcontracting clearly is -- I'm not sure how much less profitable than non-subcontracted.

That's correct.

Okay and if have you had any inclination from CMS on the contract and how it's going to be handled on the RFP? You said you expected a quick turnaround. Is that they suggested that we would hear something -- you would hear something this year, mid this year or shortly after you submit your RFP?

What we know, Bob, is that it is a priority re-compete contract for CMS, and so we are anticipating that they will try to get the re-compete done in a timely fashion. They have not conveyed to us any specific time frame officially regarding the RFP for contract renewal but we -- they have told us that it's forthcoming in the near-term, and they will make a decision shortly thereafter.

Okay. Last question. The Grant Thornton relationship -- how is that progressing? Are you seeing any type of pipeline of opportunity still through the Grant Thornton joint venture or partnership?

We are working with them to develop a pipeline.

Okay. Great. Thank you very much.

Thank you. Our next question is from the line of Michael Tarkan with Compass Point. Please go ahead.

Thanks for taking my question. Can you talk a little bit more about the changes to income-based repayment? I guess basically what I am trying to get at is when specifically where you notified from the Department of Ed that you may get to use this as a rehabilitation tool, and I apologize if you already mentioned this, but are you currently using IBR as a rehabilitation tool?

Yes, we are currently using IBR as a rehabilitation tool and Department of Education started to emphasize that program in the latter half of 2012.

Okay. And are you getting paid regular contingency fees at this point if you rehabilitate a loan with IBR?

That is correct.

Okay. And then kind of as a follow-up, I have seen a lot of proposals recently in Washington about making IBR a default option for borrowers basically right as they enter repayment. I was just curious if you had any thoughts on that, or those proposals.

As you might know, the IBR program on the non-defaulted side has been in place since I believe 2009. So it's not a new program on the un-defaulted side. As we look at the participation of borrowers on the front-end side or the un-defaulted side of student loans, it has not had great traction and partly because of the kind of documentation required in order to participate in the IBR program.

Also, as you probably know, the IBR program allows forgiveness of the loan balance after 20 years of payment and the balance, the remaining balance is forgiven for which the borrower is taxed. So it just hasn't gotten I think as much traction as on the front-end as we are finding on defaulted student loans, and partly because it is really a great vehicle to help borrowers become current.

Great. I guess, you know, if they relax some of the qualification, or you know, red-tape, let's call it, would you expect an impact there if more -- let's just go directly into income-based repayment before they even default. Is that something you are concerned about or is it on your radar screen, if they either promote the program or maybe relax some of the criteria to get into the program?

No. You're asking me to speculate. So if I were to speculate and think that the criteria get far more relaxed, there may be more participants in the IBR program. That said, you probably also know that default volume is at in incredible all-time high on the overall inventory that is out. So it's -- I think from a growth standpoint, I'm not sure that it -- that we view it as a negative to the growth profile that we have put forward.

Understood. And then I guess I just have one more. Can you talk a little bit about the vintages of the loans that you are seeing right now through the GAs and through Department of Ed? What years were those originated? Are those 2006, 2007, 2008 ones or are they more recent loans?

Well, I don't have the data in front of me. To the best of my recollection, I believe they are not more recent.

Okay. Thank you very much.

Thank you. Our next question is from the line of Richard Cheever with SunTrust. Please go ahead.

Hi. Thanks for taking my call. I was hoping you could maybe parse out the $1.1 billion placement from Department of Ed. Do you have a sense of how much of that was backlog versus what you would -- I guess what would be a normal run rate for the quarter?

Sure. Let me actually take a look at some of the numbers that I have on that. Clearly a significant part of it is the backlog that we have experienced with the Department of Education. As we look at -- on a normal basis, they would -- we would be looking at -- I mean if I go back to last year when we had normal placements from the Department of Education, it would be in the vicinity of around $300 million to $400 million that we would get on a quarterly basis.

2011.

For 2011. Correct. Beginning of 2011.

So the big chunk of that 30% -- you know, 25%, 30% of that was -- I'm sorry -- the reverse. About $800 million of the placement is likely due to backlog.

It's catch-up. Yes. I mean as we mentioned, just during the third quarter of 2012, we got less than $200 million from Department of Education. So clearly there is a significant catch-up here that we did (inaudible) which again, if you look at that placement of $1.1 billion or $2.2 billion for the quarter. As you look at the nine-month lead process, that will impact our results very possibly as you look at the Q3 time frame.

Right. And then on the salary and benefit line you highlighted a couple of things that drove the - - looks like about a 300 basis points increase from last year. Can you kind of parse out how much of the increase is due to new hires in the RAC program versus the -- I think you mentioned the software implementation? Is that more of a one-time event? Is it -- is that implementation complete?

That implementation is complete as far as the software license that we purchased earlier in 2012. As you look at our salaries and benefits we continue to invest in our business for future long-term growth.

So we invest in the business both on the student lending side, but as we look at Q4 in particular, and we have noted as it relates to the RAC contract, and we are ramping on the RAC contract and the hiring nurse coders and so forth to facilitate that growth. So that is a large portion of the overall increase that we are seeing in salaries and related.

And are you still having success? Have you sort of tapped the nurse market or is there -- you know, that market.

We are having no issues as far as continuing to hire and grow the required staffing to support the growth that we're looking at.

Okay. Thank you.

Thank you. Our next question is a follow-up from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Hey, guys. Just maybe to go back and think through a little bit of this other revenue and also tying that to new business development capabilities, as we are kind of looking at our model we had sort of some base assumptions for health and for student and obviously all the drivers for that. But the part that's kind of interesting I guess is just thinking about what you guys can do outside of that, so obviously Magellan and this new DOE contract.

So maybe, Lisa, can you just help us walk through your business development capabilities and then maybe from an operational perspective what you guys are capable of sort of onboarding on a normal annual year basis in terms of new contracts. Any way to think of about that and how that could flow through the other revenue line item here?

Yes. Magellan would be a Healthcare type of contract. So let me focus first of all on the onboarding question that you had. One, is if it's a relatively straight forward in our wheelhouse type of new contract, we have great capacity to onboard numerous contracts.

So for example, if there's a Healthcare recovery contract that's a core competency that we have. So we would not struggle with onboarding numerous contracts of that type. In a contract, for example, that's an audit recovery contract for another type of federal agency, that will be highly technology related in terms of the analytics, and we will use our big data platform and analytics capability in order to drive results for our clients. Now, that will take a little bit more time upfront as we load the data and work with our clients and define the metrics of the analysis that we need to conduct.

Yes.

But -- so that is -- that will take a little bit more time upfront, but when we think about in the wheelhouse kind of core competencies that would be a fairly -- I mean that's -- we've got a great deal of expansion capability there.

Got it.

And then when we think about business development and growth, as you see from what we have released, we are using clearly channel partners as well as strong large organizations with depth in very specific areas of our foundational markets. Magellan is one of those strong players in the Healthcare market.

Got it. So how many business development people are there in the organization right now?

There are -- if you think about overall sales force, there are -- we have several dozen sales force folks and specifically at a higher level for business development we have three or four individuals focused partially on sales, largely on business development.

Okay. Great. Thanks.

Thank you. Our next question is I follow-up from the line of Kelly Flynn with Credit Suisse. Please go ahead.

Thanks. I was hoping you could revisit that $2.5 million revenue that you were talking about that I guess kinds of pulled into Q4 from Q3. Can you go over again what exactly that was? And I 'm just not understanding why you don't see that again in Q1 if it relates to the re-ramping of the technology issue at the Department.

Sure. So, Kelly, so what -- the -- we were impacted last year as you know by the technology change at Department of Education. That had an impact in two ways. One way was that we were not getting the normal amount of placements that we would expect, which we touched on here earlier.

The secondary impact that we had was in our ability to recognize revenue on the completed rehabilitation process. So we were not able to recognize any rehab revenue for Department of Education in Q1. We started to recognize it in Q2 and in Q3 we had $2.5 million worth of rehabilitation revenues still on the books and on our balance sheet and deferred revenue.

That was fully recognized during Q4. So as we look at the rehabilitation process, that is now working and we're -- we've been able to recognize the backlog of loans that were sitting out there.

Okay. Right.

And then --

Sorry. Go ahead.

Yes. And then -- I mean we it have -- you're going to see it in our balance sheet that we do have some deferred revenue still in the Department of Education on the balance sheet. And what that relates to is that we were notified by the Department of Education that we were entitled to a performance bonus for our performance during 2012, and we billed that out and we have that -- gotten that paid, but we still need to go through this reconciliation process as Lisa mentioned earlier before we can recognize that revenue. So that's the primary amount that is under deferred revenue right now.

Okay. And when -- when do you think you will recognize the performance bonus?

We anticipate that that's going to be during Q2. It's possible to come through in Q1, but we're anticipating it will come through in Q2.

Okay.

That's when we complete the reconciliation process.

Okay. Great. And then for the Student Lending business what do you consider to be a normalized year-over-year revenue growth rate? I guess as we think about 2013 can you give us a sense of where you think that growth might come in?

When we look at -- at overall growth, what we're anticipating is something similar to what you saw in growth in 2012 versus prior year. And part of that -- and as you think about the flow of inventory as we come back to the flow of inventory that's normalized for Department of Education, while that started in Q4 of 2012, it will continue through 2013 and as you know, the nine-month rehabilitation process will put much of that benefit into 2014 year.

Okay. So when you say the same growth rate as 2012, you're talking about the student lending revenue?

Yes.

Okay. All right. That's helpful. Thank you very much.

Thank you. And we have no further questions at this time. I will turn it back to Lisa Im for any closing remarks.

Great. Again, as we look ahead we feel very good about the trends in our business, and we do expect to continue to build on the positive momentum, and for 2013 to be another strong year for us. And we, again, want it thank you for joining us. We appreciate your time and attention.

Ladies and gentlemen, this concludes the Performant Financial Corporation's fourth quarter and full year 2012 earnings conference call. Thank you for your participation. You may now disconnect.