Performant Healthcare Inc (PHLT) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Performant Financial Corporation's 2013 second quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, the 8th of August, 2013.

I would now like to turn the conference over to Mr. Rich Zubak 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 second quarter 2013 results. If you have not, a copy is available on our website www.performantcorp.com.

Today's 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 described in the Risk Factors section of the Company's Form 10-K and other 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 any responsibility 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, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call today.

The second quarter was particularly strong for Performant. Today we are reporting revenues of approximately $69 million, which is a year-over-year increase of over 26%, driven by the strong performance in all of our markets.

Adjusted EBITDA in the second quarter was approximately $27 million. Adjusted EBITDA margin for the second quarter was 39%.

Adjusted earnings per diluted share were $0.27 in the second quarter.

During the second quarter Student Lending represented over 65% of our total revenues. Revenues from this business were up 35% sequentially and 25% year-over-year. Our results were fueled by the strong loan placements we received during the third quarter of 2012. Additionally, as we had indicated on our last quarter's call, we benefited from the favorable timing of some large placements in the latter portion of the second quarter of 2012. We also benefitted from a placement that we received early in the fourth quarter of 2012.

In addition to the favorable timing of these loan placements, our second quarter 2013 results also reflect about $4 million in revenue from a new specialized portfolio contract that we were awarded with one of our leading guarantee agencies. Going forward we will continue to recognize revenue from this contract, but it will be at a lower run rate.

Loan placements during the second quarter totaled $1.3 billion. Although this total was a decline from the $1.7 billion in placements that we received during the first quarter, we do not view this as a negative or unusual. Loan placements from the Department of Education have been lumpy over the past 18 months and it's possible that it may remain lumpy for still some time. In fact, we received over $600 million in placements from the Department of Education in the month of July alone.

From a longer term perspective we believe that the Department of Education still has a significant amount of defaulted student loans that are awaiting placement and we believe that we should continue to see meaningful placements from the Department of Education for the remainder of the year and into 2014.

The Department of Education recently issued its RFP for the new Recovery Contract and is employing a two-phased approach to narrow the list of potential vendors. We are in the process of submitting our response to Phase One, which has an initial due date of mid August. We expect a relatively quick decision from the Department of Education on those companies that make the Phase One cut and the Phase Two proposals are expected to be due in November. Ultimately the Department of Education has announced that they expect to award the new contract in January of 2014.

While we cannot comment on the specifics of our planned response, we are confident that our strong performance on each and every contract for the past four contracts over 22 years will serve us well in being reselected as one of the vendors on the new contract.

Turning to our Healthcare business, as you may be aware, we have received an update from CMS regarding the current contract, which I will discuss momentarily, but first I want to discuss our results from the second quarter.

Our Healthcare business had revenues of approximately $18 million, up 75% sequentially and 33% compared to the second quarter of 2012. Revenues during the second quarter benefitted from delays in revenue recognition during the first quarter caused by the suspension of certain audit and claim activities due to Hurricane Sandy and a temporary interruption in claim processing during the first quarter. Also, in mid June CMS resolved a technology constraint that had previously prevented the automated processing of claims to periodic interim payment providers.

As we mentioned on prior calls, at the start of 2013 the lack of automated processing of claims involving PIP providers had prevented us from submitting claims that would generate revenues estimated at approximately $6 million. First quarter revenues attributable to PIP claims was about $200,000. With the technology issue resolved late in the quarter we were able to recognize approximately $3 million of revenues from PIP claims during the second quarter.

While we were waiting for the technology patch to be implemented we continued to perform audit work on PIP hospitals for the medical records requested. As a result on a year-to-date basis we identified an additional approximately $6 million of revenue from PIP providers.

As it relates to the Medicare RAC contract and renewal process, CMS continues to work through their transition from the first to the second contract. Although we do not have a definitive time for the award of the new contract, we have received a modification to the current contract that extends our ability to request medical records from providers through November 15th of 2013.

While we view the work period extension as a positive, there are a few items that we expect to negatively impact our results. First, CMS has restricted all of the RACs from sending medical record requests to PIP providers until further notice. This action has a significant impact on our Healthcare revenue as approximately 20% of the hospitals in our current region are PIP providers.

Second, our inability to submit new record requests during the month of July will impact our fourth quarter as there will be a noticeable lag in the number of new medical requests available for our nurse auditors to process.

Lastly, CMS implemented some additional limits on the number and type of claims we can make during the transition. Under the revised contract the review of any one particular claim type is now limited to 70% of the provider's limit.

When we spoke to you last quarter we did not have sufficient information to accurately adjust our guidance, however, we said that our full year top line results could be adversely affected by $10 million to $15 million should we not be able to operate under normal conditions due to potential transition constraints initiated by CMS.

Given the revised transition procedures implemented by CMS earlier this month we now have much better visibility on the remainder of 2013 and, as a result, we are revising our full year guidance expectations. Based on our current operating environment we are revising our revenue and adjusted EBITDA forecasts to $247 million to $252 million and $77 million to $81 million from earlier guidance of $252 million to $265 million and $81 million to $85 million, respectively. However, if CMS opens up our ability to send PIP providers medical record requests we will evaluate our full year revenue and EBITDA forecasts respectively.

Finally, while we do not provide explicit quarterly guidance these ranges also imply that we expect the third quarter revenues to be a little bit softer than Q2. Furthermore, the fourth quarter will be even softer still, primarily due to the current limitations on sending medical record requests to PIP providers and our temporary inability to submit medical record requests in the month of July.

The bottom line is that we have a contract extension, which not only benefits us but also CMS, and we have complete confidence that they will take appropriate steps necessary to minimize any disruption to the recovery stream.

On the new business front we continue to have strong pipeline activities in both government and commercial markets. We cannot divulge our clients due to confidentiality at this time, but have a major program [integrity] win with one of the largest commercial payors in the United States and a significant contract expansion with an existing commercial Healthcare client.

With that, I'd 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, revenues in the second quarter were $69.2 million, an increase of 26.1% from the prior year period. The largest component of our revenue mix is Student Lending, which grew about $8.9 million or 24.7% to $45 million compared to the second quarter of last year. Second quarter placements were $1.3 billion, down from 2.6% year-over-year.

As a result of the decreased placement volumes revenues as a percentage of placement volume were 3.58% compared to 2.79% in the prior year period. This percentage is artificially high because of no placement volume from the Department of Education during the second quarter, combined with a high revenue recognition.

The second largest component of our revenue mix is Healthcare, which increased by $4.5 million or 33.2% to $18 million compared to the second quarter of last year. Net claim recovery volume increased by $41.2 million or 34.8% to $159.8 million. Our claim recovery fee rate was 11.3% compared to 11.4% in the prior year period.

The increased Healthcare revenues in the quarter is a reflection of a few factors. First, our ability to resume auditing healthcare providers in regions that were impacted by Hurricane Sandy. Second, the implementation of a data patch that corrected the temporary delay in claim processing last quarter, which delayed the recognition of revenue from last quarter into the second quarter.

Third, for the past few quarters we have discussed with you our challenges regarding the recognition of revenue from PIP providers. At the start of the year we had just over $6 million in delayed revenue related to PIP providers. As Lisa mentioned, CMS fully resolved this issue in mid June and we're now able to submit [ordinary] claims to PIP providers. Although our window for being able to submit these claims was limited, we were still able to recognize approximately $3 million of this delayed revenue during the second quarter. As a reminder, we have already incurred the expenses related to this delayed revenue, which is a primary reason behind our strong adjusted EBITDA growth this quarter.

In total we now have approximately $9 million in delayed revenue remaining to be recognized related to PIP providers as of the end of the second quarter. Based on our results from using the updated automated system during the second quarter we expect to be able to recognize a large part of this revenue during the third quarter.

Revenues from our other markets grew by $0.9 million or 17.7% to $6.2 million compared to the second quarter of last year, primarily as we continue to execute on the recently won [defaulted] aversion services contract.

Moving to our expenses, salaries and benefits expense was $23.9 million, an increase of 20.8% as compared to $19.8 million in the prior year period, while other operating expense for the quarter was $22.9 million, an increase of $4.2 million. The higher operating expenses are consistent with the growth of the Company's recovery activities over the past year. In addition, the Company had expenses of approximately $1.3 million associated with its public offering completed in April, and these expenses are not deductible for tax purposes.

For the second quarter of 2013 our reported net income was $11.2 million or $0.23 per diluted share compared to net income of $8.1 million or $0.16 per diluted share in the prior year period.

Adjusted net income in the second quarter was $13.1 million or $0.27 per diluted share compared to $9.7 million or $0.21 per diluted share in the prior year period.

Fully diluted average outstanding shares increased to 49.4 million shares in the second quarter of 2013 reflecting the exercise of stock options.

Lastly, our adjusted EBITDA in the quarter was $27 million compared to $20.2 million in the second quarter of 2012, while adjusted EBITDA margin in the second quarter of 2013 was 39% compared to 36.9% in the prior year period. As I previously mentioned, we recognized a significant amount of our delayed revenue during the second quarter for which we had already recognized the expenses.

With that, I'd like to open up the call to questions. Operator?

Thank you. We will now be conducting a question and answer session. (Operator Instructions)

Our first question comes from Ed Caso of Wells Fargo. Please go ahead.

Hi, good afternoon. Could you talk a little bit about some of the headlines we've seen lately around student loans? There seems to be a lot of moving parts. If any of them may have a shorter or long-term impact on your market opportunity?

Could you be a little bit more specific, Ed, on the kinds of -- certainly guaranteed student loan program has gotten a lot of popular press coverage. It has been largely because we are moving into -- still in a fairly good recession period, if you will, so I'm not sure to what specific area?

Well, the Consumer Protection Agency has made some noise. There's always noise around changing the default rules. There's been noise around the interest rate on the next -- at the July 31 deadline. I guess all of those together, are you hearing anything from your various clients as to whether that might impact your ability and the pricing and so forth?

The short answer is no. But just to kind of separate some of the categories, the student loan interest rate change really has nothing to do with us. So that's really -- that affects more the borrowers who are going through repayment.

With respect to any of the dialogue on changing default rules, et cetera, that has to be done through legislative issues which would include scoring. And at this point even though there's a lot of (inaudible) [around the] program we do not believe any of it is actually in serious legislation. But interest rates surely is an issue that the Congressional folks would like to resolve, but again that really doesn't affect us.

My other question is around PIP, just sort of trying to understand why that was pulled out here during the interim period, why that seems to have been targeted, particularly given all the challenges you've had and the lack of ability to execute in that market. Was there something special about those kind of hospitals that they aren't letting you sort of do your job? I guess that's my question. Thanks.

Well, Ed, it's our belief that because so much of the PIP volume was so recently processed, if you think about all the adjustments for the incorrect payments that were made, it's all pretty recent for all the PIP providers. And we know that CMS is very, of course, very sensitive to how they deliver care, which is again through the provider groups.

With so much of the volumetric changes happening with PIP providers more recently we think our client is just more sensitive to providing a little bit of cushion for those providers until the audits resume. So there's nothing special in terms of category of hospital, other than just the processing. A lot of processing has happened fairly recently, which is again why we stated in our comments that we believe this is temporary and that it's possible that we would be allowed to begin auditing PIPs again soon.

Great. Thank you.

Thank you. The next question is from Bob Napoli of William Blair. Please go ahead.

Thank you, good afternoon. Question on the CMS contract, I don't know if there is anything else you can say about the process that they're going through? I mean they keep delaying. What is taking, in your opinion is taking so long for them to come to a decision on awarding the contracts and having -- kind of taking out the uncertainty surrounding this whole process?

Well, this is obviously our speculation, but given the facts around the [HMS] protest, which you recall happened in April and then was withdrawn, and CMS at that point made the comment they would self-correct. We believe that they are -- that one of the issues clearly was the protested issue of appeals management. And HMS, from what it appears, did not believe that they would be responsible for appeals beyond the term of its contract. So that being in the new RFQ was the protestable item, which I believe is all public.

Once having resolved that, now that CMS has resolved that through the contract extension, we believe that they are going to prepare whatever self-correction it was and then reinitiate the process in earnest. And just so you know, we always assumed we'd be responsible for appeals, so that in no way actually affects any of our outlook on the contract or financials around the contract.

And so when you say reinitiate the process, Lisa, so you're saying you're expecting at least several more months before any decision is made, that they're going through and kind of reinitiating the process, if you would?

Again, Bob, I'm speculating, but I don't think they would want to wait that long. Once they have a resolution -- and, again, we've always believed that CMS, in their best interests was to have the least amount of disruption in the program. It's a very good payment integrity program, one that has driven great results for them. So it has always been our belief that they would like to minimize contract transition time and be able to continue the program with quality trusted vendors, partners who can conduct the work.

So would I speculate on timing? It's tough to speculate on timing, but I think once having gotten, again, the contract extension done it gives them some opportunity to again reengage their part of the process and move forward.

Okay. The new contracts that you got, I understand you can't say which commercial client, you said a healthcare client and a major program integrity win with a commercial client -- and what type of commercial client? Can you tell me what industry? And can you give some feel for the revenue you would hope maybe in 2014 from those contracts?

Well, at this point we are starting the implementation so I don't think we have a good -- we have a range, but I think we'll know more as we implement it what a more definite number will look like in 2014. The existing commercial healthcare client we had a very small contract with and now that's expanded to cover a variety of different types of integrity audits in their processing. And it's a healthcare commercial client. It's another healthcare commercial payor.

Okay. On the student loan side, the $1.3 billion of placements, how much of that was government in GA?

Yes, approximately $300 million of it was the Department of Education, the rest being the GAs.

Oh, okay.

And, again, as Lisa mentioned, we had approximately -- in excess of $600 million worth of placements from the Department of Education and we received that in the month of July. So again we don't see a lower number for Q2 as being any indication, at all, as far as lower amounts. It's just some of the lumpiness that we're experiencing in this area.

Thanks. And the last question, the limitation on the number of collectors, which is -- I mean I think is good news because I think you guys with your long track record are likely to be -- do you have any idea how -- what number -- how much they're looking to reduce the number of collectors?

The Department of Education contracts?

Yes, I'm sorry, the Department of Education contract, you said you had --

I don't think we said they would be looking to reduce the number of vendors.

Okay, I thought that's what you had said. (Multiple speakers) --

No, I don't know if that's out somewhere in the public venue, but I don't -- we do not know if they will or will not.

Okay.

We do know that they will -- that their process includes experience and a lot of experience in managing defaulted student loan volume, and it's important for them to continue to have a strong program. So we believe that they will make good selections of reliable vendor partners who have driven strong results on their portfolios over time.

Okay. Thank you very much.

Thank you. The next question is from Michael Tarkan of Compass Point. Please go ahead.

Thank you. On the healthcare side, now that the Medicare Part A to Part B rebilling rule looks to have been finalized just wondering if you can touch on maybe what kind of impacts we can expect in 2014, if you know it at this time, and maybe how the final ruling compares to the initial proposal?

Sure, Mike. As we look at this ruling, I mean first of all we don't see that it's a change from how we have been operating. Again, I mean as we look at this process, CMS is in the latest proposal is supposedly is making it -- is reaffirming their position as it relates to Part A and Part B. So from our position, again, we don't see that this is going to have any impact on us here as we look at this going forward.

Okay, and then just back on the PIP issue a little bit. You had mentioned I think that you would evaluate guidance if CMS maybe adjusts the treatment of these -- the PIP providers during this transition period. I guess are you currently having discussions with CMS about this? I mean with 20% of your exposure here it seems like it would impact you maybe a little bit unfairly relative to your peers. I'm just wondering if this is something you were having ongoing discussions with CMS about?

Well, we just received -- it's early information. So we believe that they are willing to work with us. And in the past when we've had challenges we worked on them with our client and come up with a good solution that they support. So we will initiate some dialogue with CMS around this issue, and we believe that they will be very reasonable. And as long as we are sensitive to providers -- again, providers is how care is delivered by CMS. So we fully understand that and we respect that and we will again work with CMS to affect -- so that hopefully a more positive outcome to us.

Okay. And then on the education side, I know you've been using IBR to rehabilitate loans. I'm just wondering if we saw any contribution from that this quarter and maybe what your outlook is on that revenue as a percentage of placement line going forward? I know historically you've talked that the number being a little bit north of 200 basis points. Just curious if IBR affects that at all.

As we look at this quarter, Q2, there was minimal impact in this quarter since this program was really being initiated in the September timeframe of last year. So it's only been nine months, you know, that we have the (inaudible) process, so there was a minimum amount that came through this quarter. We do expect to see an impact here during Q3 and Q4. And the one thing to remember here is that IBR just pertains at this time to one client, being the Department of Education, so in the GA clients we're not doing IBRs with them. So, again, you need to kind of just make sure that -- I just want to make sure you're aware of that part of it.

Sure, and I mean on the revenue as a percentage of placement, if you're utilizing IBR and that's driving maybe stronger recovery rates would we expect that line to maybe trend higher or is it going to still stay roughly in that 200 basis point range?

We would expect that it's going to be north of 2%, so it's going to be -- right now as we look at it, I know that we've had some choppiness as you look at the quarterly numbers and the 2% number on a more annualized basis right now is around 2.2% and we would anticipate and expect that this percentage is going to be slightly north of that.

Great. Thank you.

Thank you. The next question is from Julio Contreras of Goldman Sachs. Please go ahead.

Hi, guys. Just to come back to the CMS situation, first of all. It sounds like there's two pieces here. One that you guys are sort of considering as good news and then, two, one that feels like it's a little bit more delayed and more negative. Can you just walk us through real quick the pieces that you guys are actually comfortable as being positives coming out of the second quarter? And then, secondly, related to that where are the most incremental developments that are more negative and that would continue to be a drag as you think about the revenue visability going into the back half of this year?

Sure, Julio. First of all, looking on the positive side, having the PIP automatic fix finalized during the month of June is just a big plus, which enabled us to recognize again $3 million worth of revenue in Q2, and we have now $9 million of revenue that we expect to rightsize here during Q3 and Q4. So, again, that's positive.

Another positive is that as we look at the ADR hold, the document request hold that we've been under for the month of July, that is lifted based on this extension, and we can continue to request medical records through the mid-November timeframe.

On the not so good side, as we talked earlier, the current limitations that we have on not sending out document requests to PIP providers, so that's something we have taken into consideration as you look at the revised guidance that we gave. And then there is a limitation also on document limits to 70% versus the provider's limit that we had before. So that's also having a negative impact. And so again it's the PIP volume and the ADR hold during July that is going to impact us primarily in the Q4 timeframe and then the slight reduction in revenue related to these limitations to 70%.

Got it. And just as a reminder, when you guys think about the work that you're putting in how much of your work would actually be sort of single recovery efforts, if you will, so that you will essentially be against this, you'll be hitting this ceiling of 70% limitation?

I'm not sure I'm clear on your question. I mean we're not going after any single issue. I mean, we are going after a large number of different issues. But we do have a limit that we can do no more than 70% of the limitations that we have, that we've been under before.

Okay, so that wouldn't be an additional component to think about, is the 70% number by itself?

70%, yes, so again it's a reduction of 30% on the medical records we would otherwise request.

Got it. Okay. And then I mean at this point maybe, Lisa, what gives you confidence that November is really going to be the end of this? I mean you can continue to go through November. Where is the confidence beyond November that this isn't going to continue to drag on and so therein by the time you start looking at early 2014 you've got the overhang of the CMS contract possibly still running its course and then you have the Department of Education award also being a question in investors and whether you're going to be able to sustain that or that the terms won't actually go through? So it's just sort of like a perfect storm right now of developments on two of your larger contracts where the visibility right now seems like there's not a lot to really hang our hats on. So CMS by mid November, can you answer that one first, and then maybe the Department of Student Lending -- Department of Education, the Student Lending, second?

Sure, Julio. So in the extension language CMS gives themselves room and so as we look at the November 15th date if they have to extend it they have given some leeway to be able to extend the ADR timeline. So there's flexibility for CMS the client to do what they believe will be best for the objective of the program. We do not anticipate -- we would not, you know, based on that we would not anticipate downtime.

And hopefully, again this is obviously speculation, but hopefully the new contract process will reengage here fairly quickly and so there would be more visibility. But that said, again, the contract extension gives them an flexibility to negotiate an extension on the ADR timeline. So that's the CMS contract.

And on the Department of Education contract the contract, itself, will continue to run. This current contract, while it technically turns at the end of September in 2014 there is a six-month extension that they can invoke. At the same time, January is the targeted timeline for selecting vendors. We believe that our performance and our -- again if you remember we're the only vendors who have been in the program since the inception of the program from contract number one -- four great result contracts under our belt, great partner to our client. And we believe that we have every opportunity and will again participate in the Department of Ed contract.

Got it. I guess it's just not -- it's not your execution as much as it is not knowing what these bodies and some of the agencies who are at CMS and the Department of Education has any urgency, right? And that's probably the more frustrating part because the business, itself, as far as your execution is concerned, is fine. But it's just the kind of the annoyance in the background of how the agencies work and the time limits that they tend to operate under, so you know that's --

Yes, I think it's a little bit of that, Julio. But, again, I think from our business standpoint the continuity of the program and the work that we're providing to the client should diminish some of that noise. So, yes, we're waiting for the new contract award, but we continue to have the opportunity to work on the contract and generate returns for our client, in turn be able to generate revenues and continue growth in our business.

So it would be great if all things were timely, but as you know in the real world we don't get that always. So our important priority is to continue to provide the best work that we can for our client, to have continuity in that work, which we do, and then to do our best to again recompete and provide continuity in our service to those clients.

Now just to be clear, the November date could that actually slip again or is that something you guys feel is a fixed date as far as the CMS contract is concerned?

Well, that is the current runway for ADRs, but as I mentioned CMS has given themselves a little room. So if they move to extend ADRs under the current contract they can continue to do so. They have the right to do so.

Okay. Got it. All right, guys. Thank you. Good luck.

Thank you. The next question comes from Suzi Stein of Morgan Stanley. Please go ahead.

Hi, I just want to go back to the student loan revenue for the third quarter. I know that you had talked about the third quarter being a big quarter because of placement volumes from fourth quarter of last year. How much of that did you recognize in second quarter? And should we expect third quarter to be kind of similar in terms of revenue to second quarter?

Hi, Suzi. We would expect that Q3 is going to be somewhat softer, and the reason for that as we stated in our script at the beginning is the specialized portfolio work that we did during Q2 that benefitted us with about $4 million, so that was one of the components of making Q2 strong.

We also accelerated some revenue based on -- not accelerated but based on the placements that we received, the large placement we received in October of last year.Some of that revenue was recognized during Q2. I would not say that it's a material amount, but there's a few million dollars that we were able to recognize in Q2.

So our expectation for the rest of the year as we look at Student Lending is for Student Lending to be strong in the second half and slightly stronger than what we saw during the first half.

Okay. And then on the healthcare side, just as we think about the quarters I just want to kind of put it all together. So Lisa I think said that sequentially we should look for a decline from 3Q -- from 2Q to 3Q, and then 3Q to 4Q. But with the $9 million in PIP revenues that you are expecting to recognize is that included in that or we should kind of net that out as we think about the sequential decline?

It's included in there. Suzi, we are projecting that to all be recognized in Q3 and in Q4. And then the important part as you look at Q4 is now the implications of this one-month delay that we've been under and also the current inability to request documents from PIP providers that we have incorporated into our guidance. So Q4 is going to be quite a bit softer than Q3 based on those facts.

And, Suzi, that's -- my comments about Q3 being a little bit softer than Q2 was for the total revenue, not for healthcare.

Okay, all right. Thank you.

Thank you. The next question is from Brian Hoffman of Avondale Partners. Please go ahead.

Good afternoon. You've mentioned the specialized portfolio contract with the GA, Guarantee Agency. Can you elaborate on that or give some color on that as to what that contract is?

Sure. So what this project is is that we have a -- as you look at the work that we do on the Student Lending side where we -- the (inaudible) a default of student loan through rehabilitation. If, in fact, a borrower has rehabilitated there are other ways that we can resolve that defaulted status. And so we have different tools available to resolve that at that point and that's the work that we're doing, and primarily with this client.

Do you have anything else you want to add on that point, Lisa?

No.

Okay, and then looking at the payment recapture contract with the Department of Education, can you give us an update on that? Is that coming along better or worse than anticipated?

It's slower than what we had hoped for, which is a little bit -- it's not exactly what we had hoped for, obviously. But we are starting to continue to get information from the Department of Education. Some of it has been, as I mentioned, a little slow in coming, but the good thing is that we are gaining traction with the client and getting some opportunities teed up with them. So we actually believe this will be a very positive outcome, but it has been slower getting information out of the Department of Ed.

Okay. And if I'm not mistaken that contract ends in January of 2014 so would you -- and if that's correct would you expect the majority of the revenues from this contract to be recognized in the last few months of that contract?

Actually, they have the opportunity, they have the ability to extend the contract without a process necessarily. So we are obviously working with the Department of Ed to do the very best kind of process and outcome for the Department of Ed. So that's yet to be determined.

Okay, and then also on the contract that was announced with Magellan, do you have any update on that?

We are continuing to work with Magellan clients, and we are in the early, early stages of dialogue with three or four of the Magellan clients. We have not gotten to the part of implementation yet.

Okay. And then one last question, regarding the limitation that CMS put on audit requests going forward over the next few months, that's the limitation of not sending requests of PIP providers and the 70% limit. What's their rationalization for this? Why put these restrictions on the reqs over the next few quarters?

Well, on the PIP providers, as I mentioned a little bit earlier, a lot of the processing has come through in a fairly short period of time. So CMS we believe is clearly sensitive to the impact on providers and, with the volumes that have come through in the last couple of months and will be processed here in the next couple of months, we believe that CMS just wants to ensure that there is some breathing room for the PIP providers. So, again, we're not in dialogue with CMS yet, but we believe they're open to that discussion. With respect to the 70%, don't really know.

Okay, all right. Thanks for taking the questions.

Thank you. (Operator Instructions)

The next question is from Toby Wann of Obsidian. Please go ahead.

Yes, my questions have been answered. Thank you. My questions have been answered.

Thank you. The next question is from Don Destino of Harvest Capital. Please go ahead.

Let me just ask one final PIP -- well, maybe it'll be the final PIP question. Do you suspect that these are -- or do you understand this delay to be deferred audits and so next year we're going to be talking about kind of catch-up with the things that you weren't doing in August and September and October? Or are these lost revenues or lost opportunities over the next six months?

Well, first of all, I mean this is not delayed revenue. I mean as we look at the PIP provider situation that we've discussed, that is work that we have performed that -- with delayed revenue recognition.

I'm sorry, I'm talking about the -- this loss of audits going forward in this extension. Is that -- do you suspect that at some point you'll be able to make those requests and that revenue will end up having been just kind of deferred and it'll be a timing difference? Or are PIP providers living in a world in which they don't face the risk of audit for the next couple of months and can operate accordingly?

Well, we would expect -- and again we expect as we look at it right now with us being able to request documents from providers that we will do [36] months rolling (inaudible) the different issues that we want to pursue for audit. So that continues, so from that perspective it's not lost revenue. We would pursue that.

Okay. So all else being equal this is just going to be a timing difference as opposed to revenue that you would never, that you'll never see again?

That's correct, yes, that's correct.

Thank you.

Thank you. The next question is from Sam Sekine of ALJ Capital. Please go ahead.

Maybe you can help me understand the limitation on the requests, the record requests. With the 70%, I mean are you guys are you seeing 100% of -- are you going up to 100% of the limit today or I guess in the past? And how do you really see that affecting you?

It will have a very minor impact so that has a less impact on our business. It does impact it a little bit, but we will continue to find new issues. So it's highly probable that it could be a temporary, again, small impact.

Got it. And then with the appeals, the reserve that you guys have, do you guys have it on the books for two years, is that correct?

Yes, based on the contract extension we are -- we have agreed to continue to service and provide support for the appeal resolutions over a period of two years. Again, this has no financial impact on the way we've been dealing with this and, as Lisa mentioned earlier, we've always considered that the appeals are something that we're going to be held accountable for and that we've appropriately reserved it on our balance sheet.

And just is there any commentary or anything you guys can share on the recent bills in the House and Senate just towards the RAC program, just your thoughts on that?

Sure. As you know the Hospital Association will continue to have this on their radar screen, but any proposed bill in Congress must be scored. So if the bill is scored and it's a paid-for then Congress will have a tough time passing the bill when there are no excess dollars. So when we view, when we look at the legislation that's been proposed that has a cost to it there are components in the legislation that -- for example, one of the aspects of the legislation is to only allow recovery auditors to audit errors that are in excess of 40%, 4-0 percent.

So when we have legislation that proposes those kinds of parameters we can discuss the facts with various political folks. And when we think about the concept that we would only be auditing errors in excess of 40% -- seems to be a pretty big burden on the taxpayer. So our view is the legislation is -- you know, they continue to be politically active, but on the other side there's a lot of education effort that we put forth. And any legislation must be scored, if it's a paid-for legislation it will have to come out in public what the cost of that legislation is.

Okay. And just a last one for me, on the PIP hospitals, would you say I guess compared to the other incumbents that there's a special skill that you guys have that better suits you to service or to audit these hospitals?

No. These hospitals are very similar in errors and types of errors from other hospitals. It's just that in the Northeast, in the Region A area, we happen to have the largest portion of PIP providers versus other hospitals than any other RAC region, so that's why we have the 20%.

So it's not likely CMS looks at it, you know, your experience with PIP and so they most likely award you the same region? Is that something you guys consider or think about?

Obviously, we're speculating on what CMS might think with respect to awards, but just in terms of the program, itself, each of the recovery auditors has developed a network and relationship with all of the hospitals, the providers, and the association. We all each understand the nuances of our regions and every region is just a bit different. So to the extent that there's continuity and care for the providers and understanding of how the work flows, we think it would be important for continuity of quality and service and returns when CMS thinks about who should go in what region.

Good. Thank you, that's it for me.

Thank you. We have no further questions in queue at this time. I would like to turn the conference back over to Ms. Im for any closing remarks.

Great. Thank you.

So just in closing we have very strong momentum so far this year. And although we made a slight downward adjustment in our guidance for 2013 I want to note that our business trends are very positive and at the midpoint of our revised range we are still projecting full year revenue growth of 19% compared to last year, with an EBITDA margin of 32%.

As we discussed, we believe that the PIP provider audit exclusion in the most recent contract extension is only temporary and that if CMS does allow us to audit the PIPs sooner that it is possible that our results will exceed what we have given you today.

With that, we want to thank you very much for joining us and, as always, we appreciate your time and attention.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.