Performant Healthcare Inc (PHLT) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Performant Financial Corporation's 2013 fourth quarter and fiscal year earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, February 27, 2014. I would now like to turn the conference over to Rich 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 for the Company's fourth quarter and full-year 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 their 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. Lisa?

Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. Today, I'm going to provide you with an overview of our operational results for the fourth quarter and 2013. Then after Hakan walks you through the financials, I'll discuss some of the near-term challenges that we've encountered and the overall impact to operations that we expect to see in 2014. With that, we are reporting strong revenue and EBITDA growth during 2013 of 22% and 29% respectively. This performance is a reflection of our technological capability; all of the employees, their performance and the hard work they put in on a daily basis, whom I want to thank for their dedication. I also want to thank our clients, who have given us the opportunity once more to serve them in the past year.

In our core market: as we look specifically at our key markets, our fourth quarter student lending revenue of $42 million benefited primarily from the $1.7 billion of placements that we received during the first quarter of 2013. Overall in 2013, we had total loan placement volume in excess of $6.6 billion and we generated nearly $164 million in revenue or 2.5% of our placement volume. Turning to our Medicare payment integrity contract; despite the challenges we faced in our healthcare market during 2013 such as work stoppages, limitations on who and what we could audit, and even a little bit of Mother Nature; we still grew revenue by 23.4% compared to 2012. In fact at the end of 2013, our recovery audit vendor effectiveness, which is our total recovery after adjusting for the size of the region and our inability to audit PIP providers, is the second highest among the four current prime vendors.

Although Medicare recovery audit revenue in Q4 of 2013 was $10.9 million, down 30% compared to Q4 of 2012, we are confident in our ability to achieve recovery of areas even with the current restrictions. Overall, the recovery audit program has been a very successful program and we believe that CMS will continue to strongly support this great accountable public policy program. The most recent [SERC] report states that at 10.1%, Medicare fee-for-service error rate is the highest of all federal programs amounting to more than $36 billion in annual improper payments. As it relates to revenues in our other markets, which grew 5.2% year-over-year, we continue to look for long-term opportunities in both the government and commercial markets such as the state tax amnesty program that we ran during the fourth quarter.

As we mentioned last quarter, we are in the process of ramping up on a number of exciting opportunities and expect them to be more meaningful to our operational results during 2014 and beyond. During the year, we entered into numerous new contracts, several of which were Master Servicing Agreements with multiple contract opportunities. We did this with four of the six largest commercial healthcare payers in the US. We estimate that the US market for revenue optimization and post-payment review of healthcare claims is over $5 billion per year. Of this, the four of six largest payers who are our clients pay out approximately $1.7 billion in fees for their services. For one share point that we gain in each of these four clients, revenue will be approximately $17 million per year.

These contracts are still in early implementation, but we anticipate that they will contribute between $5 million to $15 million in revenue in 2014, which will be a ramp up year, with more significant contributions into 2015. Lastly, we have a strong balance sheet and we are actively pursuing a range of business development opportunities that would enhance our technological platform and further diversify our business. I'll discuss 2014 and the impact of some of the recent news in more detail shortly. But now, I'd like to turn the call over Hakan to walk you through the financials. Hakan?

Thank you, Lisa, and good afternoon, everyone. We were very pleased with our financial results for the fourth quarter and full year. Today, we are reporting revenues of approximately $60 million in the fourth quarter and $255 million for the full year, increases up 7% and 22% respectively year-over-year. Student lending continued to represent the largest component of our revenue mix and grew by $7.8 million or 22.9% compared to the fourth quarter of last year. Fourth quarter placements were $1.5 billion, which represents year-over-year and sequential declines of 32.4% and 31.5% respectively. As a reminder, we received catch-up placements from the Department of Education in Q4 2012 and Q3 2013 that is causing the unfavorable respective comparisons.

Revenues as a percentage of placement volume in the fourth quarter was 2.5% compared to 1.6% in the prior year period. Full-year revenues and placements were $163.7 million and $6.6 billion respectively, increases of 23.6% and 14.5% over 2012. Our ability to successfully leverage and execute on the increased loan placements we received during the second half of 2012 was a large driver of our strong revenue performance in 2013. The second largest component of our revenue mix, healthcare decreased $4.7 million or 30.3% to $10.9 million compared to the fourth quarter of last year. The decrease in healthcare revenues was primarily due to contract concession constraints. Net claim recovery volume decreased by $41.9 million or 30.2% to $96.5 million. Our claim recovery fee was unchanged at 11.3% compared to the prior year period.

In 2013, total healthcare revenues grew 23.4% to $67.5 million compared to $54.7 million in 2012. Revenues from other markets. Revenues from other markets in the fourth quarter were $7 million compared to $6.1 million in the prior year period. As Lisa mentioned, we completed a state tax amnesty program that contributed to the year-on-year improvement. Overall in 2013, revenues from this market totaled $24.1 million compared to $22.9 million in 2012. As Lisa noted, a number of factors disrupted our operations and impacted our results in the fourth quarter and full year. However, despite all of these temporary interruptions, we still reported strong growth across all of our business lines. This success is a result of our flexible business model and strong technology platform that has proven capable of being adapted across multiple industries.

Moving to our expenses. Salaries and benefit expense in the fourth quarter was $23.8 million, a slight increase of 1% as compared to $23.6 million in the prior year period. Other operating expenses for the quarter was $20.4 million, an increase of $2.1 million primarily due to increased subcontractor expense and the utilization of contracting [fees]. For the fourth quarter of 2013, our reported net income was $7.9 million or $0.16 per diluted share compared net income of $6 million or $0.12 per diluted share in the prior year period. Net income for the full year was $36.3 million or $0.74 per diluted share. Adjusted net income for the fourth quarter was $9.1 million or $0.18 per diluted share compared to $7.2 million or $0.15 per diluted share in the prior year period. Fully diluted average outstanding shares increased to 49.6 million in the fourth quarter of 2013.

For the full year, adjusted net income grew 39.6% to $42.8 million or $0.87 per diluted share. Our adjusted EBITDA in the fourth quarter grew 11.7% to $19.4 million compared to $17.4 million in the 2012 period while adjusted EBITDA margin was 32.4% compared to 31.1% in the prior year period. Our adjusted EBITDA for the full-year 2013 grew 28.5% to $89.4 million and our adjusted EBITDA margin was 35%. Our effective tax rate for 2013 was 40.7%. Cash flows from operating activities in 2013 were $61.2 million compared to $37 million in 2012. Turning to our balance sheet. As of December 31, 2013, we had cash and cash equivalents of $81.9 million. Our total outstanding debt as of December 31, 2013 was $133.3 million. The sequential decrease in outstanding debt of $14.5 million reflects scheduled payments on our long-term debt.

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

Thanks, Hakan. As we look ahead, we are planning for 2014 to be an anomalous transitional year that provides for continued strong future growth. Mid to long-term trends look positive and we are excited about the opportunities that we see on the horizon. However, there are a couple of near-term issues that will cause higher than normal volatility in our results in 2014. I'd like to share our thoughts with you on these topics so that you can understand the long-term value that we place in our contracts with the Department of Education and CMS and why we compete so vigorously for them. With respect to our student lending markets, there are two key open items. First, the Department of Education contract is in a bidding process and it is our understanding that the Department of Education anticipates awarding the new contract in Q2 of 2014.

We remain confident that we will receive one of these new contract awards based on our [exceptive] performance over more than 20 years and four consecutive contracts. Given our extensive experience, we expect the transition process to the new contract to be business as usual and not business interrupting. Second, following language in the Federal Budget Act that reduces the compensation a guarantee agency receives for rehabilitating a loan. There is uncertainty surrounding what the potential revenue impact will be to Performant. Just a reminder as it relates to the guarantee agency compensation structure, any potential change won't be implemented until July 1 of 2014 and after the point, we don't know how our guarantee agency clients will react. However, we believe that it's possible that our 2014 revenue and adjusted EBITDA could be impacted by approximately $5 million to $15 million due to this change.

Turning to our healthcare market. As you are aware, the CMS Recovery Audit Contract renewal process has been underway since February of 2013. CMS recently released five revised RFQs that we have now responded to. We are confident that our past performance will reflect positively on Performant and will help us get awarded at least one of the regions under the new contract. Although we would prefer to see a near-term award, it has come to our attention that multiple protests have been filed regarding these revised RFQs, which we believe will likely delay the award of the contract. Also, regarding the current contract, CMS recently communicated to the recovery auditors that February 21 was the last day a recovery auditor could send providers additional documentation requests and that February 28 is the last day a MAC may send prepayment ADRs.

Furthermore, CMS has identified June 1 as the last day a recovery auditor may send improper payment files to the MACs for adjustments on this current contract. An important point to remember is that we have an existing pipeline of medical records that we are in process of working through. In addition, we submitted document requests through February 21 that are still to be received. We will thus have audit activities to be performed through May of this year and revenue will be recognized accordingly through Q2 and Q3. Beyond this, we do not have any additional information regarding the award of the new contract. Although the timing of the contract re-award is delayed can be original schedule, we should not overlook the long-term value of this program and how successful this RAC program has been in reducing government waste.

During 2013, this program returned over $4 billion back to the government and for the past two years, nearly $6.8 billion had been reimbursed to CMS. After being on this contract for the past five years and continuing to refine our expertise, we believe that under normal operating conditions, this contract continues to be a good public policy program that has strong future value. In addition to timing delays, CMS also announced changes to the contract including which providers could be audited, what issues we could focus on, and what percent of our request could be a single issue. An example of this was CMS' decision to implement the 2-midnight inpatient care policy. We believe the intent was to help hospitals more easily determine if the treatment was medically necessary and therefore deserving of the higher reimbursement levels under Medicare Part A. That said, this decision impacts Performant and the other recovery auditors as it initially precluded us from auditing this specific billing condition until December 31 of 2013.

Moreover, this initial deadline was subsequently extended to March 31, 2014 and amended again on January 31, 2014 to September 30, 2014. We believe CMS will complete the implementation of this new policy change by the end of September of this year. I want to stress that while there has been much discussion around the issue of short stay claims or those lasting less than two midnights, our business is not solely dependent on the inclusion of this one claim type. We currently have 720 issues that have been approved by CMS, which we will be able to audit, and we have already begun to shift our focus toward other areas of payment errors to replace those associated with the 2-midnight rule. Under normal operating conditions, our visibility and ability to accurately forecast our business results is quite high.

However, 2014 is not expected to be a typical year for Performant, but rather a bit more transitional in nature. After taking into consideration the one-time higher margin delayed revenue we recognized in 2013, including revenue related to PIP providers as well as the uncertainties that I've just discussed, we believe that full-year revenues in 2014 will be in the range of $200 million to $240 million and adjusted EBITDA to be between $47 million and $55 million. As we obtain more definitive information surrounding any of our open issues, we hope and expect that the couple of uncertainties that we are currently faced with will be resolved by the time we report earnings for Q1, which will allow us to update guidance at that time. Further, we expect and remain confident in the outlook of our business for 2015 and beyond as we continue to grow our commercial contracts.

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

Thank you. (Operator Instructions) Edward Caso, Wells Fargo.

Congrats on finishing the year strong here. Hakan, you finished looks like with a good DSO, what number was it?

Our DSO was approximately 38 days and we had some favorable timing of payments at the end of the year that drove that lower than what we normally see. So I would say on a normalized basis, we expect to be around 40 days.

Alright. It looked like your salary and benefits line came in much better than we had thought in the fourth quarter. Have you already started the process of dialing back some of the workforce and some of the expenses or where there some comp accrual reversals that were in the quarter?

There has been some attrition of staff primarily relating to the RAC contract that we have not replaced for the time being so there is some benefit of that part. You may have also seen that our other expenses went up a little bit more and what that relates to is us utilizing subcontractors to a larger extent than what we have in the past.

Okay. And the placement rate in the quarter was particularly high. Is that just going to be a volatile number quarter-to-quarter or will that eventually shake out here?

It should shake out once we get into a normal pattern of placements from the Department of Education. As you may recall, last quarter we had a pretty significant placement from the Department of Education that was over $1 billion, which represented some catch-up so that drove the placement number that was lower. And then this quarter, I would say more of a normalized level of placements from the Department of Education due to the timing of revenues. I think looking at it from a year-to-date perspective, it's going to be more indicative of where we're at and on a year-to-date basis we're looking at about 2.5%.

Okay. And the last question, just looking at the old RAC contractor or the current one that's sort of wrapping up now, can you give us some sense of seasonality how that would flow? I assume again ignoring the new one coming on, does it sort of march down Q1, Q2, Q3, and then nothing in Q4?

That would be correct. So Q1 and Q2 will continue to have revenue as we work through the backlog of documents that we have and the new documents we're going to be receiving in. Q3 would be significantly softer based on the timing perspective. But the first half of the year will continue to generate revenue.

Great. Thank you.

Suzy Stein, Morgan Stanley.

Can you give a little more color on the range that you gave for revenue in terms of what that includes? Is that kind of a worst case scenario on what may happen on the healthcare side? I mean does that include a ramp-up of the new contract at all or does that just assume the wind down of the first RAC contract and then similarly on the student lending side? What's assumed in that range of $200 million to $240 million?

Sure, Suzy. So as we look at student lending, we have assumed as Lisa mentioned earlier that we're going to have a guarantee agency impact of between $5 million to $15 million in revenue in 2014 so that's a range from low to high that we're looking at there. And then on the RAC contract, which is the more material range, we have assumed that there's going to be again a ramp down of this current contract and there will be a ramp up on the new contract although from a revenue standpoint, we are not in the range that we're looking at, we're not anticipating a material amount of revenue on the new contract for this year. A lot of that is obviously going to be dependent on timing of the new contract start-up so the sooner the new contract starts up, obviously the more material revenue we will see in 2014.

But that said, with a new contract award, you can see the impact of investing in that contract as a start-up so we would obviously get fully staffed and start to gain momentum on that contract. So, that's part of what you're seeing. So, all of those effects have been built into the range.

Okay. And then you made a comment when you were talking about your balance sheet that you're exploring a range of opportunities, what did you mean by that? I mean were you just talking about is CapEx going to be higher, are you looking at acquisitions? How should we interpret what your comments were about that?

Sure. We expect CapEx to be pretty much in line with what our investment has been historically. And again as you know we invest in our technology capability in a way to continue to improve our quality and our service and differentiation in the market. We're aggressively looking at acquisition opportunities that will help accelerate share build in the commercial healthcare market as well as maybe accelerate some of the development of newer capabilities in that market as well.

Okay. Then just maybe one more. On the healthcare revenue number for this quarter, was there anything in there that related to timing of I don't know revenue that should have been in the last quarter or something that maybe should be recognized, would have been recognized next quarter or is there any timing issues there?

There are no timing issues there and so what we were dealing with in prior quarters was the backlog off PIP revenue, but that was all recognized in Q2 and Q3.

If you look at Q4 revenue, that was impacted. If you go back to 2013 if you remember, we had a work stoppage for the month of July so the Q4 revenue that we just reported would have actually been impacted by that July gap.

Got it. Okay. Thanks for taking my questions.

Michael Tarkan, Compass Point.

On the education side, can you just be a little more specific in terms of what the placements were this quarter from ed versus guarantee agencies?

So as we look at Department of Education, our placements in the quarter was about $600 million and the other $800 million was guarantee agencies.

How do you see those trending? You said the $600 million is sort of more of a normalized level, do you expect sort of normalized placements from here on out from ed and to grow sort of with overall delinquency and default rates?

I would say yes. I mean as you look at the placements that we have gotten this year, it's averaged $600 million a quarter, the $2.5 billion that we have received from Department of Education this year. So, we would expect that that's going to continue to grow with the increase in volume overall.

The $5 million to $15 million impact from the guarantee agency fee cuts, does that contemplate any potential offsets from income based repayment rehabilitations?

Not for this year. So, that's going to start again based on the new regulation is going to go into effect kind of later this year in July and we'll see that benefit primarily in 2015.

And just to clarify, you said the revenue as a percentage of placement volume should shake out in that 250 basis point range. I guess I was just a little surprised to hear that given that we are getting the cuts to the GAs later in the year so 250 basis points is the number that we should be thinking about.

250 basis points is what we're looking at this point, I mean that's what it has been year-to-date. So as we look at the impact of IBR and whatever the outcome is here of the guarantee agency adjustment, that would obviously have an impact. So, we're not giving guidance on that percentage at this point because as we see this guarantee agency situation unfold, we'll be able to frame that a lot better.

Okay. And then just one quick one. The state amnesty program, can you tell us how much that added in this quarter?

When you're looking at the other line, it was not a significant number. I believe it was somewhere in the vicinity of about $1 million.

Okay. Thank you.

Andrew Jeffrey, SunTrust

Harkan, just to be clear. The guidance range that you gave us, the revenue guidance range, does or does not include the potential GA fee reduction?

It does include an impact of the GA fee reduction in the magnitude of between $5 million to $15 million.

Okay. But your 250 basis point yield assumption doesn't seem to incorporate that fee reduction, is that right?

Yes, that is correct. The 2.5% that's where we are year-to-date. So as I stated earlier, that is more indicative of a normalized quarter as we look out based on the revenue that we have seen and the placement that we have seen during 2013.

Okay. So in other words, anticipate a reduction in the yield. At such point, do you have a better sense of what the magnitude of the GA fee reduction actually is?

That's accurate, yes.

Okay. And perhaps modestly offset or partially offset by IBR revenue?

That's correct.

Alright. That helps, thanks. Lisa, I know this is conjecture in light of what's happened with the timing on CMS. If you kind of probability weight timing on a new CMS RAC and assume that the region looks about the same for Performant as it is now, for how many quarters do you think Performant might essentially had no healthcare revenue? Is it the back half or the fourth quarter of 2014 and then it starts to pick up in 2015? And I realize it's a difficult question to ask, but I'm sure you've kind of looked at potential timing outcomes internally. What's the ramp-up period that we might expect on a new CMS RAC.

Well, for the sake of this discussion from an illustration standpoint, let's assume we get the same region. Four of our old states are moving into a different region and we're getting four new states. So in those four states where we have to do outreach, we expect a little bit longer timeframe in terms of ramp up, but the states that would be consistent we would be able to start pretty quickly. And to your point, it's conjecture; but based on all of the indications and statements that CMS has released, it is their desire and their objective to re-award these contracts pretty quickly. From their public announcements on the CMS website, we believe that they are going to -- it appears that they're going to try to make the awards here in the I would say fairly near term. So again, we're hopeful that the awards will be made and our best case scenario is clearly something that happens in early Q2 and then we're able to start pretty quickly. If it does get delayed for protest or some other issues, of course then we've built in that into the low end of the range.

Okay. And when you talk about the EBITDA guidance range, I think you said it was $47 million to $55 million. If I just contemplate the midpoint of the range and the sort of run rate of expenses that we saw in the fourth quarter, it seems pretty conservative. I mean is there anything else really to think about there?

Well, I think just and again the start-up of a Recovery Audit Contract requires us to invest in the workforce. So what you will see, as I mentioned, we see 2014 really kind of a bit of a transitional year in that we do expect to invest in workforce to ramp up the RAC contract. As you know, a contractor can win up to two regions and our anticipation is that even with one, we expect to have some expense that we have to invest early on in order to get a very good momentum into the back part of the year and into 2015. So, you will see a bit of investment this year that is transitional and not long term in nature.

Okay, I understand. So we should anticipate that Performant would scale those investments as we get out into 2015 and the RAC contract volume ramps?

Yes.

Okay, great. Thank you.

Brian Hogan, William Blair.

On the EBITDA guidance and actually expenses, even the midpoint of the ranges both EBITDA and revenues turns out to be at 23% and as you said, you're investing for buildup of the new contracts and whatnot. But I guess looking even longer term, what do you think your long-term EBITDA margin should be? I mean historically it has been kind of running at low 30%s. Do you feel comfortable getting back to that range?

I think, Brian, as we look at what we see sort of mid and long term, once we're ramped on the contract, investment will scale to the revenue that we're driving and so as we look longer term, we definitely expect to be back at the sort of what we have defined as low 30%s.

Okay. And then as these new commercial plans kind of get ramped up and there's this air pocket with the Medicare RAC contract, do you anticipate moving some of your skilled nurses over to working on the commercial? I mean what are you doing so like do you have a contingent plan for this air pocket with the Medicare RAC with your workforce?

Yes, we have some reallocation of workforce and then of course with commercial contracts, there's some specialty needs that we have filled separately. So, there's some transferability and there is also some non-transferability so we are staffing appropriately. We do not anticipate there to be and as Hakan mentioned, anticipating there to be not a big gap between contract production start-up. We've already seen a reduction in workforce in the Medicare Recovery Audit program and so we're very carefully managing those expenses and the resources.

Okay. Did you mention that there were already protests on the RFQ, did I hear you correct?

Yes, in a couple of the RFQs. So this unlike the 2013 procurement, this RFQ was not one, it was multiple and so there are protests on a couple of them.

How long do you anticipate that delaying awards?

Well, on the RFQs that were protested because not all have been protested at this time, there is a 100-day decision period by the GAO, which if we look back at the first should be over close to the end of Q1 or early Q2.

Okay. And do you anticipate them awarding all contracts at the same time?

I don't know, Brian. If I had a crystal ball like that, I'll tell you what I see in it, but I actually don't know. As they certainly have released them separately, they could award them separately or they could award them all at once and we just can't tell.

Okay. And then you mentioned that you can win two regions, is that Region A and B or I think they changed it to 1, 2, 3, and 4 now?

Yes, they've used numbers this time instead of letters and there are five Recovery Audit Contract regions 1, 2, 3, 4, 5; and 5 is the national durable medical equipment, home health, and hospice contract. So, it is possible for a recovery auditor to win up to two, but no more than two.

So that could be 1 and 2 or 1 and 5 or 1 and whatever it may be.

We don't know what the award structure will look like. It's our belief that the current incumbent vendors have probably been on all of the regions because they can, but I don't think we can guess at what the award structure will look like.

Okay. And then a quick clarification question to make sure I heard you correctly. You said you had four commercial healthcare contracts? Is that --?

Four of the six largest commercial insurers in the US. So, we have signed Master Servicing Agreements which allow us to develop multiple contracts with each of our clients. So it isn't one contract, but multiple contracts under each of the Master Servicing Agreements.

And all of those up and running right now or is that just kind of in ramp up?

We have a couple of contracts that are starting to run in the early stages and there are a handful that we have completed the [initial] work and we're starting to ramp up on those. So, it's still pretty early.

All right. That's it from me for right now. Thanks.

Brian Hoffman, Avondale Partners.

It's actually Richard Close here, I got on the call late. But Hakan, I was wondering if you could walk us through the $5 million to $15 million impact from the GA impact that you're factoring in. Can you just go through some of the assumptions that got you to those numbers please?

Sure. So what we have in calculating this range, we have looked at the guarantee agency revenue that we have with our existing clients, we have looked at the rehabilitation revenue associated with activities that we are doing, and then we have applied a low-end and a high-end range of the potential outcomes of this change. So as we look at the range of $5 million to $15 million, we have assumed that that range is also going to fall to the bottom line in EBITDA so it's $5 million to $15 million on both topline and bottom line. And again, we have to see how this plays out. We have not had any indications as we look at our top clients on what the fee reduction may be, so just building in a range of potential outcomes here is the way we're looking at it right now.

Okay. And that's a six-month sort of impact, right? I mean that's July 1 through December 31, correct?

That's right. Six month impact and then as you look at 2015, as we indicated earlier, we'll have the positive impact of IBR to take into account there as well.

Is there any type of guess or assumption you could say on the IBR offset in terms of does it fully compensate for that $5 million to $15 million?

At this point, I think what we will do is we'll see how this plays out and down. As we look at our next quarter call, we expect to better be able to address again what the impact is on any GA fee impact and also on IBR.

And final question on the GA impact here, is this based on any discussions or conversations that you've had since I guess the new language or new rule came out?

No. At this point, we have not had discussions with our key clients in regards to what the potential fee cut maybe.

Okay. With respect to moving on to on the RAC side of things, on the negative impact on EBITDA associated with the RAC, it sounds based on your commentary that it's really more related to the ramp up of a potential new contract rather than any changes to the existing program or ramp down of the existing program, is that correct?

That is correct, yes.

Okay. So really -- I'm sorry.

Yes, that's the primary reason. That's correct.

Okay. So as we think about versus our estimates and maybe Street estimates and the changes that need to be to the EBITDA for 2014, primarily speaking, most of the impacts are going to be in the second half of the year?

To some extent, yes although you need to take into consideration current volume of business on the RAC side as you look out. Earlier in 2013, we had the positive impact of recognizing PIP revenue as we talked before about so there is current constraints that we're operating under the current contract. So, you need to kind of take that into consideration as you ramp in 2014.

But definitely on the investment side and on the revenue side, Richard, that is correct, that we would see more of that impact probably in the back part of the year because it does take a little bit of time to get fully ramped up on these contracts as you know.

Maybe I could add one comment. As we look at the first quarter of 2014, we expect that revenue and EBITDA for Q1 would be higher than Q1 of 2013, but slightly below what we saw in Q4 of last year. So hopefully, that would kind of help frame it up for you.

Okay. And then Lisa, just to go back your comment, I think you said resolution or maybe that wasn't the right word, but you used near term, and just I'm curious of your thoughts in terms of I guess the next couple months on the RAC decision. What makes you think that there's going to be something resolved in the near term and what exactly would be resolved?

Well, the issues that are being protested, there is process timeline of 100 days that the agency will use in order to resolve the protest with GAO and with the protester so that 100-day mark is going to happen over the next couple of months. And from prior experience, we believe that these issues will come to some sort of resolution. So other than that, I don't have an indication of the federal agency, I just have watched the process in other types of contracts and then also certainly one that was protested last year. So, the 100-day mark is really the way I'm gauging when I think the resolutions will appear. But again, that's speculation on our part, but it's --.

That's not related to anything like CMS stepping in and taking a corrective action and or anything like that?

Right. If CMS can step in and take the corrective action, then that issue would resolve before then.

And I guess my final question would be the reason of the protest I guess is because of the timeframe in terms of the appeals and not being able to potentially I guess collect the money until after the second level of appeals. How is Performant in terms of a company with respect to the financial standing of the Company, is it impacted at all or put at a disadvantage at all versus maybe some of the other bidders on the contract based on if there was no corrective action regarding the appeals?

Our balance sheet is very strong and we have a cash position that is very positive to be able to weather any potential delays in payments. And again as we look at this, these appeals are under protest and we have to see how this shakes on. But to no extent are we at a disadvantage in this area, not at all, I mean our balance sheet is very strong.

Okay, great. Thank you very much. I appreciate the questions.

Toby Wann, Obsidian Research Group.

Quickly if we look at fourth quarter healthcare revenue and on a sequential basis, if you back out the $10 million that was there in the third quarter so you kind of get to I guess a regular run rate of about $18 million. What led to the big sequential fall off other than the July air pocket? I mean $18.3 million down to $10.9 million, I know there's the July air pocket; is the balance of that related to the moratorium on short stay inpatient audits and can we quantify what that impact actually is?

So, the July work gap was obviously a chunk of that and then the other thing in Q4 is you should keep in mind that even though the PIP automated processing fix was in place, we were still precluded from auditing any PIPs. So if you look at the revenues that you just mentioned, if you look at Q4, it's really artificially depressed because PIPs comprise 20% of our providers and almost 30% of Medicare spending in the region. And so on a normalized contract going forward, you have to build that back in. And so if you look at the Q4, yes that does include if we're looking at revenue, we obviously from October 1 were not able to audit any of the short stays, but that is not from our standpoint while that takes certain class of audit out, we have so many other issues that we have been able to identify and work through, we don't see that as being a deterrent to the full value of the contract.

Okay. That's helpful, thank you because I'm totally spaced on the PIP audit issue. And then as it relates to the rebid, I know we're kind of going through the process or CMS is going through the process, you guys have all already submitted your bids, but yet my understanding is that the statement of work for the RAC contracts is relatively vague at this point. Do you guys have an opportunity to revise your bid as the statement of work becomes a little more specific? I know that CMS has changed the program pretty significantly over the past three or four months with different moratoriums on what you can audit, can't audit, the timing of when those audits can take place, appeals, all of those sorts of things. I mean do you guys have a chance to go back and revise your -- I mean it's a fixed bid on a contingency basis, but do you guys have a chance to go back and revise that at all or would that have to be addressed under a protest situation?

I think we're speculating at this point about that. I do think so that and again, there's a lot of misinformation and information that's out in the public. So some of it's real, some of it's not real; but we do continue to believe that CMS supports this program as a very good integrity program. It brings back actual dollars into the Medicare Trust Fund and it's done both ways, sometimes they've made changes to the statement of work that have been very helpful. And so I think they remain very open to working a contract that is good for the program as well as addressing some of the provider concerns and needs and as a group of companies, I think we're very committed to making this a successful program and working with CMS so that the outcome is a positive one for the program. But obviously the providers as well I mean to the extent that obviously nobody likes to be audited, that's just a given; but a good program that adheres to Medicare policy, rules, and regulations is a good program. It captures errors and it's of significant value to CMS and to the federal government, to tax payers.

Okay. Thanks for taking the question and congrats on the quarter.

An Singh, Credit Suisse.

My first question, I just wanted to see if you can give us any color as to what sort of trajectory you might anticipate for a new contract ramp. I realize that there are a lot of moving pieces and it's tough to do that, but provided that a new contract has been awarded and the volume is normal, what sort of trajectory, is it going to take several quarters to come in? Will that be a one or two quarter issue? And then what sort of issues if any do you anticipate flexing up your staffs faster to meet that volume when it does come?

Sure. I mean as we look at a new contract, clearly as Lisa mentioned earlier, the start-up of the contract is a key issue and then also if in fact we are awarded our current region, that would facilitate a quick ramp up on the contracts as we've already done the outreach and so forth on a large part of our current region. So as you look at it and again from a timing perspective, if we would have a new contract being awarded in the end of Q2 let's say, we will start to see revenue at the end of Q3, Q4 time frame.

Okay. And then on my second question, would you anticipate any issues with flexing up your staff to meet that kind of demand?

No. We've flexed up staff obviously in the past on these contracts and we do not anticipate there to be any more of a challenge than what we faced and we've definitely been able to very adeptly staff up.

Okay. All right. That's helpful. And then the second question, you guys had won a contract with the DoE I think it was about a year ago. Could you tell us what sort of revenue that might be generating at this point?

Sure. We actually went into the contract with participation from DoE on how we wanted to structure that program. To be just fairly honest with you, that contract really resulted in very little revenue partly because of the way the records were kept, it was not as smooth of a data transition and process as we would have liked, and we actually terminated the contract with DoE.

Okay. And then I guess this leads into my next question, what gives you the confidence on the new contracts that you mentioned, the Master Servicing Agreements? What sort of gives you the confidence that these might result in pretty material new revenue $5 million to $15 million I believe was your guide? If you can just give us some guidance as to how you came up with that range.

Sure. These are actually healthcare audit recovery contracts and so it's really in our sweet spot of capability. The Department of Education one was a accounts payable type of audit. Department of Education was technologically just not prepared to take on kind of a massive information transfer of that nature. We tried to work with the client, but it was just a new program for them. The contract that we have with our commercial payers, these are contracts that are very much well known quantities in terms of expectations. The clients are definitely capable of handling their side of the work that's required. As I mentioned, these are healthcare audit and recovery contracts; they're right up our alley, they're in our wheelhouse of capability. So, our confidence level is very high that these are known quantity types of work and capabilities both on the client side and on our side.

Okay. All right, that helps. Thank you.

(Operator Instructions) Michael Tarkan, Compass Point.

Just a quick follow-up on the new commercial contracts. The $5 million to $15 million, you mentioned it should be more significant in 2015. How should we think about that? Is it possible for that range to essentially double in 2015? Just any kind of color around that would be helpful. Thanks.

Sure. Obviously, business objective of ours would be to get that into the multiple range of what we think a ramp-up year should look like. As I mentioned, we've done market research and work around this space and the four payers who have become our clients control $1.7 billion of service fees for these kinds of payment integrity programs. And so when we look at those four clients, we look at one share point equaling $17 million of revenue and of course our objective would be to have more than one share point as we ramp up on these. And so we're very excited about the fact that again these contracts and the statements of work will be within our wheelhouse of capability. We believe we can add greater value to these clients, they are fully prepared and capable and ready to work with us. And so our objective would be multiples of what we're going to see in a ramp up year.

Thank you.

Thank you. We have no further questions in queue at this time, I would like to return the floor back over to Lisa Im for closing comments.

Thank you. So just in closing, as I mentioned, we see 2014 as a transitional year that provides for continued strong future growth. We are very excited as we ramp up our commercial contracts and believe that our mid to long-term growth trends look very positive. And with that, what we'd like to do is thank you very much for your interest and your participation on the call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.