Performant Healthcare Inc (PHLT) 2014 Q1 法說會逐字稿

Good afternoon, and ladies and gentlemen, and thank you for standing by. Welcome to the Performant Financial Corporation's 2014 first-quarter earnings conference call.

During today's presentation, all parties will be a listen-only mode. Following the presentation, the conference call will be open for questions. (operator instructions) As a reminder, this call is being recorded today, Thursday the 8th of May, 2014.

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

Thank you, operator. Good afternoon, everyone.

By now, you should have received a copy of the earnings release for the Company's first-quarter 2014 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 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, 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 first quarter, and then Hakan will walk you through our financial performance during the quarter. Afterwards, we will open the call for your questions.

During the first quarter, we reported strong revenues and adjusted EBITDA growth of 19% and 53%, respectively, compared to the prior-year period.

This performance is a reflection of not only our technological capability but also all of the employees and performance and the hard work they put in on a daily basis. And I want to thank them for their dedication.

As we look specifically at our key markets during the first quarter, student lending represented approximately 67% of our total revenues. We received total loan placements of $1.4 billion, which is consistent with our expectations and largely flat with the volume of placements we received during the fourth quarter of 2013. Compared to the first quarter of last year, student-lending revenues grew by over 18% to $39 million.

In early April, the Department of Education announced that Performant was among the list of vendors that qualifies for phase two of the [default] collection service contract rebid process.

However, last week the Department of Education issued an announcement notifying the [offerers] that have advanced to phase two that the due date for subsequent proposals was suspended until further notice.

We do not anticipate that this will be of adverse impact to our operations this year, as there are contract extensions available.

As it relates to our guarantee-agency contracts, last quarter we indicated to you that the Federal Budget Act reduced the compensation received by guaranty agencies for [rehabilitating] a loan and that there were uncertainties surrounding what the potential revenue impact will be to Performant.

We have been in discussion with these clients. And while some are still contemplating the magnitude of the fee reduction, we have heard from others.

Based on our conversations, we believe that our previous expectation of an impact of $5 million to $13 million on revenue and adjusted EBITDA is still appropriate.

As a reminder, any changes to the guaranty-agency compensation structure won't will implemented until July 1 of 2014, which also coincides with the introduction of income-based repayment opportunities at guaranty agencies.

Historically, student lending has been a predictable contributor to our revenues and provides our Company with consistent growth. Longer term, we expect student lending will continue to be a big growing industry with strong secular growth.

There continues be exceptional benefits to getting a higher-education degree. According to recent findings published by the Bureau of Labor Statistics, the median salary for an individual with a college diploma is 70% higher than for someone with just a high school education.

Furthermore, the unemployment rate for individuals with a college degree are at about 4%, compared to 7.5% for individuals with only a high school diploma.

Our healthcare revenues increased 32% year over year to $13.6 million, and our net claim recovery volume during the quarter was $120.3 million.

There has been much discussion around the issue of short-stay claims, or those lasting less than two midnights, over the past few quarters, and what the impacts of not being able to audit such claims would have been on our business.

I'm pleased to report that we were able to achieve positive strong results without the benefit of revenues related to short-stay issues, which were historically a significant portion of our healthcare revenues.

This demonstrates that although we benefitted from being able to audit issues related to short stays, our business is not solely dependent on the inclusion of this one claim type.

Currently, there are over 700 claim types that have been approved for audit by CMS. And as we demonstrated, we have actively shifted our focus towards other areas of payment [errors], in lieu of those associated with the two-midnight rule.

Last quarter, we discussed that we have recently signed new contracts, including some MSAs with multiple contract opportunities, with four of the six largest commercial healthcare payers in the US. All of these contracts are in the implementation or ramp-up phase at this point.

While revenues during the quarter from these contracts was minimal, looking forward we anticipate that these commercial contracts will contribute between $5 million to $15 million to our healthcare revenues in 2014, which is a ramp-up year, and we expect a more significant contribution in 2015.

Lastly, we have a strong balance sheet, and we are actively pursuing a range of business-development opportunities that will enhance our technological platform and further diversify our business.

Now, I'd like to turn the call over to Hakan to walk you through the financials. Hakan?

Thank you, Lisa, and good afternoon, everyone.

We are pleased with our financial results for the first quarter. Today, we are reporting revenues of approximately $58.6 million, an increase of 18.8% year over year; net income of $6.3 million, or $0.13 per diluted share; adjusted EBITDA of $17.4 million, an increase of 53.2% year over year.

Student lending continues to represent the largest component of our revenue mix and grew by $6.1 million, or 18.5%, compared to the first quarter of last year.

First-quarter placements were $1.4 billion, which is down from $1.7 billion in the first quarter of 2013, but in line with the $1.5 billion in placements the Company received in the fourth quarter of 2013. Revenues as a percentage of placement volume in the fourth quarter was 2.7%, compared to 1.9% in the prior-year period.

The second-largest component of our revenue mix, healthcare, increased $3.3 million, or 32.1%, to $13.6 million, compared to the first quarter of last year.

The increase in healthcare revenues was primarily due to our ability to leverage our technological capabilities and continue to identify and process payments not related to short stays or the two-midnight rule. Net claim recovery volume increased by $29.9 million, or 33.1%, to $120.3 million.

Our claim recovery fee rate was 11.3%, compared to 11.4% in the prior-year period. Revenues from other markets in the first quarter were $5.6 million, compared to $5.8 million in the prior-year period.

Moving on to our expenses.

Salaries and benefit expense in the first quarter was $24.8 million, an increase of 3.4%, as compared to $24 million in the prior-year period.

Other operating expense for the quarter was $20.3 million, an increase of $1.4 million, primarily due to increased [subcontractor] expense and the utilization of contract (inaudible).

For the first quarter of 2014, our reported net income was $6.3 million, or $0.13 per diluted share, compared to net income of $1.8 million, or $0.04 per diluted share, in the prior-year period.

Adjusted net income in the first quarter was $7.6 million, or $0.15 per diluted share, compared to $4 million, or $0.08 per diluted share, in the prior-year period.

Fully diluted average outstanding shares were 49.6 million shares in the first quarter of 2014.

Our adjusted EBITDA in the first quarter grew 53.2% to $17.4 million, compared to $11.4 million in the first quarter of 2013, while adjusted EBITDA margin was 29.7%, compared to 23% in the prior period.

Our effective tax rate in the first quarter of 2014 was 41.6%, and cash flows from operating activities in the first quarter of 2014 were $14.3 million, compared to $2 million in the first quarter of last year.

Turning to our balance sheet.

As of March 31, 2014, we had cash and cash equivalents of $90.7 million. The total outstanding debt as of March 31, 2014, was $130.6 million. The sequential decrease in our spending debt of $2.7 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 indicated last quarter, given the ongoing contract-renewal process at CMS, guaranty-agency retention reduction, and implementation of new commercial healthcare contracts, 2014 is not expected to be a typical year for Performant, but rather one that is more transitional in nature.

Specifically related to the CMS contract-renewal process, on April 23, the Government Accountability Office issued a decision denying the multiple protests filed on the recovery audit contract. Given this decision, we are hopeful that CMS has a clearer path to begin awarding regions under the new contract.

As a reminder, we have not been able to request new medical records to audit since February 21 of this year, but we continue to work with the inventory received [with] June 1 being the last day new claims can be submitted on the current contract.

Although 2014 is going to be a transitional year, we remain focused on identifying opportunities that foster our long-term growth and customer diversification. One such example is our advancement within the private-payer space.

We are reiterating our full-year-revenue and adjusted-EBITDA guidance that we provided in February. We continue to expect that revenues will be in the range of $200 million to $240 million and adjusted EBITDA in the range of $47 million to $55 million.

We remain confident in the outlook of our business for 2015 and beyond, as we continue to grow our business.

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

(operator instructions) Edward Caso of Wells Fargo.

Hi, guys. This is actually [Tyler] on for Ed. Thank you for taking my question. Just to get on the RAC contract right away, here -- we heard some rumblings maybe that there might be another protest filed by the competitor, even after this GAO protest decision came out. Is this -- do you know if there's a protest out on it right now?

And then sort of on top of that, with your current employees on the RAC contract, what kind of flexibility do you have to move them to some of your commercial projects? Any color on that would be great. Thank you.

Sure. This is Lisa. So there's not another protest, but what's in the public domain is that CGI filed a lawsuit in federal court, filing an injunction, which essentially, from what we were able to tell, appears that it is the same issue, of payment terms and commercial practices.

So we do not yet know the outcome of that, and we probably wouldn't speculate on that. But it's essentially the same as the protest they filed, which was denied by the GAO.

We remain hopeful that CMS will be able to award the contract in the near future. But I think we've yet to see what happens with that lawsuit.

In the meantime, we have diverted many of our medical staff to the commercial business. So as yet, we've not had a deleterious effect. And we continue to find ways for them to apply their experience as we spin off those businesses.

All right, great. So on that -- with the lawsuit now filed, does that mean that CMS is not going to be able to award the contract until that issue is resolved? Or could they potentially award the contract while that's going on?

We don't believe they can award the contract, but we're trying to get confirmation on what the process will be.

Okay, that's great. Thank you very much for taking my questions.

Michael Tarkan of Compass Point.

So I know you're confident that you're going to win your region of the RAC renewal. I'm just wondering what your level of confidence is potentially also taking down the home-health or DME contract. Thanks.

Well, we remain hopeful. We believe we submitted a very strong bid. We have great expertise that we've applied to both our response and to the results that we've driven on the RAC contract, on the DME side.

So I think it's difficult to handicap that at this point, but we are -- obviously, Michael, we're hopeful that we'll be successful there.

On the commercial opportunity, I know you've talked about $5 million to $15 million this year. Can you just help us with maybe what that could look like maybe three years out or five years out? Just how are you thinking about that, in terms of really how big that can get in that sort of intermediate time frame? Thanks.

I think I'd rather frame it up by reiterating -- we've had some market research done through various firms.

We believe that the market, itself, is about $1.7 billion per year spent on program integrity. That's both internal and vendor management and vendor fee.

So if we look at that, what we obviously are targeting is some share gains in that commercial space of a meaningful size, each share point being targeted at about $17 million of revenue.

So as we look outward, it is our objective to be very competitive and to provide incremental value to those payers in the commercial space, to be able to gain some share points as we look out with three-plus years.

Do you think there's a potential -- and I'm not asking you for guidance -- but I mean, in terms of how much share you could potentially pull down, could this be something where in three, four years from now, we could be looking at 4% or 5% market share?

We're certainly targeting that kind of share growth. And what will be important is, obviously, as we start on these contracts, to show differentiated results and incremental value, as I mentioned.

Okay. Thanks. And then one last one. I noticed in the new [tactics vendors] bill in Congress, there is a provision in there that I think requires the IRS to outsource their debt collection.

I'm just wondering -- I know you guys were on the pilot program, I believe, and I'm just wondering if you see that as an opportunity down the road, if it could be meaningful. Any color on that would be helpful. Thanks.

Yes, it's an interesting opportunity. We have not [opined] on that. And certainly if it comes to fruition -- as you might know, we're one of four vendors on the US Department of Treasury contract with the financial-management services division. We're also the only contractor to have been on this contract since the inception of the program in 1997.

So certainly we believe that if this is a program that does get pushed through, it certainly presents a very nice opportunity as we look down the road. And it's down the fairway of what we've done historically for our federal-agency clients.

Understood. Thanks for taking my questions.

Suzi Stein of Morgan Stanley.

Hi. There've been a couple of new student-loan proposals recently, one which would allow refinancing, and the other which focused on different types of income-based repayment. How would those impact your business?

We believe those would be a positive impact. Those are all borrower-centric programs that are designed to help borrowers with their payment processes.

So if we look at the nine programs to help borrowers pay into the program, we believe that those will continue to be something that we can help our clients deploy in the market with [defaulted] student loans, as well.

Okay. And then what drove the quarter-over-quarter increase in salaries?

I would say that's largely volume-driven cost (inaudible) higher revenues.

Okay. And then, Lisa, I think you alluded to business-development activities that you're pursuing. Does this relate to things that you've already announced, like commercial healthcare? Or was this meant to relate to something else?

No, these are our aggressive pursuit of business-development opportunities we have yet to announce.

Okay, all right. Thank you.

(operator instructions) Aaron Singh of Credit Suisse.

Thank you for taking my questions. I was wondering if you guys can comment on the new claim areas that you're focusing on. Can you tell us what the biggest claim area for you might be at this stage?

I would say it's pretty much all over the map. I mean, we have over 700 issues that we're allowed to -- approved to audit. And again, as we look out over the last few quarters, we've been precluded from auditing inpatient type of procedures. So it's pretty much all over the map, as far as the type of orders that we're doing.

Okay, got it. And on the CMS contract, I was wondering is there any possibility -- I think the first question was getting to this -- is there any possibility of new protests delaying the award? I guess my question is more on -- is there any time line these protests have to be filed under? Or can the RFQs be protested at any point up until the award date?

I believe the time line has passed since the issuance of the RFQ. What I referred to earlier was not a protest by CGI, because those protests have been denied by the GAO. But this is a lawsuit in a federal court with the same issue. So the time for protest has passed (multiple speakers).

Okay, understood. And one final one, if I may, switching back to the student-lending side of things.

Do you have any insight as to whether terms will be relatively consistent, or is it too early to say? And do you have a view of the placement-fee rate being the same at this stage?

It's pretty on in the procurement process. Historically, the fees have been pretty -- I would say pretty consistent, contract to contract. I mean, we're speculating, but at this time we would not speculate there could be any material changes in fees.

Okay --.

And as you look at the placement fee [that] placement fee was about 2.5% in 2013. So we expect that that rate should remain pretty constant during this year.

Okay, thank you so much.

Toby Wan of Obsidian Research.

Good afternoon, guys. Just quickly on the student lending and the (inaudible) education contract, that phase-two delay -- what was the cause of that again? I know the timing, I think, is still indefinite suspension, but I'm just kind of curious as to the cause behind that, if you have any input.

What is publicly available is -- there were a number of protests by vendors who were not selected to move on to phase two. One of those vendors filed a lawsuit.

Similar to -- again, the lawsuit is really similar to a protest, in terms of content and objection. So that's essentially what the protest was.

Okay. Does that have the same adjudication process that is in place on the RAC side of the business?

Yes. It [absolutely] does. But keep in mind that on this Department of Education contract, the procurement process runs in the background. So in no way does it impact operations.

Right, right, absolutely. Good distinction. Thank you.

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

Great. Thank you very much. We just want to reiterate both our guidance for 2014 and that we are really actively engaged in pursuing the range of business-development opportunities, looking to further diversify and strengthen our business.

And with that, again, we want to thank you very much for the time that you spent with us today.

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.