Performant Healthcare Inc (PHLT) 2015 Q2 法說會逐字稿

Greetings, and welcome to the Performant Financial Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Richard Zubek with Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the Company's second quarter 2015 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, including those described in our 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'd now like to turn the call over to Lisa Im. Lisa?

Thanks, Rich. Good afternoon everyone and thank you for joining us for our earnings call. Revenue and adjusted EBITDA were sequentially higher in Q2 as we continued to focus on executing on our productivity targets, ramping up our commercial healthcare business and managing our expenses. Compared to last year, our revenues and adjusted EBITDA were lower, which is consistent with our guidance and is reflective of the transition period attributable to the ongoing delay in the CMS contract renewal process, and the guarantee agency rehabilitation fee reductions that took effect in July 2014.

Student lending revenue was up 14% sequentially, but lower on a year-over-year basis due to the rehabilitation fee reductions and an increase in the number of borrowers who are choosing IBR rehabilitations versus loan consolidation.

The Department of Education has not updated its status on new contract awards. But we believe that it is still their objectives to announce awards in the near-term. The last placement we received from them was just prior to the contract expiration in April of 2015. And at this point, we do not anticipate receiving new placements from the Department of Education until the award of a new contract.

Our results on recovery of student loans, size of managed portfolio and strong regulatory compliance program, which we believe is a distinction in our service to clients, position us well for a recompete award.

Furthermore, the Department of Education routinely conducts audits on its vendors and comparative data they provided indicates that from a compliance perspective, we are in the best of three groupings. However, going forward, each month that passes without student loan placements from the Department of Education will have a negative impact on our results roughly nine months later, potentially prolonging a transitional time period in student lending.

Our healthcare revenues in the second quarter were close to those in the first quarter, as the slight increase in revenues from commercial healthcare customers was offset by a slight decrease in Medicare revenue. In addition to the commercial healthcare clients we are implementing, this period has been very active with a number of opportunities we are pursuing in the commercial healthcare space that leverage our Medicare expertise, cost integrity audit capabilities and our proprietary technology. These opportunities range from large commercial payers to mid-sized payers and reflect a significant effort we are focused on executing our strategy of aggressively growing our commercial healthcare business and diversifying our revenues. We believe that the next several months will give us a clearer picture of how those opportunities can translate into revenue in 2016, and we are excited about the momentum.

As it pertains to the CMS contract renewal process, effective June 4, 2015, CMS has withdrawn the request for quotes for the next round of recovery auditor contracts. CMS has indicated that it plans to update the statement of work and release new requests for quotes shortly. Lastly, we are also pleased to tell you that we have received a closing letter from the Consumer Financial Protection Bureau, or CFPB, regarding our Civil Investigative Demand or CID, which began in April of 2013 that we previously disclosed. As expected, the CFPB has determined that no enforcement actions are necessary, and the CID is closed. With that I'd like to turn the call over to Hakan to walk you through the financials. Hakan?

Thank you, Lisa, and good afternoon everyone. Today, we are reporting results for the second quarter with revenues of $41.3 million, net income of $726,000 or $0.01 per share, and adjusted EBITDA of $8.4 million.

Beginning with our student lending business, revenues totaled $31 million, a decline of $9.1 million compared to the second quarter of last year. During the quarter, the Department of Education accounted for $10.5 million of revenues, while Guaranty Agencies generated $20.5 million. These amounts represent declines of $4.1 million and $5 million respectively when compared to the second quarter of 2014.

As we previously discussed, there are a number of items that can impact our student lending revenues, including fluctuations in loan placements, the reduced loan rehabilitation pricing structures that we've put in place by our GA clients effective July 1, 2014 and the increased documentation requirements to qualify borrowers with the rehabilitation process. In addition, the recent market shift from borrowers utilizing loan restructuring to rehabilitation as a result of the increasing use of income-based repayment has in essence resulted in a shift in the timing of revenue recognition as loan rehabilitation fees require nine months of timely payment.

On a sequential basis, student lending revenue is up $3.9 million or 14% from the first quarter. This is primarily a result of the increase in borrowers participating in income-based rehabilitation programs with our Guarantee Agency clients. Also we refocused some of our production staff on assisting with completing the documentation requirement, which in essence accelerated roughly $1 million of revenue into Q2 that we would have otherwise recognized in the second half of 2015. During the second quarter's June student loan placements were $1.7 billion, down from $1.9 billion in the second quarter of 2014. The decrease is primarily a result of receiving DOE placements only through April of this year, when our DOE contract expired. As Lisa mentioned, we do not anticipate receiving new placements until the re-award of the new contract which will impact us next year. We were, however, encouraged that the DOE placements in April were sizable at $618 million, representing 37% of our total loan placements for the quarter. Combined with a very strong first quarter, loan placements in the first half of 2015 increased 16% compared to the prior year period, providing positive momentum for later of this year.

Our healthcare revenues were $5.3 million compared to $11.3 million in the second quarter of last year. Revenue from our work with the Centers for Medicare and Medicaid was $3 million, down from $10.6 million in the prior year period due to the current limited audit scope. Our commercial healthcare business continues to gain traction, generating $2.2 million in the second quarter, an increase of $1.5 million from the prior year period.

Revenues from other markets in the second quarter were $5.1 million compared to $6 million in the prior year period. The decrease is due to the completion of the previously noted tax amnesty project, as well as a piece of business not renewed due to unfavorable pricing.

Moving to our expenses, salaries and benefits expense in the second quarter was $22.1 million, a decrease of 9% compared to $24.3 million in the prior-year period, primarily due to completed cost reduction initiatives. Other operating expense for the quarter was $15.5 million, a decrease of 24% compared to the second quarter of 2014, primarily due to volume-related costs and other completed cost reduction initiatives. We are focused on improving our productivity, executing on our business development initiatives and thoughtfully engaging in expense restructuring.

As we've discussed previously, a significant portion of expenses are highly variable in nature and as such there are other adjustments that can be made as necessary to achieve our objectives. We're balancing this with a focus on building long-term revenue.

For the second quarter of 2015, our reported net income was $726,000 or $0.01 per share compared to $5.9 million or $0.12 per diluted share in the prior year period. Adjusted net income in the second quarter was $2.3 million or $0.05 per diluted share compared to $7.2 million or $0.14 per diluted share in the prior year period. Fully diluted weighted average outstanding shares were 50 million shares in the second quarter of 2015.

Our adjusted EBITDA in the second quarter was $8.4 million compared to $16.7 million in the same period last year. Adjusted EBITDA margin was 20.3%. Our effective annual tax rate during the second quarter was 34.5% compared to 41.8% in the same period last year. Cash flows from operating activities in the second quarter were $12.1 million.

Turn to the balance sheet, as of June 30, 2015, we had cash and cash equivalents of $76.1 million. Our total outstanding debt as of June 30, 2015 was $100.1 million. The sequential decrease in outstanding debt of $11.7 million reflects continued payments on our long-term debt.

Now I'll turn the call back to Lisa for some concluding remarks.

Thanks Hakan. Our reported results in the second quarter do not fully reflect the hard work and considerable efforts from our employees. For the first half of this year. our employee productivity remained solid and we continue to focus on delivering results to our clients, prioritizing regulatory compliance and expense control. With stronger execution in the first six months, we are adjusting our prior 2015 guidance at this time to the higher end of our revenue range of $150 million to $160 million and increasing adjusted EBITDA outlook from between $20 million and $22 million to $21 million to $23 million. From a quarterly results standpoint, we anticipate Q3 to be similar to Q1 and Q4 two pattern Q2, primarily due to fluctuations in student loan placements and productivity in prior period.

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

(Operator Instruction) Ed Caso, Wells Fargo.

It's actually [Rick] on for Ed. First question, just I'm hoping you can kind of level set us on where we are with the RAC contract. You did talk about how they have pulled back on the request for quotes. So just kind of where are we in terms of timeframe of when you think this could move forward, both on the overall RAC piece and then also on the DME piece. Thanks.

Thank you, Rick, it's Lisa. With respect to the contract process, as I mentioned earlier, the original request for quota -- RFQ has been withdrawn from CMS. They do expect to send out a new RFQ shortly. We believe it's probably in the next few months. In the meantime, there are very clear indications from CMS that they do not want another pause of work on the contract, and we believe it is their intent to continue to extend this in a more meaningful way, to extend the old contract in a more meaningful way, as we continue to move through their procurement process. It is possible that a new RFQ could be protested, but again, we believe that CMS' intent clearly is to have us continue, not just with the current scope, but we believe that that is their desire to actually expand the scope and have a fuller program

And so in the meantime, should we be looking for kind of a similar $3 million per quarter type number for the RAC revenue until we get more clarity on that RFQ?

I would say that's appropriate right now, Rick, and again, as Lisa mentioned that we are optimistic that there's going to be some increase in scope that -- in the meantime let's stick to the $3 million a quarter.

Then just switching over to the commercial side of things, I'm just curious for kind of your thoughts on how the healthcare payer market consolidation could impact your ability to penetrate the market, either positively or negatively, what sort of opportunities could it unlock for you guys?

I'm going to actually hand that question over to Jeff Haughton, he is one of my EVPs and the healthcare operation is one of the areas that actually falls under Jeff. So, Jeff?

We are obviously watching those situations play out and it'll be interesting to see as the situation play out if those transactions actually close. I think the good news is certainly as we look at our revenues now and what we're forecasting to bring in, and the dialog that frankly we're having with a number of large payers in the space in terms of existing business, as well as new business opportunities, we really don't think there's a lot at risk for what we're doing now and that's something that as you look at M&A deals, you certainly want to be mindful of, but we don't feel like there is risk that any of this consolidation impacts the business, but again, we're either executing on now or plan on executing in the near term.

I think from an opportunity perspective, you know, as we look to continue to flesh out our product suite and really become a kind of one-stop shop, if you will, for a number of these products for these commercial payers, I think that aligns well with large a payer space and with some of these combination activities where certainly these companies on a combined basis are going to look to maximize as much cost savings as they can from a cost integrity perspective and we think we're going to be well positioned to play that out. I think further to the opportunity to us is in all of these potential combinations that have been announced, we have relationships with all of the competing parties and in a couple of them we have more fully fleshed out relationships where frankly we think there could be some upside to us in terms of accelerating relationships and dialogs with some of the participants, where we've had kind of a initial conversations, but haven't really expanded out into a full of product set that's then been developed. So again, it's something we're very mindful of. We think there's some opportunity for us and we don't think there is any near-term risk to us in terms of existing products.

And then just the last one maybe for Hakan, if you can just -- for the revenue guidance you now expecting to hit the high end, if you can kind of just level set us in where the components are. You said $3 million per quarter roughly for the Medicare RAC side. I believe I saw in the release and in your comments that the commercial is still on track for the $10 million. So just what are your expectations for the pieces of student lending, I guess, is the question? Thank you.

Yes, we expect that the student lending is going to be the driver for driving our guidance up to the higher end. As we talked about last quarter, we had a significant amount of production increase in Q1, and also strong placements from our student lending clients in Q1 that help drive a strong performance in Q4, so that's really where the improvement is coming from.

And is it more on the -- I mean based on this quarter, it looks like more on the GA side, is that -- are you expecting that strength to continue or would some of that stuff -- the [$1 million] that was pulled forward that you talked about?

If we look at for the year, we expect that the GA area is where we are going to have the improvement. But what we are seeing and we saw that here in Q2, is the increased volume of borrowers that are participating on to the IBR, the Income Based Rehabilitation process that started in July of last year, as you recall, and the volume impact is what we saw here in Q2 and we expect to see that here going forward as well.

Anjaneya Singh, Credit Suisse.

I just wanted to focus back on the guidance. I appreciate some of the comments you made just now, but hoping you can parse that out a bit. It seems if I look at the run rate for the first half, it already implies that you hit the top end of the range, if it mirrors this type of performance and you're bullish on sort of the impact from the placements and the productivity at Q1. So I am hoping you can just talk a little bit about which factors are leading you to assume a sequentially flattish back half, despite these upside or tailwinds?

So as we said in the opening remarks that we expect that Q3 is going to be a softer quarter than Q2, it is going to pretty much mirror Q1. And then again Q4 to be similar to Q2. And one of the key things as we look at why Q3 is going to be a softer than what we saw here in Q2 is the productivity challenge that we experienced in Q4 of last year. Again, that is based on the new documentation requirements and so forth that went into effect, and our productivity was not on par with what we've seen historically, nor -- again as you look at Q1, what we saw the improvement in Q1. So we will feel that revenue decline in Q3, but again, then expect an improvement in Q4.

And on the expense side of the equation, it was down both -- for both types of expenses, nicely from the last few quarters. Could you talk about what took place at 2Q to account for this? Was this just some of the restructuring initiatives at Q1 you discussed or was there something else and is this sort of a reasonable run rate to think about going forward for these levels of revenue?

To your first question, as it relates to the cost initiatives that we executed on in Q1 that is a primary driver of the lower operating cost that we are seen here this quarter, primarily the decline is in salaries and related. So going forward we expect that -- as you look at the following quarter to be at similar cost levels. As it relates to Q4 there are some volume related costs that we will incur, based on the higher expected revenue that we expect to generate in Q4. So a bit of an uptake in cost in Q4.

And two quick ones. Any update on the Cambia contract ramp? Is that something that is being implemented along the pace you had originally envisioned? I realize it's a little bit longer of an implementation, but just any update on that?

Yes, so it's Jeff. I'll take that one. So on Cambia, we are implemented, it's a good working relationship and so we're off and running on that business, but this is the first time that they've done desktop audits and we're working with them to make sure that as we move forward with this process that they understand the process, we understand what their objectives are and then ultimately how it's being run and coordinated with their providers, is all done in a way that makes sense for them, and certainly makes sense for what we're trying to do, which is to bring cost savings to them.

So that's a long-winded way of saying, we're implemented, we feel very good about that momentum, we feel good about the relationship and it will take some time -- over time to see how we can ramp it up to volume levels that are acceptable to them, and makes sense for their business.

And I realize this is tiny, but couldn't help but notice the transaction expenses in the quarter. Is that related to the PHX transaction, is there something else in the works and then along those lines, if you could just give an indication of your M&A pipeline, as much as you're able to, in a sense of what we should be expecting there? Thank you.

Yes, the expense that you saw here in Q2, again, it was tiny, related to PHX, and at this point we have no further expenses that we expect from an M&A perspective here in the near term.

Michael Tarkan, Compass Point.

Just get this one out leisurely. Lisa you mentioned that you're hopeful that the [Ed] contract is announced soon. I'm just wondering if you had any kind of color around that. The latest we heard, I think was maybe by the end of September, is that consistent with your expectation?

That's what we believe, Michael, there is a process that Department of Education is undertaking, we believe that process will play out and [add to] their targeted timeframe.

And then just -- I mean, is it your sense that when the contract is in fact awarded, assuming you guys are on it that you would start immediately thereafter with placements and we wouldn't see necessarily a big sort of intermediate ramp-up period? I know that there is this delay between April 22 and by the time the contract is awarded, but just kind of curious how quickly you can get started on that?

We think based on conversations with folks at the Department that that is their intent and you know -- and I think they are aware of all of the investments that we put into -- first of all getting an ATO years ago and then obviously maintaining that and continuing to focus on technology and physical security in the program. And I think that's a big part of the start-up question. So we believe based on what we know today that Department of Education is targeting a quick start for -- [we think] vendors who have an ATO.

With the five vendors that are currently receiving new volume from [Ed], have you had any discussions with them around potentially subservicing some of their work load?

No, we have not. And again, I think part that Michael, was just the transition time was anticipated to be a very short transition time. As you know, earlier in the year, all indications from the Department where that there was a dividend. And so this has been a longer delay I think than what they'd even anticipated.

And then I guess just one last one, a little separate, but now that we're sort of a month after the new fee structure went into place from Department of Education, have we seen any kind of impact on your revenue from that new fee structure on the fixed fee structure? Thank you.

I would say at this time, Mike, that that's still a TBD. We're obviously working to maximize our productivity and enhance the volume, but that's still a TBD. That's also reflected in the guidance that we gave for the rest of the year.

But do you still expect a little bit of pressure just on the fee level by the move going to fix from variable, is that fair?

That is fair, yes.

Denny Galindo, Morgan Stanley.

Overall, looking at GA volumes, the defaults are up around 4% or so. I don't know if you said exactly how fast your placements are growing in that group. I think you gave us the Department of Education piece, but not the year-over-year, but are placements at the GAs growing faster than this, slower than this or what kind of guidance can you give us on how fast those GA placements are going to grow?

Let me first provide you with the stats here through the first six months. So we have received placements from our GA clients of approximately $2.3 billion this year. As you look at the comparable period last year, we received out $1.8 billion. So again that's been an increase of about 16% year-over-year for the first six months.

How long are you expecting this kind of increase in place since the last -- we were kind of expecting maybe this year and next year will be the peak, but that sounds like a pretty strong growth there. Do you have any sense of how long they can grow at this rate?

Well, I think for us it will depend on Guaranty Agency consolidations as well. I think as you know, we have strategic relationships with the large Guaranty Agencies, we've serviced them for many years and our clients' objective, as you know, is kind of our top priority. But we look at what happens in that industry. It's hard to specify what we think the increases will be, but we do believe that there will continue to be consolidation of smaller and maybe mid-sized guarantee agencies into the larger ones. And we do have strong strategic relationships with those.

Was there consolidation in that 16% number?

There were some of that, yes, so that's part of it. And then the other part, I mean these are performance driven contracts, so we're very focused in driving strong performance, which gives us the ability to increase our share of the placements from the guaranty agencies as well. That's a component that plays into the placements.

And then on the last contract there was a little bit of a ramp up. You're hoping that the -- between winning the contract and getting the first placements and now you're hoping the ATO will work this time and then you'll be able to start up pretty quickly, but maybe you can discuss what you would do with labor working these contracts. Can you shift people between guys working the GA placements and the DOE contracts pretty seamlessly or is there some kind of specialization that would occur that would make somebody not be able to move between the two?

It's Jeff. Let me take that one first and Lisa and Hakan can jump in. So we do have flexibility in terms of where we can direct some of those resources and we've been working through that already this year to maximize kind of efficiency in terms of where we think we're going to need the most bang for the buck in terms of what those resource is focused on and we do think we have continued flexibility to do that and that's within our recovery business, and also apply to some of the stuff we do in our other revenue streams related to some of our Performant technologies business as well. Now ultimately, depending on the timing of the ED placements and what that means, you know, we also have to just be mindful of the overall cost to make sure that how we allocate headcount, really is efficient and is generating the revenue that we want it to. But I would say we do have a number of levers that we have and can continue to pull to make sure that we've got the workforce in the right place at the right time and we're going to continue to monitor that throughout the rest of this year and into 2016.

And then to your question about the ATO, the reason why the last contract was a bit delayed in implementation from the ATO was no vendors actually had the ATO. So the contract that started six-plus years ago, that was one where everyone has to get their ATO for the first time and the incumbent vendors on the contract, on the Department of Education contract today obviously have maintained and have continued to meet the standards of the ATO, as those have gone up over the years. So that's the reason for the difference in view of this contract start versus last contract start.

And then just lastly on the new education contract, is there any update on your thinking about how many contracts might be awarded? They were saying eight at one point, or maybe all 17, whether you win -- any kind of clarity there on which direction they might be headed?

We don't have a firm number and they have not conveyed a number where earlier as you know, in the public Q&A they did -- we do believe however the Department of Education is very focused on compliance, on regulatory compliance, specifically as it relates to student loans. And so our belief is that Department of Education will look to a number of vendors who they believe can meet those regulatory requirements. And so, we think again, student loan experience and recovery and managing and working with defaulted borrowers to better their situation is going to be a key criteria in terms of selection and there just aren't that many vendors with that level of experience.

And just lastly on that. With the eight contracts, I know that they have performance metrics that used to be disclosed. Are you guys definitely within the top eight if they were to choose eight as a cut-off or are you kind of more in the bubble?

The selection process is not just based on actual recovery, and by the way, we feel good about where we are in terms of competitive position, but that selection criteria will be based on not just recovery on Department of Education, but on all federally guaranteed student loans, how we work to the borrowers, the size of the portfolio that we manage and a very significant focus on compliance. And so, the criteria will be different from just the recovery numbers that are competitively published by Department of Education. We also think that compliance is going to be a very big factor in the contract that will be renewed as well.

Toby Wann, Obsidian Group.

Quick question, on the DOE contract, is it safe to assume that there is a due process, procedure that is similar to the RAC contract in the event that somebody does decide protest? I mean, is that anything that we need to be even thinking about in the back of our minds at all?

There certainly is a process, but we believe based on the procurement modifications that have been made, there's very specific criteria that have been added to the decision making process. The Department of Education has been very clear in terms of structural support for how they intent to select the vendors. We believe that that is very smart way to run the procurement and they are -- we believe that they will be in a good position to address any protests in a very expedient manner.

And then one last one. Adjusted EBITDA prior guidance, I somehow missed that and can't seem to find it in my notes anywhere. So housekeeping item.

The prior guidance was $20 million to $22 million.

Oscar Turner, SunTrust.

My first question was just a follow-up to the prior question on the EBITDA guidance. So your updated guidance implies second half margin -- EBITDA margin of just 13% versus, I think it was 16% in the first half, even though it looks like both expense categories came down significantly in the second quarter. I was wondering is there a pick-up in expenses that you're expecting in the second half?

Overall, again, as you look at the guidance that we gave we expect that Q4 is going to be stronger and that again will mirror pretty much Q2. Q3 is going to be a softer quarter. So as you look at it, if you just focus on the operating costs, we expect that the operating costs are going to be pretty similar in the second half to the first half, but again the difference is going to be on the revenue side.

The only thing I'd add to that is, as I think Hakan alluded to earlier, we do think there's going to be some additional expense on the healthcare side that's related to kind of tangible revenue that we think we can drive in the near term and really some of the headcount to drive that. So there is a little bit of that impact, that I think you look at the expenses and as again Hakan alluded to, some of the increase in those expenses towards the back half of this year that's really what it's tied to.

And then on student lending, I know you talked about strong productivity levels in the first half of the year. So how did the productivity levels in the second quarter compare to those in the first quarter and then just how much upside to productivity levels do you exists?

So they were a little bit less in the second quarter, but again, largely as a result of some lesser inventory and while our costs are highly variable, there is a certain amount of pool that we want to -- resource that we want to make sure continue to be focused on the business, but I will tell you that we're hitting our objectives and we believe that we will continue to make a productivity gain through -- again what we're looking at is technology, not just profits, improving the technology tools that we can add on to our platform in order to enhance productivity consistently across the board, across clients, and obviously then it becomes a permanent part of the structure.

So, we believe that there is continued opportunity for productivity increases and we obviously have them prioritized and we're working on those.

And then just on healthcare, you talked about CMS with two requests for the quotes last month. I may have missed this, but did you provide any updated expectations for timing for the award?

We think -- I still believe that CMS would like to get the new RFQs out in the next few months and of course there is a response time and then an award time. So typically the response time we're estimating is probably a month after the RFQs go out. And then assessment and awards probably another 30 days after that. So, after the RFQ comes out, it's probably at least a 60-day process. But again, I think I want to reemphasize that CMS' intent really is to make sure there's no more pauses in the program and the (inaudible) itself can become even a more fuller program than what it is today, and I think they are -- they believe in the program and it -- again, it's clear to us that their intent is to have a consistent good program integrity applied to Medicare spend.

So just based on that timeline, it looks like it'll be December before the award is out?

It's possible. Yes.

(Operator Instructions) [Michael Cohen], Opportunistic Research.

First question, you alluded, Lisa, to a belief that the CMS contract will increase in scope and I thought I heard you say that you expect it to increase in tenure, duration, am I correct in that and can you expand on what you mean by a wider scope?

We are in dialog with CMS with respect to additional audits that we'd like to conduct and they've been very open in those discussions. And again, my view from the client side is that they're very supportive of good program integrity around Medicare. So right now, we're working on a bit of a limited scope, but we do believe that it is their desire to open up the audit to other areas. And then with respect to the tenure of the contract, as you recall, last year there was a pause in the program where we literally stopped our work and then there was a softer start-up, which is [to this date] a limited scope which we're currently working.

We believe in terms of tenure that it is their intent not to have a pause and that they will continue to have the program and their audit companies continue to audit regardless of the procurement process.

And so, what would be the duration you would expect that the Medicare contract would have without pause, so to speak?

We think they'll -- it is their intent to continue to run the program until the new contracts are awarded, and the awards are in the clear. So, that could be into next year if the awards are protested, but again, I believe it is their intent to continue to run the current programs that we're not stopping and starting, and stopping and starting.

And then you also alluded to developments, potential developments on the private side, I believe it could have a impact on 2016 revenues, if I heard you correctly. Was that based on the relationships that you already have or was that based on sort of a pipeline of business development activity, what were you referring to there?

Jeff?

Yes, let me take that one. I guess the way I would summarize it is we've got a nice mix right now. So when Lisa talked about being encouraged and excited about kind of the momentum, I'd say we've got a nice mix of clients that are -- we're in the process of implementing and that should happen through the course of this year and then into the back half of this year, which will really start -- not impacting revenue until 2016, but we've got that component through the commercial healthcare business. We've got clients now that are implemented, but where we are working with them to ramp up volume and expand the program into or add new products to what we're providing for them now. So we're also focused on that. And then specifically, look there's a number of opportunities that we are pursuing right now that I would characterize as the culmination of months, sometimes over a year of dialog, but are either RFP situations or competitive situations where we think there is going to be relatively definitive timeline to understand where we are on those specific opportunities and I contrast that a bit with some of the more open-ended dialog we have with clients for periods of time that there is no kind of clear line in the sand in terms of when we're going to know where we stand. There's a number of opportunities that as we look towards the back half of 2015, we think it will give us a good picture of what the new business is going to look like as we start to roll on and implement in 2016.

And then last question with regards to the conversations that you've had with the DOE where they've given you some indication of this updated timeline relative to what we might have thought three weeks, four weeks, five weeks, six weeks ago. When did you speak with DOE most recently, when had they sort of made that clear to all the bidders that late September was likely to be the time horizon?

The have it public by that date. So I don't know that there is something public that sitting out on Department of Ed's website or there hasn't been an all-vendor call any anything like that, but we've had some dialog that indicate that that is their target date.

And then back to sort of within the context of sort of a decision criteria, you obviously made clear that compliance is going to be a significant factor. Does that make it a much higher bar for those bidders who have never done DOE work in the past?

Yes. We absolutely believe that the bar for regulatory compliance is very, very high on the Department of Education contracts, and if there are companies that don't have that level of experience, we do not believe that their compliance program could meet the standards the Department of Education is expecting from vendors on the new contract.

Toby Wann, Obsidian Group.

Quickly, not to get too far out over our skis, start to think about 2016, given the DOE contract pause and all of that, I mean how are we starting to think about 2016 in -- I mean the first part of the year expected to be soft relative to typical run rate, given the first half of this year. Again, I'm not trying to get specific guidance or too far out over the skis here, but just kind of as we think about things going forward, we're halfway through this year and when you start kind of thinking about 2016 as well.

Yeah, Toby, that is accurate. I mean as we look at the impact of not receiving placements from Department of Education and as you look at revenue from Department of Education here in Q2, we generated approximately $10 million worth of revenue. So in every period that -- as you look at a three month period without placements, I mean that is having a immediate impact as you look at the revenue loss into 2016, so nine months out. So yes, we will have that based on the three month delay that we have experienced to-date, and again, as we look at it, every month going forward will have an impact in 2016.

And then any update on region 5? I think you guys protested that one, if I remember correctly on the RAC contract, and just kind of where that stands.

Yes, actually the region 5 was also -- the RFQ was also canceled, the award was cancelled. And so, when [CMS] releases RFQs, we expect region 5 to come back out in its newly minted form.

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

Thank you. Our results in the first half of this year really represent a lot of hard work and I want to thank our employees for their continued dedication. I want to take our clients for their continued opportunities to serve them and thank you all for joining us today.

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