Performant Healthcare Inc (PHLT) 2015 Q4 法說會逐字稿

Greetings and welcome to the Performant Financial Corp Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Mr. Richard Zubek, 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 fourth quarter and full year 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 risks and uncertainties, including those 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'll provide you with an overview of our operational results and update you on the procurement status for the awards with the Department of Education and CMS. Then, after Hakan walks you through the financials, I'll discuss our expectations for 2016.

Before I begin, I'd like to announce that 2016 is Performant's 40th Anniversary. Across the years in the industry, the success of our clients has been our most important priority to deliver unsurpassed results and value to our clients. We have grown the business through increasing new and repeat business across large growing markets, through competitive advantage that we've built from experience and innovation. We are deeply grateful to our clients who have allowed us the opportunity to serve them over these decades and the past year.

I also want to thank all of the employees at Performant, whose hard work and dedication help us achieve our results and goals. There have been many who have been with us for decades.

In 2015, we reported overall revenues and adjusted EBITDA of $159.4 million and $28.8 million respectively. While these results are lower than prior year, adjusted EBITDA exceeded our expectations due to aggressive expense management. Our operating expenses were $15.4 million below the prior year, which is primarily attributable to reductions in variable cost as you wound down the operational resources post April of 2015, when we stopped receiving student loan placements from the Department of Education.

As we look specifically at our key markets, total student lending accounted for revenues of $119.4 million, which is down approximately 13.7% from 2014. Although, our 2015 gross recovery back to clients of $1.7 billion exceeded 2014 levels of $1.6 billion, our revenues declined due to the July 2014 fee reductions from Guaranty Agency clients, coupled with the Department of Education's fee decrease, which became effective July 1, 2015.

Our placements in 2015 decreased by $1.4 billion from $6.7 billion in 2014 to $5.3 billion in 2015, largely due to the Department of Education. On the Department of Education procurement update, the RFP responses due on February 22 for the majority of the response with two sections, the sub-contracting plan and small business participation due on February 29. At this time, there are no commitments from Department of Education on when the contracts will be awarded, start or how many vendors they will select.

Turning now to our healthcare market. Our healthcare revenues in 2015 were $19.9 million of which the Medicare Recovery Audit Contract contributed $12.5 million. Commercial healthcare revenue is below our forecast, but at $7.4 million, it's over two times 2014 levels. As you may know, the CMS Medicare Recovery Audit Contract procurement has now been delayed almost three years, during which time CMS continued to reduce the scope of audits. As a result, 2015 revenue declined from 2014 levels of $29.2 million to $12.5 million in 2015. While the contract has been extended through July of 2016, the scope has been further reduced during this extension time frame. We'll discuss the impact of this in a few minutes.

As to the current state of the Recovery Audit Contract procurement, we do not know what the timing of the new contract RFP will be, as that information is not been posted and no additional information has been provided by CMS. During this transitional time, where contract recompete processes have been continually delayed, we have been managing the business with the objective of reducing expenses, while maintaining our capacity to ramp up our performance if and when we receive the contract awards.

We are also looking very hard to develop our opportunities in the commercial healthcare space and we remain optimistic about our prospects in this area. Very recently, we have also been able to renegotiate our debt covenants with our lender group to extend our run rate as we continued to await the pending contract awards. Hakan will provide more details in the financial portion of this call.

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 fourth quarter with revenues of approximately $41.1 million, net income of $2.2 million or $0.04 per share and adjusted EBITDA of $9.8 million. Student lending revenue totaled $32.8 million, an increase of $2.2 million compared to the fourth quarter of last year and sequentially higher than the third quarter by $2.6 million. Results in the fourth quarter benefited from the exceptionally strong student loan placements we received in the first quarter of 2015.

Additionally, we are also seeing an increase in the number of borrowers choosing to participate in income based rehabilitation programs, which also had a positive impact on results. During the fourth quarter, student loan placements were $0.9 billion, which is down from the $1.7 billion we received in the fourth quarter of 2014, but a meaningful increase from the $0.5 billion and placements we received in the third quarter of 2015.

As we mentioned during our last earnings call, placements from our Guaranty Agency clients were unusually low during Q3 and we had anticipate that Q4 placements will return to more normalized levels. The decrease from the fourth quarter of 2014 is a direct result of receiving the DoE placements only through April, 21st of 2015, when our DoE contract expired. We do not expect to receive new placements from DoE until new contract starts up.

For the full year, student lending revenues and student loan placements were $119.4 million and $5.3 billion respectively, which represents declines of 13.7% and 20.4% respectively over 2014 results. Our total healthcare revenues in the fourth quarter were $4.3 million compared to $2.4 million in the fourth quarter of last year. The increase in healthcare revenues was due to high revenues on the both CMS RAC contract and commercial healthcare business.

Revenue from our work with the centers for Medicare and Medicaid was $2.8 million, up from $1.4 million in the prior year period. Our commercial healthcare business generated $1.5 million of revenues in the fourth quarter, an increase over the $1 million from the prior year period. For the full year, healthcare revenues were $19.9 million, which represents a decline of 38.8% over 2014.

Lastly, as it relates to revenues, our other markets generated revenue of $3.9 million in the fourth quarter compared to $6.6 million in the prior year period. This decline is primarily the result of a tax amnesty program we conducted in the fourth quarter of 2014 with one of our state tax clients. We manage tax amnesty programs for some of our clients from time-to-time. Overall, in 2015, revenues from other markets totaled $20.1 million compared to $24.6 million in 2014.

Moving to our expenses. Salaries and benefits expense in the fourth quarter were $20.5 million, a decrease of 8.5% compared to $22.4 million in the prior-year period, primarily due to lower staffing related to the CMS RAC and Department of Education contracts. Other operating expense for the quarter was $15.8 million, a decrease of $2.3 million, primarily due to a reduction in volume related cost.

For the fourth quarter of 2015, our reported net income was $2.2 million or $0.04 per share compared to a net loss of $2.4 million or a loss of $0.05 per diluted share in the prior year period. Net loss for the full year was $1.8 million or a loss of $0.04 per share. Adjusted net income in the fourth quarter was $4 million or $0.08 per diluted share, compared to an adjusted net loss of $244,000 or a loss of less than $0.01 per diluted share in the prior year period.

Fully diluted weighted average outstanding shares were 50.1 million shares in the fourth quarter of 2015. For the full year, the adjusted net income declined by 57% to $6.6 million or $0.13 per diluted share. Our adjusted EBITDA in the fourth quarter was $9.8 million compared to $4.9 million in the same period last year. Our adjusted EBITDA for the full year 2015 declined 35.6% to $28.8 million and our adjusted EBITDA margin was 18.1%.

Our effective tax rate for 2015 was 18% compared to 45% for 2014. The decrease in effective tax rate is primarily due to the loss from operations in 2015 compared to the income from operations in 2014 and the resulting impact of the state income taxes on the effective tax rates. Even though we had a loss in 2015, in certain states we continued to pay taxes due to the profitability of our Performant Recovery subsidiary, which files a separate turn in those states. Cash flows from operating activities for the year ended December 31, 2015 was $16.7 million.

Turning to the balance sheet as of December 31, 2015, we had cash and cash equivalents of $71.2 million. Our total outstanding debt as of December 31 was $94.3 million. The sequential decrease in outstanding debt reflects continued payments on our long-term debts.

Lastly, in light of the prolonged delays related to the contract awards and other timing issues, we have very recently entered into an amendment of our credit agreement adjusting several of our covenants through Q2 of 2017. This amendment is expected to provide us with additional flexibility to operate the company through these delays. As part of the amendment, we also paid down debt by $22.5 million.

With that, let me now turn the call back to Lisa for some concluding remarks.

Thanks, Hakan. Although we've had some headwinds recently, we continue to aggressively preserve the very real improving strengths of our Company during this difficult transition period. Our outlook assumes that these transitions will continue into 2016, which is why earlier this year we completed additional expense reductions, which continue to align our cost with the current revenue model.

While the changes we implemented in our student loan operation have improved employee productivity during 2015, we expect 2016 to be softer than 2015 due to the changes to our landscape that started in late 2014, including our Guaranty Agency and Department of Education fee reductions, the lack of placements from the Department of Education effected April 2015, and the drawn out Medicare Recovery Audit Contract procurement process and subsequent reductions in audit scope.

Because of the timing of a new Department of Education contract start and the number of contracts to be awarded both uncertain, we have for now excluded the impact in our guidance. Similarly, while the Medicare Recovery Audit Contracts are expected to be awarded this year, we assumed no impact from any of these contract awards.

We expect 2016 full year revenue to be in the range of $125 million to $135 million with adjusted EBITDA to be between $14 million and $18 million. Although our commercial healthcare business has also experienced some headwinds, we continue to work on building more meaningful growth from here. We expect healthcare revenue in 2016 to be overall flat compared to last year; as expected growth in our commercial healthcare business is expected to be offset by lower Recovery Audit Contract revenues due to the limitations on audit activity.

Lastly, despite the challenges we faced in 2015, we responded with aggressive thoughtful expense management. More importantly, our strategy for growth includes both our focus on healthcare and opportunities in our core recovery markets. These opportunities include the Internal Revenue Service contract, additional state tax contracts and consolidation in the Guaranty Agency market into our largest clients. While the timing of these is not certain, we believe that our exceptional performance, our great compliance results and the value creation for our clients position us well to capture these growth opportunities.

And now, we'd like to open up the call for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Toby Wann, Obsidian Research Group.

Quickly, Hakan, could you kind of detail the changes to the covenants, just kind of how, I guess, lose were they allow -- did they allow you to make them?

Sure, Toby. First of all, we have regular dialog with our lenders and we have been in discussions with them as -- the investors' side as well, in regards to updates on the contract renewals and so forth. And they have been very supportive as we have said before, as evident also by this latest amendment as that provides us flexibility here to operate the Company through the next year and a half. So as we look at it at a high level, we paid down debt by $22.5 million. It also provides for add-backs related to start-up costs with the new Department of Education contract and we have filed as part of our press release, we filed the actual agreement, so happy to discuss that with you further, you might have a chance to review it, those are the key aspects. And again, covenants were amended over the next six quarters, so many of the old covenants were dropped off, such as minimum EBITDA and so forth.

Okay, that's helpful. I'll take a look at that filing to discuss it little -- and we'll talk about it offline. And then, just wanted to see if I can get some more color on the kind of a commercial healthcare biz. I know it was down a little bit sequentially and I don't spend a ton of focusing on sequential changes, because it's just a point in time, it's better to look at things over a longer-term trend. But just kind of maybe, you could shed some more color on what you guys are doing, specifically on the commercial side, is it post-payment stuff? Are you looking to doing pre-payment audit type activities, receptivity of commercial clients and kind of what's been the, I guess, you could say a headwind to getting it to ramp faster?

So, Toby, first of all, the ramp -- we're actually reasonably happy with the restructure that we did in 2015. If you remember, we restructured that part of the business and so far we're cautiously optimistic that we're getting some pretty good traction. As we look at some of these commercial clients, we do have contract vehicles with many of the large commercial payers, as well as the mid-sized payers. We are starting on many of these contracts and building our way up from there.

What we have had is, some of our clients when they come to expanding these contracts have been a bit slower in the process than what we had anticipated or would like. And so with a couple of them particularly, we're still working through the contracting vehicle, with some of the others, we're actually building from smaller audit capacity into large audit classes. As we prove our capability to add value to those clients, we are doing largely post-payments, although we have, with some clients offered up with pre-payment opportunity as well. And we are starting to see some traction in terms of expansion of our scope in these clients.

So, again, a little slower than what we had hoped for, and what we'd like, but as you know, it's a competitive market and we are trying to distinguish our offerings through providing services that we think are not being addressed at all or well by the current existing competitors.

Okay. And if I could follow-up on that, with regards to the kind of the commercial target, is it -- are you focused, I guess, on a specific patient -- maybe patient is not really the right word, but I guess, commercial segment, say, Medicare Advantage, Managed Medicaid, I mean, could we get a little more color on those types of targets that you guys were trying to go after or is it employer-sponsored type stuff?

Sure. We're actually going straight for the commercial payer relative to how providers are reimbursed. So we're looking at different classes of care, different classes of claim, including, as you know, through our Medicare Recovery Audit Contract, we offer the entire breadth of over payment or claims type auditing, and so that's really what we're looking at. We are not specializing or focusing specifically on Medicare Advantage at this time, although some of our clients have talked with us about that. So it's not to say it's not something that we're going to pursue in earnest, but we think there is plenty of opportunity, just given the types of audits, again, different types of claims, complex claims, automated claims, durable medical equipment, hospice. I mean, so there are a number of different types of audits that we're offering to these providers, particularly payers rather.

Michael Tarkan, Compass Point.

This is actually Andrew on for Mike. So just first question on the education side. We're hearing a lot about a higher touch servicing push from the CFPB and Department of Education with efforts to sort of help borrowers before they default. How are you guys thinking about the impact of that as it relates to the growth rate of your collections business?

Are you talking specifically about the efforts on the (inaudible) services side?

Mainly just sort of the push to get borrowers to stay current and not default. Basically what I'm getting at is, how are you guys thinking about how that could potentially affect the pool of defaulted loans that you guys are able to work?

Sure. I think there always have been programs to help borrowers prevent default. There is certainly the push by the current program to help borrowers prevent default. But as we know from a variety of different life reasons, borrowers will default and so the percentage potentially might go down a bit, but the absolute dollar pool is still very large and borrowers still need a lot of -- just focusing in on how to keep their -- how do they make their payments and then keep those payment sustainable over time.

What we do find is that even though there is an increase in efforts, we do see that there are still -- and I don't think the Department of Education has produced there last cohort of defaults, but there certainly are a meaningful percentage of borrowers who will continue to default over time and they have programs that they can engage in after default in order to stay current. So we're not seeing the efforts have a material impact. We are certainly keeping an eye on what's happening, but we certainly see a lot of borrowers' still needing help and needing assistance in restructuring their payment stream. So we're still seeing that affecting the market, increasingly in borrowers.

Okay, thanks. And then just one more, shifting to the RAC side. I believe, sort of back in the day before this whole delay in the contract awards, you were running at something like $70 million annual run rate in revenue and I know that there's been a lot of moving parts since then. But given some of the limits on ADRs and changes to the two midnight rule, how should we think about the economics of that contract moving forward?

I think, it's still obviously very early in the restructuring process with CMS. Their objective is to try to refine the program, so that providers who make a greater percentage of errors get audited at a higher level. There -- CMS we believe is attempting to bring in the program, so that there's a balance between audit provider and attempt to correct some of these issues upstream. So I think it's hard to say exactly when and how this contract will ramp up, but we do know that CMS's ultimate intent is to make this a key part of the program integrity. So I can't estimate the timeframe or even speculate on timeframe, but we hope to be able to work with them to make this again a very much an integrated part of their program integrity efforts.

(Operator Instructions) And if there are no further questions, I'd like to turn it back over to management for any closing remarks.

Thank you. As I mentioned, this year the Company turns 40 and really in that time, we've grown the business through very -- through hard work, but through organic efforts. And in fact, when we look at sort of 10 years prior to 2013, the Company's stock and revenue grew in [efforts] of five-times and we've done that by crafting into industries and by growing our new and existing business.

And despite the current challenging headwinds, we are committed to growing the business and committed to aggressively managing everything that's within our control in order to provide for more opportunistic engagement as we look forward.

Once again, I'd like to thank our clients for letting us to serve them this past year and I want to thank our employees for bringing their very best efforts to our organization. I want to thank you all for joining us today.

Thank you. This does conclude today's conference. You may disconnect your lines and have a wonderful day.