Performant Healthcare Inc (PHLT) 2019 Q4 法說會逐字稿

Greetings, and welcome to Performant Financial Corporation's Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions)

Please note, this conference is being recorded.

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

Thank you, operator. Good afternoon, everyone. And by now, you should have received a copy of the earnings release for the company's fourth quarter and full year 2019 results. If you have not, a copy is available on the Investor Relations portion of our website. On today's call will be Lisa Im, Chief Executive Officer; and Rohit Ramchandani, Vice President of Finance and Strategy.

Before we begin, I'd 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, all 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?

Thanks, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. If you haven't already, please find a financial supplement on our website that provides some additional details regarding our recent financial results.

For the past several years, we've worked tirelessly to transform Performant from a company that derived its success from a small number of large contracts into a highly dynamic company with diversified product offerings and client base. We shared on our investor website the resources required to bring major contracts to steady-state margin. With those investments and share gains that we have made across our markets, we are entering 2020 with revenue growth and positive EBITDA. Hard work and dedication drove strong operational results in Q4. We had revenue growth of 10% versus prior year and achieved our target of profitability for fourth quarter of 2019. We reported positive EBITDA of $6.5 million. This is our largest positive quarterly EBITDA since 2016. Additionally, fourth quarter EBITDA was approximately $9.5 million higher than the third quarter of 2019. This turn from a negative Q3 to a strong positive Q4 EBITDA is due to continued operational improvements. These improvements in the fourth quarter were not due to any large positive onetime events, rather these results are due to the hard work that we do every day.

We've talked to you on past earnings calls about inflection points, needing patients and how we would need time to grow our health care business, just beyond the Medicare RAC contract, strengthen our footing, gain market share and demonstrate client growth. We provided diagrams detailing the general investment return of our new contracts, particularly on the commercial side, which demonstrated the 2-plus years of heavy investments that are required before these contracts would show profitability and trend to steady-state margins.

The fourth quarter of 2019 is the inflection point to which we have been speaking. These results are real and are indicative of the potential that we believe our technology platform and organization will deliver going forward. Most of our long-term shareholders have patiently waited with us during this period, with many of you adding shares to your already large positions. And I thank you for your confidence in our ability to execute on our stated strategy.

From a composition standpoint, Performant at the end of 2019 looks nothing like the company it was just 2 years prior. In 2017, our recovery business accounted for nearly 82% of our overall revenue. Health care was just over 7.5%. At the end of 2019, health care has grown to just shy of 30% of our overall revenues while recovery remains a more balanced 60%. Total revenue in 2019 is up $18.2 million or nearly 14% versus 2017, and health care revenues are more than 4x higher than what they were just 2 years ago, and we're currently projecting strong double-digit growth in 2020.

Through the years, some questioned our decision to expand into the approximately $4 trillion health care industry, where many companies had already established relationships. They questioned whether we would be able to meaningfully disrupt those relationships. Just to clarify, we are not a startup, and we had already made strong inroads in the health care market, going all the way back to 1999 when we worked on CMS receivables through our treasury contract. Our analysis indicated that the dynamics of the health care markets were ready for the correct focus and opportunity to showcase our platform. In this market, we would be able to demonstrate a significant uplift in results for prospective clients and establish Performant as a strong competitor with a differentiated and more effective service offering, which is exactly what happened.

Here's an anecdotal example of one particular client. We were hired by one of the nation's largest MCOs as a second-seat vendor to conduct Medicaid reclamation, which is Asset Recovery, and to expand identification of new savings. In this capacity as a second-seat vendor, our results returned a 50% lift over the incumbent vendor. Following this, we were moved into the first position for 5 test states, covering about 1 million lives. And we again demonstrated impressive results, providing a 75% gain over the incumbent across historical results for those states. As a result of our hard work and strong results, in 2019, that client canceled services with their incumbent vendor of over 10 years and shifted all 25 of its states to Performant. Despite early implementation challenges with the client, we're happy to report the performance in Q4 2019 was strong with robust momentum into 2020. Similarly, our recovery operation remains a significant and important piece of our overall business.

Over the past several years, we have successfully extended our recovery platform into additional markets with significant opportunities. We have entered and are growing in diversified consumer and commercial markets. We also continue to expand our work with clients in federal and state tax as well as federal treasury receivables and health care recovery markets. Related to the recovery activities for federal taxes, congress mandated the creation of the Internal Revenue Service, IRS, Private Debt Collection, PDC, program to expand the customer service capacity of the IRS by leveraging private sector technology and expertise to conduct outreach to taxpayers who owe a particular subset of much needed federal tax revenue, tax underpayment. Performant is 1 of 4 forms that -- firms that currently partners with the IRS for this effort. Although the initial placement volumes were low when we commenced work under this contract in April of 2017, which reflected the IRS' objective of a methodical contract start, the number of placements of federal tax receivables that we get from the IRS have more than tripled from what we have processed in that initial start-up year. Furthermore, since officially launching in 2017, the PDC program is demonstrating significant value to the U.S. treasury, has driven dollars into the IRS to self-fund the program and provided incremental funding that allows the IRS to rapidly increase full-time internal staff dedicated to tax collection. Our long-term strategy has always been to build a strong diversified business on our core strengths: Analytics, innovation, compliance, audit and recovery, where those capabilities combine and create unique strengths and value propositions to our clients, we believe we can win competitively and find solid market opportunities.

Fourth quarter 2019 results were strong, and we believe they show that we can accomplish and deliver great things with our rebuilt and refocused business. Companies don't typically go from reporting an EBITDA loss of $3.1 million in 1 quarter to positive EBITDA of $6.5 million in the next quarter. We knew the heavy investment part of our transformation was largely complete, and that we would succeed in achieving our goal of becoming EBITDA positive in Q4 of 2019. We accomplished this purely on our operating success, and we believe it is indicative of our future results.

With that, I'd like to introduce Rohit Ramchandani, our Vice President of Finance and Strategy, to walk you through the results of the quarter. Rohit?

Thanks, Lisa. In Q4 of 2019, we reported revenues of $43.8 million, which was in line with our internal projections and up 10.3% versus the prior year period. Adjusted EBITDA in the fourth quarter was $6.5 million compared to $2.5 million in the prior year period and a loss of $3.1 million in the third quarter of this year. For the full year 2019, we reported revenues of $150.4 million as compared to revenues of $155.7 million for the full year 2018. However, as a reminder, our 2018 revenues included a onetime benefit of $28.4 million related to the net impact of the termination of the company's 2009 CMS Region A contract. After adjusting for this release, full year revenues in 2019 were an increase of 18.2% over 2018 revenues of $127.3 million.

Adjusted EBITDA for the full year 2019 was a loss of $3.2 million compared to an adjusted EBITDA loss of $5.2 million in 2018, which excludes the impact of the CMS reserve release.

Overall, our operations benefited as our investments in key health care contracts started to achieve steady-state contribution margins with further growth potential and as investment in other mid-tier contracts continues. Health care revenues in the fourth quarter of 2019 totaled $14.3 million, which was 44.4% higher than in the fourth quarter of last year and 32.8% higher quarter-over-quarter. The sizable increase reflects the positive strides we made relative to the aforementioned investments across both CMS and our nonfederal client base as well as the continued expansion of both our audit and coordination of benefit offerings.

For the full year 2019, health care revenues were $43.3 million, an increase of 66% as compared to our 2018 health care revenues of $26.1 million, which again excludes the onetime benefit from the CMS reserve release on the prior RAC contract.

We're very excited about the progress that we've made in driving growth in our health care market. As Lisa mentioned, health care markets now represent roughly 30% of our revenue stream versus just under 10%, 2 years ago. And we anticipate that our health care business will continue to grow via both our audit and COB market offerings.

Total recovery revenue in the fourth quarter was $25.2 million, which was essentially flat with the fourth quarter of last year and up 20.4% from Q3. For the full year 2019, we reported recovery revenue of $89.6 million, an increase of 7% versus 2018. Although student loan revenues are countering growth as expected, due to the macro trends on the guarantee agency market, our overall diversification strategy has helped offset those declines. We've made strong traction in growing our diversified consumer and commercial debt service offerings, including the success of the IRS program, which has been good for government, taxpayers and a longer-term opportunity. Additionally, we've continued to see growth in our ED subcontracting opportunities.

As can be seen in the revenue proposition chart that we included in the financial supplement posted on our website, our recovery markets outside of Guaranty Agency student loans were over 50% of recovery-related revenues in FY 2019 versus 18% of recovery-related revenues in FY 2017.

Expenses in the fourth quarter of $39 million were $1.2 million lower than the prior year period. The decrease in cost was mostly due to our commitment to improving our productivity, executing on our business development initiatives and thoughtfully engaging in expense restructuring.

We conducted our annual good loan impairment test on 12/31/2019. And as a result of that test, we recorded a $7.2 million noncash impairment charge to goodwill in the fourth quarter 2019 results. Goodwill was originally recorded as part of Performant's acquisition of DCS in 2004. This impairment charge will not have any impact on the future operations or any effect on our liquidity, cash flows or compliance with the financial covenants set forth in our credit agreement.

With that, I'd like to turn the call back over to Lisa for some closing remarks before we open up to your questions. Lisa?

Thanks, Rohit. We are excited for 2020 and beyond as our larger contracts are now actively moving into the positive EBITDA phase that we expect will strengthen and drive our business in the mid- to longer-term. As a reminder, while many of our contracts have begun to turn profitable, there are a number that are still in the first 2 years where heavier investments are required. As we've previously announced, we are reiterating our full year 2020 revenue guidance of $170 million to $180 million, a projected increase of 16.5% at the midpoint and adjusted EBITDA to be between $12 million and $15 million. We are excited to continue pushing forward on our positive trajectory into 2020, and we plan on continuing to strategically invest in expansion across all markets.

We are excited about the long-term prospects of Performant and believe that we can achieve the $200 million revenue target in the future. As we look at driving continued sustainable growth beyond that number, we may choose to make investments in the business on the expense side. We should consider high return strategic investment opportunities even if that means sacrificing a near-term margin goal.

Lastly, we wanted to let our clients and investors know that as it relates to COVID-19 and other health ailments, we are following standard precautionary practices, and we're encouraging the adoption of good hygiene practices at all of our facilities with regards to ensuring the health and safety of our employees. Most importantly, we have extensive business continuity plans that are retested annually for a variety of scenarios, including one such as this.

With that, we'd like to open up the call and take your questions.

(Operator Instructions)

Our first question comes from the line of Brian Hogan with William Blair.

Lisa, my first question is actually going to be on leverage and your covenants. Obviously, you've had covenant waivers, I believe, that extends through the second quarter. But I guess, could you remind me on your -- how comfortable are you still staying within those covenant ranges, given your EBITDA guidance and basically, as I get to the quarterly cadence and your EBITDA? Obviously, you mentioned that there are some contracts that are in ramp-up mode. So should we expect maybe some negative EBITDA in the first quarter? Or is it still going to be positive going on?

No. I think we're expecting positive EBITDA every quarter, Brian, and especially coming out of a very strong Q4, where we had great operational momentum that we believe is carrying forward into 2020. I think as we sit here, we feel like we have really good results from operations and feel like every quarter is going to be a very -- a positive EBITDA quarter every quarter of 2020.

Now that said, obviously, this COVID-19 issue is evolving kind of almost every hour. So at this point, we have only probably a couple of contracts where we're sort of pulling back. But most, I would say, almost all of our contracts are still continuing to push forward at the same momentum. But with that said, I would imagine, as we think about the impact of COVID-19 on the entire economy in the U.S., if we have a deleterious effect as a result of this pandemic, I would think that our lender would be willing to work with us on any issues that arise out of that. It would be unreasonable for a lender or otherwise not to consider what the current economy is doing and the threat of the COVID-19. So operationally, we feel very good about it. But clearly, as we think about this pandemic, we just -- we don't know yet what the impact will be. We are obviously hoping it will be minimal. But it's just -- I think it depends on how long it lasts and what other guidance is provided by federal and local governments.

Sure. Have you seen any changes in behavior, if you will, at -- from -- as your outreach to -- in doing your work?

Well, not yet. And we're thinking this is a good time to find people at home in the recovery business because most people will be at home, but we are obviously monitoring the situation. And just in terms of impact to the business so far, we've -- obviously, none of our facilities has an issue, but to the extent that we have tried to take as many functions and operations remote in our health care business, now I think everyone is remote. And to the extent that we can do otherwise for other functions, we're clearly taking precautions to make sure that we keep our employees safe and our contracts continuing to run. So at this point, I would say no. But as you know, every time you turn on the news, it could change by the hour, and so we're very closely monitoring the situation. We have a business continuity team that has a standup call every day and a couple of times a day, if needed. So we're managing the situation very, very tightly.

Right. Appreciate that. You mentioned on the -- in your prepared remarks, the strength across the board across all your businesses. And I guess, I didn't see that the student loan placement volume was generally weak. So I assume some of the strength was coming from some of the subcontract business as well. But I guess, could you expand on, particularly where you're seeing strength?

Sure. Rohit, would you like to answer that question?

Sure. Brian, so in that regard, I think within student lending as we report the Guarantee Agency volumes, yes, those are declining and the related revenues are declining. That's something we've kind of always known coming and planned for. And we're seeing strength across almost every other recovery business line. So with consumer and commercial debts on the IRS contract, on our treasury contracts, state tax contracts as well as some of the newer opportunities within the premiere brand name are all showing quite strong and growing to counter that.

Sure. And then some of that treasury or IRS that was maybe -- I know fourth quarter has historically been a little bit the seasonal bump. Is that -- was that the case? Or is that kind of in line with expectations?

The answer would be yes to both of those. So there is usually a little bit of a seasonal bump in the fourth quarter, more so from the student loan market actually, which was experienced but also expected.

All right. Switching over to the commercial health care trends. It was a little lighter than I expected, but still positive and going in the right direction. I guess, can you discuss the pipeline there? And how is that building, and then just trends in that business?

Rohit, would you like to take that question as well?

Sure. So I think some of the strong commercial numbers that maybe not as high as expected had to do with some of the implementation issues with taking over for some clients in the coordination of business space. It's something that we've kind of gotten past now into 2020. So expecting strong results continuing going forward. And we're additionally expecting double-digit growth again within the health care markets, solely out of the existing client base let alone a robust pipeline that we're continuing to execute on. So we're feeling very strong and good about that market.

Interesting. And then from the CMS, particularly in -- focusing on the RAC, are you seeing them loosen up on anything there? Or has there been any change? Or what's the kind of -- is it just solid execution on there?

It's -- so in terms of the overall program rules, we have not seen a change yet. However, we still feel there's a lot of room for continued expansion within the current limits and the current cadence they allow. So it's been operational results, and we expect that will continue to carry us forward.

All right. Shifting over to expenses. I guess, how should we think about operating expenses going forward? As you're investing a little bit more in some contracts that are ramping up, the trend in the quarter was a nice -- under control that, pretty impressive, actually, given the jump in the revenues. So I guess, how should we think about operating expenses as a run rate going forward?

I would -- if I were you, I would think about them as stepping up slightly every quarter as we continue to expand a lot of our contracts as well as invest in future growth. I think where we ended the fourth quarter is probably a good starting point and an early increase from there as we're growing the business.

All right. And then one last one. On the bigger picture, and obviously, the markets aren't being super helpful here. But I mean, your interest expense is relatively high, your interest rate is to say, I guess, are there any opportunities out there to refi that debt as the -- as you start to look out into 2020 and 2021 in terms of EBITDA-positive? And I guess, any comments around potentially doing that?

Yes. I think -- yes, thanks, Rohit. Yes, I definitely think we're sort of seriously evaluating that opportunity, Brian, because yes, the interest rate is a little high. And as we look at sort of strong results as we head into 2020, we start to have -- obviously, we're going to delever here fairly quickly. So feel like there's some pretty good opportunity to refinance the debt. So we're definitely looking at that. We think, especially now where the -- I mean the market -- the debt market right now is, I think it's changing, obviously, for very favorable terms. So as we look out into this year, I think there's a strong opportunity for us to actually have a less expensive interest rate for sure, and we're seriously evaluating that opportunity.

Ladies and gentlemen, this does conclude our question-and-answer session. And now I would like to turn the floor back over to Lisa Im for any closing remarks.

Thank you, operator. Our hearts and prayers go out to all those who are impacted by COVID-19. Clearly, it's a serious issue. We just want everyone to know that we're thinking about those folks. We also want to thank our employees for their commitment and for bringing their best to Performant. We want to thank our clients for letting us serve them. And we want to thank our shareholders for continuing to support the growth of the company as we executed against our strategy, and we appreciate your being with us today. Thank you.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.