Performant Healthcare Inc (PHLT) 2024 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Performant Financial Corp third quarter, 2024 earnings conference call at this time.(Operator Instructions)

I would now like to turn the conference over to John Bozzuto, Head of Investor relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. By now, you should have received copy of the earnings release for the company's third quarter, 2024 results. If you have not, a copy is available on the investor relations portion of our website. Joining me on today's call are Simeon Kohl, Chief Executive Officer and Rohit Ramchandan , Chief Financial Officer.

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 nongaap 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 Simeon Kohl.

Thank you John. Good afternoon everyone and thank you for joining us for our earnings call. Earlier this afternoon, we reported third quarter results which were highlighted by 6% growth in health care revenues compared to the same quarter of 2023 and positive adjusted ebita of $2 million. Our team continues to deliver on our mission to reduce payment waste and abuse in the health care system. I'll begin by sharing our operational accomplishments, followed by Rohit who will walk you through our financial results.

In the first nine months of the year, we successfully capitalized on market opportunities, advanced our organizational transformation and expanded our technology footprint all while scaling a record number of new contracts. This has been achieved despite several challenges in the health care industry as a disruptive player in the payment integrity space. Our client centric philosophy remains the primary catalyst to growing our market share.

In the third quarter. We implemented 12 statements of work primarily with existing commercial clients who continue to purchase additional services from performance.

Year-to-date. We've implemented 32 programs that we currently expected to deliver between $13million and $14 million of annualized revenue at steady state.

Our journey began with our first health care contract with C MS, which established our strong reputation in the industry. Since then, we've expanded to serve the majority of the large largest commercial payers in the country, albeit still with a small wallet share. We've also carved out a solid foothold in the middle market payer space by staying laser focused on meeting our clients where they are and partnering to expand their payment integrity efforts.

While the commercial market remains our largest growth opportunity, we've experienced some delays in our sales and implementation cycle. We believe these delays are largely due to slower decision making resulting from the change health care breach earlier this year. As we've discussed previously, its indirect impact has affected the market but we remain confident that our strong compliance and security credentials demonstrated by our rigorous controls which are regularly tested by CMS and our commercial partners will continue to reinforce our commitment to safeguarding client interests and ultimately help to increase market share over the long term.

I am happy to report that our rack region two implementation which began approximately a year ago continues to scale well, helping to counter the election related tamp down in our overall rack auditing business. We are excited that the end of the election cycle is upon us in the hope of moving past this distraction.

Our other federal contracts are performing to expectation. Rounding out a continued strong partnership with C MS and its parent organization. HHS.

Fortunately, our diversified base of clients has allowed us to achieve our year-to-date revenue targets. Despite the macro challenges, looking ahead, we anticipate C MS will issue RFPS for rack regions 34 and five by the end of the year.

As the current contractor for region five, we expect CMS to initiate the standard contract wind down process leading to a decline in work and revenues associated with this contract in early 2025. Regardless of the rfp's outcome, rack regions three and four which encompass the western and southeast portion of the United States present potential opportunities for performance to expand our footprint with C MS. And we are carefully evaluating our options as the procurement nears turning to the State Medicaid market. We've recently made inroads into this space which we estimate to be a 3 to $500 million annual revenue opportunity across both audit and TPL services.

In early September, we were excited to announce the tentative award of the New York State recovery audit contract. This award is significant for three key reasons. First, the award was made based on overall value with performance, technical qualifications being the primary factor behind the award. Second, I'd like to highlight that this is the second time New York has awarded performance the R opportunity following a protest from the incumbent after our initial award in 2023 which led to the RFP being reissued. This reinforces our ability to successfully navigate and withstand protests when replacing a longstanding incumbent, both at the federal and state level.

Finally, New York boasts one of the largest and most sophisticated Medi Medicaid programs in the country. Our entry into this market has been both strategic and deliberate with years spent expanding our product offerings, refining our methodologies and positioning ourselves to effectively meet the needs of state Medicaid agencies, secure performance. New York Rack Award is a significant achievement and should resonate across the industry.

We're excited about the anticipated contract start in early Q2 2025 which will provide us with the opportunity to demonstrate our capabilities in a state market. Eager for a fresh approach.

Staying on the state market in Q3, we sponsored the NPI conference which gave us an opportunity to hear from many State Medicaid programs to better understand current gaps for those unfamiliar NPI stands for the National Association for Medicaid program integrity and includes representation from ALL50 states.

Given that this market has primarily been served by a single program integrity vendor for decades. It was encouraging to receive direct feedback from state stakeholders on how performance can differentiate itself in the marketplace, gaining market share and expanding our influence within the payment integrity industry was our primary goal. When we transitioned to a pure play health care company.

In 2021 we achieved this by recruiting influential leaders from payers providers, vendors and government organizations. Each contributing their unique expertise to support our vision and reinforce our position in the payment integrity industry, our growth and success since then speaks for themselves. And our team remains focused and committed to achieving either even greater achievements in the years ahead.

As I look ahead, the next phase of our organizational transformation is centered around scale to innovate, one of our four core pillars alongside client Centricity, ownership, culture, and operational excellence, scale to innovate is a theme that is woven into the very fabric of our organization.

Importantly, we now have company wide initiatives that support this theme through our focus on scalable infrastructure and workflows particularly as part of project tour. We are strategically positioning ourselves to drive to drive greater innovation and value for our clients while also advancing our margin expansion goals.

Technology has always been central to scaling capabilities. We've developed a world class data engine and recently integrated natural language processing technologies to enhance both our solutions and scalability.

I'm pleased to announce that we've successfully incorporated the assets from our recent acquisition into our technology stack and are now optimizing it for our work flows with plans to deploy it across our broader client and product suite.

Our commitment to a data driven approach remains unwavering and this thoughtful integration is a key part of that strategy.

Our goal is to equip our auditors with cutting edge tools that efficiently address the payment, waste and abuse burdening our health care system.

Finally, amid our ongoing business transformation and following our expansion into the State Medicaid market, we have made the strategic decision to reduce services within the customer care line of business. This decision is guided by two main considerations.

First, while we have successfully managed our customer care revenue to a positive margin contribution, this industry has experienced significant volatility due to regulatory and oversight changes that have continued to make it difficult to effectively plan and operate.

Second, it aligns with performance strategy to concentrate on the health care payment integrity market, which we believe offers the most effective path to achieving long term profitability and sustained growth. We believe focusing entirely on this health care market opportunity continues to be in the best interest of our shareholders. Rohit will dive into some of the financial updates and implications associated with de emphasizing these services.

Before I turn it over to Rohit, I want to take a moment to express my gratitude to all our employees. Your dedication and hard work have been the driving force behind our success, particularly as we, as we have collectively navigated a transformative period for our organization.

This transformation fueled by technology and our relentless pursuit of innovation has not only strengthened our operations but also positioned us to capture significant market opportunities.

While this year has been atypical due to the impact of increased security breaches and the conservatism surrounding the election. We have successfully managed the business to maintain guidance with our in our range. Despite these challenges, we have fulfilled our commitments, showcasing the resilience and adaptability of our team and business strategy with the momentum we've built and the exceptional team we have in place. I am confident in our ability to continue delivering strong results and creating long term value for our stakeholders. With that, I'll hand it over to Rohit Ramchandani, our Chief Financial Officer for a discussion of the financials. Rohit.

Thanks SAM another solid quarter of results. Amid amidst all the uncertainties from this past year in the third quarter, 2024 our total company revenues were 31.5 million which included health care revenues of$ 30.3 million delivering year over year growth of five and 6% respectively.

Our customer care outsourced services business accounted for $$1.2 million of the revenue during the quarter. A decline from the previous year.

As Sim mentioned, we are adapting to reduce services in this market while this line of business was projected to generate approximately $7 million in annual revenue. It's estimated impact on performance bottom line has always been minimal.

As SIM mentioned, the continuous tumultuous changes in expectation have made this market difficult to plan for and operate in with the decision to pull back the run rate revenue for the remaining services in this line of business in the quarter ahead is expected to be less than a quarter of previous expectation.

There will be corresponding impacts on near term margins. But again, as SIM mentioned, we anticipate those will be minimal and have no impact on our overall margin expansion strategy.

Health care remains our sole growth strategy and we remain excited about the long term prospects of this business. Our third quarter health care revenue grew 6% year over year and through the first nine months of the year, we've grown 12% compared to the prior year period.

These health care results continue to demonstrate our ability to gain market share and scale new opportunities within health care. Our claims based business also known as claims auditing led the way with revenues of $14.2 million in the quarter.

Our claims based business has grown over 30% both in the third quarter and through the first nine months of the year. When compared to the prior year period.

Once again, both our government and commercial clients contributed to this growth. In particular, our commercial claims based portfolio showed strong kps helping to offset the impacts from election related tamp downs in the governmental rack programs eligibility revenues for the quarter were $16.1 million representing a decrease of roughly 12%. In comparison to last year.

In the third quarter of 2023 we mentioned a large implementation which resulted in meaningful initial revenue as a result of a back sweep leading to a known difficult comp year over year for eligibility revenues.

We currently do not see any meaningful indication of weakness in this market and we continue to expect growth both in the near term and long term.

And though admittedly not the best way to analyze our business, I do note 17% sequential quarterly growth in eligibility revenues as we think about 2024 thus far compared to the previous year, our commercial clients are scaling well and slightly offset by our mature relationship with C MS MSP. Now on its second CRC contract, a portion of our commercial eligible success is stemming from a further enhanced product suite. As a result of some of the early achievements of project touring.

As we look toward the building blocks of future growth, we continue to build off the momentum of our record commercial implementations. In 2023 we have implemented 32 programs year-to-date which collectively currently are expected to deliver$ 13 million to $14 million in annualized revenues at steady state.

We are encouraged by the high volume of programs amongst new and existing clients, particularly considering how sticky these opportunities can be.

While these are slightly below internal expectations, we are encouraged by the continued wins traction. As SIM mentioned, clients are balancing other priorities and pressure testing their information security posture following the change cyber breach. Earlier this year, we still currently expect our 2024 implementations to clear the $18 million hurdle. We set an estimated annualized revenues from last year's implementations in spite of these external factors, 15 to operating expenses. These represented $33.7 million in the third quarter or roughly$ 3 million ahead of the prior year. This was primarily driven by increased spending to scale implementations it investments related to project touring in our acquisition and investments in our sales and business development teams that we discussed earlier this year.

We are encouraged by all of these investments in the road map of project turing including its early indicators of proving out the ability to drive incremental margin gain.

With that, we are pleased to report a positive adjusted ebita of $2 million in the third quarter, approximately flat to the prior year period as expected.

Achieving this alongside the increased investments in 2024 compared to last year was no small feat. And I'd also like to thank the performing team members for all their contributions to this achievement.

The nine month year-to-date just the deduct comparison is also showing well at roughly $2.5 million ahead of the prior year.

We've talked about remaining focused on these operational efficiencies without compromising our opportunity to expand top line growth. A great example of top line growth is the New York State rack win.

I've previously talked about how government opportunities will have a stair step function in revenue due to their size and immediate scope. We believe at steady state, the New York Rack Contract can indeed generate double digit millions in annual revenues.

We are hesitant to provide a more definitive range until we can work more closely with the New York only team to understand the specifics of their program scope and implementation. Something that we've begun to do now, we will endeavor to provide updates as this implementation progresses with the support of our $25 million credit facility. With Wells Fargo, we strategically managed to a lower cash balance and draw on the facility as needed. We remain focused on managing our business to support strategic organic investments and meet ongoing working capital needs for implementations within our current capital framework. As we approach our goal of self sustaining cash flows.

Reflecting on the first nine months of 2024 performance has executed on our operational initiatives to drive efficiencies. We've scaled new and existing clients. We've implemented new opportunities and we were awarded the New York State contract for a second time, opening the doors to a new state Medicaid market for performance.

We have executed on what we can control. We've successfully navigated what we cannot and I'm so proud of the team and their efforts to get us here.

As been discussed. There are some industry challenges that have impacted our commercial clients, decision timing and conservativism within our government clients. Due to the tumultuous election season, we do find it prudent to continue articulating some of these less predictable market factors that directly and indirectly impact our business. They'll remain very strongly positioned with our overall portfolio of client relationships with that. We are pleased to reiterate our guidance for 2024 healthcare revenues to be in the range of $117 million to $122 million. And for the full year 2024 adjusted EBITDA to be in the range of $4 million to $5 million our ability to deliver within the range of goals established early in the year. In spite of industry challenges continues to make me confident in our position and approach accordingly. We will continue our efforts to make investments to improve our efficiency and to support the scale and long term growth of our numerous contract wins.

Operator, would you please open up the lines for questions?

Ladies and gentlemen, we will now begin the question and answer session.(Operator Instructions)

Your first question comes from the line of Kyle Bauser from B Riley Securities. Please go ahead.

Great, Isin Rohit John, thank you for taking my questions here.

Maybe I'll start with the state business. Medicaid. So nice New York contract win. That is set to begin early next year, I think in April and you mentioned at steady state, this could generate the kind of double digit millions, which is great. Can you, you know, given this is a new opportunity set and you're just starting this new vertical, can you talk about any expectations on how long it might take to kind of hit steady state and, and operationalize that contract?

It's a Khol Thanks. As we stand today, I think we anticipate it will follow generally the the normal course we typically describe with commercial clients and other of that 2 to 3 year ramp cycle to a full steady state. That being said, we, will update that as we progress forward as if we do end up with a more motivated client similar to what we experienced a bit on the implementation with rack region two, there could be avenues to compress that which we'll certainly be looking to tackle, but just don't know today.

Yeah, Kyle and I think just add on one add on to that is if you think about our solution suite and ultimately our product offering all this is kind of a new market state based market for us. We have spent a significant amount of time and I think it was a big factor of the of the win in New York in terms of our qualifications, working with large National Medicaid Managed Care plans. So, you know, our product offering absolutely applies and we have a significant amount of experience. And so a new market for us, but not in terms of our, our experience and our, product suite, in terms of how we think about applying it.

Got it, appreciate that and maybe just sticking on, on this topic. And, and maybe this is a little bit of an unknown as well. But do you expect the margins to kind of be similar at steady state to your existing federal and commercial business? And then part two of that is s you mentioned getting some great feedback at NPE.

And how performing can differentiate from the current marketplace of any specific color on, gaps that performing can address what would be appreciated?

Yeah, sure. Why don't you take the first one and I'll, tackle a second. Exactly.

Yes, on the margin front. I mean, the quick answer is yes, we, do anticipate it to be a similar margin profile, some of our other opportunities similar to how we've talked about some of the C MS programs, you know, government typically gets a better fee rate, but then the efficacy of our results turning into those dollars is typically higher with government contracts. So we expect it to net out to similar to what we currently have in the portfolio.

Yeah, and then feedback Kyle, that we're hearing from, from other Medicaid agencies, the directors, etcetera. Really is, is frankly quite similar to another win theme that, that we had in New York. And, and that's just what performance brings to the table in terms of innovation. As I shared in my prepared remarks, you know, this has been an industry that's largely been served by a single program integrity vendor for the last 10-15 years. It's really taken a cookie cutter approach. And as we've shared consistently performance really looks at, at everyone's business quite uniquely.

So whether it's a large national plan or regional payer, a government entity, etc, we believe that there has to be more customized approach available to address just the particular needs of those particular markets. And so, we talked a lot about innovation.

It was something that New York State built into part of their evaluation to bring things to the table that they didn't, they weren't aware of in terms of how we might be able to move the program integrity needle. And so that was something that again, I think was a big part of the win theme for us in New York State and something that's been resonating as we've talked to other Medicaid directors around their future plans.

Great, appreciate that call. Maybe if I could just sneak in one more in terms of the commercial side of the business, you had 32 implementations year-to-date compared to, you know, 41 last year and 21 the year before and 23 and 2021. Do you have a number of active programs in place since presumably some of these projects that have been completed? Thank you.

We don't have a sort of disclosed number of active programs, but, and if you're tracking, you know, as you mentioned and related to those years of, of mentioning how many we've been adding and, and the fact that we generally haven't lost a client, you know, that number is certainly 100 plus in terms of number of programs across the board and growing, which we're excited to see.

Sounds great. Well, thanks for taking my questions and and for all the updates here.

Thanks Kyle.

Your next question is from the line of Jacob Stephan from Lake Street. Your line is now open.

Hey, good afternoon guys.

Thanks for taking my question.

Maybe just focusing on some of the, you know, sales cycle delays that you guys have talked to on the commercial side. You know, kind of, what point did you start to see some of these delays was this, you know, recently? And then maybe if you could just kind of help us think about what you're seeing at the, you know, a month into Q4 here.

Yeah, happy to address that. That's a good question. So we've seen it for a little bit now, certainly following the change, you know, the change data breach, I I think, you know, more and more as payers have become a bit more cautious, you know, in terms of security. So in some cases, led to kind of a more comprehensive security views and that's for both new and existing vendors. And so as a result, decisions on a few of our pipeline opportunities have been delayed and we've also seen some implementations have kind of been put on hold as the payers just take their time to kind of complete the expanded reviews. Jacob, we definitely see this as temporary, however, and don't have any concerns in terms of its long term impact on our relationships with existing clients or current prospects.

And in many ways, it's important to note that that as a government contractor, we are held to an exceptionally high standard when it comes to security framework and controls and you know, look, no doubt that some of the delays are a bit frustrating. We've we've been able to absolutely manage them through is as it's mentioned, but it's actually provided us with a valuable opportunity to kind of demonstrate just just how robust our security credentials and controls are. And, and we're convinced this is going to further reinforce our competitive advantage as and and serve as yet another kind of key differentiator for us as we move forward.

Okay. That's helpful. But it kind of just one more around kind of the same topic here. Do you see any kind of difficulties filling up, kind of, you know, the top of the funnel? It sounds like a lot of the decisions were just delayed. But you know, what is the, you know, kind of top of the funnel look like? And you know, customers still interested in, you know, pursuing things just initially?

Yeah. No, absolutely. Just no impact to the top of the funnel. Just, you know, a a somewhere in the, you know, in the sales cycle where we had anticipated we'd be getting close to a decision, you know, you have a few opportunities where, where those have been paused and we saw, you know, similar with some of the implementation just to allow the payers to kind of complete those expanded reviews. And I think as we talk about the pipeline in general, look whether whether a lowered stars rating increased utilization or decrease in payers kind of Medicaid population as a result of the the recent redetermination process.

Now these are all our headwinds to payers bottom bottom line which which in turn, in many cases, you know, creates potential opportunities for cost containment vendors like performance and we're absolutely seeing the same in context of a of a very healthy sales pipeline.

Okay?

Just last one for me, you know, you guys mentioned rfps going out for 34 and five. Obviously you guys have five.

What is kind of the, you know, size differential look like between three and four. And you know, how many people could this be to the top line?

Yeah. You know, I don't think we disclose those specifically, but just to give you some context. Rack region four is a 16 state region that includes California. And comparably rack region three is, is an eight state region. I think one of its primary states is Florida. So I think historically, if you just go look at the figures, Rack region four is probably one of if not the largest Rack A&B region. And then Rack Region three probably somewhere close to our, our regions, one or two for context.

Okay. Got it. Very helpful. Appreciate it guys.

Sure.

Your last question is from the line of George Sutton from Craig Hallum. Please go ahead.

Thank you. Sim, you had mentioned the success you've had in beginning to work with many of the large commercial payers. But at the same time, you know, you start with a small market share. Can you just walk through what you anticipate to see with some of those larger players? What kind of market share opportunities exist for you over a reasonable period of time?

Yeah, look as thanks George, as we've said, even in our prepared remarks, right? We we continue to do very well with you know, all types of payers across the spectrum certainly have a significant number of the largest payers in the land. We've talked about all of these implementations, but we still think we have a very small percentage of the of the wallet share if you will, with those large payers, we have demonstrated over and over. I don't have the particulars here. But as ro it talks about those, you know, 100 plus whatever it is, programs, many of them are part of our land and expand strategy. And so, while, you know, we certainly are excited about the mid tier opportunities, we may get more opportunities out of the gate when we sign up those for more comprehensive offerings.

But we have demonstrated in every single one of our national client relationships that we have the ability to, to win additional business. And I think that's underscored by the fact that this quarter with those implementations that we talked about, the majority of those are with current clients. And again, you know, to, to us, while we like to increase logos, etcetera, many times, just seeing that you have the these these current existing clients continuing to expand, I think just underscores you know, our capabilities because look in some cases, we're bringing some net new capability to the payer.

But in many cases is we're taking share from some of the very large established incumbents. So whether it be on a federal space with C MS and the Rack program taking the largest State Medicaid program in New York or taking share in these national payers. We we're taking them from the, the the key established incumbents out there. So again, further indicative of just how performing can differentiate itself in terms of our offerings.

So you mentioned distraction relative to the election cycle, which I completely understand, can you walk through for us? What some of those distractions are that now get removed and how quickly do you think they begin to work to your favor?

Yeah. So, I mean, let me first say this because I've got a lot of questions on this, right? I think the change in administration, you know, you could certainly have an impact on, on C MS priorities and, and policies and certainly including the Rack Program.

It's, it's a little too early to tell and to predict any specific changes and we'll be monitoring that very closely for any early signals. But at this point, don't, don't have, have anything concrete. But as we said, and I think George, you point out here, you know, the Rack Program placed such an important role in safeguarding the Medicare Trust Fund and as I highlighted in my prepared remarks, right, we're, we're relieved to have this election cycle behind us and it, and it absolutely should help address some of the conservatism that we've seen over the past last few quarters. And to answer your question specifically, George, look, you know, this is a critical program for C MS.

No different from any large cost containment program in another agency. You know, from time to time you your, you know, intra year, your, your challenge and having to make some, some tough decisions sometimes on volume, sometimes on, you know, a push back that you might have from, from a lobby organization or a particular large provider with, with a particular topic, etcetera. And we've seen it before. It's not unique to this particular cycle.

It's, we've seen it before that during a, a election cycle, some of those challenging situations get kind of put on the back burner until the kind of cycle gets, you know, completed and closed. And so we've just labeled that as a more conservative approach. And so all of that in aggregate, I think our, our comment that we put in terms of tamping down the program, you know, it hasn't, has had an aggregate impact on driving volume ultimately. And so, I don't think it's going to change overnight, but we certainly do believe that, you know, as the new administration gets its legs under, there'll be a new, I'm sure HHS nominee, the secretary that'll be nominated, you'll see some of those slowdowns, etcetera. And then, you know, we're just excited about people getting back to work to support the Charter of the Rack Program to safeguard the, the trust fund.

Great. And last for me, you mentioned you have now integrated records one into your platform. I'm curious because that's really a cost centric benefit that you should start to see. When would we start to see those impacts flow through down to the EBITA line?

Sure, Rohit you want to talk about.

Yeah. So I think as part of the, the guidance will endeavor to put out in the beginning of next year, you'll see some of the margin expansion in our 25 expectations as a result of some of those early pieces. And I think you'll really start seeing that increment up in 26 and 27 when a lot of those projects come to fruition and on the the records one integration, right? I think we're pretty excited to have that technology now fully in our ecosystem. So we can actually start plugging it in kind of to each client and really seeing those games.

Got you. Great guys. Thank you very much.

Thanks George.

Thanks, sir.

Ladies and gentlemen, there are no further questions. This concludes today's conference call. Thank you very much for your participation. You may now disconnect.