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Performant Financial Corporation (NASDAQ:PFMT)

Q1 2013 Earnings Conference Call

May 09, 2013 5:00 pm ET

Executives

Lisa Im - Chief Executive Officer

Hakan L. Orvell - Chief Financial Officer

Jeff Guzman - Investor Relations

Analysts

Paul Thomas - Goldman Sachs

Suzanne Stein - Morgan Stanley

Michael Tarkan - Compass Point

Edward Caso - Wells Fargo Securities

Robert Napoli - William Blair

Richard Close - Avondale Partners

Julio Quinteros, Jr. - Goldman Sachs

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Performant Financial Corporation’s First Quarter 2013 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, 09th of May, 2013.

I would now like to turn the call over to Jeff Guzman with Investor Relations. Please go ahead.

Jeff Guzman

Thank you, operator. Good afternoon everyone. By now, you should have received the copy of the earnings release for the Company’s first quarter 2013 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 described in the 'Risk Factors' section of the Company’s Form 10-K and other 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. The Company does not undertake any responsibility 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 tables attached to our press release.

I would now like to turn the call over to Lisa Im.

Lisa Im

Thank you, Jeff. Good afternoon everyone and thank you for joining us for our earnings call today. Our first quarter was another solid quarter for Performant. Today, we are reporting revenues of approximately $49 million in the first quarter, a year-over-year increase of 7.6%. Adjusted EBITDA in the first quarter was approximately $11.4 million. Adjusted EBITDA margin for the first quarter was 23%. Adjusted earnings per diluted share were $0.08 in the first quarter.

Before getting into the details of our first quarter results, I would like to provide additional color around several questions that have been raised in the last couple of weeks. First, the Medicare RAC recently processed. As you may know, the current CMS RAC contract is scheduled to expire in February of 2014. This past February, CMS issued a request for quote, or RFQ, with the original expectation of a response and award from CMS later in the second quarter. We filed our response to the RFQ in early April. We believe that we submitted a highly competitive bid and that our seven year relationship with CMS and our related experience of providing recovery services to identify a proper payment allows us to compete favorably. We also expect that our ongoing performance under the current RAC contract and established system utilization with CMS and related Medicare administrative contractors to be key factors in determining our continued service to CMS in Region A.

Under the original framework, CMS communicated to RAC vendors that they should stop sending new medical record requests to providers in late May ahead of the new contract award anticipated in June. We understand they are thinking on the transition plan from the current contract to the new contract and acknowledge that this transition process would result in a temporary interruption of our recovery efforts. We also expect this temporary interruption to have a greater impact on existing RAC vendors who do not win the same region.

On April 26, we learnt that a protest was filed by a current RAC vendor that alters this timeframe. This protest was accepted by the GAO which has up to 100 days or until mid-July to rule on this matter. A central argument to the protest is related to how recovery vendors would bear greater financial burden and a new contractor in the new contract due to their continuing responsibility for appeal cost under the existing contract, which the protesters argue creates an unequal treatment to bidders in the re-procurement process. As a result, we believe the timing of the new contract awards may now be delayed until the third quarter.

Regarding how this protest will impact the current contracts and the transition to the new contract, CMS has not yet officially commented. A number of possible scenarios exist. One, CMS could have the RAC vendors continue to operate under normal conditions on the current contracts until the protest is resolved. Two, CMS could communicate a new date on which they want us to submitting new medical record request to providers, creating a temporary transition period. Or three, CMS could stick to the May 22 date in spite of a potentially extended delay in the award of the new contract, which could create an extended period of downtime.

Under such a downside scenario, where our activities are suspended in May and we don't begin work under a new contract until September, we estimate that the potential impact to our 2013 total revenues could be in the range of $10 million to $15 million and approximately $5 million in adjusted EBITDA. However, based on the historical performance on the current contract, which returns approximately $600 million to $700 million per quarter to CMS, we believe that CMS will look to minimize the disruption of that recovery stream as much as possible and we expect that CMS will likely instruct the RAC vendors to continue to operate under normal conditions on the current contract until the protest is resolved, thereby replicating the original plan which would have involved only a short term disruption.

A second topic relates to one night stays. CMS has been sued by the American Hospital Association for denying any payments to hospitals that improperly provides patient care, or one night stays, when the appropriate level of care is outpatient care. The American Hospital Association would like its hospitals to receive the difference between Part A, or inpatients, and Part B, outpatient, payments without a time limit (indiscernible) and a law to provide us to bill for all outpatient services after his inpatient claim has been denied for lack of medical necessity.

In addition, a bill has also been introduced in the U.S. Congress that would also permit healthcare providers to revisit such claims of payment under Part B services without a time limit on the claim. In response, CMS has recently proposed a move that would permit healthcare providers to resubmit certain of these claims for payment for Part B services. This type of improper claim has accounted for a substantial portion of the claims identified under our RAC contract. However, it is still too early to tell how all of this is going to shake out.

For example, we don't know what claims may be eligible for rebilling or the timing for rebilling. We also don't know what penalties are going to be imposed as many believe that the rebilling will result in higher levels of improper billing which could actually benefit us. In the meantime, we are continuing to focus on these other types of improper payments.

Finally, on the topic of PIP hospitals, in January, CMS began processing a small portion of the PIP claims manually, and as a result, we recognized only a small portion of about $200,000 of revenues in the first quarter of 2013. CMS is working on implementing a permanent solution that we expect will be in place by the end of Q2 and we expect to be able to recognize all of our delayed PIP revenues during 2013. We'll discuss our guidance a little bit later but hopefully this should provide us some clarity on some of the other recent topics that have surfaced related to the RAC contract and their implications to Performant.

Let's talk about our student lending business. During the first quarter, student lending represented over 67% of our total revenue. Total loans placements were $1.7 billion during the quarter. We feel there are still a significant amount of defaulted student loans that are awaiting (indiscernible) by the Department of Education, and we expect that we should continue to see meaningful placements from the Department of Education for the remainder of the year.

Student lending continues to be a solid business and provides predictable revenue consistent with growth. Compared to the first quarter of last year, revenues from this market grew by 14.1%. We expect to see a strong growth throughout the remainder of the year as more borrowers take advantage of income based repayment option. We anticipated that the Department of Education will issue its RFP for the new recovery concepts in the near-term. While we are not in a position to speculate on the details, we are confident that our strong performance (indiscernible) every one of the past four contracts over the past 22 years will serve us well in being reselected as one of the vendors on the new contract.

Turning to our healthcare business, as we have discussed previously, our total net claim recovery volume for Q1 declined 14.8% compared to the first quarter of 2012. This decline directly correlates to the impact from Hurricane Sandy. As a reminder, because of disruption caused by Hurricane Sandy in October of last year, we were not permitted to submit requests for medical record or submit claims to healthcare providers in the states of New York, New Jersey and Connecticut for a 30 day period which ended December 7 of 2012, and providers that were located within designated federal disaster areas received this relief until January 6 of 2013, which reduced our net claim recovery volumes in the first quarter and pushed the recognition of certain revenues into the second quarter.

As mentioned before, our healthcare results in the first quarter only reflect a very small portion of revenue associated with PIP related recovery activity. As a reminder, PIP (indiscernible) account for approximately 20% of Medicare claims in Region A. In addition, another factor affecting our first quarter results was a temporary interruption during the quarter in our clients' claims processing that also delayed the revenue recognition. We expect to recognize these revenues in the second quarter of 2013.

Finally, with respect to activities in other markets, we continue to look for opportunities to expand within our current markets as well as seeking new opportunities to explore our technology enabler services platform and the recovery experience in new markets. We are still in the process of implementing the payment recapture contract that Performant was recently awarded by the Department of Education as well as executing our other engagements (indiscernible). At the federal level, we believe there are multiple opportunities similar to these that are being developed. Given our long-term success with the Department of Education and CMS, we believe we are well situated to capture these incremental growth opportunities as they arise.

We focus on capitalizing on two significant laws that were passed in recent years, The Patient Protection and Affordable Care Act or Obamacare, which was signed into law on March 23 of 2010, using the implementation of ICD-10 which will provide opportunities for penetration and expansion of traditional and new programs that would be on it; the Improper Payments Elimination and Recovery Act or IPERA, which was passed into law in 2010 and recently expanded in January of 2013. Through this law, we are able to leverage our experience, services, strong existing relationships, reputation and recently established partnerships and alliances to work with federal agencies charged with creating their own IPERA path forward.

Lastly, we are evaluating ancillary opportunities within existing customers as well as in new markets to leverage our expertise and technology. Our value story of enterprise integrity allows our team to target multiple audiences within a single customer. For example, at a health plan, we are not simply engaging claims management or cost-containment areas. Our technology and services enable us to target compliance, medical management, finance, accounts payable, all areas which require our powerful data analytics technology and recovery services to uncover areas, maximize revenues, contain costs and mitigate risks.

In just over a year, our pipeline has grown aggressively and we are expanding existing accounts. While it is a little early to announce the wins in the pipeline today, I will say that we have been proactively pursuing our growth strategies and expanding our business through a combination of organic cross-selling, customer penetration, strategic alliances, and opportunistic acquisitions. The number of opportunities and diversities and alignments of our pipeline to our strategy reflects a large and diversified market in need for the services and technology Performant provides. There will definitely be more to come in the future.

As it relates to our guidance, based on our current operating performance and expectations under a steady-state environment, we are reaffirming our revenue and adjusted EBITDA forecast of $252 million to $265 million and $81 million to $85 million respectively. These estimates of course assume that we are successful in maintaining our position as the Medicare RAC contractor in Region A and that our audit and recovery activities are not significantly impacted by the transition procedures adopted by CMS in connection with the contract re-bidding process. Should the transition procedures limit our ability to request additional documentation for providers from late May until September, we estimate that our 2013 revenues and EBITDA could be adversely affected in the range of $10 million to $15 million and approximately $5 million respectively.

With that, I'd like to turn the call over to Hakan who will now walk you through the financials. Hakan?

Hakan L. Orvell

Thank you, Lisa, and good afternoon everyone. As Lisa mentioned, revenues in the quarter were $49.4 million, an increase of 7.6% from the prior year period. The largest components of our revenue mix is student lending which grew by $4.1 million or 14.1% to $33.3 million compared to the first quarter of last year. First quarter placements were $1.7 billion, up 74.2% year-over-year. As a result of the increased placement volumes, revenues as a percentage of placement volumes were 1.91% compared to 2.91% in the prior year period.

The second largest component of our revenue mix, healthcare, decreased $1.8 million or 14.8% to $10.3 million compared to the first quarter of last year. Net claim recovery volumes decreased by $15.7 million or 14.8% to $90.4 million. Our claim recovery fee rate was 11.4% compared to 11.4% in the prior year period.

The reduced healthcare revenues in the quarter primarily reflected Company's inability to audit certain healthcare providers in the fourth quarter of 2012 following Hurricane Sandy, and as Lisa mentioned, to a lesser extent, a temporary interruption during the first quarter in claim processing by the Company's principal healthcare clients that delayed recognition of certain revenues until after quarter end.

Similarly, we continue to experience delays in recognizing delayed revenue from PIP providers. Of the estimated $6 million in delayed revenues related with PIP providers that we had at the start of the quarter, we recognized approximately $200,000 during the first quarter. As a reminder, we've already incurred expenses related to the delayed revenue and we're able to recognize these revenues, we estimate that over 70% would drop to our pre-tax earnings.

We believe that CMS is closely implementing a fix to allow automated processing of these things. However, until the data update is completed, CMS is utilizing a manual system to process these claims. We remain confident that the delay is mainly over and we anticipate that our work on claims by PIP providers will strongly contribute to our growth opportunities in 2013 and beyond. Revenues from other markets grew by $1.3 million or 25.1%, primarily as we continue to execute on the recently won (indiscernible) services contract.

Moving to our expenses, salaries and benefit expense was $24 million, an increase of 28.7% as compared to $18.6 million, while other operating expenses for the quarter was $18.9 million, an increase of $2.7 million. The higher operating expenses are consistent primarily with the growth of the Company's healthcare claim recovery capacity over the past year. In addition, the Company had expenses of approximately $1.6 million associated with its public offering completed in February of 2013, and these expenses are not deductible for tax purposes.

For the first quarter of 2013, our reported net income was $1.8 million or $0.04 per diluted share compared to net income of $2.5 million or $0.02 per diluted share in the prior year period. Adjusted net income in the first quarter was $4 million or $0.08 per diluted share compared to $5.7 million or $0.12 per diluted share in the prior year period. Adjusted net income remains above the preliminary estimate that we provided in April due to a calculation error. This resulted in a more favorable tax adjustment than we originally forecasted, although no impact on our effective tax rate.

Fully diluted average outstanding shares increased to 49 million shares in the first quarter of 2013, [we're expecting] (ph) the exercise of stock option. Our adjusted EBITDA in the quarter was $11.4 million compared to $13.7 million in the first quarter of 2012, while adjusted EBITDA margins in the first quarter of 2013 was 23% compared to 29.9% in the prior year period.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Julio Quinteros from Goldman Sachs. Please go ahead.

Paul Thomas - Goldman Sachs

This is Paul Thomas for Julio. In your annual guidance, are you accounting for any change in states that could be a part of the new Region A, and as a follow up, did you have to move regions, have you thought about what the impact that could be on 2013 revenue assuming there is no other disruption related to the protest?

Hakan L. Orvell

Yes, we have taken that into account. As we look at the shift however, as you know, the percentage allocation of national spend is still very close to what we currently have. We currently have 23% of the national spend, they're going to go to 25%. And as we look at the anticipated ramp-up of the new contracts, they are going to be later in the year, as we look at it as a revenue recognition part. So it is going to be more of an impact for 2014.

Paul Thomas - Goldman Sachs

Okay, thanks. As a follow-up, on student lending, were there any one-time catch-up payments in the quarter? The fee rate you got in the quarter looked pretty strong compared to what we would have expected given sort of the lump in volumes that arrived last quarter. Is there any acceleration going on because of income based prepayments or what's driving your improvement there?

Hakan L. Orvell

As we look at – that idea first of all was implemented in the starting of September of last year, so that is going to be something that would be a benefit to us as we look into the latter part of Q2, starting in the latter part of Q2. And then our anticipation on the fee rate, it came in at 1.91%, we expect it to be just north of 2% on a steady state going forward. So we are pretty much in line with what our anticipation is there.

Operator

Our next question comes from the line of Suzy Stein from Morgan Stanley. Please go ahead.

Suzanne Stein - Morgan Stanley

Can you just be more specific about your communication with CMS? Your comments seem to be a little more optimistic than what we have heard from HMS or PRGX, and I'm just wondering if you've actually had conversations with them about how this may play out or is it just that you are hoping that logic will prevail as far as the cut-off date?

Lisa Im

Sure. So, first of all, PRGX as you know is a subcontractor versus the prime, who are CGI, Connolly and HMS, I can't speak to where PRGX's comments are relative to what they are anticipating but believe that it is directly related to their status as a subcontractor versus the prime. With respect to HMS's comment, I think we agree that certainly there is a possibility that the award date could be delayed. We really kind of talked about three different scenarios.

The original intent of CMS was never to have a protracted gap in recovery, and again, I think the trend of recovery to CMS is growing strong double-digit. They're really on trends to look at about $1 billion of recovery per quarter, and historically about $700 million per quarter. So it is a very good program and we believe that similar to other ways that they have handled contract transitions and protests, where they have kept the contract running until the protest is resolved, that their original objective was to continue the – have continuity in the program. So I can't speak to conversations directly with CMS, I can tell you what their original objective was and the timeline in terms of document requests under the old contract was really designed again to have, to be very closed in to new contract awards.

Suzanne Stein - Morgan Stanley

Okay, and then can you give us a sense of what the timing is likely to be on the change in rebilling rule, when could that begin to impact your numbers?

Lisa Im

If the policy does change, and again there is quite a bit of pathway when it comes to policy changes, so it has to go down some sort of runway, but if the policy does stage, we believe that it would be a look forward and there will be a small impact in 2013, but we'd really be looking at more of an impact in 2014. Again, we reiterate, we're not really sure what that impact will be because it is yet to be determined, what will be allowed, what the time – will there be a time limit, filing requirements, so there are still a lot of moving factors that have yet to be more settled.

Suzanne Stein - Morgan Stanley

And just to be clear, the guidance that you gave for this year includes kind of a normal transition period between the contracts or does it not include any kind of disruption between the two contracts?

Lisa Im

It includes a normal transition.

Suzanne Stein - Morgan Stanley

Okay, great. Thank you.

Operator

And our next question comes from the line of Michael Tarkan from Compass Point. Please go ahead.

Michael Tarkan - Compass Point

Thanks for clarifying some of those healthcare issues. Can you just elaborate a little bit more about expectations around pricing under the new contract? You mentioned you submitted a highly competitive bid, I'm just looking for a little more color there around maybe how much may come in under the new contracts if anything, it would be helpful. Thanks.

Lisa Im

First of all, I want to tell you that we are not going to talk about a fee structure per se because in the event we have to resubmit our RFQ response, it would of course put us at a competitive disadvantage if we talked about fee structure. From a competitive fee standpoint, and again a bid standpoint, the program itself is so strong with strong recovery, there are nuances to the program including provider relationships and working with CMS and all of their constituents that we feel are important as CMS makes a decision about how to continue the program. So I don't want to speak more about pricing, Michael, and I know there have been comments around pricing from other folks in the state. Again, what I would suggest to you is, comments around from PRGX, they are a subcontractor, we really don't know what their model is in terms of operations, expense, but it is difficult for us to say where is the market in terms of pricing.

Michael Tarkan - Compass Point

Okay. And then I guess giving your full-year 2013 guidance, does that take into account what you have bid on the new contract, assuming a normal transition?

Lisa Im

Yes.

Michael Tarkan - Compass Point

Okay. And then just as a follow-up, you mentioned the potential September implementation based on the new contract, I guess given that the existing contract officially expires in February of 2014, is it possible that we have to wait until then for the new contract to start, and if so, are we talking about another $10 million to $15 million in revenue if we hypothetically got to that point?

Lisa Im

We don't believe we'll actually see that kind of again a drawn-out process. I think at this point it would be difficult to conceive of a program of this kind of value with that kind of a gap. So I think that February timeline, again CMS's original intent was to try to have the mobile asset, have a very orderly contract transition, which I believe is still their objective and we believe they are working towards that.

Hakan L. Orvell

And Michael, again just one other point to that part, I mean if this process should drag out to that extent, I think new contract will not start until potentially in February when the current contract expires, we would expect that we would then continue to operate under normal conditions, and again, then it would not be any impact on the guidance that we have given here as far as the transition into a new program.

Michael Tarkan - Compass Point

Understood, thank you.

Operator

Our next question comes from the line of Edward Caso from Wells Fargo Securities. Please go ahead.

Edward Caso - Wells Fargo Securities

Congrats on a solid quarter here. Can you update us on the seasonality? You've talked previously about Q2 and Q3 being much stronger given the PIP situation, the Sandy situation and so forth. Can you just give us some framework on the revenue and margins?

Hakan L. Orvell

Sure. As we look at it – and let's talk about student lending first, on the student lending side, as you may recall, we had an increasing trend in placements. So as you look at Q3 of last year, we increased our placements by, it went up to 1.3 billion. In Q1 as an example, it was only 1 billion. And then in Q4 of last year, it increased to 2.2 billion. So again as we look at the Q3 increase in placements, that will drive revenue to us nine months out if you're looking at Q2 of this year. Similarly in Q4, that strong pickup in placements which was very much driven by Department of Education is going to drive a spike in revenue in Q3. So that's on the student lending side. And then just furthermore as we look at Q1 placements of this year, it was also solid, it was at 1.7 billion, so again that would benefit us in Q4.

And then furthermore, as we look in on the healthcare side, as we talked about, we had a delay in revenue recognition related to Hurricane Sandy. That impacted I think Q1 and that moved also into Q2. And then we have the PIP backlog that we talked about last year that was, at the end of last year it was at $6 million. Again we would expect that to come through here in the Q2 Q3 timeframe. We are heavily weighted towards Q3 that that's going to drive again. So those are some of the key components for the spike in revenue in Q2 and Q3, expected spike.

Edward Caso - Wells Fargo Securities

Can you update us and give us some help with the quarterly pattern of the tax rate? I understand that the impact of the advisor fee that hurt your tax rate in Q1, obviously revisit that again in Q2, but what was the sort of the tax take in Q3, Q4?

Hakan L. Orvell

Sure. As we look at the tax rate, I guess that repeats on Q1, that came in at around 50% and that was very much impacted by the non-deductibility of the secondary offering and the expenses associated with the secondary offering. Absent that, we would have been right around 40%. We are going to have a similar situation here in Q2 with a similar amount of cost that was part of the secondary offering that we just did, and you need to kind of take that into account. As we look out to the rest of the year, we would anticipate for these to be right around 40%, is where we see our effective tax rate being, absent any other – as normal situation or absent anything out of the ordinary.

Operator

(Operator Instructions) Our next question comes from the line of Bob Napoli from William Blair. Please go ahead.

Robert Napoli - William Blair

I'm sorry I missed part of the opening comments but the trend on the Medicare business, in April and the recovery I guess from the decline from Hurricane Sandy in the first quarter, can you give a little more color on that?

Hakan L. Orvell

Sure. So again as we look at Hurricane Sandy, we were unable to request medical records or submit claims findings to provide us for a period of 30 days and then up to 60 days for FEMA designated providers. Again the impact of that has, and that's the primary reason that you see a decline in revenue from quarter ago, from Q4 to Q1, that revenue we expect to flow through and be able to recognize during Q2.

And then in addition we have the PIP revenue is in backlog. We were able to recognize just a very small portion here during Q1, I guess based on timing. Again we recognize revenue once the payments are done or the offsets are done. So that's something that we have in our back pocket right now going into Q2 as well.

Robert Napoli - William Blair

Okay. And then can you give us a break out of the placement volume mix and the student loan business between the GAs and Ed?

Hakan L. Orvell

Yes, I can give you an approximate number. As we look at it, Department of Education is about $0.5 billion and the rest is in the GA and other space.

Operator

Our next question comes from the line of Richard Close from Avondale Partners. Please go ahead.

Richard Close - Avondale Partners

Thank you for all the information. With respect to the PIP, for some reason the Medicare RAC, you lose their contract and you haven't been able to recognize the PIP revenue, what happens to that? I mean, that doesn't necessarily go away at all.

Lisa Im

No, Richard, that will actually process in the contract transition, in the wind down of the old contract. Again, this is what we've already done and submitted. So this is a part of the wind down of the old contract.

Richard Close - Avondale Partners

Okay, great. I just wanted to be sure on that. And then, as we've been looking at the Part A, Part B re-bill, there's the interim rule that I guess we are operating under but then there is the proposed rule, and on the proposed rule, it doesn't look like – it looks like there is a one-year data service, yet the re-bill within that one-year data service, and so based on that, the way it's written, it seems like it wouldn't be that much of an impact if that was adopted in its form as currently being proposed. How do you guys view the proposed rule?

Lisa Im

What you're saying is actually correct. There should be a timeliness requirement on the re-bill and the OMB has quoted based on a 12 month timeliness window. So given that, there wouldn't be much in the way of impact.

Operator

(Operator Instructions) And we have a follow-up question from the line of Richard Close from Avondale partners. Please go ahead.

Richard Close - Avondale Partners

Okay, sorry about that, I would've kept on asking. Can you give us an update on the Department of Education contract that you – I think that was awarded in February, what you think the ramp is and any additional insight you can give in terms of now that you are beginning to look at that more closely?

Lisa Im

We're actually still in the process of this implementation, so just to give you a sense of where we are in the process, it's still pretty early on, we are still in the process of exchanging data files. So at this point, Richard, it's a little bit tough for me to articulate which is why I think we want to wait until we are a little further along to comment about that contact, but we are underway

Richard Close - Avondale Partners

Okay, and with respect to the guidance, is there any contribution in this year's guidance associated with that contract?

Lisa Im

Very, very minimal.

Richard Close - Avondale Partners

Okay great. Thank you.

Operator

Our next question comes from the line – a follow-up from Michael Tarkan from Compass Point. Please go ahead.

Michael Tarkan - Compass Point

Just a quick one. On the education side, are you using income based repayment now to rehabilitate anything from the GAs or is that still just Department of Education?

Lisa Im

It is still largely Department of Education with just a very little usage from the other channels of federally guaranteed student loans.

Michael Tarkan - Compass Point

Do you expect that to change going forward, are you hearing from them that they are allowing you to use that more going forward?

Lisa Im

There is some openness to the IBR process that we are seeing in the GAs, but again I think given where we are – again, I think if you were to ask if this is the fifth year of the recession and a lot of the loans, as you recall, direct loans are now being made through the Department of Education. So we actually see clearly a much broader adoption by the Department of Ed.

Michael Tarkan - Compass Point

Okay, thank you. And then I guess as a follow-up, the fees under rehabilitations now, those were cut 13%, is that correct and that was as of March 1?

Hakan L. Orvell

That is correct, yes.

Operator

We have a follow-up question from the line of Julio Quinteros from Goldman Sachs. Please go-ahead.

Julio Quinteros, Jr. - Goldman Sachs

One quick follow-up, on the CfBT report that was published last night and some of the requests in there, some of the recommendations that they had in there, any read across from you guys if you had a chance to look at that and if there is anything in there that is worth pointing out?

Lisa Im

We took a quick look, again largely related to, specifically related to private student loans and that's really not a big market for us. One of the interesting points that they make is on using private capital to help fund federally guaranteed student loans which frankly is potentially another form of the public private partnership that used to exist (indiscernible), just in a different form. So we are very interested and continuing to follow their comments on that particular initiative.

Julio Quinteros, Jr. - Goldman Sachs

So nothing direct as far as your business is concerned then?

Lisa Im

No, nothing direct.

Operator

At this time, I am showing no further questions in my queue. I'd like to turn the conference back over to Lisa Im for closing comments.

Lisa Im

We want to thank you for being with us again today and appreciate all of your focus on our business, and we look forward to continuing our conversation with you over the next quarter. Thank you again any much.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation. At this time, you may now disconnect.

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