Performant Financial Corp. (PFMT) CEO Lisa Im on Q2 2016 Results - Earnings Call Transcript

| About: Performant Financial (PFMT)

Performant Financial Corp. (NASDAQ:PFMT)

Q2 2016 Earnings Call

August 4, 2016 5:00 PM ET

Executives

Richard Zubek - Investor Relations

Lisa Im - Chief Executive Officer

Hakan Orvell - Chief Financial Officer

Analysts

Operator

Thank you for standby. This is the conference operator. Welcome to the Performant Financial Q2 2016 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Richard Zubek with Investor Relations. Please go ahead.

Richard Zubek

Thank you, operator, and good afternoon, everyone. By now, you should've received a copy of the earnings release for the company's second quarter 2016 results. If you have not, a copy is available on our website www.performantcorp.com. Today's speakers are Lisa Im, Chief Executive Officer; and Hakan Orvell, Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call including our financial guidance are forward-looking statements. These statements are subject to risks and uncertainties including those described in the company's filings with the SEC. Actual results may differ materially from those described during today's call. In addition, all forward-looking statements are made as of today and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.

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

Lisa Im

Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. Today, I'll provide you with an overview of our operational results and update you on the procurement status for the awards with the Department of Education and CMS. Then, after Hakan walks you through the financials, I'll provide additional thoughts on 2016.

For Q1 2016, we reported overall revenues and adjusted EBITDA of $38.1 million and $8.9 million, respectively. Compared to prior year, revenue was lower by $3.2 million, but adjusted EBITDA was $500,000 higher due to lower operating expenses. This is primarily attributable to our active management of variable costs as we wound down Department of Education resources, post April of 2015, when we stopped receiving student loan placements from the Department of Education.

As we look specifically at our key markets, total student lending accounted for revenues of $28.8 million, which is down from last year by $2.2 million. On the Department of Education procurement update, the complete RFP responses were submitted at the end of February. At this time, there are no commitments from Department of Education on when the contracts would be awarded, start or how many vendors they will select.

Healthcare revenues in Q2 were $3.4 million, of which the Medicare Recovery Audit Contract contributed $2.3 million, down from $3 million in 2015 as we work through reduced scope. Commercial healthcare revenues of $1.1 million were $1.1 million below prior year. As it relates to CMS Medicare Recovery Audit Contract, the RFP was released on April 25 with a due date of May 24, and CMS has indicated that it expects the contracts to be awarded and start during the summer of 2016. There is no further update at this time. Revenues from other operations were $5.9 million, up slightly by $900,000.

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

Hakan Orvell

Thank you, Lisa, and good afternoon, everyone. Today, we're reporting results for the second quarter with revenues of $38.1 million, net income of $1.5 million or $0.03 per share, and adjusted EBITDA of $8.9 million.

Beginning with our student lending business, revenues totaled $28.8 million, a decrease of $2.2 million compared to the second quarter of last year. During the quarter, the Department of Education accounted for $7 million of revenues while Guaranty Agencies generated $21.8 million. These amounts represent a decline of $3.5 million, an increase of $1.3 million respectively when compared to the second quarter of 2015.

The decrease in our student lending revenues is largely a reflection of the continued delays in the Department of Education contracting process. And that we haven’t received any new student loan placements from the Department of Education since April of 2015. While we remain optimistic, we have not heard any update regarding the timing of when the new contract will start up and when we might expect to receive new placements. We would expect our Guaranty Agency results, we again benefited from strong placement volumes that we received in the first and second quarters of 2015.

Student loan placements during the second quarter of 2016 totaled $1.3 billion, down from $1.7 billion in the second quarter of 2015, although, placement volume from Guaranty Agency clients were up 24%.

Our healthcare revenues in the second quarter were $3.4 million, compared to $5.3 million in the second quarter of last year. Revenues from our work with the Center of Medicare and Medicaid were $2.3 million, down from $3 million in the prior year period. And our commercial healthcare business generated $1.1 million, a decline from the second quarter of 2015.

As a reminder, CMS is in an active procurement process for the next round of its Medicare stifle service Recovery Audit Program Contract. In anticipation with this contract sensation, CMS is seeking to have the current Recovery Auditors complete all outstanding claim reviews by the conclusion of the active Recovery Audit in phase of the accounting contracts. As such, May 16, 2016 was the last date that we and the other Recovery Auditors could send Additional Document Request or ADR, letters or semiautomatic notification letters to providers or hospitals.

With July 29 being the last date, we could submit the notification of an in prophet payment to providers. As in the near term contract award, we anticipate that these limitations will have a negative impact on our healthcare revenues for the remainder of 2016.

Lastly, our other markets generated revenue of $5.9 million in the second quarter, compared to $5.1 million in the prior year period.

Moving to our expenses. Salaries and benefit expense in the second quarter was $20.1 million, a decrease of 9.4% compared to $22.1 million in the prior-year period. Other operating expense for the quarter was $13.7 million, a decrease of 11.5% compared to the second quarter of 2015, primarily due to a reduction in volume-related costs and other completed cost reduction initiatives. We remained focused on improving our productivity, executing on our business development initiatives and thoughtfully engaging in expense restructuring.

For the second quarter of 2016, our reported net income was $1.5 million or $0.03 per diluted share compared to a net income of $0.7 million or $0.01 per diluted share in the prior-year period. Adjusted net income in the second quarter was $2.9 million or $0.06 per diluted share compared to an adjusted net income of $2.3 million or $0.05 per diluted share in the prior-year period. Fully diluted weighted average outstanding shares were 50.5 million shares in the second quarter of 2016.

Our adjusted EBITDA in the second quarter was $8.9 million compared to $8.4 million in the same period last year. Adjusted EBITDA margin was 23.3%. Our effective income tax rate changed to 40% compared to 32.1% in the same period last year. Cash flows from operating activities in the second quarter were $20.7 million.

Turning to the balance sheet, as of June 30, 2016, we had cash and cash equivalents of $53.2 million and our total outstanding debt was at $67.2 million, reflecting our continued focus on paying down our long-term debt.

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

Lisa Im

Thanks, Hakan. As you know, we completed expense reductions, which aligned our costs with the current revenue model and we improved employee productivity, which is visible in the results generated during the first six months of 2016.

The year-to-date results are stronger than expected as a result of the hard work of our employees and our ongoing commitment to excess control. But as we look to the back half of this year, we will see some softening in our revenues sequentially as CMS has paused the rack program during the closeout of the old contract and the amount of residual revenue from the Department of Education continuous to wind down due to the lack of loan placements since April 2015.

However, based on our strong performance through Q2, we are raising our full year revenue guidance to $135 million to $145 million from $125 million to $135 million. We are also raising our adjusted EBITDA guidance for the full year to $18 million to $22 million, from $14 million to $18 million.

As we mentioned last quarter, our guidance excludes the effect of any new Department of Education contracts in 2016 due to the uncertainty of the contract to update and the number of contracts to be awarded. Similarly, while the CMS has stated a target award timeframe of summer, we assumed no 2016 impact from this potential award based on time of implementation.

With that, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

Lisa Im

[Starts Abruptly]…our expectations largely due to improvements in productivity and effective expense reductions. Before we go, I want to thank our clients for letting us serve them and thank our employees for bringing their best efforts to our organization. Thank you for being with us today.

Operator

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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