Performant Financial Corp. (NASDAQ:PFMT) Q4 2017 Earnings Conference Call March 6, 2018 5:00 PM ET
Richard Zubek – Investor Relations
Lisa Im – Chief Executive Officer
Jeff Haughton – President and Chief Operating Officer
Ian Johnston – Chief Accounting Officer
Michael Tarkan – Compass Point
Brian Hogan – William Blair
Greetings, and welcome to Performant Financial Corp. Fourth Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Richard.
Thank you, operator. Good afternoon, everyone. By now you should have received a copy of the earnings release for the company's fourth quarter and full year 2017 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 Jeff Haughton, President and Chief Operating Officer.
Before we begin, I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to risks and uncertainties, including those described in the company's filings with the SEC. Actual results may differ materially from those described during the call.
In addition, all forward-looking statements are made as of today and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.
I would now like to turn the call over to Lisa Im. Lisa?
Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. If you haven't already, please find the financial packet on our website that walks through our financial results for the fourth quarter and 2017 in more detailed form.
In addition, we've provided a summary of our 2018 guidance, which I will reference later in this call. But before I get into the specifics of 2018, I want to take a step back and provide a broader look at how we see our current position and the direction we are headed.
As you know, our strategy is to build a strong diversified business on our core strengths, analytics, innovation, compliance, audit and recovery. Where those capabilities combine and create unique strength and value proposition to our clients, we believe we can win competitively and find solid market opportunities.
Despite the headwinds we faced in the past, we've been working very hard to execute a strategy of expansion and diversification. These efforts have resulted in a series of contracts that we are very excited about as we enter 2018. Some of these are expected to be large revenue contracts, although they will require near term investment before we begin to achieve a consistent level of revenue. These new contracts include The Medicare Secondary Payer Commercial Repayment Center or MSP CRC contract, several large commercial healthcare contracts and the IRS contract.
The startup investments for these contracts will fall in 2018 and some in 2019, before we achieve full contract potential. By continuing to execute on this diversified strategy, we are targeting to achieve annual revenues in excess of $200 million in 2021 with EBITDA margins in excess of 20%. These targets do not include revenue or EBITDA contribution from the Department of Education contract.
With that perspective as a backdrop, let me shift to the updates in our student lending market, then move to healthcare and other markets. Towards the end of the call, we will spend a few minutes on key metrics and talk more about 2018.
As you know, on January 11, the Department of Education completed their corrective action process, which resulted in Performant receiving one of two unrestricted contract awards. Based on the publicly available questions and answers, available on fbo.gov, what we know is that the department evaluated proposals in accordance with the solicitation and source selection plan. They did not rank proposals and considered all relevant past performance information submitted and available to the evaluators.
Performant is the only company to have participated in consecutive Department of Education Collection Contracts since the early 1990s. Our experience is across direct, self and campus-based loan program. Our results in the portion of the self portion of the federally guaranteed student loan market are unparalleled. And from an industry perspective, we believe this experience is also highly relevant since the self industry comprised more than 75% of the originated loans until July 10, 2010, when the direct loan program became the sole originator of the federal student loans.
Naturally, there is a similar proportion of the defaulted student loans in the two channels for several years following. We believe that our combined self and direct portfolio experience is deep, broad and provides the best service value to the department in the new contract. To date, it is our understanding that over 17 companies have filed appeals regarding the award of this contract in the court of federal claims.
However, at this time, we cannot say much more about the court process. Because of the protests and the timing of work under this contract, we have excluded this opportunity from our financial guidance, which we will discuss a little later.
Separately, as you know, Great Lakes terminated our student loan recovery contract last year due to a strategic need for a servicer for their entire portfolio, which is beyond our current capacity. The transition of our Great Lakes student loan inventory began in October of 2017.
Since the termination of our contract with Great Lakes, we have been able to secure a new contract to act as a recovery subcontractor for Great Lakes new prime recovery contractor and servicer, Navient, under which we will provide recovery services to both Great Lakes portfolio as well as Great Lakes recently acquired USAF and NELA portfolio, which is about 50% larger than that of the original Great Lakes portfolio.
Under this arrangement, we have started recovery services for approximately 25% of the Great Lakes defaulted loan portfolio. And in the next few months, should receive some of the USAF, NELA portfolio. The subcontracting arrangement provides us with some ability to gain share through performance versus competition.
Our contract with Navient does not have a termination date, but contains standard language allowing for termination at the discretion of Navient. Total student loan placements during Q4 were $549 million, which is down 12.7% versus prior year Q4. And down 15.2% sequentially versus Q3. Excluding the impact of Great Lakes, placement volumes are up 24.1% year-over-year and up 11% sequentially.
Student lending revenue in Q4 was $22.5 million, which was $4.9 million or 17.8% below the prior year, largely due to the absence of revenues in Q4 of 2017 from the prior Department of Education contract. For the total year, student loan revenues of $94.3 million are down $15.3 million or 13.9% versus prior year. Department of Education revenue was down $22 million versus prior year, partially offset by a growth of $6.7 million from other clients.
With that, I'd like to turn the call over to Jeff Haughton, to talk about our healthcare and other markets.
Thanks, Lisa. We continue to implement several healthcare contracts for both commercial and government clients. Several of these contracts are expected to generate significant revenue as they achieve steady-state, but we will require investment during 2018. As we mentioned in our third quarter earnings call through September 30, we had added nine new commercial healthcare clients representing over 15 new audit and recovery programs.
During 2017, we were focused on implementing and ramping these programs. And when coupled with the requisite time to increase audit volume and the subsequent revenue recognition cycle, they had limited impact to 2017 revenues. However, we anticipate these same programs will provide greater contribution in 2018 with even more upside in future years. In addition, we have a list of new programs that we will be implementing in 2018 as well.
As Lisa mentioned, in October, we announced that we were awarded the Medicare Secondary Payer CRC recovery contract. Last month, we began operations under this contract with over 60 newly dedicated employees. And we are continuing to hire up to the anticipated need of approximately 250 employees. We did not give specific guidance for this contract at the time of award, but we did note that Centers for Medicare & Medicaid publishes annual results for the program, including administrative costs over the last two fiscal years, which range from approximately $18 million to over $24 million annually.
Most of these costs represent contingency fees paid to the CRC recovery contractor. In our 2018 revenue guidance, you will note that we provide an expected range of revenues for the new MSP CRC contract of $10 million to $16 million. Keeping in mind that this will be that 2018 will be a startup year for this contract.
As we discussed the new MSP CRC contract, I would also note that several of our larger commercial healthcare programs entail coordination of benefits recovery for the Medicaid program. And as a result, are highly complementary with the work we will be doing under the new MSP CRC contract. These Medicaid recovery programs are also ramping up in earnest during 2018.
Switching gears to our CMS Recovery Audit programs, we began work under the Region 1, the Region 5 contracts during Q2 of 2017. While we have some revenue from these contracts, CMS continues to be slow to scale up claim volumes for the RAC program. Moreover, the Region 5 DME national contract remains under the 0.5% of documents request limit. With Medicare improper payment errors and it still report still close to 10%, which cost taxpayers nearly $40 billion a year. And with DME errors estimated at 44.5%, representing approximately $3.7 billion, we do look forward to working with CMS to accelerate expansion of these important programs.
For Q4 2017, our commercial healthcare revenue continued to grow at a strong double-digit rate as we execute it against the growing number of contracts in various stages of implementation. Specifically, we generated $3.2 million of commercial healthcare revenue in Q4 of 2017, which represents a 77% increase year-over-year and a 75% increase sequentially. Commercial healthcare revenues have been a little lumpy in 2017 due to revenue recognition as well as the early stage of several contracts, but we expect that will smooth out over the next several quarters.
More importantly, we expect that these contracts will show meaningful growth in revenue during 2018 and beyond. Our 2017 healthcare revenues from commercial clients were $8.6 million in total, that's up 50.9% versus the prior year. And as the old RAC contract wound down, revenues of $1.4 million were down $4.3 million or 75% in 2017 versus 2016.
So as a result, for the full year 2017, healthcare revenue was $10 million, which is down $1.4 million versus the prior year. Again, this is due to the decline of the old RAC contract offset partially by the new RAC contracts that were started in April of 2017 as well as a growth in our overall commercial client healthcare base.
Finally, within our other revenue line, we continue to grow through a handful of new contracts. Our Q4 other revenue of $7.2 million is above prior year by $3.1 million or 75.6%. For the full year 2017, this revenue was $27.7 million, which is $7.3 million or 35.8% over the prior year.
Within this other revenue line, our customer care operations continue to drive most of this revenue growth, which we believe will continue in 2018. In addition, this revenue line reflects growth from our IRS contract and other state tax recovery contracts. Specifically, the IRS contract startup in 2017 was very methodical with very small placement volumes that started in late Q2 2017. This is due to the objective of the IRS to create a solid sustainable program with taxpayer care as the top priority.
As we move into 2018, we're expecting expansion in the program. Although still far from where we expect this contract to ultimately end up in terms of placement volume. Keep in mind that this is a straight payments recovery contract with the revenue that builds as you recover. It's very similar to other tax contracts in that regard, but is in contrast to a student loan recovery contract that will entail a nine-month rehabilitation funnel that needs to build before you generate significant revenues.
So with all that, I will turn it back to Lisa.
Thanks, Jeff. Touching on Q4 expenses, our expenses of $34.5 million were slightly above Q3 by $0.5 million or 1.4%. Excluding an impairment charge in Q4 of 2016, Q4 operating expenses were above Q4 2016 by $1.1 million or 3.3% as our cost containment efforts were offset by expenses related to new contracts.
For the total year, revenues were $132 million and adjusted EBITDA was $9.2 million. This was slightly softer than what we expected due to timing issues associated with rehabilitation funding from one client and delays in the revenue flow from a few healthcare contracts, which both will be captured in early 2018.
As we look at 2018, we have a few uncertainties that will affect our guidance as we progress through the year. These are one, the Department of Education contract. Clearly, as the contract protest process plays out, we are hopeful that the selection process remains as is. But until we know more about the outcome, it is difficult to say what impact this will have on our expenses for 2018. Keep in mind that there is a nine to 10 month lag in recognizing rehabilitation revenue.
And prior to that, we do expect investment expense of some magnitude. Two, the MSP CRC contract is expected to be a significant contract, which will have a positive revenue and EBITDA impact this year, despite this being a ramp up year. That said, our results will depend on successfully hiring, training and engaging healthcare employees.
Over the next few months, we will have much better visibility into the timing of the full ramp up process. Three, as we stated in the earnings press release, the term of our first Medicare recovery audit contract with CMS for Region A expired on January 31, 2018. During that contract, we accrued an estimated liability for appeals and other payables that are associated with cases that may be successfully appealed by the providers or billing differences that we had with CMS during the life of the contract. Our estimates for appeals liability were based on historical experience with some the Medicare recovery audit contract appeal process.
At the term of the original contract expired, CMS issued a letter to us in January of 2018 stating that performance will no longer be obligated to support the appeals process or maintain an appeal reserve after January 31, 2018. CMS on January 31, 2018, also issued to us their final letter of demand, which reconciles all outstanding, billing or payables differences with CMS for the old Region A contract. Accordingly, we expect to release at least $21.5 million of the total $28.4 million liability as of January 31, 2018. This will increase first quarter 2018 revenue by an amount equal to the total liability released and impacts EBIDTA by a positive $14.4 million.
We expect to maintain the balance of the reserve as we continue to assess the remaining estimated liability for refunds and appeals over turn prior to the expiration of the contract term. Because these revenues are not driven from 2018 operations, they are excluded from our guidance.
With all of that in mind, our guidance for 2018 revenue and adjusted EBITDA, excludes both Department of Education contract, which would require additional investment in 2018 and the balance sheet impact of closing out our old Region A recovery audit contract. Our 2018 revenue guidance range of $123 million to $150 million is such due to the potential that we have in executing on both commercial contracts and the MSP startup.
As you can see in table A, Great Lakes has a large negative impact due to the transition timeframe. We stopped receiving placements in October of 2017 under the old Great Lakes contract and we will require to return non-paying accounts to Great Lakes earlier than what we anticipated. We believe our performance on the Navient subcontract is off to a strong start, but we are taking a cautious view as to how this will turn out.
The deleterious affect of the laws of the prior Great Lakes contract will be more significant in 2019, which we expect to be offset by contract growth in other parts of our business and hopefully, by a strong Department of Education contract.
Our expected commercial healthcare business growth is based on contracts in hand, which we have been implementing or starting during 2017. We anticipate that these contracts to show significant growth versus 2017 and continued strong growth as we look to 2019 and beyond. Our RAC contract revenues are based on current restrictions imposed on audit activity. And while we hope CMS will increase program parameters, we have been cautious in our view for 2018.
As you heard from Jeff, the MSP contract is off to a good start. And we are cautiously optimistic that we will be able to hire the talent and create the productivity we need in order to execute a strong year one of the contract. Because of the newness of this contracts for us, we do have a broad range of around 2018, and we will certainly have greater visibility as we progress over the next few months.
Our forecast for other revenue is again based on current contracts that are in hand and implemented. Expectations for call center opportunity for which we have new contracts and a couple of additional contracts which are very close to execution.
We discussed the need to invest in several larger contracts during 2018 to achieve contract potential in steady-state. These are costs we will incur before full monthly revenues are achieved. And our EBITDA guidance of $2 million to $6 million is reflective of these investments during 2018.
If we think about these investment expenses on a steady-state contribution basis beyond 2018, depending on where we end up on contribution margin, which again we will understand better as the year progresses, as shown in table B, incremental revenue versus 2018 could be as high as $20 million, if we achieve a 40% contribution margin. This would be additive to the current revenue assumptions as we look beyond the 2018 forecast.
We are very excited to be executing these contracts, which have strong long-term value and are based on distinct capabilities, which we believe are unique to us. Please keep in mind that these investments are only representative of a handful of contracts and that we do have other contracts while ramping up, do not have the investment profile of these few.
We are very pleased with the recent momentum in our business and the new contracts we have been awarded, although the ramp up in these new growth opportunities will have a near-term impact on our EBITDA margin, these investments will drive our long-term growth and ability to achieve our 2021 targets of $200 million plus in revenue at EBITDA margin in excess of 20%.
Our value proposition to our clients is based on a client-centric foundation with strong innovation, analytics, compliance and actual recovery of dollars for them. We add value to our clients’ financial picture through results. We enhance the reputation by the quality and care of work that we perform and we distinguish ourselves from competitors through innovative unique programs that are tailored to our clients.
With that, I'd like to open up the call for questions.
Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Michael Tarkan with Compass Point. Please proceed with your question.
Thanks for taking my question, and thanks for the additional disclosures on the guidance, that’s very helpful. I guess, first question is, just so I'm clear, there was a lot of numbers there, but the $9 million to $12 million of investments, can you just clarify, which contracts that investment spent relates to?
Sure. I'll let Jeff answer that question, Mike.
Yes. Hey, Mike, it’s a good question. That is a combination of contracts. I mean, certainly a large piece of that is MSP contract. There are some additional dollars in there for other commercial healthcare clients that we are ramping up in 2018 as well. But you also see some of that in our other revenue lines. So our customer care business, where some of the new programs that we are ramping up in 2018, there are some additional spent related to those as well.
So if you take a step back, it's really across all of our businesses. There is even some recovery contracts in there as we think about the continued growth. So it's a pretty broad capture of our revenue streams where we're investing to drive growth in those programs.
Okay. And so, on the RAC side, still limited scope, I guess. Just how do we think about really the growth trajectory there? $4 million to $6 million revenue in 2018. How do we think about just PAM, any kind of growth trajectory on that line? Thank you.
Yes, this is Jeff again. What I would say is, Lisa and I were thinking about it today. As we think about the RAC contract and where we are now, certainly, it's off to a, what I call, a methodical start. Given the error rates you see and the opportunity there, with still think those will be sizable contracts. We do think it’s going to take additional audit types and working through a process with CMS to make sure that all of these new types of audits that we propose are approved, they’re tested and then they get to scale up over time.
But while we work on under these ADR limits, and while we go through that process, again, you can see the $4 billion to $6 billion we forecasted in 2018. Ultimately though, I think, we still believe this should be $15 million to $20 million a year opportunity for us across both of those contracts. I think some of the uncertainty or the cautious approach we’re taking to be forecasted really comes on the timing and how long will it take for us to get there. But the opportunity is there. There are building a sustainable program and we think the long-term revenue opportunity is there for us as well.
Okay. And then just to be clear, the $15 million to $20 million is that both contracts combined or is that individual contract.
Both contracts combined.
Okay. Switching gears to the education side, a couple here. I think you mentioned placements excluding Great Lakes were up pretty significantly, and I’m just wondering where that volume is coming from?
So on our education side, we do have one client with whom we had a partial – a portion of their business as we started this year because we competitively won against other vendors. We actually got 100% of their business starting in 2017. So that actually ended up adding quite a bit also as you think, about gaining business through combinative performance, we’ve done that with a couple of our larger clients, including ECMC as well. So we are seeing business growth through competitive performance that we worked hard over the last, I would say, probably 2, 2.5 year to gain.
Okay. On the Great Lakes piece, you mentioned 2019 being the bigger impact. How do we think about sort of like a steady-state run rate? I realize loans are running off, but just kind of curious, that $19 million to $23 million, how you think about that for 2019?
Yes. So, that $19 million to $23 million reflects the Great Lakes revenue as we see it in our rehab funnel. So these are accounts we put into rehabilitation in 2017 as you know how our business works. So if you think about Great Lakes going forward, and this revenue stream does not include what we are doing for Navient. This is purely under the old Great Lakes contract. So if you look out to 2019, the majority of that $19 million to $23 million in 2018 will go away in 2019. We will continue to get revenues from accounts that are in pay file and AWG status, but the bulk of the rehab revenues will be gone by the time you get to 2019.
But it will be partially offset by the revenue that we are going to create with Navient under their contract. And as we mentioned, Mike, we are off to a pretty good start on the Great Lakes business and over the next few months, we do expect to see some of the new stuff business come through, which again will be competitive and with the ability to gain share.
Okay. Last one from me and then I’ll hop back out. I know it’s tough to comment on the Department of Education contract. But as of now, those 17 companies have filed appeals. Is there any indication from ED or when we can get some clarity from a timing perspective? And then, whether ED can start the contract, while it remains under protest or under appeal? Thank you.
Yes. So the timing as we’ve been made aware and the court has been pretty clear in terms of what the calendar looks like from here to the end of April, which is essentially over the next several weeks, the various sides are going to be filing briefs and summaries that will take it through the end of April, at which point, the court will decide how the discussions go on from there. I think if we were kind to put a baseline and assume there is no wild card changes to how the court process plays out.
I think if you get to the end of April in terms of when all the formalized briefs are filed, then you are probably looking at another month for the court to evaluate and come back with some status in terms of where the outcome is. Now there is a lot of things that could influence it over time. But as we think about the base case, I think our council would say, you are looking at the end of May before you get some clarity there.
In the meantime, again, as this plays out, we don’t know what direction this will go, but we’re assuming we won’t be working in any ED business as this plays out. And if it gets to a ruling that changes that determination or allows ED to move forward, we’ll do that. But I think, it is safe to say for now, our base case is we’re not going to get any ED inventory at least till the end of May and potentially a little bit beyond that.
Thank you very much.
[Operator Instructions] Our next question is from Brian Hogan with William Blair. Please proceed.
I appreciate the additional disclosure there, really helpful and your commentary in your prepared remarks is very helpful. And I guess, we’ll take it from there. Lisa I think, early on, you said that in 2021 $200 million revenue with 20%-plus margins is attainable. I guess what do you need to see happen to the reach that? Is it that continued ramp and CMS, RAC contract audit expansion, just kind of how do you bridge from today until 2021?
Jeff, do you want to take that?
Yes. Sure. I think it is consistent with what we talked about just conceptually. Here is what I would say. A lot of that is based on the footprint of clients that we have now right. So even as we look at health care, we’re certainly going to be outselling new clients and looking for new opportunities, but it doesn’t take into account the MSP level new contract. And frankly, there is not a lot of brand-new clients in that forecast. So it’s really based on the footprint that we’ve spending all this time developing.
So that’s the first comment I would make. As it pertains to RAC, it does assume that we are able to certainly expand beyond the $4 million to $6 million of revenue that we are forecasting in 2018 and heading towards that kind of double-digit revenue that I just talked about with Mike’s question. So you make that assumption. And then on the recovery side, it’s really us executing with again the footprint that we have in our existing business and continuing to manage our guaranty agency clients as well as ramp up on the IRS contract in some of our other revenue streams.
So in summary, what I would say is, it’s really executing well on the footprint we have, making sure we’re being efficient with the cost structure that we have and finding opportunities to continue to manage that. It doesn’t require anything Herculean from a margin perspective, but accurately reflects where we are from a pricing perspective as you look at our businesses and as we look at the pricing from our clients in the recovery business.
And Brian just to add a little bit more color. Jeff and I had chatted about this. In our healthcare business, we talk about few contracts that have a fairly – that have an investment this year that we think are going to have pretty strong opportunities. We have a couple of very large channel partners that really with our capability in not just healthcare analytics, but on recovery, we feel very good about large growth with those channels as we think about benefits across obviously MSP contract is separate, but also across some of the Medicaid programs as well that are managed by these large channel partners. So we do have that footprint. We’ve got – we’re ramping up pretty quickly but again, it’s starting off as we look at 2018, but these are probably two of the largest channel partners in that space.
And look, I think it goes without saying that you extrapolate out what you’re seeing for guidance in 2018 and extrapolate out in the future, from a revenue mix perspective, if you look at that $200 million and what it implies is a business that is much more diversified than frankly what performance has ever seen from a diversification perspective. And so we feel like that’s helpful kind of progress as we think about what our strategic objectives are.
Yes. Thanks for that comments there. I think, you said 20%-plus margins, 2021 longer-term. I mean, historically you’ve done 35% back in 2013. I mean, do you think that’s even obtainable? Or is that at this point too far?
I think we’re not necessarily targeting those margins, one, we have some pricing compression in our student loan market, but we also, as we look at continuing growth, I think one of the things, one of the actions that we want to continue to take as a company is continue to invest in growth. So as we think about continually growing and diversifying, we are really targeting something around the 20%. Now obviously, if we go through the next couple of years and we’re seeing better margins, obviously, we’re not – as you know, we’ve been very careful about how we invest and how we control expenses, but we do want to make sure that we are investing in growth and driving shareholder value through top line growth and making the necessary investments to do that.
Yes. Makes a lot of sense. Switching to the other revenue stream. The IRS contract, you mentioned in 2017 was very methodical start by the IRS. Have they kind of loosened up the range? And or is this still very methodical and still ramp?
Yes. So I would say, most of 2017 had been pretty methodical, I think in a smart way by the way. I want to say that working with the IRS. They’ve been good partners on this, everybody involved, it has been very cognizant of providing taxpayers with a very strong customer service approach and that is absolutely, what we’ve done and what we will continue to do and with the IRS is very focused on. So what we expect to see and what we’re starting to see is increased inventory, which will certainly help. The other component for this is – operationally, we’ve gotten much better at the inefficient year. And so we are starting to see some very meaningful productivity gains here as we begin to understand the inventory and apply technology in an appropriate way.
So I think, what you hear from us is we don’t expect any big step functions per se. But as we’ve launched the program, there has been very few complaints, it’s been great experience, I think for tax payers and all the data shows that. As we continue to see that and we expect the IRS to continue to expand in a thoughtful way, but expand inventory, which we will certainly use. And my expectation is that our folks are going to continue to get better at being efficient with that as well. So frankly, given where we are right now and what we see in 2018, I think we feel pretty good on the progress on the IRS front.
All right. The commercial business, some very nice progress there. Taking back several years ago, that business is starting to ramp and then kind of had a reset. Commercial, obviously behaves a little bit different than the government. How confident are you that it’s not going to be as lumpy going forward? You mentioned it is going to start smoothing out here. What drives that confidence? Is that long-term contract? Is it kind of more color there?
Yes. Part of it is just simply – some of the lumpiness you see is, if the startup of the new contract is delayed by a bit, right. You see revenue that could move back. And so there is still – I think, as we talk about on the last earnings call, there were something like 15 new programs through 2017 that we get implemented and we started new one. And for every one of those programs, you have to take a new account, what is the date it gets implemented.
And with a lot of these, you got to work out some things with the clients, workout things with their contract they have with their providers. And you start pretty methodical and sometimes you come across think that you have to make adjustments too. So all of that leads to some lumpiness in the revenue, I think when we talk about it smoothing out, we say that because you’re going to have enough of a breadth of contracts across our healthcare business that you just won’t notice the noise as much, right.
It will just be more streamlined and really the variability will be – in my opinion, how fast are we growing, right, as opposed to some fits and starts. So it’s kind of the law of large numbers to some degree that we expect to smoothing out over time and give us better predictability.
The other thing, I would keep in mind is, we started 2017, you’ve got certain types of audits that we’re doing for clients, maybe we’ve got one client doing one type of audit. And so, you learned some lessons from that, you get smarter on it. And then by the end of 2017, you’ve got five clients who are doing that audit for work. There is a lot of learning that goes in that and the meantime, a lot of efficiency that gets into it. And that helps smooth things out as well.
So it’s really the combination of all of those components. And, I guess, the last comment I make is again, some of that volatility you are seeing really is brand-new clients coming on board. As I mentioned in the earnings script, we are doing some medicated reclamation work for some very important channel partners of ours. We think there are some great opportunities there. But those types of opportunities coming online can have a pretty big impact, whether it comes in one month or the next. So over time, it will have less of an impact. But again, the direction we’re heading, the foundation that we’ve been building over the last several years, we feel very good about the direction that, that business is going.
All right. And then reserves, maybe clarify what the $14.4 million benefit of the reserves that you had on the balance sheet for the CMS RAC Region A contract that’s been terminated or ended or – that flows through that. Should you see the balance sheet item have been go down, just kind of help me understand, I guess, the accounting there?
Yes. Ian is here with us, our Chief Accounting Officer. Ian, do you want to take that question.
Sure. This is going to have a balance sheet impact. The contract terminated on January 31. And as part of the wind down there will be adjustment to the reserve and payables to client and the EBITDA will impact, will consist of approximately $21.5 million or up to $21.5 million of revenue and approximately $7 million of expense. So it just basically, making balance sheet adjustments to acknowledge that the contract is in the wind down phase or has terminated more accurately.
Okay. And then maybe a simple one tax rate. Obviously, you’ve had some losses and whatever you got – you obviously had tax reform, I guess, longer-term, what kind of tax rate are you thinking about? And I guess, what are you thinking for the effective tax rate in 2018? In your assumption within longer term, what would it be?
Hi, this is Ian again. With the change in the federal rate from 35% to 21%, we’re estimating that our state rate, net of federal benefit, is going to be about 6.5%. So we’re thinking about a 27.5% rate on a go forward, as we become probably profitable. We’ve been close to breakeven in previous periods and we have been taking evaluation allowance on the benefits, tax benefit when we’ve been in a loss, GAAP loss position. So to the extent that we have GAAP losses, we’ll continue to have valuation allowances. You won’t see much benefit. But as we think on a go-forward basis, with GAAP profits, we’re looking at an assumption of 27.5%.
All right. Really appreciate it and lot of things was going on as the company. I’m truly excited. So I look forward to the future.
Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to for the management for closing remarks.
Thank you. As you heard today, we have a lot of very exciting activities as the company executing our contracts, which we worked very hard to obtain. As we think about 2018 and forward, we do continue to build our business through diversified revenue stream. We have great channel partners and clients with whom we think we have great opportunity as we look forward. We again want to thank all of our clients for trusting us with their business and all of our employees for bringing in their best to performing every day. We want to thank you again for joining us today.
Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.