Performant Financial Corp (NASDAQ:PFMT) Q2 2019 Earnings Conference Call August 13, 2019 5:00 PM ET
Richard Zubek - IR Professional
Lisa Im - Chairman & CEO
Conference Call Participants
Brian Hogan - William Blair & Company
Greetings, and welcome to Performant Financial Corp. Second Quarter 2019 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Richard Zubek, Vice President of Investor Relations. Thank you, sir. You may begin.
Thank you, Devon, and good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's second quarter 2019 results. If you have not, a copy is available on the Investor Relations portion of our website. Today's call will be led by Lisa Im, Chief Executive 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 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 supplements on our website that walks through our 2019 second quarter financial results in more detailed form.
Our business is built on the core foundation of analytics, innovation, compliance, audit and recovery. Over the past several years, we've spent a lot of time during our earnings calls discussing our focus on cost containment and investing in strong, competitive differentiators. Specifically, we have been focused on our technology with the objective of creating capability that exceeds currently available market services. We have also invested in best-in-class talent, focusing on the correct list of people to execute our longer-term growth strategy.
The result of our ongoing investment is that our platform, Performant Insight is proving to be a highly disruptive health-care technology, so much so that we are actively taking meaningful market share from more established players across the health-care market. As discussed in previous calls during 2018 and 2019, we have been implementing master service agreements with multiple large national players and have made significant penetration into the Blues network. Health-care revenue is beginning to evidence the strong growth opportunity that we are projecting into 2020 and 2021.
As we continue to execute on our existing contracts and expand to serve clients across a wider spectrum, we believe the true depth and potential of our platform will be recognized. This is driving contract wins and growth in the health-care peer markets. We expect that our strong double-digit growth will continue well into the mid- and long-term future of the company. Additionally, our recovery and customer care market presence continues to be solid with strong contribution to the overall business.
In second quarter of 2019, we reported total revenue of nearly $36 million, which was in line with our internal projection and up over 14% versus the prior year period. Adjusted EBITDA in the second quarter was a loss of approximately $3 million compared to a profit of just over $119,000 in the prior year period.
Overall health-care revenues in the second quarter of 2019 exceeded $9 million, which was 52% higher than it was in the prior year period. Federal health-care client revenues in the second quarter were approximately $5 million compared to approximately $3.5 million in the prior year period, an increase of nearly 40% year-over-year.
Commercial health-care revenues accounted for over $4.4 million in second quarter of 2019 compared to just $2.6 million in the prior year period. The first half of 2019, health-care revenues of $18.3 million are up 90% over prior year period, excluding the onetime CMS Region A contract closeout in Q1 of 2018.
Total growth is coming from both federal and commercial health-care clients. Last quarter, we also mentioned the plan to expand our CMS recovery audit contract Region 1 and Region 5 audits during 2019, and that plan is still underway. We continue to make great strides with our health-care business and believe that our solution, which combines analytical technology with competitively better services, is causing significant disruption in the market providing us the opportunity to take share away from well-established legacy companies.
Total recovery revenue in Q2, which includes our student lending, PAC, IRS and treasury markets as well as premiere, with just over $22 million, which was approximately 8% higher than the second quarter of last year. Year-to-date recovery revenue of $43.5 million is up $1.1 million or 2.6% versus last year period.
Lastly, our customer care and outsourced services revenues of nearly $4.5 million were down $6.1 million versus last year. However, year-to-date revenue of $8.9 million is up $424,000 or 5% versus prior year period.
Q2 expenses of $40.1 million were $5.4 million higher than the prior year period. The increase in costs were mostly due to headcount growth and expenses related to Premiere. As we have stated in previous calls, the investments in our business are expected to drive additional revenue into 2019, 2020 and beyond with most of that growth attributable to health-care contract growth and implementations during 2018 and 2019.
Overall, our results demonstrate our continued success in transforming from a company that just a few years ago was heavily dependent on the student lending industry to one today that has diversified its offerings and serves clients across a broad spectrum of industries, including health-care agencies, state and federal taxing authorities, other federal agencies and commercial clients. Finally, we are reiterating our 2019 revenue and EBITDA guidance of $158 million to $168 million and a loss of $2 million to $6 million, respectively. We continue our work and focus on growing the company through technology differentiation to drive results that exceed client expectations and competitive offerings. This progress would not be possible without the hard work and dedication of our talented team as we continue marching towards our targeted long-term 2021 goal of $200 million in revenue with margins in excess of 20%.
We anticipate most of this growth to actually come from our health-care business. With that, I'd like to open up the call for questions.
[Operator Instructions]. Our first question comes from the line of Brian Hogan with William Blair.
My first question is actually on the cost basis. Obviously, your expenses do ramp up our procedure revenues. Nature of the business. So I was just curious, is this -- you have all your stuff in place, all your people, all your technology, all -- are you still need to ramp some more until we should eventually see the revenues cross over the expense barrier?
We actually see our expenses at a fairly steady rate. As we go into third quarter, there's a little bit of an uptick but, again, largely because there's one large health-care contract that we are ramping up starting in third quarter because we don't expect to see that revenue necessarily hit this year until sort of late this year, but it's really going to be 2020. It's a fairly large contract. So there will be a little bit of an uptick. But I think as we get into sort of third quarter, we're going to see stabilization of our investment and go forward expenses.
All right. That's helpful. And then the revenues then proceed to catch up then from there. Is that...?
Yes. That's correct.
All right. Shifting over to the federal RAC and MSP contracts. It was down quarter-over-quarter. I guess what are the drivers of being down? Obviously, it's up year-over-year. And then as a follow-up to that, any discussions with CMS to lift some of the caps and the RACs?
Yes. So on the MSP, sometimes we'll see a little bit of delay depending on what we've actually got built out. So as you know, the broad trough of payers in both group health plans and nongroup health plans are receiving information from us with respect to what they owe Medicare. So occasionally, we'll have a little bit of lumpiness, but we do expect that to be a continuing upward trend as we go into the third quarter and beyond.
And with respect to the CMS recovery audit contract, we are actually executing against, increasing the number of office adds. CMS is working with us on that as well. So as we go forward, we actually see the span of the contract and our ability to audit providers to actually increase as we go into the back of the third quarter and into the fourth quarter, we see that program expanding, and we see CMS being very helpful in that effort. So we will see that contract -- those two contracts continue to extend over the next couple of quarters and obviously into 2020.
Helpful. And then the commercial health care. I think it's -- you've done a nice job there. I guess, one, what differentiates your offering? And then can you talk about the backlog? I think you just trying to mention that you're ramping up on even a new contract as you hit third quarter. But what are the drivers of that new commercial health-care growth? And what's differentiating your offering?
So we have two sort of primary areas in which we're growing our commercial health care. One is obviously complex audits and also automated audits. We use -- we're very dependent on our proprietary analytical platform to drive ways to add value to payers in the market. So as you know, the health-care market is -- has plenty of vendors who provide audit capacity. What we're trying to do, and again, what we're successful at doing is utilizing our analytics platform in order to drive incremental value. So not doing the same thing everyone else is doing. We're finding ways that the health-care -- or the payer is able to find additional errors that are over and above what others are finding for them.
And then in the coordination of benefits or third-party liability market, it's not just analytical platform. But we have a really -- we have an exceptional, I would say, customer outreach and service organization that we've built in order to make the process seamless and much easier for other payers, who actually, obviously, from a third-party standpoint, other payers who have to be -- who have to reimburse our clients. So with the combination of both, obviously, analytics is an interesting and unique differentiator. But we also have a very, very strong customer service and a workgroup that, alongside of our analytics platform, provide the service that exceeds what the returns have been in the market to-date.
And so that -- and these are large contract clients. So when we say we're implementing, we're implementing dozens of programs under one particular payer. So it does take some time to get that up and running, but we're very pleased with where we are so far, and we think our clients are excited about what value we're bringing to their program.
All right. And then moving on to the student loans. The placements, obviously, they can be very lumpy by quarter. I guess what is your outlook for the placements going forward? What's kind of a nice range to expect? And then, obviously, it's mostly with GAs today. How long does that GA run rate last? I mean, obviously, the federal government took over those two landing and -- who knows what it's going to go into the future with the -- can you just talk about your run rate with the GAs as well?
Yes. I think depending on who you talk to in the former FFELP market and the Guaranty Agencies, I think folks are thinking there's probably seven plus years of servicing still left in that FFELP funnel. And we've mentioned before. We're partnered with some of the larger clients. So that as we see that market consolidating, and keeping in mind that there's still 24 guaranty agencies who are actively engaged in managing the remainder of the portfolios, we do believe that our market share will continue to be consistent.
We also work as subcontractors to some of the small businesses under the direct loan program. The capacity of the small contractors requires that they try to partner with some of the larger organizations. And so we're pretty excited about that work. It's a way for us to participate in the Direct Loan program as well. So we see continued opportunity for stability as the potential growth in that student loan market. But on the other side, we're also growing in our commercial market and in our tax markets as well. Our work for the IRS continues to increase.
And I think the program, if you read all the publications, continues to be a very successful program for the government and, frankly, for the folks who ower the back taxes because we are providing really a customer service to those folks. And so we see all of the practices in our recovery business is actually stable to growing.
I guess my last question is kind of a focus on the balance sheet and your leverage. Where do you -- obviously, you have covenant waivers, I believe, through early next year. But can you just talk about your comfort level with the balance sheet?
Sure. We have a couple released through second quarter of 2020. And as we look at what the covenants are based on where we currently are projecting, we actually feel pretty confident that we'll be good with the covenants. As you see from the loan, it's -- the term is -- ends August of 2021. And I believe there are two one-year extensions that we can also extend the term by those two one-year extensions. So from a balance sheet standpoint, I think as we get into 2020, we feel really good about where our business is going to be. We know we're going to see the revenue and the earnings and the cash come from the work that we've done this year and last year.
We knew these were investing years and that we were in the process of transforming the company. We fully expect that, as we get into the back part of this year and enter 2020, we're going to see some really good results and the fruits of our labor. So we do expect our business to continue to grow. And as we look again at sort of Q2 of 2020 and the covenants coming back into play, we're, at this point, confident that we'll be fine.
All right. And this is actually a follow-on to that question. You're going into 2021 then, your targets of $20 million revenue with 20% from margin. The confidence in getting there, I'm thinking you kind of articulated in your prepared remarks being primarily, the driver being the health-care business. Can you just elaborate a little bit on that? What's driving that confidence? But then second maybe what would cause you to come short of that target?
So when we look at our health-care business today, we understand obviously what the contract cycles are. So year one, year two, year three, and we see year three as some of the contracts already in place. As we move towards year two and going into year three of some of these contracts, we have a pretty good understanding of the workforce of the volume that the total addressable market. We have our client volumes that we're working with. And then we also have technology improvement that we continue to make during our -- in our health-care practice. So we actually feel pretty confident that we can achieve those margins.
I would say if there was something that, that impacted those margin targets overall, which is the continued investment, so if we, for example, got a few more very large contracts for which we would have to put more heavy investments in place, then we might see that change from 20%-plus to something a bit less. But again, if we're implementing large contracts, we would expect to see some pretty strong revenue growth as we move into 2022, and that margin we should actually continue to see as we move forward in the business. So the -- again, large contract require heavier investment. And so that could certainly impact where we are. But outside of that, we are pretty confident that our technology and work process is achieving what our targets are.
Ladies and gentlemen, there seems to be no further questions. And I would like to turn the call back over to management for any closing remarks.
Thank you, operator. I want to thank you for joining us for our call today. I also want to thank all of our dedicated employees who bring their very best to performance. I want to thank our clients for letting us serve you in the past quarter. Once again, we appreciate your business. We appreciate your dedication. And thank you again for joining us.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.