Thirteen months ago, I praised Performant Financial's (NASDAQ:PFMT) management for its decision to abandon the company's legacy student loan recovery business and focus on the rapidly growing healthcare segment.
Unfortunately, the performance of the new core business has also been impacted by COVID-19 as hospital utilization rates have not yet returned to pre-COVID levels.
As a result, management was required to revise its full-year FY2021 expectations for the segment twice from an initial range of $83-$90 million to $77-$80 million at the time of the company's third quarter report.
Final segment revenues came in at $77.5 million thus representing approximately 13% year-over-year growth.
Management expects healthcare growth in 2022 to re-accelerate to almost 20% at the middle of the provided range, but profitability and cash flow will continue to be impacted by required investments into the business:
"We remain cautiously optimistic on a thawing of the COVID-related impacts on our operations as we look forward to 2022,” added Rohit Ramchandani, Senior Vice President of Finance and Strategy at Performant. “As such, we are introducing full year 2022 healthcare revenue guidance in the range of $90 - $94 million, with EBITDA in the range of $2 to $4 million, with an expectation of EBITDA in the first half of 2022 being negative, followed by stronger margins in Q3 and Q4, due to the anticipated quarterly trending of our revenues, as well as the continued investments into new customer contracts."
Despite the weaker-than-expected operating performance, the company managed to raise $42.6 million from an equity offering in August thus paving the way for an important $35 million debt refinancing in December.
"Our new commercial banking relationship with MUFG Union Bank provides further stability to our balance sheet, while enhancing our ability to drive investment into our growing healthcare operations. Compared to the credit facility that we have now refinanced, we estimate that this could yield over $8MM lower debt service payments in 2022 alone,” stated Ramchandani. These savings are expected to be achieved through a combination of lower annual principal payments and a lower interest rate margin, which is tiered based on the Company’s consolidated leverage ratio.
The credit facility has a maturity in December of 2026, with a fully funded $20 million term loan and an initially unfunded $15 million revolver. A combination of the term loan proceeds and existing cash on the balance sheet were used to repay all outstanding amounts under our prior credit agreement.
With near-term debt maturities having been addressed, a vastly-improved balance sheet and sufficient liquidity, management should be able to focus on growing the new core business going forward.
That said, with negative EBITDA currently expected for the first half of 2022 and COVID-19 still representing a major impact, there appears to be no need to hurry for investors.
While shares have suffered alongside the general market, I would advise investors to hold off from opening or adding to existing positions at this point and closely monitor the company's progress over the first half of the year.
Should management again start to revise expectations downward, shares would almost certainly take a major hit in the current market environment.