Performant Financial Corporation. (NASDAQ:PFMT) Q2 2022 Earnings Conference Call August 8, 2022 5:00 PM ET
Richard Zubek - IR
Lisa Im - CEO
Simeon Kohl - President
Rohit Ramchandani - SVP of Finance and Strategy
Conference Call Participants
George Sutton - Craig-Hallum
Kyle Bauser - Lake Street Capital Markets
Greetings, and welcome to the Performant Financial Corp. Second Quarter 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded.
I will now hand the conference over to your host, Richard Zubek, Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's second quarter 2022 results. If you have not, a copy is available on the Investor Relations portion of our website. On today's call will be Lisa Im, Chief Executive Officer; Simeon Kohl, President; and Rohit Ramchandani, Senior Vice President of Finance and Strategy.
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. Our results in the second quarter were right where we thought they would be. Our enhanced efficiencies related to our technology platform combined with our team's continued progress on expanding our commercial operations has us well positioned for continued growth throughout 2022 and beyond. The winter COVID surge related to Omicron largely played out as anticipated in terms of slowdown impact to our results as the rebound in non-COVID hospital utilization rates remained sluggish during the second quarter.
We aren't anticipating anything to suggest that we are racing to return to historical core utilization levels at this time. However, we aren't overly concerned with this as one of the early trends that we have noticed is a shift to rising outpatient services. In some cases, outpatient services have eclipsed inpatient services.
It is too early to tell, but this could be the new norm in the post-COVID world. While we anticipate COVID will continue to remain with us for the foreseeable future, at this time, we do not believe we will see a precipitous drop in core utilization rates this year as we did last year.
Overall, we are pleased with the pace of our transition and our ability to continue to gain market share, which would not be possible without our incredible hard-working team members. Thank you again for your dedication and commitment to Performant.
With that, I'll turn things over to Simeon Kohl to discuss the second quarter and other initiatives in greater detail. Sim?
Thanks, Lisa, and good afternoon, everyone. The second quarter of 2022 marks another quarter of strong year-over-year growth in our health care revenues. Overall, our health care revenue in the second quarter was $21.8 million, an increase of approximately 17% when compared to the same period last year. Revenue from our claims and eligibility-based offerings were up 26% and 13%, respectively, over the second quarter of last year.
Eligibility growth was tempered by some softness in recoveries within our government sector. But of note, our newer MSP Advantage offerings in the commercial market have shown great traction with 30% growth over the same quarter last year. In addition, our eligibility inventory development in the first half of the year was strong, which we believe should set us up nicely for the second half of 2022.
Through the first half of the year, we have completed 10 new implementations. We are working on a similar number for the second half, and we have a number of new deals in contracting that will serve to bolster our implementation pipeline into 2023. While excited about the growth of our sales pipeline and our ability to expand statements of work with existing clients, we are also pursuing additional avenues of growth.
To that end, we are in discussions with two midsized payers to become their exclusive enterprise payment integrity partner. The operative word is partner. Different from their traditional vendor stack model, our highly customized approach allows us to design a comprehensive offering specifically tailored to meet the payers' unique needs. We believe there are significant number of similar opportunities among the small to midsized health plans, and we are actively working to develop a road map for how best to expand this model.
This should lead to a faster penetration of wallet share while reducing the costs and risks of managing multiple payment integrity vendors for our client partners. This ability to operationalize a highly customized end-to-end offering is exactly what we've been communicating in terms of our uniqueness, and it's truly rewarding to see payers begin to recognize the same.
Looking ahead, we have a robust sales pipeline, which provides foundation to bolster long-term growth if we were able to convert these opportunities into implementations that flow through our on-boarding and ramp-up cycles.
As I think about these opportunities and to Lisa's earlier comment, people are at the core of everything we do. They are, without a doubt, our most valuable asset and what truly sets us apart from our competition. Fostering a client-centric, high-performance culture has and will continue to be a vital priority.
To that end, I am pleased to announce that Melissa Christ has joined Performant as Chief People Officer to lead this very important area of focus. Melissa brings 20-plus years of experience in people strategy and working with high-growth companies. She understands what it takes to recruit and retain top talent, and she has a great track record for developing highly engaged teams. Melissa's addition rounds out an exceptionally talented leadership team, and we all look forward to working with her as we navigate the next phase of our growth.
In terms of the CMS RAC Region 2 protest, the award continues to be under review by CMS. We stand by the quality of our submission, as evidenced by the award and the work that we currently do for CMS in Regions 1 and 5. We just have to allow for the procurement process to play itself out.
On a related note, the CMS MSP recompete RFQ was recently issued as expected. We are in the process of responding, and having produced record recoveries during our tenure as the incumbent, we are confident of our qualifications and ability to submit a qualified response.
Finally, on the topic of COVID, as Lisa noted, we remain optimistic that the headwinds and related audit restrictions will continue to gradually abate alongside a sustained rebound in core utilization. As an encouraging sign, a handful of customers have begun to reverse limitations put in place due to COVID.
But this remains on a very limited basis. The majority of our customers are in holding pattern as they wait to see what measures CMS will take on the matter. Regardless, even the limited activity is encouraging and allows us to better forecast expectations for 2023.
Further, even though we cannot fully predict the future of COVID, we are aware of new variants that have been identified as being more contagious and more easily transmissible than Omicron. A large outbreak could lead to lower core utilization rates and possibly provider forbearance, which would be an impactful headwind.
But at this moment, we believe central impact is likely to be more constrained and largely staffing related, which still could delay implementations and stall recoveries, but we do not anticipate this to have a large-scale impact to our operations.
Overall, we are executing according to plan, and we are reassured by our expanding sales pipeline. We believe we are well positioned to have a successful second half of the year and achieve our guidance targets for both revenue and EBITDA.
With that, I'll hand it over to Rohit Ramchandani, our Senior VP of Finance and Strategy, to discuss the financials. Rohit?
Thanks, Sim. As Sim mentioned, our results in the second quarter of 2022 were in line with our expectations, which accounted for a potential impact from the Omicron variant this past winter.
Overall, we reported total revenues of $25.7 million, which included health care revenues of $21.8 million or a 17% increase as compared to our health care revenues from the second quarter of 2021. We are also excited to note that on a trailing 12-month basis, health care revenues are currently north of $90 million.
Our total customer care outsourced services revenue were $3.9 million for the quarter, which represented an increase of nearly 25% when compared to the second quarter of last year. So it's worth noting our expectations remain unchanged given the continued pause in the federal student loan payments, which are currently set to expire on August 31 of this year, though we would be unsurprised if this pause is extended again.
Total non-health care recovery revenue in the second quarter of 2022 was $7,000, in line with our anticipation of this stream going to 0.
Adjusted EBITDA in the second quarter was a loss of $1.4 million compared to $4.2 million in the prior year period. Sequentially, we saw elevated operating expenses from some hiring catch-up as well as continued new contract implementations.
Claims-based, also known as claims auditing, revenues in the second quarter of 2022 were $9.3 million or an increase of over 30% compared to the $7 million in the second quarter of 2021, representing growth from both new implementations as well as continued volume increases as existing statements of work move towards steady state. We maintain our expectation to continue seeing a healthy growth trend for the claims-based revenues into the rest of 2022 based on the opportunities available to us.
Revenue from our eligibility-based services for the second quarter was $12.4 million, representing roughly a 7% increase from the $11.6 million in the second quarter of 2021. While we currently anticipate balanced growth trends in all our health care product offerings that were multiyear spend, we acknowledge and recognize that each year may look different.
Operating expenses in the second quarter were $29 million, which is roughly $5.1 million lower compared to the second quarter of last year. Similar to the first quarter, this decrease was primarily driven by decreases in operating expenses related to the cessation of activity within recovery markets and offset by continued investment into our health care markets, specifically the addition of human capital, which we expect to increase our operating expenses and capital expenditure levels going forward.
Given no resolution of the RAC Region 2 protest as of yet, we still maintain a similar view on cash usage for 2022. This includes believing we have ample flexibility between cash on the balance sheet and revolver availability to pursue currently known and unknown organic investment opportunities.
We are pleased to be able to note this flexibility amidst the tumultuous macroeconomic climate, which includes a number of companies that can be read about in the national spotlight that are pausing hiring or even conducting layoffs. We are proud that we remain focused on the continued investment into technology and scale and continue to be active in our own hiring efforts.
Given our continued achievements in the second quarter, building upon the first quarter and in combination with the strong KPIs and opportunity growth ahead of us, we remain pleased with how we are tracking toward both the current year expectations and more importantly, our long-term goals. As we look ahead to the second half of the year, we are pleased to reiterate our health care revenue and overall company EBITDA guidance for 2022 of $92 million to $96 million and $2 million to $4 million, respectively. By all accounts, this has been a strong start to the year, our long-term strategy remains intact, and we are quite excited about the future.
Operator, would you please open up the line for any questions.
Thank you.[Operator Instructions] Our first question is from George Sutton of Craig-Hallum. Please go ahead.
Thank you. Simeon, obviously, the highlighted new information on the call is your discussion to be exclusive with a couple of midsized players. Can you just walk through how mature these discussions are, how these business models might evolve over time, just so we have some perspective?
Yes, happy to. Look, we're in pretty advanced conversations on the topic, George. And look, as you think about it, right, I think it's evidenced by the work we do for CMS and several national health plans, right? We have a significant experience and obviously demonstrated success supporting kind of large-scale program integrity engagements. And as we think about our flexible technology and some of the efficiencies that Lisa even mentioned in her opening remarks, it really does allow us to provide kind of a similar end-to-end offering to midsized plans.
And so these plans get the benefit kind of a comprehensive solution that covers kind of all areas of claim spend for audits such as inpatient, outpatient, acute care, etcetera, as well as kind of a set of pretty robust eligibility and recovery products that can be all tailored to the plan, right?
And so when we combine all of this with our national visibility, both the claims and eligibility landscape via those national RAC and MSP contracts, it really does become quite the compelling offering.
So it's important to note as we think about all of that in context of the overhead and complexities to manage multiple vendors, right, especially for some of the mid to smaller plans that really lack that infrastructure and staffing to do so. So look, as I noted in our prepared remarks, we are in discussions with two of these plans, pretty advanced. And they really do recognize the value of engaging kind of a single end-to-end solution.
And so we're excited to see how it plays out. And our teams are already kind of planning on how we might think about change in some of our workflows, if you will, in terms of kind of on-boarding. So kind of still a little bit in the early innings in terms of how we would actually on-board this and what the cadence would be, but I hope that gives you context in terms of why plans are looking at Performant in terms of our capabilities and what we can do for them on their scale.
How much of what you'd be providing to them would be people based versus technology based?
Yes. So it was largely the people in the beginning. I think look, it's always a combination, right? We use the technology behind the scenes to support everything that we do in terms of our end deliverable. But these two conversations that we're having right now, George, are largely focused around the similar contingency services that we provide, both in claims and eligibility, in identifying the findings and then turning it over to the plans to recover. So that's the initial conversation.
But I think, again, as our offering and our road map of products evolve, these really sticky opportunities, I think, give us an opportunity to have yet another channel for advancing those offerings.
Got you. One other thing. You mentioned a handful of customers have reversed limitations on COVID, but many are awaiting CMS guidance. I was not aware of the CMS guidance being a key factor here. Can you just explain that?
Yes, of course. So look, as I think I've mentioned on a few of these calls. CMS definitely kind of sets the tone. We have -- and again, I think that's a big part of what Performant brings to the table to all of our customers and prospects, that we are closely aligned with CMS and our various RAC programs. And so your commercial payers tend to look for CMS and what CMS does, especially as we think about Medicare Advantage plans.
And so we do have a lot of the payers reaching out to us asking for some insights, watching closely to see where CMS is going to go. I don't think, George, it's going to be any policy statement. It really is just if they see the RAC program start evaluating those claims and then it gives them more comfort level to do so themselves.
And so as I noted in my prepared remarks, we are having conversations with a number of plans around the topic. We are seeing some plans actually, in a limited basis, start to actually start bringing in some of these claims for review. So that is very consistent with what I've been forecasting, which is kind of Q3, Q4, we should have a pretty good consensus of where this is going to -- how it's going to unfold and what's that impact going to be for us in 2023 and beyond.
Understand. Very good, thank you.
Our next question is from Kyle Bauser of Lake Street Capital Markets. Please go ahead.
Great. Thanks for taking my questions and for all the updates here. So Sim, maybe I'll just follow up on your comments regarding the discussions with the two midsized payers. So it sounds like the offering that you're considering is kind of more bespoke as opposed to kind of the SaaS offerings you're contemplating and focusing on for the smaller-tier payers. Is that still the case?
Do you anticipate kind of this new offering for these midsized payers kind of rolling over into the smaller-tier space? Or is it still kind of two separate buckets, more automated SaaS play for the smaller payers and then bespoke services for the midsize?
Yes. I think -- look, I think the fast play opportunity, which continues to be in development that we're working on here, we still have that targeted more towards those smaller entities. I do think midsize as well in terms of some of the capacity and capability that it offers.
But I think specific to these two opportunities, the callout here is that they're sizable enough that they would still follow that traditional model of kind of a multivendor approach. I think we referred to this as the kind of that vendor stack approach. And as health plans look at that, they do so -- look, some of the larger plans do so for just trying to drive pricing down, but many also do just purely based on volume play.
As we look at some of these midsized plans and frankly, the majority and obviously, the smaller ones as well, they just -- it's -- there's a lot of complexities in trying to manage multiple vendors. And so if you can find a vendor that has a real end-to-end solution, is able to bring all of the audit capability, all the audit spend to the table and be able to provide services around that, a full suite of eligibility offerings, the ability to support non-par recoveries and do that and have that vendor also have the view of the national landscape as Performant does, that's pretty unique.
And so that's what we've been trying to share in terms of some of our unique capabilities and then obviously, a platform that allows us to really specifically tailor these offerings. And so that's starting to resonate. And so we've had these conversations now for probably as long as that 12 to 18 month sales cycle. But it's starting to resonate, and we're starting to get some good traction.
So I think that's really the distinction. So Kyle, as we think about that, clearly, if that does get further traction, it's just -- I think in many regards, it just gives us, as I said, a greater share of that wallet even more quickly because it's a one-vendor solution versus a competitive multistack approach.
Got it. That makes sense. I appreciate that. And maybe switching over to the guidance. Rohit, I appreciate the reiteration. Can you talk a little bit about how we should model cadence, both in terms of kind of Q3 and Q4 and also eligibility versus claim based. I'm assuming Q4 will be the strongest and claims as well, but just kind of want to get your thoughts on that.
Yes. No, I think you're thinking about it right. I think as you know, right, we're providing annual guidance. But I think similar to previous years we do expect the revenues to show strongest in Q4. So kind of a sequential step-up would be logical there as you think about the two quarters. I also think that you'll see a like trend between the eligibility and the claims based and perhaps kind of continuing on what you've seen in Q2, slightly stronger growth rates on the claims-based side, at least for the near term.
Great. Appreciate it. And maybe one more follow-up, 2-part for Sim. Great to see the update for the hiring of Melissa as Chief People Officer. Do you feel like you've got kind of the appropriate leadership team underneath you? Or do you think there's an opportunity to add more roles?
And then secondly, just kind of curious, are you seeing any other competitive headwinds out there for another pure play kind of similar to yourselves with smaller scale? Thank you.
Yes. So the first part, I think Melissa really does round this out, right? So we have some fantastic operating leaders. We brought in some folks from the payer space that they're helping us guide the product road map and support some of our new offerings. And just as we've been growing and growing, as I noted, right, our people are our number one asset and driving the culture that I'm trying to accomplish here and obviously, hitting our hiring targets. It's just great to have someone who's -- in Melissa, who's got great experience in working with high-growth organizations. So I think she really does round out the team, Kyle.
And then in terms of the competitive dynamics, look, not much has changed on that front in terms of our key competitors or market dynamics. We continue to kind of see a healthy pipeline of opportunities growing. And we're going up against the same players. I really haven't seen anyone yet kind of other than the key ones that we've discussed emerge. So I don't think there's a whole lot of change, and we continue to do very well on that front.
Okay. Appreciate it. And congrats on all the updates.
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for any closing remarks.
Thank you, operator. We want to thank you for joining us today. We want to thank our clients always for allowing us to serve and partner with you. And of course, we want to thank our team members who bring your best to Performant every day. Thank you for your time and your attention today.
This concludes today's conference. Thank you for joining us. You may now disconnect your lines.