Jeff Guzman – Investor Relations Lisa Im – Chief Executive Officer, Director Hakan Orvell – Chief Financial Officer.

Bob Napoli – William Blair & Company Tyler Scott – Wells Fargo Securities Michael Tarkan – Compass Point Richard Close – Avondale Partners Toby Wan – Obsidian Research Group.

Good afternoon, and ladies and gentlemen, and thank you for standing by. Welcome to the Performant Financial Corporation's 2014 Second Quarter Earnings Conference Call. During today's presentation, all parties will be a listen-only mode. Following the presentation, the conference call will be open for questions. (Operator Instructions).

As a reminder, this call is being recorded today, Thursday 07, August, 2014. I would now like to turn the conference over to Jeff Guzman with 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 2014 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 the risks and uncertainties as 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 tables attached to our press release. I would now like to turn the call over to Lisa Im..

Thank you, Jeff. Good afternoon everyone and thank you for joining us for our earnings call. Today I am going to provide you with a brief overview of the key development in our business during the quarter and then after Hakan will walk you through the details of our financial results.

Afterwards I’ll discuss our outlook for the remainder of 2014 before opening the call for your questions. I’m very appreciate of the continued partnership opportunity from our clients and proud of our hard work from our team in delivering the second quarter results.

We reported overall revenues and adjusted EBITDA of $57.4 million and $16.7 million respectively. As we look specifically at our key markets during the second quarter, student lending accounted for revenue of $40 million which is up approximately 1.6% sequentially and down 10.9% from the 2013 period.

This result is largely reflective of the timing of loan placements. During the second quarter of 2014, we received total loan placements of $1.9 billion compared to $1.4 billion from the first quarter of 2014.

With respect to the Default Collection Service contract rebid process with the Department of Education we have been operating under an extension of the current contract and [indiscernible] award position. Over the past few months there have been a number of announcements as it relates to the contract rebid process.

Keep in mind that the Department of Education of voice disruption [ph] by continuing to operate their contract while procurement processed was in the background.

Based on the latest timelines, [indiscernible] unrestricted contracts are due on July 23, with an expected award day occurring in September of 2014 and actual work on the new contract commencing in April of 2015.

We do not anticipate that this delay in the award timeline will impact our operations and we expect that it will largely be business as usual until the new contract begins. Historically, student lending has been a predictable contributor to our revenue and has provided the company with consistent growth.

Longer term we expect student lending will continue to experience strong secular growth. Turning to our healthcare business, we are still awaiting announcements of the CMS Recovery Audit Contract awards.

As you know, we had expected the awards would have been made by now, but they have been delayed by pre award process and following the denial of those protests, now a lawsuit in the Federal Court of Claims that seeks an injunction against the awards and changes to the payment terms in the new contract.

We understand that CMS can move to the court that will not award contracts at issue with the litigation any earlier than August 15, the date the court issued a final decision on the merits of the case, or the date this case is dismissed whichever comes first.

Due to the continued delay in awarding the new recovery audit contract, earlier this week CMS announced they are looking to initiate contract modification to the current recovery audit contract to allow the recovery auditors to restart from the [indiscernible].

Most of the views will be done on an automated basis, but a limited number will be complex reviews of topics selected by CMS. We believe this test underscores the public policy importance of this program and the cost savings it drives to the federal government.

That said based on the amount of time that was required for to – new engage providers we anticipate this decision will have a limited impact to our topline in Q4 of 2014. Our healthcare revenues decreased 17% sequentially and 37% year-over-year to $11.2 million and our net claim recovery volumes during the quarter was $100.2 million.

We view this as a solid result given the significant restraints imposed in connection with the contract transition process and exclude all short things and periodic interim payment providers. Remember February 21st was the last day we could request new medical records from providers and June 1st was the last day we could submit new claims.

With respect to our commercial top tier contract, we continue to initiate the implementation process and ramp up on this opportunity. Additionally, we continue to have a strong balance sheet and we are actually pursuing a range of business development opportunities that would enhance our technological platform and further diversify our business.

Before I turn the call over to Hakan to walk you through the financials, I want to announce that our Chairman of the Board Dr. Jon Shaver will retire effective August 12, 2014. Jon has been Chairman of our board of directors since June 2007 and he has served in various board and executive role at Performant and its subsidiaries since 2000.

I have known Jon for 12 years and we share a number of great experiences throughout our careers. We will miss Jon and wish him the very best in retirement. The board has elected me to take on the Chairman’s role in addition to my current responsibilities as CEO. Hakan..

Thank you, Lisa and good afternoon everyone. We are pleased with our financial results for the second quarter. Today we are reporting revenues of approximately $57.4 million, net income of $5.9 million or $0.12 per diluted share, and adjusted EBITDA of $16.7 million.

Student lending continues to represent the largest component of our revenue mix and totaled $40.1 million, decline of $4.9 million compared to the second quarter of last year.

However, Q2 of last year benefited from some favorable – timing issues in combination with revenues from an initial placements from a specialized portfolio contract with one of our leading guarantee agencies.

Second quarter 2014 placements were $1.86 billion which is higher than the $1.26 billion we received in the second quarter of 2013 and an increase of $416 million from the $1.4 billion in placements we received in the first quarter of 2014.

Revenues, as a percentage of placement volume, in the second quarter was 2.2% compared to 3.6% in the prior year period. Our healthcare revenues in the quarter were $11.3 million compared to $18 million in the second quarter of last year.

The decrease in healthcare revenues was primarily due to the contract wind down of the CMS RAC contract in advance of a new contract ramp up While our net claim recovery volume decreased by $59.6 million to $100.2 million our claim recovery fee rate remained flat at 11.3%. Revenues from other markets.

Revenues from other markets in the second quarter were $6 million compared to $6.2 million in the prior year period. Moving on to our expenses. Salaries and benefit expense in the second quarter were up slightly at $24.3 million, compared to $23.9 million in the prior year period.

Other operating expense for the quarter was $20.4 million, a decrease of $2.5 million primarily due to cost associated with our Q2, 2013 follow on offering and volume related cost.

For the second quarter of 2014, our reported net income was $5.9 million or $0.12 per diluted share compared to net income of $11.3 million or $0.23 per diluted share in the prior year period.

Adjusted net income in the second quarter was $7.3 million or $0.14 per diluted share compared to $30.1 million or $0.27 per diluted share in the prior year period. Fully diluted weighted average outstanding shares were 49.7 million shares in the second quarter of 2014.

Our adjusted EBITDA in the second quarter was 16.7% compared to $27 million in the same period last year. Adjusted EBITDA margin was 29.1% compared to 39% in the prior year period.

Our effective tax rate in the second quarter of 2014 was 41.8% and cash flows from operating activities in the second quarter of 2014 was $21.1 million compared to $19.3 million in the second quarter of last year. Turning to the balance sheet. As of June 30, 2014, we had cash and cash equivalents $81.5 million.

Our total outstanding debt as of June 30, 2014 was $116.7 million. The sequential decrease in outstanding debt of $30.9 million reflects payments on our long-term debt. Let me now turn the call back to Lisa for some concluding remarks..

Thanks, Hakan. As we previously stated, we expect 2014 to be a transitional year and that certainly remains the case today. However, we are very optimistic about the longer term trends that are occurring in our industry.

As the year will progress, we have a gained incremental visibility on the business and I will now provide an update to our 2014 guidance.

First as it relates to our guarantee agency clients we have previously indicated to you that the federal budget tax reduce the compensation received by guarantee agencies for rehabilitating a loan and, as a result, that there was uncertainty surrounding the potential financial impact of Performant.

We now have improved clarity around the new fee arrangements with our guarantee agency clients and we would expect to impact to our 2014 revenue and adjusted EBITDA to be near the mid point of our previous expectation of $5 million to $15 million. Second, as part of our guidance we assumed a timely start of the new CMS contract.

However, given the on-going delay in awarding the new contract, it is not clear that there will be no revenues from the new contract instituted in our 2014 results. We expect that there will be approximately a four to six month period until we start to recognize revenue on the new contract after the awards made.

Third, as previously discussed we signed contracts with [indiscernible] with four of the six largest commercial healthcare payers in the U.S. While we believe that this market opportunity is significant we have seen a slower ramp up process than we originally anticipated.

As a result, we expect revenue generated from these contracts in 2014 to be at the low end of our previous range of $5 million to $15 million. We remain optimistic regarding the long term opportunity from these contracts and we expect a meaningful contribution in future years.

In total, with regard to our full year 2014 guidance we are tightening our expected revenue range to $200 million to $220 million and that’s also tightened our outlook for adjusted EBITDA to a range of $48 million to $52 million. We remain confined in our future outlook as the long term trends in the market we operate remain very robust.

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

(Operator Instructions). Our first question comes from Bob Napoli from William Blair..

Thank you. Good afternoon.

What are -- I guess, Lisa, are you have discussions with CMS? What do you expect on August 15th? Do you expect there to be an announcement or a placement of -- are they giving you any indication of what will happen and when they would make those awards?.

Bob, we’re actually not in active discussions as you know this is an active ongoing procurement, but what we do know from courts document is that on August 15th this date the court issued the final decision on the merits of the case. So what we believe we should be on the 15th is a decision either to for the plaintiffs or a dismissal of the lawsuit.

And that will allow CMS to make a decision on what they have to do. So clearly it’s the lawsuit is upheld for the plaintiff we believe that CMS will then have to re-release the RFQ if it is dismissed then we believe CMS may be able to continue on with the award..

Okay. It looks like you're holding onto your staffing, your expenses.

Your comp expenses are relatively flat so you're holding onto the staff through this process?.

Bob, as we look at our staffing you are doing Q2, it’s – remember as well that we are continuing to work under old contracts. We worked on their old contracts all the way up through in the beginning of June and so that’s factor. The other part as you look at Q2, is we have – we’ve had favorable placements – in defaulted loans from – lending clients.

So if you look at that volume we had that stepped up a little bit to increased volume..

Okay. And then just on that increased placement volume, what is the mix of that? I mean that was a pretty good level of placements probably in [GA] versus….

Yes that was a good quarter. On the Department of Education placement was about $900 million and then close $1 billion from guarantee agencies..

Do you have any visibility into placements in the back half of the year?.

Nothing specific at this point, but as you’ve seen over past quarters it tends to pretty steady on a quarter-to-quarter basis..

Great. Thank you very much..

Thank you. Our next question comes from Edward Caso from Wells Fargo Securities..

Hi, there. It’s actually Tyler on for Ed. I just had -- I saw with the RAC restart, that’s good news while they kind of work this out.

I was hoping that you might be able to provide us a little bit more color just on sort of the scope of the work that you might be able to get back from that and when we can start to see maybe some revenue from the more automated audits?.

Hi, Tyler. The automated audits will be as soon we start – I’m not sure as I sit here whether we have a signed document -- countersigned document with CMS, but the automated start really quickly. And then they are currently are limited number of complex audit. We will start to see some revenue in the half of this year.

But as I mentioned, because we have to reengage our providers after couple of months or so of pulling back, we’re not going to see a lot of revenue in 2014. But as we – I think that as I mentioned we’re optimistic, this is indicative of CMS’s affirmation of the program.

Its return since the beginning of the program, the recovery audit program including the demonstration has return over $10 billion came to the Medicare Trust Fund, and that’s a lot – and that is including auditing of less than 2% of all Medicare claims. So, we believe that CMS sees the value of the program.

It is the most improved program according to Health and Human Services, OIG report. And we look at that what that does in terms of public policy. We believe CMS is indicating their strong support for the program..

Absolutely and how long does this kind of restart, does it just kind of open-ended until the new contract is awarded or is there a stop date?.

We believe there is an open end and again CMS is clearly trying to do the right thing by public policy. So, and there are statements actually on their website, due to the continuous delay in awarding new recovery auditor contracts and if we interrupt with that, we believe CMS is initiating this contract modification in order to restart the work.

So, it’s our belief from their statement that they are intending to ensure that good program continues..

Great, great. And then just switch gears a little bit on the Department of Education contract, the recompete, is that going to kind of be the same model as the old contract where there is going to an allocation based on the internal ranking? I remember that the system a challenged with an upgrade and then there was an impact from the recompete.

So, do you have any color kind of that or is it still in the early phases of those negotiations or contracting issues?.

Well, when the awards are made on the upcoming contract, the Department of Education will select a specific number of vendors, and they will actually, if they follow historical behavior which we believe they will.

They will allocate based on number of vendors for a performance period of six months and then based on performance from month seven forward, every quarter they will re-allocate based on performance..

Okay. Alright, great. Actually, I’ll just sneak just one more on the commercial side. I was wondering if you’ve had any early success or what the possibilities are to kind of take what you’ve been on doing on the commercial healthcare side and sort of apply to other industries and that will be my last question. Thank you..

On the commercial healthcare contract, these are very specific related to each of the insurers, but they’re along the same lines as the work that we’re doing with respect to auditing claims according to payments policies. We have some early success and we’re pleased with that.

As I mentioned it’s just – and I think I mentioned in the last call as well. It’s a really bit slower startup than what we had hope for. So, definitely we have the ability to initiate the similar product and services across other healthcare payers..

Alright, great. Thank you very much..

Thank you. Our next question comes from Michael Tarkan from Compass Point..

Thank you. Just on the guidance you mentioned, you maintained the low end on the revenue side, but you took down the low end of EBITDA by about $9 million.

Can you just reconcile that a bit for us?.

First of all, as we look at the guidance that we did that we’re narrowing the guidance based on the broad guidance that we gave earlier in the year with some of the uncertainties that we were faced with at the beginning of the year, so, as we look at – as Lisa stated earlier, we have now clarity around the RAC contract on the transition that we are looking at there, and its implications on this year, as well as on the commercial healthcare contract and the [GAC].

So, again as you look at the mid point that we wrap this forward we were at $51 million, now you’re looking at midpoint of about [$50] million, which is slightly higher overall as a percentage of revenue slightly up..

Sorry, I misunderstood; I though you had said the low end of the EBITDA guidance was $38 million. That’s my mistake.

So, its $48 million on the low end?.

$48 million, correct. Okay..

On the healthcare side, with June being sort of the last time for new claim activity, how should we think about RAC revenue in the third and fourth quarters here? Not looking for specific guidance, but outside of these limited changes that CMS is now allowing?.

Sure. If you look at the old contract, there is a runoff since we recognized revenue when the settlement of payment is done. So you would definitely see a material reduction in Q3 versus Q2. But there would be revenue in both Q3 and Q4, as we again the settlements are made on everything that we identify prior to June 1..

Okay.

And then, I don’t if you have this answer yet, but the new auditing that you’re allowed to do again, are you allow audit PIP providers as part of that?.

Not at this time..

Not at this time. Okay.

Any idea if that’s going to change under the new contract or are you still under the impression that the new contract you will be allow to audit PIP like you would normally audit any other providers?.

We believe that periodic interim payment provider should be included in the new contract. And as you recall, part of the rationale for not being able to audit them for the majority of the old contract was due to a lack of automated processing, which as you recall was actually implemented last year.

So, we believe in the new contract that they should be included in this scope of work..

Okay. And then just on the education side, I know you mentioned second quarter of last year there was maybe some one time stuff in there.

Can you give us that number?.

The one-time – there were two factors that impacted mainly in revenue last year. First of all you have -- timing of placements. The Q1 of last year was a softer quarter in student lending and then you had some favorable timing implications in Q2.

And then we have the initial placements from specialized portfolio of work that we were doing for one of our leading GA client that provided some benefit in Q2. But I would say that the timing of placement was really the most material issue..

Okay.

I mean, can you give us a little more clarity there? So, the $45 million that you did in student lending in the second quarter of 2013, any sense as to how much that was benefited from either of these two issues?.

I would say from the specialized portfolio that we had, that was about, it looks close to $4 million of revenue that we recognized in Q2..

Okay.

And then lastly, I guess the overall revenue in the educations that came in a little later than what I was looking for especially in light of the big placement that we saw in the third quarter of last year and so I’m wondering if you have any color there I would have thought I guess that with that $2.1 billion in the third quarter of 2013 that we would have started to see some of that revenue kick in? And then I’ll hop in the queue.

Thank you..

Sure. As we look at this Mike, I mean, you have some impact, we’ve seen that in prior quarters depending on when the placements were made during the quarter and especially if you look at some of these larger placements than the catch-up that we had on Department of Education, there was a large placement at the time of the beginning of the quarter.

So you have -- your timing of the placements during the quarter is going to have some impact here, so its nothing be a clean necessarily a direct correlation with three quarters out..

Okay. Thanks..

Thank you. Our next question comes from Richard Close from Avondale Partners..

Yes. Thanks for allowing the questions. Yes. Thanks for allowing the questions. On the commercial contracts or commercial healthcare, if you can walk us through some of the dynamics there with respect to the slower ramp.

Exactly what is causing that or maybe some -- what are the hurdles you're facing in that? And then as you think about 2015 in contribution I guess to 2015 revenue from the commercial side of the house?.

Sure. I’ll just give you a couple of examples. With one of the [peers] we have – I believe that’s six or eight different contracts that we’ve signed under the MSA, but getting those negotiated and signed has been a bit of a back and forth process.

So, we were obviously hoping for a much more shorter close, but that’s dragged on a bit and so our ability to actually start the work was delayed by several months. And one of the other healthcare care providers, we’ve just for example, data transmission testing and working through that aspect of it has been a bit slower than what we had envision.

So, as we go into 2015, we believe that obviously these issues are being resolved and as we ramp into our commercial contracts that we – again we’ve signed and implemented, we think 2015 represents a much lesser multiple of what we’re seeing in 2014..

Okay.

But for 2015 -- or for 2014 we should be expecting $5 million, the low end of what you -- I mean, I said -- or said a couple quarters ago? Is that correct, $5 million?.

Yes. The low end of our range, yes..

Is that -- do you have a gut feeling that that's conservative or is that a stretch based on some of these delays to get to that $5 million with, I guess, five months to go?.

Its obviously, our job is to try to accelerate revenue and growth in our business. So we’re certainly going to work towards that, Richard, but I think at this point we feel like that’s probably our best estimate..

Okay. With the GAs in the midpoint of the impact that you thought it was going to have, just want to be clear on that.

That was a $5 million to $15 million negative impact to EBITDA in the second half of the year, correct?.

That’s correct, yes..

And so you're looking at the midpoint of that. With respect to the conversations with the GAs, and we thought maybe some of impact potentially would be offset by higher volumes as people did the income-based payments, if I'm not mistaken.

So why don't you talk to us a little bit about what you're thinking on GA volume based on the income-based payments and whether that really has a juice to your volumes?.

The income-based payment programs are rehabilitation driven, so there is a start period, obviously, effective in July, but we’re not going to see those volumes uptick in our numbers until we get to the end of rehabilitation process.

So the program is design to allow borrowers who have not had a chance to adjust their levels of the payment to their income. And so, what we have our borrowers either have not been able to enter program or who have made payments, but not been able to officially enter the rehabilitation process.

And so we will see some of those numbers start to uptick, but we need –again, not in 2014, that will be a 2015 impact..

Okay. My final question is on the healthcare revenue. You mentioned – Hakan, I believe you said that the decrease was primarily related to the RAC.

What else would be in there that might have led to the decrease? Is there anything else or was that – am I reading too much into that?.

I mean it’s very much related to RAC contract, and as you look at the wind down on the old contract, we stopped work in June 1. So we were again winding down old contract, yes, that’s primarily why you’re seeing reduction from Q1 on the healthcare revenue.

And similarly as we just discussed there will a similar reduction going into Q3 as we see the runoff from the old quarter. .

Okay. So it's all the RAC business.

There's nothing else that decreased in the quarter in the healthcare?.

No. the other healthcare, the commercial healthcare contracts are growing, so that’s a counter, but again that’s been – it’s still the process, but that’s going in the right direction..

Okay. And I guess my final question for you guys is, if you -- obviously there’s been a lot of balls that have been juggled here over the last year or in the air still and we're waiting on things.

But how would you characterize the business overall as – I mean obviously you're dealing with these contracting issues, but do you think the business, after we get beyond this, is better than ever or – I mean, just what's your longer-term outlook in terms of where performance sits in just this fraud, waste and abuse area?.

Yes. I think once we get through this contracting process, which has been long. We feel very good about where we are in market. And again, we talked about our little bit of slowness in the commercial healthcare, but we believe we have the right solution. We are working with our clients to driver innovation in our services.

We also believe that expanding our presence across the healthcare market, not just to the largest payers, but to other payers in the market will drive additional business for us more quickly.

We also believe that technology is a differentiator for us, when we think about working with out clients that were very – it takes a lot of hard work, right, to create a good business. But we are putting in spades and we feel pretty good about the position that we’re in as we look out into the future..

Okay. Thank you..

And just in addition. Just one thing in addition to that. As you look at the long-term trends in the markets we operate in, there is [indiscernible] healthcare spend is increasing. You look at the student loan volumes, and we have seen that historically for us has been growing.

So if look at the overall of dynamics of these long-term trends, they have been – they look very confident..

Okay. Great. Thank you..

Thank you. (Operator Instructions) Our next question comes from Toby Wan from Obsidian Research Group..

Hey, good afternoon, everybody. Quickly, I know the Part A and Part B Medicare RAC contract's still – that's hanging out there and who knows when that whole thing gets resolved, but any thoughts on the DME and home health contract? I don't think there's any protests or delays with regard to that contract.

Any thoughts there on that being awarded?.

Hi, Toby. I think it’s our belief and CMS clearly has not made a public statement about this.

When we look at across our RFQs and the contracts that have been released for response, the DMA and home health contract, well, it is not protested or included in the lawsuit, still has payment terms that would be affected depending on which way the case goes.

So its – and we believe CMS was just being cautious and ensuring that they don’t have to go back and change anything. So that’s where we think they’re headed..

Okay, fair enough.

And then kind of along similar lines, maybe kind of talk about you all's thoughts with regards to CMS recently, within the last week or so, putting out kind of – I don't want to say official RFQs, but the preliminary steps to an RFQ coming down the road on Part C and Part D and your all's thoughts about maybe market expansion opportunities within those aspects of the Medicare program? Thanks.

Yes. We saw the – I think the Part C is actually an RFI. It’s actually the second time that the RFI has come out. And it certainly presents an opportunity to expand the work scope for CMS. We are contemplating and considering what that mean to our business. The Part D as you might know was awarded to a small company and ran its contract course.

And our view is that we have to read it to make sure that we want to bid on it. We just want to make sure the terms and the scope of work indeed would provide opportunity for growth. So we are certainly contemplating those..

Okay, thanks. Congratulations on the quarter..

Thank you..

Thank you. At this time we have no further questions. I will turn the call back over to Lisa Im for closing comments..

Thank you. We’d like to thank all of you for participating again in our earnings call. We do continue to be cautiously optimistic that CMS recovery audit contract will be awarded soon.

And as we said, we believe CMS has restarted the work under the old contract is indicative of their support of this very good public policy program, as well as an acknowledgment of the dollars that this program returns to Medicare Trust Fund.

And as we discussed today we’re very excited about our growth in the commercial healthcare business and although a bit slower than what we would like. We believe the future is a very good prospect for us in that market. So again, thank you again for you attention and for participating in our call..

Thank you. This does conclude today’s teleconference. You may disconnect your line at this time. Thank you for your participation..