Richard Zubek - Investor Relations Lisa Im - Chief Executive Officer Hakan Orvell - Chief Financial Officer.

Toby Wann - Obsidian Research Group Andrew Eskelsen - Compass Point.

Greetings, and welcome to the Performant Financial Corp Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to the conference over to your host Mr. Richard Zubek, Investor Relations. Thank you. You may begin..

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 2015 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’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, 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. Today, I’ll provide you with an overview of our operational results and update you on the procurement status for the awards with Department of Education and CMS. Then, after Hakan walked you through the financials, I’ll discuss our expectations for 2016.

Before I begin, I’d like to announce that 2016 is Performant’s 40th anniversary. Across the years in industry, the success of our clients has been our most important priority to deliver and surpass results and value to our clients.

We have grown the business through increasing new and repeat business across large growing market through competitive advantage that we’ve built from experience and innovation. We are deeply grateful to our clients who have allowed us the opportunity to serve them over these decades and the past year.

I also want to thank all of the employees of Performant whose hard work and dedication help us achieve our results and goals. There have been many, who have been with us for a decade. In 2015, we reported overall revenues and adjusted EBITDA of $159.4 million and $28.8 million, respectively.

While these results are lower than prior year, adjusted EBITDA exceeded our expectations due to aggressive expense management.

Our operating expenses were $15.4 million below the prior year, which is primarily attributable to reduction in variable costs as we wound down the operational resources post April of 2015 when we stopped receiving student loan commitment from the Department of Education.

As we look specifically at our key markets, total student lending accounted for revenues of 119.4 million, which is down approximately 13.7% from 2014.

Although, our 2015 gross recovery back to clients of $1.7 billion exceeded 2014 levels of $1.6 billion, our revenue decline due to the July 2014 fee reductions from guarantee agency clients coupled with the Department of Education’s fee decrease, which became effective July 1, 2015.

Our placements in 2015 decreased by $1.4 billion from $6.7 billion in 2014 to $5.3 million in 2015, largely due to the Department of Education.

On the Department of Education procurement update, the RFQ response is due on February 22nd with the majority of the response with two sections, the subcontracting plan and small business participation due on February 29th.

At this time, there are no commitments from Department of Education on when the contract to be awarded, start, or how many vendors they will select. Turning now to our healthcare market, our healthcare revenues in 2015 were $19.9 million of which the Medicare recovery audit contract contributed $12.5 million.

Commercial healthcare revenue was below our forecast but at $7.4 million is over two times 2014 level. As you may know, the CMS Medicare recovery audit contract procurement has now been delayed almost three years, during which time CMS continues to reduce the scope of audit.

As a result, 2015 revenue declined from 2014 levels of $29.2 million to $12.5 million in 2015. While the contract has been extended through July of 2016, the scope has been further reduced during this extension timeframe. We will discuss the impact of this in a few minutes.

After the current state of the recovery audit contract procurement, we do not know what the timing of the new contract RFP will be as that information has not been posted and no additional information has been provided by CMS.

During the transitional time where contract we compete processes have been continually delayed, we have been managing the business with the objective of reducing expenses while maintaining our capacity to ramp up our performance, if and when we receive the contract award.

We are also working very hard to develop our opportunities in the commercial healthcare space, and we remain optimistic about our prospects in the area. Very recently, we’ve also been able to renegotiate our debt covenants with our lender group to extend our runway as we continue to await the pending contract award.

Hakan will provide more details in the financial portion of this call. With that, I’d like to turn the call over to Hakan to walk you through the financials.

Hakan?.

Thank you, Lisa. And good afternoon everyone. Today, we are reporting results for the fourth quarter with revenues of approximately $41.1 million, net income of $2.2 million or $0.04 per share and adjusted EBITDA of $9.8 million.

Student lending revenue totaled $32.8 million, an increase of $2.2 million compared to the fourth quarter of last year and sequentially higher than the third quarter by $2.6 million. Results In the fourth quarter benefited from the exceptionally strong student loan placements we received in the first quarter of 2015.

Additionally, we’re also seeing an increase in the number of borrowers choosing to participate in income-based rehabilitation programs which also had a positive impact on results.

During the fourth quarter, student loan placements were $0.9 billion, which is down from the $1.7 billion we received in the fourth quarter of 2014, but a meaningful increase from the $0.5 billion in placements we received in the third quarter of 2015.

As we mentioned during our last earnings call, placements from our guarantee agency clients were unusually low during Q3 and we had anticipated that Q4 placement will return to more normalized levels. The decrease from the fourth quarter of 2014 is a direct result of receiving DOE placement only through April 21st of 2015 when a DOE contract expired.

We do not expect to receive new placements from DOE until the new contract starts up. For the full year, student lending revenues and student loan placements were $119.4 million and $5.3 billion respectively, which represents declines of 13.7% and 20.4% respectively over 2014 results.

Our total healthcare revenues in the fourth quarter were $4.3 million compared to $2.4 million in the fourth quarter of last year. The increase in healthcare revenues was due to higher revenues under both CMS RAC contract and commercial healthcare business.

Revenue from our work with the centers for Medicare and Medicaid was $2.8 million, up from $1.4 million in the prior year period. Our commercial healthcare business generated $1.5 million of revenues in the fourth quarter, an increase over the $1 million from the prior year period.

For the full year, healthcare revenues were $19.9 million, which represents a decline of 38.8% over 2014. Lastly, as it relates to revenues, our other markets generated revenue of $3.9 million in the fourth quarter, compared to $6.6 million in the prior year period.

This decline is primarily the result of a tax amnesty program we conducted in the fourth quarter of 2014 with one of our state tax clients. We manage tax amnesty programs for some of our clients from time to time. Overall, in 2015, revenues from other markets totaled $20.1 million compared to 24.6 million in 2014.

Moving to our expenses, salaries and benefit expense in the fourth quarter were $20.5 million, a decrease of 8.5% compared to $22.4 million in the prior year period, primarily due to lower staffing related to the CMS RAC and Department of Education contract.

Other operating expense for the quarter was $15.8 million, a decrease of $2.3 million, primarily due to a reduction in volume-related costs. For the fourth quarter of 2015, our reported net income was $2.2 million or $0.04 per share, compared to a net loss of $2.4 million or a loss of $0.05 per diluted share in the prior year period.

Net loss for the full year was $1.8 million or a loss of $0.04 per share. Adjusted net income in the fourth quarter was $4 million or $0.08 per diluted share, compared to an adjusted net loss of $244,000 or a loss of less than $0.01 per diluted share in the prior year period.

Fully diluted weighted average outstanding shares were 50.1 million shares in the fourth quarter of 2015. For the full year, adjusted net income declined by 57% to $6.6 million or $0.13 per diluted share. Our adjusted EBITDA in the fourth quarter was $9.8 million compared to $4.9 million in the same period last year.

Our adjusted EBITDA for the full year 2015 declined 35.6% to $28.8 million and our adjusted EBITDA margin was 18.1%. Our effective tax rate for 2015 was 18% compared to 45% for 2014.

The decrease in effective tax rate is primarily due to the loss from operations in 2015 compared to the income from the operations in 2014 and the resulting impact of the state income taxes on the effective tax rate.

Even though we had a loss in 2015, in certain states, we continue to pay taxes due to the profitability of our Performant Recovery subsidiary, which files a separate turn in those states. Cash flows from operating activities for the year ended December 31, 2015, were $16.7 million.

Turning to the balance sheet, as of December 31, 2015, we had cash and cash equivalents of 71.2 million. Our total outstanding debt as of December 31 was 94.3 million. A sequential decrease in outstanding debt reflects continued payment on our long-term debt.

Lastly, in light of the prolonged delays related to the contract awards and other timing issues, we have very recently entered into an amendment of our credit agreement adjusting several of our covenants to Q2 of 2017. This amendment is expected to provide us with additional flexibility to operating company through these delays.

As part of the amendment, we also paid down debt by $22.5 million. With that, let me now turn the call back to Lisa for some concluding remarks..

Thanks, Hakan. Although we’ve had some headwinds recently, we continued to aggressively preserve the very real and proven strength of our company during this fiscal transition period.

Our outlook assumes that this transition will continue into 2016, which is why earlier this year, we completed additional expense reductions, which continue to align our costs with the current revenue model.

While the changes we implemented in our student loan operation have improved employee productivity during 2015, we expect 2016 to be softer than 2015 due to the changes to our landscape that started in late 2014 including a guarantee agency and Department of Education fee reductions; the lack of placements from Department of Education effective April 2015; and the draw out Medicare recovery audit contract procurement process and subsequent reductions in audit scope.

Because the timing of a new department of education contract starts and the number of contracts to be awarded are both uncertain, we have for now excluded the impact in our guidance. Similarly, while the Medicare recovery audit contracts are expected to be awarded this year, we assumed no impact from any of these contract awards.

We expect 2016 full year revenue to be in the range of $125 million to $135 million with adjusted EBITDA to be between $14 million and $18 million. Although, our commercial healthcare business has also experienced some headwinds, we continue to work on building more meaningful growth from here.

We expect healthcare revenue 2016 to be overall flat compared to last year, as expected growth in our commercial healthcare business is expected to be offset by lower recovery audit contract revenues due to the limitations on audit activity. Lastly, despite the challenges we faced in 2015, we responded with aggressive, thoughtful expense management.

More importantly, our strategy for growth includes both, our focus on healthcare and opportunities in our core recovery markets. These opportunities include internal revenue service contract, additional state tax contracts and consolidation in the guarantee agency market into our largest clients.

While the timing of these is not certain, we believe that our exceptional performance, our great compliance results, and the value creation for our clients position us well to capture these growth opportunities. And now, we’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 Toby Wann from Obsidian Research Group. Please go ahead..

Quickly, Hakan, could you detail the changes to the covenants, just kind of how I guess loose did they allow you to make them?.

Sure, Toby. First of all, we have regular dialogue with our lenders and we have been in discussions with them as the investor side as well and regards to update on the contract renewals and so forth.

And they have been not very supportive, as we’ve said before as evidenced also by the latest amendment that provides us flexibility here to operate the company through the next year and half. So, as we look at a high level, we paid down debt by $22.5 million.

It also provides for add backs related to start up cost with the new Department of Education contract. And we’ve filed as part of our press release -- we field actually agreement, so happy to discuss that with you further as you have a chance to review it. Those are the key aspects. And again, convents were amended over the next six quarters.

So, many of the old covenants were dropped off such as minimum EBITDA and so forth..

That’s helpful. And I’ll take a look at that filing to discuss a little and we’ll talk about it offline. And then just wanted to see if I can -- some more color on the kind of a commercial heath care biz.

I know it was down a little bit sequentially and I know tend kind of focus in on sequential changes because of shift of point in times, it’s better to look at things over a longer term trend.

But just kind of maybe you could shed some more color on what you guys are doing specifically on the commercial side, is it post payment stuff, or are you looking to do in prepayment audit type activities, receptivity of commercial clients and what’s been the I guess you could say headwind to getting it to ramp faster?.

So, first of all, the ramp, we’re actually reasonably happy with our restructure that we did in 2015. If you remember, we restructured that part of the business. And so far, we’re cautiously optimistic that we’re getting some pretty good traction.

As you look at some of these commercial clients, we do have contract vehicles with many of the large commercial payers as well as the mid-sized payers. We’re starting on many of these contracts and building our way up from there.

What we have had is some of our clients, when it comes to extending these contracts, have been a bit slower in the process than what we had anticipated or would like.

And so with couple of them particularly, we’re still working through the contracting vehicle; with some of the others, we’re actually building from smaller audit capacity into larger audit classes, as we prove our capabilities to add value to those clients.

We are doing largely post payments, although we have with some clients offered up a prepayment opportunity as well. And we’re starting to see some traction in terms of expansion of our scope in these clients. So again, little slower than what we had hoped for and what we liked.

But as you know it’s a competitive market and we’re trying to distinguish our offerings through providing services that we think are not being addressed at all or well by the current existing competitors..

Okay.

And if I could follow up on that with regards to the kind of a commercial targets, is it -- are you focused I guess on a specific patient -- patient is not really the right word, but I guess commercial segment, say Medicare Advantage, Managed Medicaid, I mean, can we get little more color on those types of targets that you guys are trying to get go after or is it employer sponsored type stuff?.

Sure. We’re actually going straight for the commercial payer relative to how providers are reimbursed. And so we’re looking at different classes of care, different classes of claims. Including as you know through our Medicare recovery audit contracts, we offer the entire breadth of over payment of claim type auditing.

And so that’s really what we’re looking at. We’re not specializing or focusing specifically on Medicare Advantage at this time, although some of our clients have talked with us about that.

So, it’s not to say it’s not something that we’re going to pursue in earnest but we think there are plenty of opportunities just given the types of audits, again different types of claims, complex claims, automated claims, durable medical equipment, hospice.

And so there are number different types of audits that we’re offering to these providers or payers rather..

Our next question is from Michael Tarkan from Compass Point. Please proceed ahead..

This is actually Andrew on for Mike. So juts first question on the education side. We’re hearing a lot about a higher touch servicing push from the CFPB and Department of Education with efforts to sort of help our borrowers before they default.

How are you guys thinking about the impact of that, as it relates to the growth rate of your collections business?.

Are you talking specifically about the efforts on the key [ph] services side?.

Mainly just sort of the push to get borrowers to stay current and not default. Basically what I’m getting at is how are you guys thinking about how that could potentially affect the pool of defaulted loans that you guys are able to work..

Sure. I think there is always -- there always have been programs to help borrowers prevent default. There’s certainly is a push by the current program to help borrowers prevent default. But as we know from a variety of different life reasons, borrowers will default.

And so, the percentage potentially might go down a bit, but absolute dollar pool is still very large and borrowers still need a lot of it focusing in on how to keep their -- how to make their payments and then keep those payments sustainable over time.

What we do find is that even though there is an increasing efforts, we do see that there are still -- I don’t think the Department of Education has produced their last cohort of defaults.

But there certainly are a meaningful percentage of borrowers who will continue to default over time and they have programs that they can engage in after default in order to stay current. So, we’re not seeing the efforts have a material impact.

We’re certainly keeping an eye on what’s happening, but we certainly see a lot of borrowers still needing help and needing assistance in restructuring their payment stream. So, we’re still seeing that in effect in the market and increasing borrowers..

And then just one more shifting to the RAC side. I believe sort of back in the day before this whole delay in the contract awards, you were running at something like $70 million annual run rate in revenue. And I know that there has been a lot of moving parts since then.

But given some of the limits on ADRs and changes to the Two Midnight Rule, how should we think about the economics of that contract moving forward?.

I think it’s still obviously very early in the restructuring process with CMS. Their objective is to try to refine the program. So that providers to make a greater percentage of errors get audited at a higher level.

Their CMS we believe is the testing to bringing the program, so that there is balance between audit provider and to correct some of these issues upstream. So, I think it’s hard to say exactly when and how this contract will ramp up, but we do know that CMS is ultimate intensive to make this a key part of their program integrity.

So, I can’t estimate the timeframe we’re going to speculate on timeframe. But we hope to be able to work with them to make this, again a very much integrated part of their program integrity effort..

[Operator Instructions] And as there are no further questions, I’d like to turn it back over to management for any closing remarks..

Thank you. As I mentioned, this year the company turns 40. And really in that time, we’ve grown the business through hard work, but through organic efforts. And in fact when we look at sort of 10 years prior to 2013, the company stock and revenue grew in excess of five times.

And we’ve done that by crossing into industries and by growing our new and existing business. And despite the current challenging headwinds, we are committed to growing the business and committed to aggressively managing everything that’s within our control in order to provide some more opportunistic engagement as we move forward.

Once again, I’d like to thank our clients for letting us serve them this past year. And I want to thank our employees who bring their very best efforts to our organization. I want to thank you all for joining us today..

Thank you. This does conclude today’s conference. You may disconnect your lines and have a wonderful day..