Richard Zubek - IR Lisa Im - CEO Hakan Orvell - CFO.

Andrew Eskelsen - Compass Point Brian Hogan - William Blair.

Greetings, and welcome to the Performant Financial Corporation First Quarter 2016 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] I would now like to turn the conference over to your host Richard Zubek with Investor Relations.

Thank you, you may now begin..

Thank you, operator, and good afternoon everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2016 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 today's 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 walks you through the financials, I'll provide additional thoughts on 2016.

For Q1 2016, we reported overall revenues and adjusted EBITDA of $38.3 million and $7.4 million respectively. Compared to prior year, revenue was slightly lower by $300,000, but adjusted EBITDA was $3.8 million higher due to lower operating expenses.

This is primarily attributable to reductions in variable costs as you round down Department of Education resources, post April of 2015, when we stopped receiving student loan placements from the Department of Education.

As we look specifically at our key markets, total student lending accounted for revenues of $29.6 million, which is up from last year by $2.6 million. On the Department of Education procurement update, the complete RFP responses were submitted at the end of February.

At this time, there are no commitments from the Department of Education on when the contracts would be awarded, when they would start or how many vendors select. Healthcare revenues in Q1 were $2.7 million of which the Medicare Recovery Audit contract contributed $1.2 million, down from $3.2 million in 2015 as we work through reduced audit scope.

Commercial healthcare revenues of $1.5 million were $500,000 below prior year. We do expect commercial healthcare to trend higher sequentially for the balance of this year.

CMS Medicare Recovery Audit contract RFP was released on April 25 with a due date of May 24, and CMS has indicated that it expects the contracts to be awarded and start during the summer of 2016. Revenues from other operations were $5.9 million, down slightly by $300,000 versus 2015, primarily due to a one-time project for a tax client.

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 first quarter with revenues of $38.3 million, net income of $80,000 or $0 cents per share, and adjusted EBITDA of $7.4 million.

Beginning with our student lending business, revenues totaled $29.6 million, an increase of $2.6 million compared to the first quarter of last year. During the quarter, the Department of Education accounted for $7.4 million of revenues while guarantee agencies generated $22.3 million.

These amounts represent a decline of $4.4 million, an increase of $6.9 million respectively when compared to the first quarter of 2015. Student loan placements during the first quarter were $0.6 billion, down from $2.2 billion in the first quarter of 2015.

For reference purposes, we received $0.9 billion of Department of Education placements during the first quarter of 2015. In addition, placements from Guaranty Agency clients were lower than normal in the quarter, primarily due to fluctuations and placement volumes that we occasionally see from Guaranty Agency clients.

We expect Placements Volumes from Guaranty Agencies in the next quarter to be at more normalized level. The increase in our student lending revenues, the decrease in Placement Volumes are largely a reflection of the continued delays related to the Department of Education contracting process.

While we remain optimistic, we have not heard any update regarding the timing of when the new contract slowed when we might expect to receive new placements. As it relates to our Guaranty Agencies results, we again benefited from strong placement volume that we received in the first and second quarter of 2015.

Our healthcare revenues in the first quarter were $2.7 million compared to $5.3 million in the first quarter of last year. Revenues from our work with the Centers for Medicare and Medicaid was $1.2 million, down from $3.2 million in the prior year period.

Due to the current limited scope in combination with the processing delay implemented by CMS that shifted revenues out 30 days. Our commercial health care business generated $1.5 million in the first quarter, consistent with the fourth quarter, that a decrease over the prior year period.

Also regarding the updated RFP for their Recovery Audit Contractor that was recently released, I wanted to share leases positive sentiment that also remind you that even if CMS, which make a prompt decision and avoid one big regions, we would not likely to see a meaningful impact to our revenues until 2017.

However, should we be awarded more than one contract, we would anticipate incurring upfront cost as part of our efforts to get ramped out on that contract. This would also be the case in the event of a new Ed award. Lastly, our other markets generated revenues of $5.9 million in the first quarter, compared to $6.2 million in the prior year.

Moving to our expenses; salaries and benefits expense in the first quarter was $21.3 million, a decrease of 10.1% compared to $23.7 million in the prior year period.

Other operating expense for the quarter was $14.4 million, a decrease of 25.2% compared to the first quarter of 2015, primarily due to a reduction in volume-related costs and other completed cost reduction initiatives.

We have focused on improving our productivity, executing our business development initiatives and thoughts for engaging in expense restructuring. For the first quarter 2016, our reported net income was $80,000 or $0 per share compared to net loss of $4.4 million or $0.09 per diluted share in the prior year period.

Adjusted net income in the first quarter was $2 million or $0.04 per diluted share compared to an adjusted net loss of $0.5 million or $0.01 per diluted share in the prior year period. Fully-diluted weighted average outstanding shares were 50.2 million shares in the first quarter of 2016.

Our adjusted EBITDA in the first quarter was $7.4 million compared to $4.1 million in the prior year period. The adjusted EBITDA margin was 19.4%. Our effective income tax rate changed to 47.7% compared to 34.7% in the same period last year. Cash flows from operating activities in the first quarter were $11.3 million.

Turning to the balance sheet, as of March, 31, 2016, we had cash and cash equivalents of $48.1 million and our total outstanding debt was at $69.5 million, reflecting our continued focus on paying down long-term debt. Now I'll turn the call back to Lisa for some concluding remarks..

Thanks, Hakan. As you know, we completed expense reductions, which aligned our costs with the current revenue model and we improved employee productivity, which is visible in Q1 2016 results.

As we stated in our last call, we have excluded from our guidance the new Department of Education contract impact in 2016 due to uncertainty of contract start date and the number of contracts to be awarded.

Similarly, while the CMS has stated a target award timeframe of summer of 2016, we assume no impact to this year from this potential award based on the time of implementation. We talked about expense control and a visible impact of that in Q1 results.

With that in place, we are very focused on growing the business topline across our different businesses, including Performant Technologies, which is our customer care business, our Commercial Healthcare and opportunities in our core recovery markets.

While not at liberty to identify clients at this time, we are in the process of finalizing a contract with a new state tax client and believe our tax business will continue to grow.

Finally, we announced organizational change during the past month, because the regulatory environment in which we operate, is growing in complexity, we believe that we must continue to dedicate -- experience and leadership to the challenges of compliance.

Hal Leach, our former Chief Operating Officer has taken on the position of Chief Compliance Officer. As Hal steps into the Chief Compliance Officer role, we will need increased focus and leadership on operational and business strategy. To best meet this need, Jeff Haughton, Executive Vice President, has been promoted to Chief Operating Officer.

We made this strategic move to further bolster our business both quantitatively and qualitatively and believe that this change will enable us to continue to deliver our best to clients; strong returns and the exceptional service quality. Now we'd like to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from Michael Tarkan from Compass Point..

This is actually Andrew on for Mike. My first question is, I know you guys reiterated your revenue outlook to the same apply to the adjusted EBITDA guidance that you gave I believe on the last call..

I guess it -- sound weird reiterating EBITDA guidance between 14 million and 18 million..

And then just on the IRS collections contract, any update there. I mean, we'd heard that RFP went out, I think it was about a week or two ago. But we haven't seen anything out anything yet.

Is there anything you're seeing on that side?.

We're actually not at liberty to discuss that. I think the opportunities will become clearer over the next coming months..

And then, just on the new CMS RFP, there's been a lot of moving parts there with ADR limits and the two midnight rule. Just wondering, should we expect similar economics to the old contracts? I think you were talking margins in the 30% range.

I know that you're going to be bidding on the underlying economics, but do you guys kind of contemplate maybe bidding higher fees to offset some of that slower volume..

I think we have to put our best forward and bid competitively both in the experience, the technological qualification and then, of course, the pricing as well. We are going to be thoughtful in the way we comprise our response.

To the RFP, what we do think is helpful Is that this particular RP that came out does delineate preferred experience versus just qualified and non-qualified. We believe that we can put together a strong proposal based on our experience list our with the current contract over the past 6.5 years.

And then, on the pricing side, we're going to have to be thoughtful because we do want to make sure that we can provide the best service to the contract and we do not want to have short change the work that we're doing.

So we're going to have to be thoughtful, but we're cautiously optimistic that we can put together a very quality response that to our experience, and as well as something that makes sense for CMS from an economic standpoint..

Okay, awesome. Thank you.

I think just one more from me, so on your healthcare revenues, is this sort of the new run rate we should be thinking about? I mean, I know you guys said that the commercial line you expected to see sequential improvement and I just had a question on is that sequential improvement with each quarter or can you just help us sort of think about the run rate for both CMS and commercial? Obviously, absent any contract award..

So let me just take your commercial piece, and I'll let Hakan speak to the balance of it. So, the revenue that we're seeing today in the first quarter is actually driven by work that we did five to seven months ago. We have to think through sort of what we were working on at that time.

Just to give you a sense of why our outlook is better as we think about sequential quarters, is this revenue was driven by about five different contracts that we were operating at the time. And then, as we look forward, we've actually signed on about 15 different contracts.

They don't all implement April 1, but they will implement as they move forward, as the more contracts, we start to implement, obviously, then the future revenue that comes from those contracts will be additive to the ones that we're currently working.

Our commercial business is actually building in a way, it's not exactly I'd like it to go, but building in a really quality way with lot of quality contracts.

And I don't know, Hakan, if you want to speak to the CMS team?.

Sure. So as you look at and as we talked about last quarter, based on the restricted scope that will account the operating under, we expect that revenues on the team as rack contract and it's going to decline here in 2016.

But again, as we look at the commercial revenue and based on the visibility that we have there at this time, we expect to continue to grow at quarter-over-quarter. So, but again, that growth is going to be mitigated by the decline on the CMS RAC side based on the scope that we're currently operating under..

So would you say that maybe the commercial offsets the CMS or more than offsets it? Just trying to think about levels moving forward for the remainder of the year?.

It would be roughly we would say that it -- it will offset. So be pretty balanced between the two..

Our next question comes from Brian Hogan with William Blair..

Good afternoon. One quick one, is actually the tax rate -- 48%.

Do you expect it to stay at this level?.

We do, we expect -- although, as we look at it for the year. The annualized estimated rate we're estimated roughly around 39%. So, if you look at the rest of the year, annualized 39%..

Okay, that's helpful, thanks. You mentioned the new state tax client -- to be signed or implement a ramp here shortly. And without naming names like -- what is the potential for that client, I mean is it extremely meaningful. I know you do some state stuff already, but....

Sure. It would be meaningful, it's a very qualitative word. It would -- it's definitely one of the larger, say taxing entities. So, while we work across the board, we look for unique opportunities where we can be as strong partner with the state and develop a long-term relationship.

We believe this one -- again being a larger taxing entity, we're cautiously optimistic that we have a good future that we can look forward to with them..

Is that like a long-term contract, 5 years, 10 years.

How should we think about the duration of that?.

These contracts, honestly I cannot remember the exact years of the contract. But, even if there are three year contract, they tend to be pretty long-term if our returns are very good, and in the states in which we operated, they do see highest recovery rate based on our work with them.

So we are -- we believe that if we put our best quality results forward that would be a long-term relationship as well..

Great, hopefully the Federal IRS learns from that too.

Anyway, the commercial business, you mentioned 16 contracts currently, in year-ago you had five contracts and we're getting -- seeing the revenue from that five to seven months' work later, I guess are you going to give us like a number of contracts going forward is because the visibility into the growing of commercial healthcare.

Given that one of your focus areas is kind of tough..

We'll try to do as we go forward, is to try to give you some metrics that will help you capture what this means. So, when I think 16 contracts, they're not all the same size, each contract is obviously a -- different.

So, we'll think through, and I'm sure Hakan will think through some metrics that will be helpful in terms of how we can help you guide to a number..

The expense reductions that you've done, and you've done a great of job managing expenses. Is there more the come, are you done and then what are the number of employees at the end of the quarter, I'm just kind of right-sized the company and often..

The expense reductions that you've done, and you've done a great of job managing expenses. Is there more the come, are you done and then what are the number of employees at the end of the quarter, I'm just kind of right-sized the company and often. Sure, as we have indicated in past quarters.

We are very focused on making sure that we control the cost appropriately for depending on the moving parts of our business. So we have done significant reductions as you've seen our staffing over the last 12 months has reduced by about 300. So approximately right now at about 1200 FTEs and down.

So as we look at it again, we are going to be mindful and it will be false to say that we are done, although there is nothing right now that is imminent to faith on business that we have at hand here and we fully expect as we look at the Department of Education contracts and the RAC contracts to continue to feel the need to grow our business and to see that business going forward..

The student loan revenue and -- this is the GA placements. You mentioned more normal levels as normal, what is normal I guess in your mind and then the progression of student loan revenues through the year.

-- we saw some drop-offs in the middle of 15 from a placement volume and should we see student loan revenues, I would expect it to go down and kind of ramp back up towards the end of the year, is that as a correct assessment or..

Sure, let me, look about the placement levels. So as we look at our placements over the averaging over the past year, it's been running at approximately 900 million. So what I would say that in our 900 million is kind of historically what we have seen as more normalized rate. We did see a dip in Q3 as you know, and then it came up again in Q4.

So there's been some fluctuations quarter-over-quarter and again, as you look at the strong pace that we got in Q1 and Q2 of last year, that was very much, it drilled the increase in strong student lending revenues that we fill in Q4 and in Q1. So as we look at it here, it's going through for the rest of the year based on the placements.

We expect a decline in revenue based on the lower relatively speaking, lower placement levels.

Does that answer your question or -- there more -- ?.

Yes, that's all.

And then, I guess, probably the last question, just thinking about the reserve for appeals regards the CMS RAC on your balance sheet, and obviously, the current contract is winding down and who knows the word for the next contract, but what are the timing of that appeal? Is that, I mean its $19 million, is that slowly get released? Obviously, you stop putting lower end, but what's the timing on that, just kind of talked about that?.

Good question. We are still in discussions with CMS and regarding the implication of the settlement offer with the RACs. And overall, at this time, but we believe that our reserve balance is a fair estimate of what we may have to return. What the timing of that is going to be, it's still the TBD.

We're still in discussions with CMS and so we don't have any particular timeline to like talk about today..

All right, I guess one more. I'm sorry.

The CMS RFP, is there any material changes from the prior ones, any concerns or what are your thoughts there?.

So a couple of changes that we think are actually helpful. In the prior RFP, there was just a distinction between qualified and unqualified, technically unqualified or technically qualified, and then, a single price point.

What we do like about this one is, it's come out and there is a preferred status qualified and unqualified and preferred status requires three years of Medicare or like kind of broad volume based claim auditing kind of experience.

And then, in terms of pricing, there are different components to pricing that we think are fair way to look at the kind of work and the resources required for this contract. So, we think it actually is a more, I would say, just more thoughtful RFP that came out of where -- we think it's a positive..

All right, thanks for your time..

Thank you..

[Operator Instructions] We appear to have no further questions. I will turn the call back over to management for closing comments..

Thank you. Our Q1 results exceeded our expectations, largely due to our strong Placement Volumes over the last year as we've discussed. And then obviously the effective expense reductions that we put in place. However, as we move forward we are very focused on building our top line revenue from our different market.

And I hope that -- have come across, at least in terms of what our objectives are, what our focus is. And also before we go, I also want to thank our clients [ph] serve them this past quarter and thank our employees for bringing their very best efforts to our organization. And I also want to thank you very much for being with us today..

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