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

Michael Tarkan - Compass Point Brian Hogan - William Blair Andrew Wessel - Sterling Capital.

Thank you for standby. This is the conference operator. Welcome to the Performant Financial Third Quarter 2016 Earnings Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] I would now like to turn the conference over to Richard Zubek, Investor Relations. Please go ahead..

Thank you, operator. Good afternoon, everyone. By now, you should've received a copy of the earnings release for the company's third 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 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 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 the Department of Education CMS and our new contract award from the Internal Revenue Service.

Then, after Hakan walks you through the financial, I'll provide additional thoughts on 2016.

For Q3, 2016 reported overall revenues and adjusted EBITDA of $31.2 million and $4.7 million, which were lower than prior year by $7.3 million and $1.8 million respectively, while expenses are substantially lower than the prior year declines in ED and rack revenue cost an overall reduction in EBITDA.

As we look specifically at our key market, total revenues from student lending the market were $23.8 million, which is down from last year by $4.7 million. Healthcare revenues in Q3 were 3 million, down $2.1 million from 2015, primarily due to the termination of the prior rack contract.

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 ED on when the contracts with be awarded, start or how many vendors they will select. That said, we are pleased to announce some contract awards.

We were recently awarded one of the four positions on the IRS Recovery contract. This program is the pace [ph] for in the December 2015 highly transportation bill.

We are honored to be one of the initial vendors and believe that this contract has the potential to be very successful based on collaborative effort with the client to accomplish their objective. The timeline for implementation is Q2 of 2017. Also, you may have seen CMS announced the new Recovery Audit contract awards earlier this week.

Performant was selected to be the recovery audit contractor for both region one and region five. Region one is the reconstructed Northeast, Performant service a large portion of this region under the previous contract. You may recall that CMS equalized the size of each of the region for the new contract.

Region five is the newly created region and is the national durable medical equipment or DME and home health and hospice contract. At this time we do not have a specific startup date for these new contract, but hope that the activity will begin sometime in the first half of 2017.

Revenue from other operations were $4.4 million, down about 500,000 from prior year. With that, I'd like to turn the call over to Hakan to walk you through the financials. Hakan? Hakan Orvell Thank you, Lisa, and good afternoon, everyone.

Today, we're reporting results for the third quarter with revenues of $31.2 million, net loss of $0.7 million or 0.01 per share and adjusted EBIT of $4.7 million. Beginning with our student lending business, revenues totaled $23.8 million, a decrease of $4.7 million compared to the third quarter of last year.

During the quarter, the Department of Education accounted for $3.9 million of revenues, while guaranty agencies generated $19.9 million. These amounts represent declines of $2.1 million and $2.6 million respectively when compared to the third quarter of 2015.

The decrease in our student lending revenues is largely a reflection of the continued delays in the Department of Education contracting process, with a result that we haven't received new student loan placements from the Department of Education since April 2015.

While we remain optimistic, we have not heard any update regarding the timing of when the new contract will startup and when the new contractors and expect to receive new placement. With respect our guaranty agency results, we benefited primarily from strong placement volumes that we received at the end of last year.

Student loan placements during the third quarter of 2016 totaled $0.7 billion, up from $0.5 billion in the third quarter of 2015. Our healthcare revenues in the third quarter were $3 million, compared to $5.1 million in the third quarter of last year.

Revenue from our work with the centers for Medicare and Medicaid was $1.7 million, down from $3.5 million in the prior year. And our commercial healthcare business generated revenues of $1.3 million, a decline from the third quarter of 2015.

As Lisa mentioned, CMS recently announced the awards for its Medicare fee-for-service recovery audit program contract and Performant was awarded region one, the same region we had on the previous contract and region five, which is the new national durable medical equipment and home health contract.

We don't have any further detail regarding exact startup time given that the contract was just awarded earlier this week, but we expect this ed the startup should be fairly sooner.

As a reminder, as part of the contract transition, May 16th, 2016 was the last day that we and the other recovery auditors could send additional documentation required or ADR, letters or semi-automated notification letters to provide a hospital, with July 29 being the last day we could submit a notification of an improper payments to proprietary.

These limitations will have a negative impact on our healthcare revenues for the remainder of 2016. Lastly, our other markets generated revenues of $4.4 million in the third quarter compared to $4.9 million in the prior-year period.

Moving to our expenses, salaries and benefits expense in the third quarter was $18.7 million, a decrease of 13.9% compared to $21.7 million in the prior-year period.

Other operating expense for the quarter was $12.3 million, a decrease of $12.7% compared to the third quarter of 2015, primarily due to a reduction in volume related costs and other completed cost reduction initiative.

During this period of contract uncertainty, we have remained focused on improving our productivity, executing on our business development initiatives and thoughtfully engaging in expense restructuring.

For the third quarter 2016, our reported net loss was $0.7 million or $0.01 per diluted share, compared to a net loss of $0.3 million or $0.01 per diluted share in the prior year.

Adjusted net income in the quarter was $0.8 million or $0.02 per diluted share, compared to an adjusted net income of $0.8 million or $0.02 per diluted share in the prior year period. Fully diluted weighted average outstanding shares were 50.9 million shares in the third quarter of 2016.

Our adjusted EBITDA in the third quarter was $4.7 million, compared to $6.5 million in the same period last year. Adjusted EBITDA margin was 15.1%. Our effective income tax rate changed to 6.9% for the nine months ended September 30, 2016 from 18.1% for the nine months ended September 30, 2015.

Cash flows from operating activities in the third quarter were $20.5 million. Turning to the balance sheet as of September 30, 2016, we had cash, and cash equivalents of $48.3 million and our total outstanding debt was $65 million, reflecting our continued focus of paying down 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 through Q4 of 2017. This amendment is expected to provide us with additional flexibility to operate our business through these delays.

As part of the amendment, we also paid down debt by an additional $7.5 million. Now I'll turn the call back to Lisa for some concluding remarks..

Thanks, Hakan. As we head into the last quarter of this year, we're expected to be in the early implementation stages of the IRS and to rack contract.

As we mentioned in last quarter's call, we did expect softness in Q3 and Q4, compared to the first half of 2015, primarily attributable to the prior CNS rack contract closeout and lower Department of Education runoff revenue from the old contract.

However, we have better than expected financial results in Q3 as we continued to execute probably in our student loan business and expense reduction program. As we head into Q4 we expect a continued strong expense management.

We are maintaining our revenue guidance at $135 million to $145 million and raising our adjusted EBITDA guidance from $18 million to $22 million, up to $22 million to $25 million. As we mentioned last quarter, our guidance excludes the impact of any new contract award in 2016 due to the uncertainty of contract start date.

Even though we received two awards from CMS, we do not expect 2016 results to be materially impacted as a result. Additionally, as we are still in the early stages and remain in discussions with CMS as it relates to startup time, we are not commenting on any potential impact to the 2017 results today.

However, we will provide additional detail after we've had the opportunity to have more clarifying conversations with CMS. Now with that, we'd like to open up the call for questions..

[Operator Instructions] The first question comes from Michael Tarkan with Compass Point. Please go ahead..

Hey. This is actually Andrew on for Mike. Thank you for taking my question. So, first one on the new rack contract. And you sort of just talk about how we should think about fees under the new contract.

I mean, we saw that the stated fee is little bit lower than the previous contract, is that sort of representative of what you think you are earning under that contract?.

Hi, Andrew. The fee structure in the new contract is very different than the old, the old contract we had one fee for all services that we are providing. In the new contract we've bid basically four different work stream and the fee that you see published is the blended fee for old work stream.

So if you look at it, its net-net, obviously as we look at the work stream that involves more work and a complex auditing work et cetera, we obviously price that to reflect the additional work that would be required.

But if you look at it net-net, the fees are quite comparable in the new contract to the old contract, as you kind of net everything together..

Okay. Thank you.

And then so I know, you wouldn’t really comment on '17, but for the rack contract, can you just sort of talk about give any initial ideas about the structure of the contract, maybe scope in ADR [ph] limit anything like that?.

Andrew, I think it’s a little bit early largely because we haven’t even met with CMS yet, we do expect a meeting with them some time mid-dish November, I think we'll have a better idea of how we start, when we start to scope.

Obviously the national contract is very different from the region contract, so I just think we need a little more time to get back with CMS. But we – when we know we have certainty around, that we'll certainly let you folks know..

Okay.

And can you talk about for future [indiscernible] can you talk about the overall opportunity there and maybe when you expect it to start contributing to the result?.

I think the overall opportunity longer term is service substantial. We look at – I think in 2011 was the last sort of published estimate, but about 160 billion or so of delinquent taxes at the IRS.

Initially, we do expect there to be a lower start, we want to make sure that the program is successful, that we are working again, as I mentioned very collaboratively with IRS, that we're being very sensitive to consumers and any concerns that there may be about ensuring a very I would say programs with high regulatory compliance.

We want to make sure that we and the other vendors are stepping through how to make the program more successful. So I think at this point, I don't think we have a projection yet for 2017, it will be a bit of a slower start simply to make sure that we are getting off on the right.

But we do think longer term that there is a fair, I mean it’s a big opportunity looking at this right..

Okay. And I'm sort of in that same vein, so you won't need the three contracts really, can you just sort of talk about how we should expect expenses to sort of slow as you ramp up on these contracts, I mean, I know you guys have done a really good job of managing expenses, the uncertainty without a contract.

But can you sort of just walk us through what your expectations for – in terms of that hiring, and you know, variable expenses how that should flow throughout next year, maybe a little bit longer term?.

Sure. So as you look at next year, next year would probably be an investment year, as you look at these contracts. Let me take it one by one. So first of all, as you look at the IRS contract and you know we e had a fair amount of that client and that we do this type of work with. We've get good appreciation for what the revenue cycle is.

And that typically lot of the revenue it is achieved you know, obviously we get a contingency fee based on what we recover and a lot of it is payment plans that we enter, depot to taxpayers into.

So what you're looking at is that you're building that funnel up and the full lump rate – full ramp you can see until maybe 9 to 12 month later and its actually going to be investing in – we would have people that will be investing into to do this work.

But its very similar to the student lending business from that perspective as look at kind of the investment stage and then we'll be actually start seeing some of the revenue. Again, that contract will be an investment here next year.

As we look at the rack contract and the rack contract obviously if we have good experience with you know, based on what we have done here with CMS on that over the past 5 years, there is – the revenue rack there is typically about four months or so after we start sending out document request and so forth.

So you have a shorter investment period involve with those contract. And that’s for the regions one, we're going to be remaining of region one, there is some realignment of faith and so forth. But you know, we are ready to hit that contract and we have a lot of good experience based on the work that we've already done at region one.

The DME national home health contract is going to have a – its better than longer ramp as we ramp that up on a national basis back down again, we will make sure to be very mindful of expenses that we incur as we ramp on that contract as well. So hopefully that’s helpful..

Yes. That’s helpful. And then [indiscernible] credit agreement, give a little bit more coverage there. But now that you’ve got three contracts in hand and forward outlook a little bit more favorable, can you talk about maybe plans to refinance or pay down that that debt near term, can you just talk about that a little bit please..

Sure. That’s definitely on our radar. We had a good cash position today and if you look at our debt we paid down debt – especially with an amendment by $7.5 million. But as we look at our capital structure we are definitely not looking to address that.

And our holding off at this stage until we see the Department of Education contract awards be made and again we see that as a key library to achieve a really good capital structure going forward long-term..

And this sis sort of an obvious question, but I know you said you don’t have any update on the edge contrast, is anything else you we can offer there in terms of color?.

I think the only thing we can – that we know, is that continue to make sure that they are going through the process, so just specific question, administrative kinds of details. So we do believe that they are going through a very thorough and good process and they are still progressing through that.

Obviously you know, we're hopeful that it will be soon, but that’s about it all the information we have at this time..

Okay. That’s it from me. Thank you..

Thank you..

The next question is from Brian Hogan with William Blair. Please go ahead..

Hello. Good afternoon. A follow up to that last question….

Hi, Brian..

Hello.

A follow up to that last question, I mean, what is the last time you’ve actually had conversations with [indiscernible] is it the fluid dialogue or what is the radio silence is just waiting?.

We haven’t heard I mean, we don't talk to them about when they expect to award the contract. But we obviously continue to talk with them as they validate specific parts of our response or ask us just to firm up or confirm information that they have on file for us. So you know, for example confirming our address the sort of thing.

So we do have dialogue with them, it’s not a radio silence relationship but we don't have confirmation or specific dialogue around you know when do you think you'll make the award. They are being very thorough in the process that they are going through..

Okay. The commercial healthcare business, just probably it’s safe to say its been disappointing, especially rampant.

I guess, what is your strategy around that, where you frame the opportunity as, how much are you investing there obviously several questions there, just kind of wanted to know more about the commercial healthcare opportunity?.

Sure. So earlier this year we restructured the entire business and just in terms of how we think about it, we are down versus prior year. But largely it because we had some commercial rack related kinds of product that are obviously in a bit of a down slide as the rack contract closed out.

But as you look at the work that we've done, we actually feel like we built a really good foundation. So for example, in terms of product that we have in the market, we went from something in the high single digit year-over-year to about over 20 products that we are implementing with the client.

It does take time to recognize the revenue, but we are actually feeling pretty good about a very strong foundation that we put in place and believe that as we – so we are not ready to call 2017 as there, but as we roll into next year we should actually start to see the kind of growth that we expected a couple years ago, but it could take some more.

We did have to restructure and reorganize, bringing some strong subject matter experts across some of the commercial areas.

But I think as we sit here today while we would love, I would love to have the numbers to hit much higher figures as we went into this year, but I do believe that as we go into next year, we're already working on all of the different types of audits and contracts, SOWs that will drive revenue, that will help us recognize revenue as we head into 2017.

And as far as investment goes, it is – it’s not an investment, its fully paying for itself..

Okay.

The other revenue, you say never be lumpy by quarter, anything in there this quarter and what do you expect kind of going forward? Is there other growth opportunities here I mean, long time ago you had announce relationship with like Grant Thornton, anything playing out there?.

Yes, we have – and it is possible as we look at this, the IRS opportunity will be reported on their other – so we expect that to be a material contributor to growth in our other reporting lines, specifically as we look at the quarter and the quarter was soft, some of that has to do with a amnesty program that we're running at the beginning of the year and that typically happens with the amnesty program and there is reset as we head start working the business in a more normalized fashion.

So Q3 is definitely lower, again, we see greater revenue is going to come in future quarters, we expect future quarters to be at a more normalized level versus what we have seen from an average and then obviously you have the IRS opportunity that was going to start making fine contributions next year and there is some opportunities as well that we are pursuing and that will contribute to the sign going forward, which you know we will address down when we give guidance that for '70..

Sure.

On the IRS contract, what is the contingency fee rate?.

I don’t believe that they made that public at t this point. But its – it’s a competitive rate that we have in that contract..

On your other IRS – or others tax contract, is to going to be similar to that, what kind of rates do you have in that, relative to directionally compare that to say the rack contract or the student loan contract?.

Yes, it’s definitely a higher fee then we're looking on the rack contract and also on the student lending side, and its good recovered business and service that we providers there. So the fees definitely higher than..

All right. And then on the contingency fees, the stated fees for the five regions on the field that goes on region for - it was looked like it was materially higher, a little more than double your stated rate. It was obviously absence the word contingency. Is there an explanation for that, why would one reason be that much higher than everything else.

I am just kind of curious?.

So looking how we speculate as to the bid on the recent four contracts, the way the procurement process was structured was very specific to preferred vendors and then fee related. We believe that our fee structure was not only competitive, but that we could – that will still be a good business model for us.

With respect to the type of fee by law, the law that puts this program in place, this has to be a pay from proceed contract, so we don't understand how that would be different from how the law structures the contract.

I think our consent would have been if we did a very high fee that there is a possibility that we would not be competitive and again as we saw thought and modeled out what this contract meant, we did see on the different categories of audit where we thought it would still be a very good business model for us, but also that would make us competitive.

I can't speculate as to how we can or fee was calculated and bid in the priority of these contracts to that organization..

Okay. Then Hakan you said that the realized contingency fee rate will be likely similar to the prior contract.

Do you expect to earn similar margins under that prior one, now that you can have a – that was really reworked your expense base and maybe become more efficient is that - is it going to be higher margin, similar margins what's kind of the outlook?.

Well, you know, as I've stated the fees are going to be quite comparable, so as you look at it from a margin perspective it will comparable as well.

Obviously, we continue to put a lot of focus on driving a high level of efficiency in what we you, so we do see that there are opportunities to improve and again, what you're looking at is the through the investment that we have done in the commercial side, is an example.

We have a strategic focus on the [indiscernible] durable medical equipment work and home health and down so we have - capability is there that we haven’t had, that we see or its going to be sort of good use to this new contract. Net-net we do see that there is opportunities, but I think it’s down out there, it’s going to be fairly similar margins..

All right. Thanks..

Thank you..

The next question is from Andrew Wessel with Sterling Capital. Please go ahead..

Hey, guys. I was just looking kind of you know on the back of that quarter about the CMS contract, so in 2013 you generated $57 million in revenue in the healthcare business and that kind of before all the changes started and everything kind of started going down.

But you know, I understand that given Caremark cap your research coverage themselves had pretty lackluster at the moment, but the publish reports out there kind of estimated that you are kind of revenue, last EBITDA opportunity in that business is less than half of what you used to achieve on one contract, in two contract.

So I just think its – its hard for people who are new to the story, probably looking at it and saying hey, this company is got a great balance sheet, they've got some runway ahead of them in terms of revenue growth, to kind of get a framework for understanding what that revenue growth could look like, given that you know, published reports are pretty scattershot about of what that opportunity could be.

So it would be helpful for me, and maybe the others on the call and other reading transcripts later to understand what your revenue really opportunity is.

From the two contract put together versus maybe – not giving a specific number, but just kind of saying, well, if the fee rate is going to be similar and the market rate is going to be similar, is your overall, you know, is the claims rate going to be similar, is their capture rate going to be similar, I mean, just kind of thinking about things on that level will be helpful?.

So you have to understand that this contract going forward is very different from the last one and I don’t if you follow the events around the last time, there was quite bit of controversy, some hospital association there was a reduction and so there was some changes to the way the Medicare program viewed certain types of claims and reimbursement to hospitals and physician.

So lot of change occurred in the program, as a result of the former recovery audit contract So as we step through the new contract starting up, there are couple things to keep in mind, one is there sort of short-term and there is longer-term and the short term is CMS, their objective is to make sure we start this in a way that's really good for the program, but also good for the constituency they have to work with including the provider.

So if we think about the short term we want to make sure that were developing the program in a way that had not a long-term ability, but the ability to grow again in a way to that keeps in mind the objective which is this program integrity, good opportunity for the vendors, but also good for the constituent involved in the program.

So those are all off factors that we think about the short-term.

When we think about longer term, if we can accomplish those short-term objectives, we do see this program as a strong ability to grow, as you may know the error rate in the Medicare program itself for Part A and B continues to be arrested $60 billion a year, or about 12% so we do think their opportunities to work with the client longer-term to create a much stronger program.

But we have accept to the short term objective first to make sure they are successful and then we think we - no longer term what do I think, how to stay at this point, but we think it continue to be a very big market, there continues to be higher error rate in the Medicare program, error rate, not deliberate fraud or falsification, but just error rate.

And so we do think longer-term it does present still a strong opportunity..

Okay. And then kind of on the DME contract specifically, just looking at that, I mean, that is – that looks like a very different opportunity in terms of according to CMS publication that the improper payment rate on DME is above 50%, whereas Medicare Part A and B, probably like a 11%.

So you know, you average all that together and it ends up being 12 or 13 or whenever it was. So you know, from the DME side do you feel like that you're kind of ability to identify I mean, if you gave 53% that’s [indiscernible] times, right, you're going to find in a proper payment.

Do you think that the hit rate will tend to be higher, maybe the recapture rate will be higher, because in the past the racks maybe really recovering 4% to 5% of the total estimated improper payment pool or was the DME, it looks like little bit different animal, could you kind of provide some detail on that?.

Sure.

I think you hit it right on, that the you know, the error rate is higher, which means as a result that we expect our hit rate to be better and on the other side there will be the average finding rate, there will be maintenance it will be lower, so you put it altogether you have a higher hit rate, which again is a past, but again a lower average finding rate versus what we are seeing on some of the complex work and so forth if we do on a regional basis.

So it’s somewhat comparable from that perspective. But overall we see that this is the contract that we wanted and it’s been a greater – huge opportunity for us as we look at this from a net national perspective..

Okay.

And then - how these contracts obviously going through this whole reforming process, how are these contracts set up in terms of term and options for renewal?.

On the CMS contract, it’s a five year contract and the IRS contract is also a five year contract..

Okay.

And there is – do the have renewal options at the end or they just go – give perhaps RFP again at the end of five years?.

I actually – I don’t know that..

Okay..

I don’t know that. I think we'll get greater clarification as we think about – as we meet with CMS, with IRS fee pay for timeline was about 10 years, so that maybe a difference – that maybe a different path. Again, assuming that it would make it a very successful program..

Okay.

And then, the question about the refi you are down, obviously the debt cost is one thing to think about you know, the convenience are so strict even in terms of what you can do with the capital structure and so from the perspective of that refinancing opportunity whenever it comes if you wait for the ED contract to come out, that’s fine, but once you’ve refi your debt [indiscernible] current debt is, you know, has the board thought about what - what the proper level of leverage is against this and from that basis you have almost no net debt today, you have very low CapEx requirement always historically so there seems to be a pretty exceptional opportunity to repurchase shares and you not at all this today, but just from a long-term planning perspective, the stocks are three bucks and maybe we're kind of moving back towards the company that has a similar or if not better revenue set up than they had kind of three years ago.

What is the thoughts on that?.

Overall we had an active dialogue with our board as it relates to refinancing our debt in appropriate capital structure. As you know we haven't done any acquisitions in the past and that something that with Zika could be a great contributor to again exaggerate that growth in terms of our business.

So we kind of looking at the debt structure kind of very holistically and similarly having a discussion with the board as far as you know potential to share with our repurchases and so forth. So it’s an active discussion at this point as we look and see how these contracts again unfold which is not to start move in..

This concludes the question-and-answer session. I would like to turn the conference back over to the management for any closing remarks..

Thank you. Our Q3 results exceeded our expectations largely due to improvements in productivity and a very effective expense reduction program. We are very excited about the IRS and rack contract awards, and we believe this continued evidence our ability to exceed in our market.

We continue to focus on client first, that is the basis on which we go to market. We believe we can drive a good value proposition. We have great consumer sensitivity and a deep commitment to regulatory compliance. We're very excited to begin the implementation of the key contract awards as we head into 2017.

Before I go, I do want to thank our clients for letting us serve them and thank our employees for continuing to bring their best efforts to our organization. Thank you all very much for being with us today..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..