Richard Zubek - Investor Relations Lisa Im - Chief Executive Officer Jeff Haughton - President and Chief Operating Officer.

Brian Hogan - William Blair.

Ladies and gentlemen, greetings and welcome to Performant Financial Third Quarter 2017 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce to your host, Richard Zubek. Thank you. You may begin..

Thank you, Operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release for the company’s third quarter 2017 results. If you have not, a copy is available on our website, www.performantcorp.com.

Today’s call will be led by Lisa Im, Chief Executive Officer; and Jeff Haughton, President and Chief Operating Officer. Before we begin, I would like to remind you that some of the comments made on today’s call, including 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 statement 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. If you haven’t already, please find the financial packet on our website that walks through our financials in more detailed form.

This is the practice that we are adopting going forward, as we believe that you are more than capable of reviewing a financial table of our results at your own pace. On this call and all future calls, we want to talk about the factors impacting our business today, as well as on a go forward basis.

We’ll start with updates in our student lending business then move to healthcare and other businesses. We will spend the few minutes on key metrics towards the end of the call. As we announced back in June, Great Lakes had terminated our student loan recovery contract. The transition of our Great Lakes student loan inventory began in October.

And, as a result of this change, we now have a contract to act as a recovery sub-contractor for Navient to provide recovery services for both the Great Lakes portfolio, as well as Great Lakes recently acquired [indiscernible] portfolios, which are about 50% larger than that of Great Lakes.

Under this arrangement, we expect to start recovery services for 25% of the legacy Great Lakes portion of the portfolio. And, in the next six months, we expect to receive a small percentage of the [indiscernible] portfolio.

There is some ability under the contract to gain share through performance versus competition including against Navient affiliated companies. The contract does not have a termination date, but contains standard language allowing for termination at the discretion of Navient. It is too early to tell what this contract will mean for us going forward.

Although, we are hopeful that overtime it will offset a significant portion of the revenue lost when our contracts with Great Lakes was terminated.

In addition as you may have recently read, NelNet announced that it will acquire Great Lakes student loan servicing company or Great Lakes Educational Loan Services Inc, a subsidiary of the Great Lakes Guarantee Agency. The Guarantee Agency is the not for profit chart agency who is responsible for the federally guaranteed student loan portfolio.

It can enter into servicing contracts and portfolio management contracts. The Guarantee Agency likely had a servicing contract with Great Lakes Educational Loan Services Inc to service the student loan portfolio.

The NelNet announcement does not impact us in the short-term given the - already occurring transition of recovery services on the Great Lakes portfolio. And, we are not yet certain as to whether it would create opportunity for us over the longer-term.

Within our other Guarantee Agency business, we are seeing a decline in defaulted portfolios, as those portfolios age and there is a larger percentage of borrowers within those portfolios about 25%, who have loans which were previously rehabilitated. Based on the current regulation, a loan can only be rehabilitated once.

So, our opportunity to work with those borrowers is more limited. This will begin to impact the turn of inventory to revenue as we look forward into 2018 and beyond. Over the past year, we have mitigated this impact through productivity gain and we’ll continue to utilize technology to increase productivity.

Furthermore, we will have to continue to grow recovery through material revenue gains from contracts such as our tax recovery contracts with the IRS and states like New York and successful apply our recovery services to additional commercial markets.

With respect to the Department of Education, on October 19, the department notified the Court of Federal Claim that they have completed a re-evaluation of their resubmitted contract proposal. We had no further details and do not know what to expect regarding timing of contract awards or the ultimate outcome.

Placement starring Q3 were $647 million, which is down 4.7% versus prior year quarter three, and down 27% sequentially versus quarter two. The quarter three decline versus quarter two is similar to what we saw last year between the two quarters.

Revenues from student lending were $19.8 million of which only 600,000 are from the old Department of Education contract. Excluding the Department of Education, student lending revenue is down 3.6% versus prior year, and 26.8% sequentially. This again is due to the timing of placements between quarter two and quarter three in 2016.

I’ll now turn the call over to Jeff Haughton, our President and Chief Operating Officer, to discuss healthcare and other market revenues..

Thanks Lisa. Our healthcare revenue continues to increase as we execute against the growing number of contracts in various stages of implementation. Specifically we generated $1.8 million of commercial healthcare revenue in Q3 of 2017. This is a 43% increase versus the third quarter of 2016.

Revenue sequentially is still a little lumpy due to the timing of our revenue recognition, as well as the early stage - several of our contracts, but we do expect that this will smooth out overtime as we look out over the next several quarters.

Since the beginning of 2017, we have added 9 new commercial healthcare clients and 15 new audits in recovery programs. Many of these programs have been recently implemented and due to the requisite time to ramp up audit volume and the subsequent revenue recognition cycle, they have a limited impact to 2017 revenues.

But they are expected to contribute to a greater extent in 2018. We are also very excited about the recently awarded Medicare as secondary payer, commercial repayment center contract or what we refer to as the MSP contract. This contract transition process is taking place as we speak and we look to begin operations under this contract in early 2018.

While we are not giving specific guidance until we have started in earnest on this contract. We do know that centers from Medicare and Medicaid has published results for the MSP program annually, including reporting the administrative costs, which over the last two fiscal years have ranged from approximately $18 million to over $24 million annually.

We believe that the majority of these costs represent contingency fees paid to the MSP recovery contractor. Several of our commercial programs entail coordination of benefits recovery from Medicaid, and as a result are highly complementary that the work we will perform under this new MSP recovery contract.

Regarding the CMS recovery audit programs, we began to work under our Region 1and Region 5 contracts during the second quarter of 2017. We are starting to see revenue from these contracts, and we expect that they will continue to increase in the coming quarters. However, CMS is taking the cautious approach to increase in the size of the RAC program.

And, although the scaling of claim volumes has begun for Region 1 work, the Region 5 national contract remains under the document request limit of 0.05%. With Medicare improper payment, they’re still estimated to be above 10%. We hope that CMS will accelerate expansion of this important program.

Switching from healthcare to our other revenue line, we are seeing growth through a handful of new contract, specifically our customer care business is driving most of this revenue growth and we expected to grow in 2018 as well.

Within this customer care business, we are providing non recovery, call center services, as well as other back office, outsourced services to support our clients business and their customers.

We see an opportunity to further drive growth in this area, and as a result we have made some modest investments to develop a strong pipeline of commercial clients to drive diversification in growth over the long-term. Finally, our other revenue line also reflects growth from our IRS recovery contract and other state tax recovery contracts.

With that, and I will turn it back over to Lisa..

Thanks Jeff. Touching on expenses, our expenses of $34 million were below sequentially by $2.5 million or 7%, they were higher than prior year quarter three by $3 million mostly due to business mixed, specifically $1.4 million was due to customer care revenue growth requiring higher employee count.

900,000 was due to higher sub-contractor fees on the MSA business for which revenue is almost entirely offset by payment to sub-contractors, and about 400,000 was due to higher outside vendor cost for legal and audit fee.

For the total year, we will be reiterating our guidance for revenue in the $125 million to $145 million range, and adjusted EBITDA in the $10 million to $13 million range. In the earnings press release, we also announced the promotion of Jeff Haughton to President and Chief Operating Officer.

In this expanded role, Jeff will continue to be responsible for operations and for working with his team to build revenue across all the Company’s businesses.

During his tenure at Performant, Jeff has been a key leader, helping to guide the Company through a period of difficult headwind and in executing on our strategy to vigorously rebuild the business.

The Board of Directors is confident that Jeff’s experience and deep knowledge of the Company’s business will prove instrumental towards strengthening the Company’s revenue base while executing across both growing newer businesses and challenging legacy markets.

Furthermore, Jeff’s knowledge of the Capital Markets will prove to be a strong asset, as the Board continues to evaluate potential strategic alternative. With that, I’d like to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Brian Hogan from William Blair. Please go ahead..

Good afternoon. A quick question on the other revenue line, and you called out to customer care and its growing fast.

I guess, can you give me a little bit more details on that little line as the year-over-year delta in the other revenue solely driven by the customer care, just a little bit of IRS, I mean, basically how big is the other - the customer care revenue and how fast is it growing, and can they continue into 2018?.

Yes, it’s a good question Brian. So, on the customer care side, I would say the majority call 60%, 70% of that revenue growth is coming from the customer care fees, the rest is, either IRS in there, there’s a couple of other smaller clients in there as well on the fact side, but the majority is the customer care fees.

And, we’re going to expect to see growth in 2018, because there are additional programs we are adding to that, but we are also going to see the run-rate impact in 2018, programs that we have just put in place there, right, so you get the full-year benefit as well.

And, to do that, there’s a lot of headcounts we had which reflected in some of the expenses that Lisa walked through earlier as you think about [indiscernible] expenses in Q3..

All right, and then the IRS contract, is it slower ramp and anticipated, I mean, how fast how you changed your expectation of how big it can be?.

So, it’s a full ramp, I think - as we have mentioned in the past operations at IRS have been very concerned about making sure that the quality of the service that the vendors are providing is beyond approach. And, so far, the service levels that the vendors are providing have met or exceeded their expectation.

So, we are working with them to try to improve the flow of business, we are hoping as we complete this year and go into 2018, we will see a greater opportunity for a bigger volume flow, what that is yet, we don’t know, but we are constantly talking to them, and we are again proving our result and showing that the quality of work we are doing is exceptional to what their standards are.

So, we are hopeful that we will have more information as we go into 2018..

Yes, from an ultimate ties perspective, so that piece kind of ramping the time, it open the ties perspective, there is still a large opportunity in terms of inventory that’s out there and it will come down to put the IRS and what the legislation requires and what folks want in terms of with ultimately realized..

Thanks. And, shifting to the healthcare, I guess, we’ll start with the commercial healthcare. You did mention it was lumpy, it was down quarter-over-quarter, but you mentioned a nice new contracts or new clients you added throughout the year, and we haven’t seen really in the revenue benefit from that.

I guess, can you elaborate on the pace of the ramp of the commercial healthcare; it looks like maybe an exit 2018 run-rate as you kind of ramp up just kind of trying to frame the size of that business?.

Well, I mean, as you know we are not giving guidance on 2018 on this call, but we can tell you that sequentially and particularly given what we are ramping in the last, I would say last probably two to three months, we feel very good about multiple of what we are seeing this year in a meaningful way and largely because as we talked about the MSP contract and recovery, and that profit is really and will have the strengthen.

And, as Jeff mentioned this actually does help in two contracts that we have in the commercial markets where we are doing a similar kind of coordination benefits work for Medicaid programs which are run by commercial organizations.

So, these again - these are not so much timely in terms of - how long do they take to ramp, but it’s really a matter of us getting started on the contracts which we have in the last couple of months. So, we do think that 2018 will be a material multiple of what we are seeing this year..

Interesting, and then the CMS healthcare kind of the same question essentially, the ramp, you obviously mentioned Region 5 was maybe a little slow because of the amounts of audits you can actually do, I guess, what can the run-rate be, can it get back up to historical levels eventually at, I guess, peak levels given that you have two contracts now, and just kind of talk about that business?.

I think longer-term is definitely going to be a meaningful contract, I don’t know that we can get backup to, as you remember in the last recovery audit contract there were revenues that were pretty meaningful just based on one regional contract.

I think as we look at the program going forward, it definitely will be a lot more diversified in terms of the types of audits that we are doing.

But we do think that as it steps up and the audit concept get approved and CMS feels more and more comfortable with the work that recovery auditors are doing with the providers, and with the audits that we are conducting.

We do think that they will be amendable to opening up a program to maybe include all other different types of audits and certainly the percentage of documents that we can request particularly if you look at DME and Jeff mentioned that the Medicare error rate is over 10%, well in durable medical equipment is over 40%.

So, we are obviously working very closely with the client to try to get this contract ramped up to a level where they feel comfortable with our work and where we feel like we are having a meaningful impact on helping CMS reduce that volume of errors..

Another thing I’ll add to that is if you look at how it’s played out this year, we started those programs, CMS was very prescriptive in terms of the approved audits that all of the contractors could conduct and it was a defined amount of and types of audits as Lisa mentioned. So, we’ve been working to diversify that.

But the way it also played out is on those audits there was also a conditional set of volumes that they want to did work there first and review kind of how the program is developing.

So, I think from a development perspective and how those audits have gone and managing all those appeal process, again if -- starts the program similar to IRS, and it’s a question of okay, how does that evolve and ramping here. But that’s some of the limiting factors if we think about where we are from the start in April..

Yes. And, I think we’ll have more visibility as we go through the next few months, and keeping in mind Brian that we just literarily just started the program in second quarter with very, very small volumes and a very cautious methodology from CMS. But we will definitely have a bit more visibility as we go through the next few months..

All right, and shifting to the student lending business, the Guarantee Agency placements, how much of those were from Great Lakes?.

I don’t have that - actually right in front of me, I can certainly get back to you on that volumes or percentage or the portion of volume from Great Lakes, I just don’t have it handy..

All right, the other revenue that was tied to the Great Lakes and maybe kind of embraced that up with?.

Hold on, we’re just looking for it. I don’t have it for the last quarter, but - again keep in mind that the revenue tied to Great Lakes in the last quarter would have been associated directly with placements we received last year. So, let me follow up with you on your specific question..

Sure. I guess, ultimately what I’m going to get to is what the ultimate impact from Great Lakes is going to be from a revenue perspective.

Obviously you have - you mentioned 25% from a sub-contracting perspective on the legacy Great Lakes if you will, and then the USAF portfolio get a small portion of that increasing overtime, I guess, go ultimate way to replace what you lost I guess through the subcontract, is that - do you think is that possible?.

I think overtime, because we definitely will have the opportunity to compete with the companies that are on that contract and really most importantly we will be competing directly against the Navient affiliated organizations.

So, I think overtime we definitely will, I do think that there is clearly the objective is to drive the greatest amount of recovery percentage versus the inventory that’s placed. So, I think overtime we’ll have an opportunity to certainly build that backup.

And, as we mentioned that USAF [indiscernible] portfolio that - that business is actually 50% larger than the portfolio of Great Lakes, so even a smaller percentage - if we can grow from that will be a meaningful growth..

Great, and then the detail on that just to mention the Navient, obviously there are competitors to NelNet and you mentioned that Nelnet acquiring the Great Lakes portfolio, I guess, to me it would seem like a big opportunity for you over the long-term to beat the NelNet servicer, but does that the way to think about it or is it too much of a speculation at this point?.

Well, I think it is certainly speculative, but I do agree and I think the market recognizes NelNet and Navient are both competitors on DeVos contract as well as in other apex of business.

So, as I mentioned it’s a little early for us to understand fully what - what an opportunity might look like, but certainly if there is an opportunity in the future, we will be pursuing it..

Thanks for your time Lisa and Jeff..

Thank you, Brian..

Thanks Brian..

[Operator Instructions] Ladies and gentlemen, it appears we have no further questions in queue at this time. I’d like to turn the floor back over to management for closing comments..

Thank you, Operator. We want to thank you for being with us today on this call. And, as always we thank our clients for letting us serve them, we believe that they are certainly at the heart of our objectives and everything that we do.

I want to also thank our employees who bring their best to our organization every day, and for all of the hardworking commitments that they bring to Performant. Thank you again..

Thank you. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for participation and have a wonderful day..