Greetings, and welcome to Performant Financial Corp. Fourth Quarter and Full-Year 2018 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 would now like to turn the conference over to your host, Richard Zubek, Vice President of Investor Relations. Please go ahead. .

Thank you, Operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the company’s fourth quarter and full-year 2018 result. If you have not, a copy is available on the Investor Relations portion of our Web site. Today’s call will be led Lisa Im, Chief Executive 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, all 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. If you haven’t already, please find the financial supplement on our Web site that walks through our 2018 fourth quarter and full-year financial results in more detailed form.

Our long-term strategy has always been to build a strong diversified business on our core strengths, analytics, innovation, compliance, audit and recovery. Where those capabilities combine and create unique strengths and value prepositions to our clients, we believe we can win competitively and find solid market opportunities.

In 2018, we've demonstrated this as we began to work in Ernst, a new contract, including the Medicare as Secondary Payer Commercial Repayment Center, or MCPCRC contract, several large commercial healthcare contracts and the IRS contract.

Furthermore, this past September we completed our acquisition of premiere credit of North America, a diversified provider of recovery services across state and municipal government, student loan, commercial and healthcare clients.

Premiere's client mix is highly complementary to performance and approximately 60% of its revenues come from non-student loan clients. In 2018, Premiere added 7 million of revenue and in 2019 we expect the transaction to deliver $28 million to $32 million of revenues. This includes new business that we have brought the platform.

We also faced our shared headwinds during 2018, including the decision from the department of education to cancel its procurement, thus terminating the contract that has been previously awarded to perform it.

We disagree with their decision, particularly since the amount of defaulted students loans being managed by the Department of Education has continued to increase.

As of September 30, 2018, the Department of Education managed $140 billion in defaulted student loans, both direct and Department of Ed managed itself, this is up $40 billion or 41% from just two years prior. Our business fundamentals remain very solid.

In Q4, we reported revenue of $39.8 million, which reflects some revenue catch-up related to delays in contract start-up that we addressed on our last quarter's call. This revenue is up 19.5% versus prior year Q4. Adjusted EBITDA in the quarter was $2.5 million compared to $2 million in the prior year period.

For the full year, we reported revenues of $155.7 million, which includes $28.4 million for the close-out of the prior vision contract as compared to the revenues of $132 million for the full year 2017.

Adjusted EBITDA in 2018, excluding the impact of the CMS Vision A contract close, was a loss of $5.2 million compared to adjusted EBITDA of $9.2 million in 2017. Commercial healthcare revenues in the fourth quarter were $6 million, an increase of 90% versus the prior year period, and up 81% sequentially.

We are very excited about the progress that we've made in our contract. We see a business with very healthy growth, margins that are improving, starting to normalize, which we believe will continue into 2020 and beyond. For the full year 2018, healthcare revenues from commercial clients were $14.1 million, up 64.8% versus the prior year.

On the CMS recovery audit programs, we had a recovery audit contractor for regions one and five. However, the limits of document requests to audit remains close at 0.5% for every 45 days, which limited our ability to properly service this contract in 2018.

As we move into 2019 with the support of CMS, we plan to accelerate our audit cycles on these contracts, which will allow us to increase the document limits for both regions. We also continue to build momentum in the MSP CRC contract, which is ramping well.

Our CMS related revenues in the fourth quarter were just under $5.1 million compared to just 468,000 in the fourth quarter of last year. For the full year 2018, the CMS RAC and MSP CRC contracts generated revenue of $41.9 million, including the $28.4 million close-out of the Region A contract as compared to $1.4 million in 2017.

Total healthcare revenue in 2018 was $55.9 million compared to $10 million in 2017. Our recovery business, including Premiere was in line with our expectations in Q4. For the fourth quarter within our student lending business, placements totaled $432 million compared to $549 million in the prior year period.

Student lending revenue in Q4 was $18 million, which was down 20% from $22.5 million reported in the prior year period largely due to a decrease in revenues from Great Lakes, following their decision to terminate their portfolio management agreement with us in mid-2017 in search of a full servicing solution.

For the total year, student lending revenue was $66.5 million, which was down $27.8 million or 29.5% versus prior year. In our other revenue category, which is comprised of tax, IRS and customer care revenues of $10.7 million, were up 48.6% versus last year and up 30% sequentially.

The strong production was a result of our ability to quickly resolve the external client delays in our customer care business that had costs us about six weeks of productivity during third quarter. For the full-year, revenue from our other category was $33.2 million, which is an increase of $5.5 million or 19.7% as compared to 2017.

We expect that these contracts, including the IRS, will continue to grow into 2019. Specifically, the IRS Private Debt Collection or PDC program has continued to be a very successful one for the federal government.

As of December 31, 2018, the total IRS PDC program has directly collected $130.6 million in long pass due tax revenue plus millions more has been collected by the IRS as a result of the PDC program tax payer outreach.

To-date, tens of thousands of tax payers have now fully resolved their debt via the PDC program and more than 27,000 installment agreements are already in process providing tax payers the opportunity to pay their tax debt overtime via flexible monthly payments tailored to their budget.

To boost internal IRS capabilities, the PDC program has also generated more than $23 million for the IRS special compliance personnel program fund, which provides the agency with much-needed resources to hire and trained new permanent collection staff.

The IRS special compliance personnel program officially began in October, and has thus far spent over just $1 million to bring our new IRS collection employees. We believe this program will continue to grow with this success. Q4 expenses of $43.2 million were $8.7 million higher than the $34.5 million in Q4 of last year.

The increase in costs were due to growth in healthcare of $2.9 million, customer care of $1.5 million and the additive expense of $6.4 million associated with the Premiere acquisition. These costs are partially offset by reduction in student revenue expenses of $2.1 million.

On a year-to-date basis, total operating expenses of $157.5 million were $18.3 million higher than last year. Healthcare expenses were $18.7 million higher than prior year due to operational increases of $9.6 million and the old region A RAC contract closeout, which was another $9 million.

Versus prior year, customer care contract expansion increased expenses by $4.9 million while Premiere expenses were $8.3 million. These increases were partially offset by reductions in student lending expenses of $14.7 million.

As we have stated in previous calls, the investments in our business are expected to drive additional revenue into 2019, 2020 and beyond.

During 2018, we made significant progress on many of our key initiatives, increased our investments to support contracts and revenue growth and acquired Premiere Credit of North America, which further strengthens our longstanding relationship with ECMC.

We are excited for 2019 and beyond as our larger contracts begin to transition out of heavy investment phase and become centers of profitability that strengthen our business in the mid to longer-term.

As a reminder, while most of our contracts do begin to turn profitable in year two, there is still a fair amount of investment required and it’s not until year three that they truly reach maturity and steady state margins.

Finally, we are providing full year 2019 revenue guidance of $158 million to $168 million and adjusted EBITDA to be a loss of between $2 million and $6 million. Although, we’re guiding to a net EBITDA loss this year, we want to reiterate the longer-term confidence that we have in our business strategy.

We negotiated growth capital with our lender who is also one of our largest clients in anticipation of investments in these contracts. Our total access to growth capital under our credit agreement is in excess of $20 million.

And with covenant relief for six quarters, we believe that we have room to fund the growth that can take us to 2021 revenue target of $200 million. With that, I would like to open up the call for questions..

Thank you. At this time, we'll be conducting a question-and-answer session [Operator Instructions]. Our first question comes from line of Brian Hogan with William Blair. Please proceed with your question..

Good morning. The 2020 target of $200 million of your plan to get there is that mostly through the healthcare and other. What are the bigger drivers there? And then I think previously you had said that 20% margin on that.

Is that still line of sight?.

So actually, I think our goal was to have that $200 million of the 2021 target, and it is going to be driven largely through healthcare growth. We are expecting to see some grow in recovery as well.

Part of the growth that we're expecting to see is through the acquisition of our Premiere Credit of North America, which as you might recall has a platform in both commercial recovery as well as on healthcare recovery.

And so we are seeing some growth there already and certainly our owned healthcare business we expect to see continued growth as we push through 2019 and 2020 into 2021. And that currently is based on existing contracts with clients, not including any new business or new clients that we might bring on.

We are targeting a strong double-digit EBITDA margin, but as you know Brian, when we continue to invest in our business, we could see some erosion of the 20% down to more in the strong double-digit EBITDA margin, that's still the current thought..

And then on the commercial healthcare. Can you talk about the pipeline of new business you kind of just eluded to that a little bit, but can you as those ramp….

Fourth quarter certainly in absolute dollars was not -- compared to competitors probably not as significant. But as we think about how that grows strong 80% over quarter-over-quarter from a sequential standpoint, we're going to continue to see strong sequential growth as we push through 2019.

And part of that again was the start of both contracts that we had in 2018 where we did invest pretty heavily and we're seeing the path to revenue as we go through 2019, and then obviously beyond that. But we're seeing some expansion in our commercial healthcare through the clients that we currently have.

We should expect it to continue with strong double-digit growth..

Shifting to the CMS RAC contact, one quick one.

How much revenue was it in the quarter? And then follow it up with you talked about in your prepared remarks conversations with CMS lifting the limitation from 0.5 something else in 2019, did I hear that correctly if you can just comment on that please?.

So, if we look at just the quarters -- did we report that on our quarter? Let me talk about the document limit increase first. When we think about the CMS contract, we can't sustain 0.5% every 45 days document limit. So we have been working with the client to increase that.

There was the path to getting that done through increasing our audits on a quarterly basis. So we're going to see that as we push through 2019.

We won't see the full benefit of that until we reach 2020, because while we're increasing the percentage of documents that we can audit, we're not going to see the benefit of that fully again, because we are going to be ramping it up over 2019, so it will cost us little bit of investment in 2019 but the benefit will start to come in 2020 as our limits start to increase.

As we think about that contract, we do think there's opportunity there and it's been too conservative. And so we have been working with CMS to make that happen, I think just similarly with other CMS contractors as well..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Performant Financial Corp. CEO, Lisa Im for closing remarks..

Thank you, operator. Thank you all for joining us on our call today. Before we go, we would like to thank our clients for letting us serve them once again. I would like to thank our employees for bringing your best to Performant every day, and thank our shareholders for continuing to believe the Performant will win in the mid to longer term.

Thanks for being with us today..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..