Greetings and welcome to Performant Financial Corporation's Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded.

I would now like to turn the conference over to your host, Richard Zubek, Vice President of Investor Relations. Thank you. You may begin..

Thanks 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 2019 result. If you have not, a copy is available on the Investor Relations portion of our website.

On today’s call will be led by Lisa Im, Chief Executive Officer and Rohit Ramchandani, Vice President of Finance and Strategy. 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, 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. With that, I’d like to now turn the call over to Lisa Im.

Lisa?.

Thanks Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. If you haven’t already, please find a financial supplements on our website that provides some additional details regarding our recent financial results.

For the past several years we've worked tirelessly to transform Performant from a company that derives it's success from a small number of large contracts into a highly dynamic company with diversified product offering and client base. We shared on our investor website the resources required to bring major contract to steady-state margin.

With those investments and share gains that we have made across our market we are entering 2020 with revenue growth and positive EBITDA. Hard work and dedication drove strong operational results in Q4. We had revenue growth of 10% versus prior year and achieved our target of profitability for fourth quarter of 2019.

We reported positive EBITDA of $6.5 million. This is our largest positive quarterly EBITDA since 2016. Additionally fourth quarter EBITDA was approximately $9.5 million higher than the third quarter of 2019. Thus turn from a negative Q3 to a strong positive Q4 EBITDA is due to continued operational improvement.

These improvements in the fourth quarter were not due to any large positive one-time events. Rather these results are due to the hard work that we do every day. We've talked to you on past earnings call about inflection point needing patient and how we would need time to grow our healthcare business.

Just beyond the Medicare rack contract strengthen our footing, gain market share and demonstrate client growth.

We provided diagrams detailing the general investment return of our new contract particularly on the commercial side, which demonstrated that two plus years of heavy investments that are required before these contracts would show profitability and trend to steady-state margin.

The fourth quarter of 2019 is the inflection point to which we have been speaking. These results are real and are indicative of the potential that we believe our technology platform and organization will deliver going forward.

Most of our long-term shareholders have patiently waited with us during this period, with many of you adding shares to your already large position and I thank you for your confidence in our ability to execute on our stated strategy. From a composition standpoint Performant at the end of 2019 looks nothing like the company it was just two years prior.

In 2017 our recovery business accounted for nearly 82% of our overall revenue. Healthcare was just over 7.5%. At the end of 2019 healthcare has grown to just shy of 30% of our overall revenue which recoveries remain a more balanced 60%.

Total revenue in 2019 is up $18.2 million or nearly 14% versus 2017 and healthcare revenues are more than four times higher than what they were just two years ago and we're currently projecting strong double-digit growth in 2020.

Through the years some questioned our decision to expand into the approximately $4 trillion healthcare industry where many companies had already established relationships with question whether we would be able to meaningfully disrupt those relationships.

Just to clarify we are not a start-up and we had already made strong inroads in the healthcare market going all the way back to 1999 when we worked on CNS receivables through our treasury contract. Our analysis indicated that the dynamics of the healthcare market we're ready for the correct focus and opportunity to showcase our platform.

In this market we would be able to demonstrate a significant uplift and result for prospective client and establish Performant as a strong competitor with a differentiated and more effective service offering which is exactly what happened.

Just anecdotal example of one particular client; we we're hired by one of the nation's largest NCOs as a second vendor to conduct Medicaid reclamation which is after recovery and to expand identification of new saving. In this capacity as a second vendor, our results returned a 50% lift over the incumbent vendor.

Following this, we were moved into the first position for five test date covering about 1 million lives and we again demonstrated impressive results providing a 75% gain over the incumbent across historical results for those states.

As a result of our hard work and strong results in 2019 that client canceled services with their incumbent vendor of over 10 years and shifted all 25 of the state to Performant. Despite early implementation challenges with the client we were happy to report that Performant in Q4 2019 was strong with robust momentum into 2020.

Similarly, our recovery operation remains a significant and important piece of our overall business. Over the past several years we have successfully extended our recovery platform into additional markets with significant opportunity. We've entered and are growing in diversified consumer and commercial market.

We also continue to expand our work with clients in federal and state tax as well as federal treasury receivables and healthcare recovery market.

Related to the recovery activities for federal taxes Congress mandated the creation of the Internal Revenue Service, IRS Private Debt Collection PDC program to expand customer service capacity of the IRS while leveraging private sector technology and expertise to conduct outreach to taxpayers who in particular stuff that of much-needed federal tax revenue, tax underpayment.

Performant is one of four firms that currently partners with the IRS for this effort.

Although the initial placement volumes were low when we commenced work under this contract in April 2017, which reflect that the IRS' objective of the methodical contract start, the number of placement the federal tax receivables that we get from the IRS have more than tripled from what we had processed in that initial start up year.

Furthermore it's officially launching in 2017, the PDC program is demonstrating significant value to the US treasury, has driven dollars into the IRS to self fund the program and provided incremental funding that allows the IRS to rapidly increase full-time internal staff dedicated to tax collection.

Our long-term strategy has always been to build a strong diversified business on our core strength; analytic, innovation, compliance, audit and recovery. While those capabilities combined and create unique strength and value propositions to our client, we believe we can win competitively and find solid market opportunity.

Fourth quarter 2019 results were strong and we believe they show that we can accomplish and deliver great things with our rebuilt and refocus business. Company don’t typically go from reporting an EBITDA loss of $3.1 million in one quarter to positive EBITDA of $6.5 million in the next quarter.

We knew we have the investment part of our transformation was largely complete and that we would succeed in achieving our goal of becoming EBITDA positive in Q4 2019. We accomplished this purely on our operating success and we believe is indicative of our future results.

With that, I'd like to introduce Rohit Ramchandani our Vice President of Finance and Strategy to walk you through the results of the quarter.

Rohit?.

Thanks Lisa. In Q4 of 2019 we reported revenue of $43.8 million which was in line with our internal production and up 10.3% versus the prior year period. Adjusted EBITDA in the fourth quarter was $6.5 million compared to $2.5 million in the prior year period and a loss of $3.1 million in the third quarter of this year.

For the full year 2019 we reported revenues of $150.4 million as compared to revenues of $155.7 million for the full year 2018. However, as a reminder our 2018 revenues included a one-time benefit of $28.4 million related to the net impact of the termination of the company's 2009 CMS contract.

After adjusting for this release full year revenues in 2019 were an increase of 18.2% over 2018 revenues of $127.3 million. Adjusted EBITDA for the full year 2019 was a loss of $3.2 million compared to an adjusted EBITDA loss of $5.2 million in 2018 which excludes the impact of the CMS reserve release.

Overall our operations benefited as our investments in key outside contracts started to achieve steady state contribution margin with further growth potential and has investments in other mid tier contracts continues.

Healthcare revenues in the fourth quarter of 2019 totaled $14.3 million which was 44.4% higher than in the fourth quarter of last year and 32.8% higher quarter over quarter.

The size of the increase reflects the positive strides we've made relative to the aforementioned investments across those CMS and non-federal client base as well as the expansion of both our audit and coordination of benefits offering.

For the full year 2019 healthcare revenues were $43.3 an increase of 66% as compared to our 2018 healthcare revenues of $26.1 million which again excludes the onetime benefit from the CMS reserve release of the prior rack contract. We're very excited of the progress that we may drive growth in our healthcare market.

As Lisa mentioned healthcare market now represent roughly 30% of our revenue stream versus just under 10% two years ago and we anticipate that our healthcare business will continue to grow via both our audit and market offering.

Total recovery revenue grew fourth quarter over $25.2 million which was essentially flat for the fourth quarter of last year and up 20.4% from Q3. For the full year 2019 we reported recovery revenue of $89.6 million an increase of 7% versus 2018.

Although these revenues are countering growth as expected due to the macro trend in the market our overall diversification strategy has helped to offset those decline.

We make some traction in growing our diversified consumer and commercial debt service offering including the success of the IRS program which is for government tax payers in the longer term opportunity. Additionally, we've continued to see growth in our BD subcontracting opportunity.

As we've seen in the revenue composition chart that is included in the financial supplement posted on our website our recover market outside of [indiscernible] where over 50% of recover revenues the FY 2019 versus 18% of recovery really addressing in FY2017.

Expenses in the fourth quarter are $39 million were $1.2 million lower in the prior year period. The decrease in cost was mostly due to our commitment improving our productivity executing on our business initiative and partly engaging in expense restructuring.

We conducted our annual [indiscernible] on 12/31/2019 and as a result of that test we recorded a $7.2 million non-cash impairment charge to goodwill in the fourth quarter of 2019 results. Goodwill was originally recorded as part of Performant's acquisition of ECMC in 2004.

This entire charge will not have any impact on these operations or any effect on our liquidity, cash flows or compliant with the financial covenants set forth in our credit agreement. With that, I'd like to turn the call back over to Lisa to some closing remarks before we open up to your question.

Lisa?.

Thanks Rohit. We are excited for 2020 and beyond as our certain larger contracts are now actively moving into the positive EBITDA state that we expect will strengthen and drive our business in the mid to longer term.

As a reminder while many of our contracts have begun to turn profitable there are number that are still in the first two years where heavier investment are required.

As we previously announced we are reiterating our full year 2020 revenue guidance of $170 million to $180 million a projected increase of 16.5% at the midpoint and adjusted EBITDA to be between $12 million and $15 million.

We are excited to continue pushing forward on our positive trajectory into 2020 and we plan on continuing to strategically invest in expansion across all markets. We're excited about the long-term prospect of Performant and believe that we can achieve the $200 million revenue target in the future.

As we look at driving continued sustainable growth beyond that number we may choose to make investments in the business on the expense side. We should consider high return strategic investment opportunity even if that means sacrificing a near-term margin goal.

Lastly we wanted to let our clients and investors know that as it relates to COVID-19 and other health ailment, we are following standard precautionary practices and we're encouraging the adoption of good hygiene practices at all of our facilities with regards to ensuring the health and safety of our employee.

Most importantly we have extensive business continuity plan that are retested annually for a variety of scenarios including one that's just there. With that we would like to open up the call and take your questions..

Thank you. At this time we will be conducting a question-and-answer session. [Operator instructions] The first question comes the line of Brian Hogan with William Blair. Please state your question..

My first question is actually going to be on leverage and your covenant obviously had covenant waivers I believe that extends through the second quarter but I guess could you remind me how comfortable are you feeling staying within those covenant ranges given your EBITDA guidance and basically is I go through the quarterly cadence and your EBITDA obviously mentioned that there are some contracts that are in ramp up mode.

So should we expect maybe some negative EBITDA in the first quarter or is it still going to be positive going forward?.

No I think we're expecting positive EBITDA every quarter Brian and especially coming out of a very strong Q4 where we had great operational momentum that we believe is carrying forward into 2020.

I think as we sit here we feel like we have really good results from operations and feel like every quarter it's going to be a very positive EBITDA quarter every quarter of 2020. So that said obviously COVID-19 issue is evolving almost every hour or so.

So at that point we have only probably a couple contracts that were pulling but most I would say almost all of our contracts are still continuing to push forward at the same momentum but with that said I would imagine as we think about the impact of COVID-19 on the entire economy in the US if we have a deleterious effect as a result of this pandemic I would think that our lender would be willing to work with us on any issue that arise out of that.

It would be unreasonable for a lender or otherwise not to consider what the current economy is doing and threat of the COVID-19. So operationally we saw very good values but I'm clearly as we think about this pandemic we don’t know yet what the impact will be.

We are obviously hoping it will be minimal, but it's just I think it depends on how long it lasts and what other guidance is provided by federal and local governments..

Sure.

Have you seen any changes in the behavior from as your outreach to in doing your work?.

No not yet and we're thinking this is a good time to find people at home in the recovery business because most people will be at home, but we are obviously monitoring this situation and just in terms of impact to the business so far, we obviously know our facilities had an issue but to the extent that we have tried to take as many functions and operation remote, in our healthcare business now I think everyone is remote and to the extent that we can do otherwise for other functions we're clearly taking precautions to make sure that we keep our employee safe and our contracts continuing to run.

So this point I would say no, but as you know every time you turn on the news it could change by the hour and so we're very closely monitoring the situation. We have a business continuity team that has a stand up call every day and couple times a day if needed so we're managing the situation very, very tightly..

You mentioned in your prepared remarks strength across the board across all your businesses and I guess I did see that based on placement volume was generally weak so I assume that some of the strength was coming from some of the subcontract business as well, but I guess could can you expand on particularly what you see in the strength?.

Sure, Rohit would you like to answer that question..

Sure in that regard I think within student lending as report guaranteed volumes, yes those are declining and the related revenue declining that's something we kind of always known coming and planned for and we're seeing strength across almost every other recovery business line.

So with consumer and commercial that's on the IRS contract on our treasury contract, state tax contract as well as some of the newer opportunities within the prepared brand name are all showing quite strong and growing to counter that..

Sure and some of that treasury or IRS that was may be fourth quarter has historically been a little bit the seasonal bump, was that the case or is that minor expectation..

The answer would be yes to both of those. So there is usually a little bit of a seasonal bump in the fourth quarter more so from the student loan market actually which was experienced but also expected..

All right switching over to the commercial healthcare trend is was a little lighter than I expected but still positive and going in the right direction I guess can you discuss the pipeline there and the other building and trends in that business?.

Rohit would you like to answer that question as well..

Sure so I think some of the strong commercial numbers that maybe not as high as expected have to do with some of the limitations issues with taking over for some clients in the coronation of business space. It's something that we've kind of gone past now into 2020.

So expecting strong results continuing going forward and we're additionally expecting double-digit growth again within the healthcare market solely out of the existing client base let alone a robust pipeline network and we're continuing to execute on. So we're feeling very strong in going about that market..

Interesting and for the CMS particularly and then focusing on the Reg are you seem then losing up on anything there or is there any change what's the kind of maybe just solid execution..

So in terms of the overall program rules we have not seen a change yet. However, we still feel there's a lot of room for continued expansion within the current limits and the current cadence they allow. So it's been operational results and we expect they'll continue to carry forward..

All right shifting over to expenses I guess how should we think about the operating expenses going forward, you're investing a little bit more in some contracts that are ramping up the trend in the quarter was it was nice under control that you’ve invested actually given the jump in the revenue.

So I guess how should we think about operating expenses as a run rate going forward?.

I would think about them as stepping up slightly every quarter as we continue to expand all our contracts as well as invest in future growth. I think where we ended the fourth quarter will be a good starting point and an early increase from there as we're growing the business..

And then one last one on the bigger picture and obviously the market and bothering, your interest expense is relatively high your interest rate I guess are there any opportunities out there to refi that debt as you start to look up in 2020 internal positive and I guess any comments around potentially doing that?.

Yeah thanks Rohit. I definitely think we're sort of seriously evaluating that opportunity Brian because yeah the interest rates are little high and as we look at sort of strong result as we head into 2020 we start to have obviously we're going to deleverage here go as quickly. So we feel like there's some pretty good opportunity to refinance the debt.

So we're definitely looking at that we think especially now where the I mean market so that market right now it I think changing obviously is for a very favorable terms.

So as we look out into this year, I think there is a strong opportunity for us to actually have less expensive interest-rate for sure and we're seriously evaluating that opportunity..

Interesting. Appreciate your time certainly as the business is turning and you did a nice job navigating through the business, nice job..

Ladies and gentlemen, this does conclude our question-and-answer session and now I'd like to turn the floor back over to Lisa Im for any closing remarks..

Thank you, operator. My heart and prayers go out to all those who are impacted by COVID 19. Clearly it's a serious issues. We just want everyone to know that we're thinking about those folks. We also want to thank our employees for their commitment and for bringing their best to Performant.

I do want to thank our clients for letting us serve them and want to thank our shareholders for continuing to support the growth of the company as we executed against our strategy and we appreciate your being with us today. Thank you..

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day..