Greetings and welcome to the Performant Financial Corp. First Quarter 2020 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] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Richard Zubek of Investor Relations. Thank you. Please begin..

Thank you, operator. Good afternoon, everyone. By now you should have received a copy of the earnings release for the company’s first quarter 2020 result. If you have not, a copy is available on the Investor Relations portion of our website.

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. Now, I’d 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. Over the past few months, the COVID-19 virus has created a new normal in the economy, work environments and our family lives. Our internal business continuity pandemic task force initiated preparation ahead of the initial stay at home directive in mid-March.

As a result of our advanced planning, we efficiently mobilized over 1,200 employees to continue our ongoing business operations in a secure remote environment.

During this time, we have been able to successfully adapt and be responsive in managing a multitude of changes coming from clients and various governing bodies at every level, from local cities and counties, all the way to the federal government.

Although, this hasn't been easy, the situation has shown us that we are capable of adapting to difficult and changing business conditions.

And while our coworkers have now become kids, spouses and pets, the commitment, courage and flexibility of our associates has allowed us to drive strong results in the first quarter and will directly impact our performance when we emerge from this temporary environment.

A huge thank you to our associates for your commitment and your continued contributions to our organization and to our amazing information technology staff, because without your effort, we would not be in the position that we are today.

While we believe we have taken the necessary step that will allow us to continue to function as a result of the COVID-19 pandemic, the extent of the pandemic effect on our operational and financial performance will depend on future developments and is not currently possible to predict the overall long-term impact of COVID-19 pandemic on our business.

For example, according to the terms of The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, enacted in March 2020, the U.S. federal government suspended payments, ceased accruing interest and stopped involuntary collection of payments or wage garnishment for student loans originated by the Department of Education.

This pause in outbound activity last through September 30, 2020. Additionally, the Department of the Treasury and IRS suspended outbound calls for a period of time. The Department of the Treasury has reinitiated outbound calls as of May 13.

This has a direct and immediate impact on our recovery operations, resulting in the furloughing of over one-third of our total workforce. And clearly, there is significant uncertainty around the breadth and duration of the business disruptions and impact on the U.S. economy related to the COVID-19 pandemic.

Although, our recovery operations have been adversely affected by this pandemic, our long-term strategy is unchanged and we remain focused on building a strong, diversified business on our core strength of analytics, innovation, compliance, audit and recovery.

Where those capabilities combine and create unique strengths and value propositions to our clients, we believe we can capitalize on future market opportunities.

Conversely, our healthcare operations have not experienced a similar level of impact as our recovery operations due to the fact that a very limited number too of our healthcare customers have been directly impacted by congressional regulations related to COVID-19.

While a few healthcare customers place short-term pauses on our audit activities, we have seen continued growth and expansion in our other health care offering, most notably our coordination of benefits contracts which have not experienced contractions to-date, additionally we currently do not expect COVID-19 to have permanent negative effects on our relationships or overall contract expectations within the healthcare market.

As a leader in payment integrity, serving multiple CMS regions and numerous national and regional Medicare and Medicaid managed care plan, our customers have come to depend on our resiliency and forward thinking.

Our ability to quickly adapt to the changing environment enabled us to continue operating and servicing our healthcare clients, despite, the highly disruptive nature of COVID-19.

Before the pandemic unfolded in March, we had strong operating momentum following our continued execution on contracts and plans from the fourth quarter of 2019 with an expectation of reporting similarly positive results for the first quarter of 2020.

As we have previously shared with you, many of our contracts are actively transitioning out of the investment phase and into periods of growth and profitability. The continued hard work and dedication of our team has driven our strong operational results.

In Q1 2020, we had revenue growth of 32% versus Q1 of 2019 and positive EBITDA of just over $7 million compared to an EBITDA loss of more than $4 million in the first quarter of last year. These results are what we anticipated in our fiscal 2020 to resemble as our contracts continue to move out of the heavy investment phase into profitable one.

With that, I'd like to turn the call over to Rohit Ramchandani, our Vice President of Finance and Strategy to walk you through the financial results of the quarter in more detail.

Rohit?.

Thanks, Lisa. In Q1 of 2020, we reported revenues of $45.9 million, which was in line with our internal projections and up 31.5% versus the prior year period. Adjusted EBITDA in the first quarter was $7.1 million compared to a loss of $4.4 million in the prior year period and a gain of $6.5 million in the fourth quarter of last year.

Healthcare revenues in the first quarter of 2020 totaled $17.5 million, which was 94% higher than it was in the first quarter of last year and represents over 20% growth on a sequential basis. The sizable increase here reflects the continued progression as our contracts move out of the investment and into more profitable phases.

We also continue to make significant strides relative to our continued investments to further expand our audit and coordination of benefits product offerings. As a market leader, we anticipate seeing continued growth via both of these audit and COB innovative market offerings.

Total recovery revenue in Q1 was $24.3 million, a 13.6% increase as compared to the first quarter of last year, but 3.7% lower sequentially due to the negative impact from the COVID-19 virus.

As Lisa mentioned, the CARES Act included several student loan-related changes that we expect will have a negative impact on our financial results for the foreseeable future and resulted in our furloughing of over 400 associates from our recovery operations. The furloughs are expected to yield monthly savings of approximately $1.5 million.

With respect to these contract pauses and our recovery operations, we believe that our results in second quarter will be more representative of the impact from COVID-19. Additionally, our results in the first quarter were impacted by a non-cash non-operational goodwill impairment charge of $19 million.

This charge is primarily due to the decrease in our stock price and associated market capitalization. There has been significant negative impact to the global economy and the public securities market as a result of the COVID-19 pandemic since March of 2020.

As a result, our goodwill maybe at an increased risk of additional impairment should there be further decline in our stock price and associated market capitalization, which may result in a potentially material non-cash non-operational charge to earnings.

Excluding that goodwill charge, expenses in the first quarter were $41.1 million, a slight decrease from the first quarter of 2019. The decrease in cost was mostly due to our improved productivity and operating efficiencies. With that, I'd like to turn the call back over to Lisa before we open up to your questions.

Lisa?.

Thanks, Rohit. Over the past 10 weeks, we have learned a lot about the efficiencies in our business. As I mentioned earlier, in under two weeks, we successfully moved over 1,200 of our associates into a secure remote working environment to ensure that our clients experience no interruptions in service.

In doing so, we now have a better understanding of the work requirements needed from our staff and new strategies we can look to employ in a post-COVID world. However, the sobering reality is that we don't know when all things will return to a pre-COVID state.

And when we reach that point, we don't know, which rules and regulations will still be in place or if there will be new ones to follow. The world is just not what it was a few months ago. When we provided you our initial look at 2020 guidance back in December 2019, we assume a stable to improving macroeconomic environment.

With unemployment rates now in the mid to upper teens, today's environment is anything but normal. As a result, we have made the decision to withdraw our future guidance.

For now, the most important thing I can tell you is that we made it our priority to produce positive adjusted EBITDA results for this year, and I believe that we are taking appropriate measures to accomplish that. We hope to be able to provide you with some clarity on our 2020 expectations at some point in the near future.

But at this time, we continue to receive updates and directives from our customers that make projecting difficult for now.

However, I'm proud of what we were able to accomplish in a hyper compressed time frame and believe that by applying the lessons that we have learned through this pandemic to fortify our recovery operations and adapt that business to new technologies and workforce strategies.

I believe we are going to come out of this leaner and better position for whatever the future holds. We remain confident in our long-term success and believe that our prospects remain strong.

Furthermore, we are excited that many of our health care contracts are now in the positive EBITDA state, which we believe will strengthen and drive our business in the long term. Lastly, I want to thank our employees for their significant efforts, patience and flexibility during these times.

I also want to thank our frontline and other essential workers for putting their lives on the line so rest of us can stay safe. With that, we'd like to open up the call and take your questions..

Thank you, operator. We want to thank you for being with us on this call today. Once again, we want to thank our clients for letting us serve them and a huge thank you to our associates for all of their commitments and hard work. Thank you again..

This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening..