Greetings, and welcome to the Performant Financial Corp. Second 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] Please note that this conference is being recorded.

I will now turn the conference over to our host, Richard Zubek of Investor Relations. Thank you. You may begin..

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

On today’s call will be 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 circumstance or revised expectation.

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. Since early March, the COVID-19 pandemic has disrupted many facets of our lives and daily activities.

Throughout this unprecedented time, we strive to ensure the safety of our associates and their families, while providing a remote work environment that meets the strict security requirements of our clients’ demand. To date, we continue to require most personnel to work remotely.

To all of our amazing associates, thank you for your tireless efforts and commitment to our company. Without your dedication, our success would not have been possible. On the healthcare front, our Coordination of Benefits eligibility business continues its strong performance and experienced marginal impact as a result of COVID-19.

As anticipated, our audit volumes decreased in Q2, as CMS and other commercial health plans understandably paused auditing and suspended recoveries during the quarter. However, as of today, the majority of our commercial programs have resumed auditing, and we anticipate the few remaining plants will follow suit in late August.

In terms of our RAC Regions 1 and 5 contracts, CMS has publicly announced the restart of audits in later August, and we are currently working with CMS to better understand the restart cadence. Despite the various COVID challenges, our healthcare business continues to experience dramatic growth.

For the quarter, we achieved 58% year-over-year growth, bringing our year-to-date growth to 76% versus prior year. Additionally, our implementation and new opportunity pipelines are at an all-time high.

The significant growth consists of both existing clients procuring additional audit and eligibility offerings, as well as record success in attracting new clients, most electing to implement multiple Performant offerings.

We are thankful for the trust our existing clients have demonstrated in us, just as we believe that our solid reputation is yielding significant wins over competitors in both the audit and eligibility market.

Finally, we are making solid progress in recruiting exceptional industry talent to our healthcare business, as we accelerate our efforts to expand audit and eligibility offerings.

Attracting these well-respected industry leaders, further underscores performance growth as a recognized leader in claims cost management and our reputation as being a trusted partner to our clients.

With respect to our recovery business, since the onset of the pandemic, some of our clients, including federal and state governments, requested that we implement a complete stoppage of our outbound recovery services, which had a negative impact on our operating results in the second quarter.

However, many of these temporary stoppages have since been lifted, and we have already resumed recovery efforts on a majority of these contracts. Furthermore, we anticipate being fully operational on all of our non-student lending recovery contracts before the end of the third quarter.

For student lending recovery contracts, as a result of The Coronavirus Aid, Relief, and Economic Security ACT or The CARES Act, 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.

Based on the new Memorandum on Continued Student Loan Payment Relief during the COVID-19 pandemic, which was issued by the Secretary of Education on August 8, 2020. This pause is expected to last through December 31, 2020.

During this time, student loan revenue and related cash flows will continue because we earned revenue for a number of months from existing in-process borrower rehabilitation agreement.

Further, while not mandated by the CARES Act, all of our guarantee agency clients, who administer the federal family education loan program, are largely compliant with the provisions of the Act, with the exception of counting MISC payments towards qualification for loan rehabilitation.

Given the impact of the CARES Act and the decisions from other clients to spend our recovery activities. We furloughed more than 500 employees to date. We continue to aggressively manage expenses in response to the way clients are managing through this unprecedented time.

There continues to be a significant uncertainty around the breadth and duration of business disruptions related to COVID-19 pandemic, its impact on the U.S. economy and the ongoing business operations of our clients. We actively monitor the impacts of the COVID-19 pandemic and may take further actions to alter our business operations.

But today, it is still difficult to estimate the full impacts of the COVID-19 pandemic on the results of our operations, financial condition, or liquidity for fiscal year 2020 and beyond.

In Q2 2020, we reported revenue of $33.8 million, a decline of about 6% versus Q2 of 2019, which was entirely related to the Q2 work stoppage to our recovery business as a result of the COVID-19 pandemic.

However, as evidence of the progress we have made and our focus on operating efficiencies, during Q2 2020, we reported positive EBITDA of more than $4 million compared to an EBITDA loss of more than $2.5 million in the second quarter of last year.

We have worked hard to increase operational improvements in our non-student lending recovery efficiencies, as well as our Coordination of Benefits eligibility operations.

During the global economic impact and challenging environment during the second quarter due to COVID-19, we still performed relatively well versus last year and against our own estimates.

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 Q2 of 2020, we reported revenues of $33.8 million and adjusted EBITDA of $4.3 million, compared to a loss of $2.5 million in the prior year period. Year-to-date, revenues for the first-half of 2020 were $79.7 million and adjusted EBITDA was $11.4 million.

This compares to revenues of $70.7 million and an adjusted EBITDA loss of $6.6 million in the first-half of 2019. From an EBITDA perspective, we have outperformed our original expectations from the first-half of the year, setting us up well for navigating the continued impacts of COVID-19.

Of note, our healthcare revenues in the second quarter of 2020 totaled $14.6 million, an increase of 57% over the second quarter of last year. Additionally, on a year-to-date basis, healthcare revenues have totaled $32.1 million, an increase of nearly 76% compared to the first-half of 2019.

We are quite excited to see this continued growth via both our audit and Coordination of Benefits market-leading healthcare services.

Our Coordination of Benefits revenues in the second quarter grew by over 100% on a year-over-year basis, while our audit-based healthcare revenues in the second quarter maintained year-over-year in spite of the impacts of COVID-19.

As we noted during our earnings call last quarter, a few healthcare customers initiated short-term pauses on audit activities, which has had a near-term impact on our results. As Lisa mentioned, the majority of our commercial auditing operations have resumed and we anticipate the rest to restart in the coming weeks.

Total recovery revenue in Q2 was $16.2 million, or 27% decline as compared to the second quarter of last year. We believe that due to the negative impact of pauses to our recovery operations, our second quarter recovery results are representative of these impacts from COVID-19.

These pauses on our recovery operations, which were driven by the CARES Act, resulted in furloughing of over 500 employees, which was and is expected to yield monthly savings of approximately $1.5 million.

However, as Lisa noted, as of today, we have already resumed most of our non-student lending recovery operations via both Performant and Premiere brands. And as such, we’re happy to report that we are currently recalling a good portion of these furloughed employees back to their positions.

Our results in the second quarter were additionally impacted by a non-cash non-operational goodwill impairment charge of $8 million. This charge is primarily due to the decrease in our stock price and associated market capitalization.

There has been significant negative impacts in the global economy and the public securities markets due to the COVID-19 pandemic since March of 2020.

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

Excluding that goodwill impairment charge, expenses in the second quarter were $31.2 million, a decrease of $8.9 million in the second quarter of 2019. The decrease in costs were mostly due to our reduced headcount in the furloughs, as well as improved productivity and operating efficiencies.

With that, I’d like to turn the call back over to Lisa, before we open it up to your question.

Lisa?.

Thanks, Rohit. In recent weeks, we’ve seen other businesses reopen their offices and storefronts and then almost as quickly close once again, as heightened protective measures were reimplemented by governmental authorities to counteract a sudden increase in infection, as well as number of deaths related to the pandemic.

As a result, it is not currently possible to ascertain or predict the overall long-term impact of COVID-19 pandemic on our business. However, we are encouraged by the strong performance of our healthcare contracts and anticipate investing further into the growth of this business.

We believe that over the next few years, they will continue to strengthen and be a key driver of our business in the longer-term. Furthermore, we believe that most pandemic-related policies and operations will be allowed to reactivate over the course of the third and fourth quarters of this year.

As they progress through the remainder of 2020, we will be nimble and continue to adapt our strategies, while still providing our clients with the highest level of service in this environment. One such example is that, we have begun to actively review our physical footprint across the country, as remote workforce has become a more accepted norm.

Although we are not reinstating quantitative guidance for the 2020 year at this time, we remain confident in our operational trajectory and reiterate our commitment to reporting positive adjusted EBITDA results for this year. Lastly, I want to thank our employees once again for their significant efforts, patience and flexibility during these times.

I also want to thank our frontline and other essential workers who are putting their lives on the line, so the rest of us can stay safe. With that, we’d 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] Thank you. Ladies and gentlemen, there appears to be no request for questions. I will turn it back to management for closing remarks. Thank you..

Thank you, operator. Once again, we want to thank our clients for the opportunity to serve them and our associates for your continued commitment and your best efforts. We want to thank our shareholders for your continued success and, again, emphasize our gratitude to the central workers for all that you’re doing in this unprecedented time.

Thank you for spending this time with us..

Thank you. This concludes today’s conference. All parties may disconnect. Have a good day..

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