Greetings. Welcome to Performant Financial Corporation Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Richard Zubek, Investor Relations. You may begin..

Thank you, operator and good afternoon everyone. By now, you should have received a copy of the earnings release for our third 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 would like to remind you that some of the comments made on today’s call are forward-looking. These statements are subject to risks and uncertainties, including those described in our filings with the SEC.

Actual results may differ materially from those described during the call. In addition, any 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. During the third quarter, we started to see the first signs of a return to normal operations since the start of the COVID-19 pandemic. We resumed auditing operations for a majority of our commercial healthcare clients in August.

Similarly, the CMS RAC program also reopened under certain restrictions. And lastly, our IRS and treasury work is also backup and running. So while the full extent of the pandemic effect on our operational and financial performance will depend on future developments, we are encouraged by strong progress to date.

To that end, I am proud of the commitment that has been demonstrated by our exceptional associates and their focused on servicing our clients to the highest standards possible. Without your focus and efforts, we would not be where we are today. Thank you for all that you do and for your continued contribution to performance.

As you know, our healthcare business is split between claims and eligibility-based offerings, also called coordination of benefits or third-party liability claims.

As a result of the pandemic, a few of our healthcare audit customers had asked us to place short-term pauses on our activities earlier this year, which directly impacted our results in the third quarter.

I am pleased to report that these temporary pauses largely ended during the third quarter, and we have restarted aggressively hiring and recruiting individuals as part of our re-ramping efforts in order to prepare to service those accounts to the highest standards possible.

However, it is important to recognize that we will incur additional expenses as a part of our re-ramping efforts, but we don’t anticipate the revenue to show until Q1 of 2021. The overall cost of the healthcare system as a result of COVID-19 has been astounding. Some industry experts believe that hospitals in the U.S.

in the aggregate spend estimated $550 million per month on things such as child care, housing and medical screening and treatments during the pandemic to support their frontline workers. Additionally, the American Hospital Association estimates that hospitals have already spent an additional $2.4 billion on PPE between March and June of this year.

While it’s unclear how much of this expense will ultimately be passed onto the patient, some healthcare industry experts are projecting that the medical cost trend for 2021 or the projected percentage increase in the cost to treat patients from 1 year to the next, assuming benefits remain the same, will increase somewhere between 4% and 10%.

As infection rates continue to rise across the country, it is still not currently possible to predict the long term overall impact of COVID-19 pandemic on our business.

The upside for our healthcare business, however, is that when the pandemic is inevitably under more control, we expect the pent-up demand in medical care, such as elective or non-emergency outpatient procedures will increase our opportunity to identify savings for our healthcare payer clients.

It is estimated that the COVID-19 pandemic has led to record job losses, which in turn means that individuals are also losing their employer-provided health insurance coverage. However, many of these individuals will likely end up on Medicaid or a subsidized policy through an ACA exchange.

As the unemployment rate in October is still double the rate from February of this year, we view these as being enduring shift in coverage that presents positive opportunities for our audit and COB offerings.

As we see the positive macro trends and continue to invest in the double-digit growth in our healthcare market revenues, we are also proud to have hired top market talent into our key positions. These leaders have come from companies in the healthcare industry, and their addition to performance attests to our meaningful growth and brand awareness.

Shifting now to the recovery operations although this business has been more adversely impacted by the pandemic, we remained focused on building a strong diversified business on our core strength of analytics, innovation, compliance, audit and recovery.

Based upon these unique strength and value proposition to our clients, we believe we can capitalize on future market opportunities. As it stands today, we have resumed activity with existing borrowers on behalf of our guarantee agency clients on a limited basis.

Department of Education related clients are expected to resume full activities at the start of 2021, and we continue to monitor for any further congressional changes to that timing. Lastly, substantially all of our work for the IRS and Treasury Department has been restarted on a remote basis.

As it relates to our work for the IRS, we resubmitted our re-bid for the new IRS contract last week and expect the contract award announcement in February of 2021. As encompass with consistent good performance under our current contract, we are confident with our position and response to this request for quote.

At the end of the day, it is the continued hard work and dedication of our team that has driven our stronger operational results in the midst of considerable uncertainty and disruption resulting from COVID-19.

In Q3 of 2020, we had revenue growth of 1% versus Q3 of 2019 and positive EBITDA of nearly $4 million compared to an EBITDA loss of more than $3 million in the third quarter of last year.

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

Rohit?.

Thanks, Lisa. In Q3 of 2020, we reported revenues of $36.2 million, which was in line with our internal projections and up 1.1% versus the prior year period. Adjusted EBITDA in the third quarter was $3.8 million compared to a loss of $3.1 million in the prior year period and a 7.1% increase sequentially.

Healthcare revenues in the third quarter of 2020 totaled $17.6 million, which was 63% higher than it was in the third quarter of last year and represents over 20% growth on a sequential basis. Overall, our healthcare activities are all going strong, and we are hitting and even in some cases, exceeding our internal KPIs.

We are very excited by these trends and are focused on furthering our results in both our current and future product offerings. However, as Lisa noted, there hasn’t been an impact from COVID-19 on our clients. And the cadence of our clients’ recruitment of audit findings has been slow to return to the previous normal.

We anticipate this will have a dampening effect on the pace of revenues from our work efforts, but should be caught up by the first quarter of 2021. Total recovery revenue in Q3 was $15.4 million, a decrease of 26% as compared to the third quarter of last year and 4% lower sequentially, primarily due to the continued negative impact from COVID-19.

As a reminder, as a result of the Coronavirus Aid Relief and Economic Security Act, CARES Act, the U.S. federal government suspended payments, ceased accruing interest and stopped and long-term collections payments such as wage margins for student loans originated by the Department of Education.

This pause in outbound activity is expected to lap at the beginning of the year and the status of which we will continue to monitor.

Student loan revenue and related cash flows that were already in the funnel prior to the start of COVID impact are expected to continue throughout the remainder of 2020 because we earn revenue for a number of months from existing in process borrowing rehabilitation agreements.

That said, as we approach the end of the fourth quarter of 2020, we expect to see these student loan revenues begin to significantly decline as the pipeline empties. Expenses in the third quarter were $34.3 million, a decrease from $41.7 million we reported in the third quarter of 2019.

The decrease in costs, were mostly due to our improved productivity, operating efficiencies and reduced headcount. As mentioned, we are actively hiring within healthcare to support the continued growth and thus, anticipate an increase in operating expenses in the fourth quarter. With that, I would like to turn the call back over to Lisa.

Lisa?.

Thanks, Rohit. Despite the turbulent year due to the disruptions caused by COVID-19, we have continued to report solid results. The third quarter of 2020 marks the fourth consecutive quarter of positive adjusted EBITDA and continuing positive net income when we pull out the non-operational, non-cash goodwill impairments in the past few quarters.

Although we achieved good performance, we believe that with continued investment, we can deliver improved results as we re-ramp on our accounts that were temporarily suspended due to the pandemic as well as through growth in new business offerings.

Analysts forecast that Medicare Advantage will continue to be the fastest-growing segment of the commercial insurance market. We recently announced our successful launch of Premium Accuracy, a Medicare secondary payer service for Medicare Advantage plans.

Premium Accuracy is another example of our mission to be the leading healthcare payment integrity provider in North America. The identification of other insurance coverage and the application of primate rules is complex with large dollars at risk.

In fact, within the first 2 months of implementing a national Medicare Advantage plan, we successfully contracted over 4 million covered lives and identified over $2 million in premiums to be restored.

Payers have taken notice of our results and are inquiring more about our offerings as they are looking for trusted partners to ensure that they are receiving the most accurate premiums for their Medicare Advantage populations.

We believe that by applying the lessons that we have learned through this pandemic to fortify our operations and adopt our tech business to new technologies and workforce strategies. I believe we are going to come out of this leaner and better positioned for whatever the future holds.

We remain confident in our long-term success and believe that our prospects remain strong. Lastly, I want to thank our employees for their significant efforts, patience and flexibility during these times.

I also want to thank our clients for letting us serve them and frontline and other essential workers for putting their lives on the line, so the rest of us can stay safe. Thank you for joining our earnings call today..

And ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..