Greetings and welcome to the Performant Financial Corporation Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Zubek, Investor Relations. Thank you, sir. You may begin..

Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release for our second quarter 2021 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; Simeon Kohl, Senior Vice President and Manager of Healthcare; and Rohit Ramchandani, Senior 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 are forward-looking statements.

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. The decision to streamline Performant into a health care payment integrity company remains on schedule and was reinforced by our results in the second quarter with health care revenues growing by over 27% on a year-over-year basis.

The wind-down of our recovery business is nearly complete, and we anticipate exiting that business entirely by the end of the year. As we see the world slowly revert back to pre-pandemic levels and emerge from this COVID thaw, we anticipate our quarterly health care revenues will continue to grow.

We are focusing our efforts to drive new business while expanding our existing contracts through the combination of innovative technology products and new services. Despite the impact from COVID, our health care business over the past 3 years has progressed largely in line with our expectations.

As we indicated to you back in 2018, most of our large contracts required a significant amount of upfront investment for people, integrating systems, et cetera, before beginning to turn profitable towards the latter stages of year 2.

However, it really wasn't until year 3, which would be where we are today, that these contracts reach maturity and begin to show more applicable steady-state margins. But just to clarify, not every new opportunity is going to have this long of a ramp-up period.

If we are expanding a scope of services with an existing client, we can implement that in 3 to 6 months since their systems are already integrated with ours.

We believe that there are multiple avenues for us to win new business and continue to grow our health care brands and operations, whether through our land and expand strategy or unseating a competitor in a new client. And to that point, the competitive landscape within health care payment integrity has dramatically changed in the recent past.

Our biggest competitor in eligibility was purchased by a private equity firm that previously purchased another large payment integrity competitor in 2018.

In addition, currently, there is a separate pending merger among 2 of the other significant payment integrity companies, but that transaction is under some additional scrutiny right now, so we will have to wait and see what transpires. Overall, we're excited about the prospects of our health care business growth.

And at this time, I would like Simeon Kohl, our Senior Vice President and General Manager of Healthcare, to take you through the results and some of his outlook.

Sim?.

claims auditing and eligibility, which is sometimes referred to as third-party liability or coordination of benefits. Performant is uniquely positioned as a national leader in both. In audit, Performant is one of only 2 CMS recovery audit contractors and is the only one with a national jurisdiction.

Performant also provides claim audit solutions to commercial payers in every state of the nation. In eligibility, performant is honored to serve CMS in its contract to operate the National Medicare Secondary Payer Commercial Repayment Center, and we provide commercial eligibility and provide recovery services in 45 states.

With this broad base of expertise, Performant is well positioned with invaluable insights to the national health care landscape. Within claims auditing, we leverage our proprietary data platform to efficiently onboard diverse client and industry data sources and seamlessly apply our analytic and segment expertise to identify improper payments.

Our workflow and audit workbench currently support the auditing of 30,000 medical records per month with line of sight to at least double that volume next year. Our more recent investments in data mining, audits that do not require a medical record have also yielded more than double the financial savings for our clients this year over last.

As a result, despite the challenging operating environment as a result of COVID, our revenues from claims audit clients more than doubled relative to the second quarter of last year. We anticipate claims-based revenue will continue to trend upward as we return to pre-COVID levels and we continue executing on new and expanding client programs.

Due to their complex nature, each program typically represents a multiyear revenue opportunity such as the 8-plus year contract we were recently reawarded for the CMS RAC Region 1.

Within eligibility, we continue to expand our Medicaid TPL service to cover more states and claim types and our CMS-based MSP Commercial Repayment Center contract continues to set records in program recoveries.

The pandemic has caused an industry-wide decline in medical spending, suppressing recoveries from the identification of third-party coverage, yet we believe our growth in multiple new programs positions us to develop our eligibility business into the future.

Of particular excitement, we recently announced our new MSP Advantage offering, which leverages our expansive experience navigating the Medicare secondary payer market.

With MSP Advantage, we partner with Medicare Advantage Plans to optimize their margins through a comprehensive suite of solutions, premium accuracy, carrier reclamation and provider recovery. We presently anticipate savings in excess of $30 million for our initial 2 health plans in just their first year of operations.

Having grown health care revenue nearly 600% in the last 3 years, we believe we have a solid foundation for continued meaningful growth in the medium and long term with strong visibility into our near-term implementations and results. Our growth has been enabled by our proprietary data platform and the unmatched efforts of our dedicated team members.

As we position to further expand our revenues, Performant is investing in the acquisition of additional key talent, the expansion of our sales and marketing efforts and in the development of our advanced analytics.

To ensure we will always remain a client-centric company at our core, we are also continuing to make investments in our account management and customer service teams.

Building from our historical growth and with line of sight into expanded growth, we are excited about our accomplishments year-to-date and believe that our investments will -- and commitment to helping our clients manage their rising cost of health care services will result in a strong second half of the year.

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

Rohit?.

Thanks, Sim. In Q2 of 2021, we reported total revenues of $32.8 million, which was lower than the $33.8 million we reported in the prior year period due to the impact of the COVID-19 pandemic as well as our decision to wind down our recovery markets and focus our attention on our growing health care operations.

Of note, health care revenues were $18.6 million or 27% higher than the $14.6 million 1 year prior. Adjusted EBITDA in the second quarter was $4.2 million compared to the $4.3 million in the prior year period and a roughly breakeven Q1 of this year.

Claims based, also known as claims auditing, revenue in the second quarter of 2021 was over $7 million, which was more than double the $3.3 million in the second quarter of 2020 and sequentially higher than the $5.4 million we reported in the first quarter of 2021.

Revenue from our eligibility services for the second quarter of 2021 was approximately $11.6 million, in line with the $11.3 million in the second quarter of 2020 and sequentially higher than the $7.9 million we recorded in the first quarter of 2021.

2020 revenues from our eligibility services benefited from a large backlog of recoveries due to the implementation of a new program, whereas 2021 now evidences a more diversified revenue base.

Similar to last quarter, our operations and related health care KPIs continue to demonstrate growth year-over-year, and we currently expect them to continue growing throughout the remainder of this year as both new and existing programs continue to ramp.

We maintain our anticipation that the second half of 2021 will represent an outsized portion of total 2021 health care revenues.

Total non-health care recovery revenue in the second quarter of 2021 was $11.1 million, down from the $16.2 million that we recorded during the second quarter of last year and the $14.5 million reported in the first quarter of this year.

Despite the comparatively strong results from this business within the quarter, this revenue will continue to rapidly decline through the remainder of 2021 as a result of our planned wind-down of our recovery markets.

We anticipate that the revenue contribution from our non-health care recovery business to be in the low to mid-single-digit millions of dollars in the second half of 2021, and we do not anticipate reporting any such revenue at the start of 2022.

Our total customer care and outsourced services revenue was $3.1 million for the quarter, which was slightly up when compared to the second quarter of last year and down compared to the $3.6 million in Q1 of this year, primarily related to CARES Act related loan forbearances.

Operating expenses in the second quarter were $34.1 million, which, after excluding our goodwill impairment charge in the prior year period, is $2.8 million higher. The increase in expenses was primarily driven by impacts of our recovery wind-down. We had a spike in restructuring expenses in the quarter alongside an increase in amortization.

The amortization increase resulted from shortening the useful lives of certain recovery assets as well as the new debt issuance costs related to our recent credit amendment. Looking forward, we expect that operating expenses overall will decline from Q2 levels in spite of the continued growth in operating expenses from health care related expansion.

As Lisa mentioned, we expect to be done with the wind-down of recovery market activities by the end of the current year. With that, I'd like to turn our call back over to Lisa before we open up your questions.

Lisa?.

Thanks, Rohit. Over the past 5 years, we have developed a strong brand as a client-centric value-added health care payment integrity partner. We have grown our health care revenues from over just $7 million in 2015 to almost $69 million in 2020 by driving almost $2 billion in health care client savings.

As we continue to deliver results to our clients, we anticipate that we will also continue to grow in 2021 and forward. We believe there is a tremendous opportunity for us to gain market share and continue to grow.

However, the recent surge in the Delta variant of COVID-19 creates some uncertainty for potential slowdowns or pauses in activities in the coming quarters.

While we have not yet seen impact, we are taking a cautious approach in opting to refine our health care revenue guidance to a range of $80 million to $85 million and maintain our confidence in achieving positive EBITDA results.

The long-term prospects of Performant remained sound, and we believe that we will continue to grow and scale our business in the coming years. With that, we'd like to open the call up and take your questions..

[Operator Instructions]. Our first question comes from Kyle Bauser with Colliers Securities..

Thank you for all the updates here. I appreciate it. Maybe I'll start with some of the new contracts that we've heard about. So I think 10 in Q4 and 5 in Q1. Sorry if I missed this, any new contracts in Q2.

And in particular, can you talk about maybe, on average, what the contract size of some of these new clients are and maybe what the average term length is?.

Kyle, it's Simeon. Yes, so I think from a -- just a quick level-set. So we announced 10 new programs that we implemented in Q4 2020. We implemented an additional 5 in Q1. And then as reflected in my prepared remarks, we implemented another 7 programs in Q2. So the 7 programs were a good blend of new logos and existing client expansion.

They're primarily claims-based programs. And just kind of from a timing standpoint, as we think about the revenue component, and I think we've previously shared this, these programs do take a little bit of time to ramp.

So we anticipate the 10 we announced in Q4 will start to contribute revenue later this year with a more material contribution next year. And then programs that we implemented in Q1 and that we just recently announced, those primarily start to contribute in 2022 from a revenue perspective.

So we continue to have a pretty good cadence of new programs that we are implementing, good line of sight into those as early -- or what we've announced here show. And so I think also, it's -- as Lisa points out, as we're executing here both with new logos in land and expand, we're seeing a good contribution for both..

Got it. And I know the Region 1 for 8.5 years is on the long end of the term length.

Is it safe to assume that a lot of these new contracts are for a few years and maybe are in the single digit for -- in terms of millions of dollars?.

Yes. I mean, I think our -- as you call out there, the RAC programs and MSP contracts or CMS contracts are longer term. The commercial contracts, though, if you look at them, those contracts are also very sticky contracts, and they have a pretty extensive time period.

In terms of revenue contribution, look, it really depends on the size of the opportunity, the number of covered lives, et cetera. So it's hard to call out exactly to quantify these opportunities from a revenue standpoint..

Got it. I appreciate that. And in terms of EBITDA, very strong in the quarter, much higher than what we were modeling. As the recovery business continues to wind down, we should see more of these costs diminish. And it looks like you sold off about $2.4 million worth of the recovery contracts.

And as you mentioned, we should expect that to be fully divested by year-end. Are you able to provide any sort of color around the percentage remaining of the recovery assets or amount? Any sort of color here would be helpful..

Yes, Kyle. I think you categorized that well. And so from our perspective, I think that goes back to -- we expect low to mid-single-digit millions in revenue for the total of second half 2021 in terms of the recovery market wind-down.

In terms of potential divestiture value, there may be small pieces from some of the structure of our transactions that come in, but I think you've seen the lion's share of it already..

Got it. And just a couple more here. In terms of costs associated with this business going away, any way to maybe quantify this on a quarterly or annual basis? Just trying to get a sense of how much cost savings we'll see come out of OpEx..

Yes. I think that they're still probably a couple of million dollars on an annual basis that will come out related to the recovery wind-down. But as we've discussed before, that will reset the floor, if you will, as we continue to grow the health care operation..

Got it. And then Region 1 and 5 have been obviously significant drivers for the business, just securing one region is a big deal. So having both is -- clearly validates your capabilities. I don't want to get greedy by asking if you think you can secure a third region with Region 2 coming up for grabs.

But is that an opportunity that you're focusing on? And any sort of thoughts here would be great..

Yes. Look, we -- to your point, we have had a long-standing relationship with CMS, and I think that 8.5-year reaward for Region 1 certainly underscores our performance. And so we will clearly look at all of the rebid opportunities in the other regions here to see if they map out to our strategy and it makes good sense.

And at this point, we are firmly available to bid on these opportunities. CMS hasn't restricted any number of regions, et cetera. And so we'll definitely look closely at pursuing some of these other opportunities as the rebids open up..

Our next question comes from George Sutton with Craig-Hallum..

In your press release, you mentioned there is a tremendous opportunity for us to gain market share within the health care space. By our calculations, and I know our calculations may be a little different, we calculate your run rate currently at a 1% share of the market.

Can you talk about extending this thought process out further? How far do you think you can get in terms of a health care share?.

Certainly. I think as it stands -- go ahead, Sim. As I was saying, I think as it stands today, a 20% market share is a goal that we have in mind as a company.

And I think if you were to extrapolate out the $240 million plus of waste in payment integrity, that could translate to a $500 million to $700 million plus revenue opportunity for us with 1/5 of the market. We can -- certainly, nothing restricting us from going beyond that, but that's the current goal..

And as you're winning these contracts with existing customers -- and frankly, I guess I'd ask the question on the commercial side with new customers as well.

Can you talk about seat levels? Are you coming in at higher seat levels? And another question relative to that is when you move up a seat, can you just walk through the impact that you can see with that account?.

Yes, we do. Look, as our solutions have matured, as we've had more opportunity to demonstrate our capabilities in existing clients, that clearly puts us in a better position to move up.

And I think in some of these new opportunities, we're clearly coming in, in that first or second seat position because of our qualifications and again, how we've been able to demonstrate capabilities and quality of what we're providing for clients.

So in terms of moving up the stack, the larger accounts, the national accounts, there's opportunities there from some of the historical early wins and we're progressing.

And I think that does give us kind of an informed playbook, if you will, as we think about growth opportunity because we know the account well, we know how the product operates and then we see ultimately the covered lives and the claim volume that we have. So it does give us good predictability in terms of growth opportunities..

So our work has suggested that there are not that many accounts out there. There's, let's call it, 40-plus, and it is a small universe and they talk. And what we continually hear is that your technology is better than others.

Could you just talk about the pipeline from that context and how much more opportunity you're seeing right now as a result of the technology advantage it appears you have?.

Yes. So look, in terms of the number of accounts, there are a number of accounts in -- across the tier, right? If we look at the total number of insurers that are out there, we're 500-plus in terms of the ones that we focus on we focus on. We focus on largely 2 segments.

The national accounts gives us great opportunity for penetration and growing with the covered lives. And then there's a healthy amount of mid-tier we refer to as kind of the regional payers that kind of 500,000 to 4 million covered lives. And so that's an area that we are also focusing on.

We've had some disproportionate success in that space largely because payers see the capabilities that we have to address kind of both ends -- I'm sorry, the kind of the end to end, if you will, from identification of opportunities of missed -- properly paid claims all the way to the recovery side.

And so we look at that as somewhat of an underserved market that because of our technology, capability to scale and support that in a cost-effective manner, we've had some pretty material success in that space.

And then just to your point on the technology as a whole, that continues to be a real differentiator in all the markets that we pursue, providing quality results, being mindful in terms of provider abrasion, having high hit rates, high findings.

That continues to be a real differentiator for us in allowing us to continue to take share from incumbents and also kind of expand in existing clients..

Great. One more question, if I could, and I'll ask Lisa if she could answer this. We are watching the infrastructure bill as closely as we can sitting here in Minneapolis. And it looks the eligibility age may fall for Medicare. It looks like services covered may grow, both of which would mean Medicare spending could be substantially higher.

Can you talk about what impact that could have for you?.

Sure, George. I think these are clearly wins that will help our overall business. As you know, CMS is a pretty significant part of the payer market and as their spending grows, our opportunity to grow with them clearly grows.

And we see so health care industry opportunities growing in 2 ways, right? There's -- one way is clearly taking share and growing within the accounts.

The second is the increase in dollars and the amount of spending that will continue to be a part of our health care spend in the U.S., which is significantly growing at, I think, twice what GDP is growing at. So we're pretty excited about what we're seeing. And we think, particularly, as Sim said, we've had a long-standing relationship with CMS.

And our -- I think we try our best to be one of their better partners in making sure that we work well with providers, we work well with the entire universe of interaction parties with CMS. So we're pretty excited about that. We think it's another opportunity to continue to grow.

And we think that's a dynamic that we are well poised to take advantage of..

[Operator Instructions]. Our next question comes from Chris Krug with Chatham Harbor Capital..

Well, great quarter, guys. I'm not sure why this is trading down. I know the guide down was by $3 million or whatever, but I don't think anyone really cares given the long-term picture and your goal of getting 20% market share. So health care revenue in Q2 of 2020 was $14.6 million, and this quarter, it was $18.6 million, which is 27% year-over-year.

Is there seasonality on the health care revenue side? Q2 is -- from the presentation, it seems to be your weakest quarter. But this was your second highest print, and the best being $18.9 million in Q4 of last year.

So is there a seasonality in Q2?.

Chris, good question. And no, we generally don't see seasonality in Q2. I think in this market, you do see seasonality from a Q4 to Q1. We know a lot of our clients try to clean up their books at the end of the year. So you typically see an inflated Q4 that could potentially decline a bit into Q1.

So in terms of our Q2 numbers, I don't think there'll be anything seasonality-wise artificially deflating or inflating them..

There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks..

Thank you, operator. Thank you for being with us today and for the good questions that we had on our earnings call. As we close this call, I want to again thank our clients for letting us serve them. We feel very honored to be your partners. We want to thank our colleagues at Performant for bringing their best to us every day.

And again, we appreciate your time and attendance on our earnings call. Thank you very much..

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation, and have a great day..