Welcome to today's Performant Financial Corp. Third Quarter 2021 Earnings Calls. [Operator Instructions] I will now turn the call 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 2021 results. If you have not, a copy is available on the Investor Relations portion of our Web site.

On today's call will be Lisa Im, Chief Executive Officer; Simeon Kohl, Senior Vice President and General 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. Our 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. We are excited to announce that our third quarter included year-over-year and sequential healthcare revenue growth, continued growth in our new implementation and expansion of the number of audits conducted.

This is being driven by our client centric focus marketplace offerings that continue to support our position within an ever consolidating industry. We maintain our visibility into strong growth toward our long term targets, both among existing and new clients.

Although, we initially entered the healthcare markets back in 2007, it wasn't until 2017 where we made a commitment to focus on the commercial markets that we truly entered the healthcare space. Since that time, we have added numerous clients and contracts across large and mid-size healthcare payers.

We've also earned multiple contracts with these payers, some we just grown some a few hundred thousand in annual revenue to millions across different services. Additionally, over the past couple of years, we have built a great healthcare leadership team with some of the top talent in the industry.

The healthcare payer integrity market is large growing and well structured. In this market, our gains have come from highly client centric focused services, which have facilitated our ability to take market share from incumbents. We believe our midterm and long term growth prospects remain very strong.

From a macro perspective, despite rising vaccine rates COVID continues to impact hospital core utilization rates. Based on a study by Peterson KFS, hospital admissions are below expected levels through early April 2021 and health spending overall for hospitals and ambulatory care remains below expected level through at least June, 2021.

Specifically, KFS noted that following unprecedented decrease in the number of hospital admissions in 2020, core utilization remains below expected levels. The persistence of lower than expected core utilization suggests that some of the care that did not occur early in the COVID-19 pandemic may have been forgone rather than simply delayed.

We will keep a close watch on how these core utilization trends will impact available claims volumes in the coming quarters as this could cause temporary compression. We have similarly been impacted within third quarter due to the back end COVID slowdown and some ramp up implementations slippage that Sim will discuss.

As we adapt to these temporary impacts, we have maintained our focus and excitement on the strong platform we have and the long term focus of our company.

As our transformation into a predominantly healthcare payment integrity company is nearly complete and as we reflect back on our journey to this point, it's humbling how we've come from a company that was focused as a vendor in the student loan recovery market with no healthcare experience, to becoming one of the leading independent healthcare payment integrity providers in the country.

I want to thank everyone who has been a part of the Performant family. To our employees, both current and former, we could not be the company that we are today without your efforts and dedication and for that, I am truly grateful.

The long term prospects of Performant remains sound and fundamentally we are making great progress toward our long term goals by continuing to capture additional market share and signing new clients.

At this point, I would like Simeon Kohl, our Senior Vice President and General Manager of healthcare talk in greatest detail about her quarter and other initiatives in our healthcare business.

Sim?.

Thanks Lisa, and good afternoon. Q3 was a busy quarter as we implemented another six programs, representing both expansion within existing clients and new logos, demonstrating our continued dual strategy of diversifying our client base while also expanding our offerings within each client.

Healthcare revenue was 14% higher when compared to the third quarter of last year and 7.5% higher sequentially. We are excited about the direction of business continues to trend and this success is a testament both to our accomplished team of experienced industry leaders and our proprietary data platform.

In our claims based offerings, we have seen expansion in our audit volumes as programs implemented in previous quarters continue to mature. Coupled with that organic growth, we were also seeing steady strengthening and our production KPIs. Collectively, these trends provide visibility into future revenue growth.

Similarly, our diversification strategy has yielded strong dividends within our eligibility business that can be seen on the growth of our MSP Advantage offerings and our impressive results on the recovery of [each] provider debt.

Additionally, our development of eligibility assets continues to strengthen and were able to confirm new contract awards and pending implementations. And finally, our sales pipeline of new eligibility opportunities continues to grow, based on our demonstrated ability to drive meaningful savings for our clients.

Taking together, healthcare achieved strong year-over-year growth as we attained our highest quarter of organic revenue in the history of our healthcare business.

However, our anticipation for growth during the quarter was even higher but we experienced some revenue delays in Q3, largely correlated with industry concerns stemming from the COVID-19 Delta variant.

In our claims business, this delay was primarily exhibited by certain of our clients affording greater latitude to providers by slowing the collection cadence of our audit timing. In eligibility, we anticipated a quicker return to pre-COVID recovery time frame than we saw during the quarter.

And while the industry as a whole has made progress, a number of insurers are still lagging in the processing of our demands. While we believe these challenges are more temporary than systemic, we do anticipate further headwinds in Q4 that we expect will continue into 2022.

Specifically, our operations have been impacted by an increased difficulty to source qualified applicants due to the unique combination of worker apathy as well as aggressive compensation packages that are being offered by healthcare organizations.

Furthering this challenge, the President recently signed an executive order requiring compliance with vaccine mandates. We anticipate this mandate may have some impact to our existing workforce in Q4.

In consideration of all of these factors, we are updating our 2021 healthcare revenue guidance to a range of $77 million to $80 million with nearly double digit EBITDA. These challenges haven't changed our strategic outlook nor have they hampered our ability to win new business or bring new products to market, which I'll address now.

We have several new implementations kicking off before the end of the year. One of these resulted from a competitive selection process at a national payer. Performance coordination of benefits solution was selected over multiple vendors, including the incumbent vendor.

The scope of this opportunity includes the payers’ commercial and Medicare advantage lines of business. We also launched our expanded offering, audit advantage for outpatient claims, and I'm excited to announce the sustained performance of our MSP advantage products for Medicare Advantage plans.

Collectively, these represent great enhancements to the continued growth in all of our offerings. We are not aware of another vendor in our space with a similar portfolio of new program implementations.

These successes demonstrate our continued growth in the healthcare payment integrity industry through the combination of our superior client center performance, robust proprietary data platform and our ability to attract top level talent.

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 the third quarter of 2021, we reported total revenues of $20.6 million, which was lower than the $36.9 that we reported from the prior year period due to the decline in recovery related activities and associated revenues as expected from previous announcements and commentary.

Of note, in spite of the factors Sim and Lisa mentioned that have caused some delays in the pace of healthcare growth, healthcare revenues were still $20 million, representing our largest quarter ever in the healthcare market excluding the quarter end [2018] when we released the reserve account associated with the end of the contract.

The healthcare revenues demonstrated 14% growth year over year compared to the $17 million of 2020. Adjusted EBITDA in the third quarter was $2.7 million compared to the $3.8 million in the prior year period.

Base EBITDA is reflective of our efforts in balancing reduction in operating expenses while still investing heavily into our healthcare operations to sustain expected growth.

Within healthcare market claim space also known claims points auditing revenue in the third quarter 2021 was $7.3 million, which was an increase of nearly 80% over the $4.1 million in the third quarter of 2020 and sequentially higher than the $7 million we reported in the second quarter of this year.

As Sim indicated, we've experienced some back end process delays, such as client recoveries, which are creating a delayed timing between our audit KPIs and our reporting revenues. As we looked at the fourth quarter, we are unsure as to how quickly these delays will clear up and would not be surprised at the extent of timing GAAP remains.

Revenue from our eligibility services for the third quarter of 2021 was approximately $12.7 million, a decrease from the $13.5 million in the third quarter of 2020 but sequentially higher than $11.6 million we recorded on the first quarter of 2021 and still represents a more diverse revenue base than the prior year period as we indicated in Q2.

As Sim mentioned, this is also a market where we're experiencing some timing slippage from Q3 to Q4 and anticipate a ripple effect to play out in the coming quarters.

We remain quite excited of the growth trajectory we continue to see in our internal KPIs as well as the continued bolstering of our implementations and future sales and implementation pipelines.

While each individual implementation varies in expectations depending on a number of inputs from around $100,000 on the lower end to a few million dollars on the higher end, implementations we’ve completed in the last few quarters alone are anticipated to drive $8 million to $12 million in incremental steady state revenues.

These efforts in tandem with the continuing albeit slower than expected returns of pre-COVID norms are what sustain our visibility into the market penetration strategy and growth trajectory we aim to achieve.

Total non-healthcare recovery revenue in the third quarter of 2021 was $5.5 million, down from the $15.4 million we recorded during the third quarter of last year and a rapid decline from the $11.1 million we reported in Q2 of this year.

We expect this trend to continue into next quarter and maintain our anticipation of not having any recovery revenues in 2022. Our total customer care outsource services revenues were $3.1 million for the quarter, which was down slightly when compared to the second quarter of last year, and flat sequentially consistent with our expectations.

Moving on to expenses, operating expenses in the third quarter were $28.5 million, which is $5.9 million lower compared to Q3 of last year, primarily driven by the decrease in operating expenses related to diminishing recovery revenues and offset by transition expenses and continued investment into our healthcare markets.

Looking forward, we expect that operating expenses overall will begin to level out in 2022 as the cost associated with our healthcare headcount growth will begin to outpace the offsets from lower expenses related to recovery.

Of note, we do experienced a bit of corporate expense seasonality with Q4 and Q1 typically representing larger corporate expense for the company.

Finally, from a financing cash flow perspective, we completed an equity offering in August 2021, in which we issued just over 12 million new shares, including the over-allotment at a price of $3.80 per share. This resulted in net proceeds of approximately $42 million to the company.

Our clients use a majority of these proceeds from the deal for working capital and other general corporate purposes and to pay down and refinance our existing debt, strategies which we are currently pursuing. With that, we'd like to open up the call and take your questions..

[Operator Instructions]. And our first question comes from Kyle Bauser..

Thanks for taking the questions and for all the updates today. Maybe just to start on the healthcare business and profitability. Can you provide a little bit more color around margins for the core healthcare business in the quarter? I know for the full year guidance of double digit EBITDA for the year would imply about 13% margin.

I'm assuming that's just for the healthcare business, correct me if I'm wrong. But in Q3, we obviously still had some sales that were around.

So I just wanted to get a better understanding of how the profitability of the healthcare business is looking in the quarter?.

So actually, just to clarify, that guidance provided was for the margins of the entirety of Performant. And similar to previous conversations, we do not actually have segment reporting on our individual segment profitability.

And it's something as we look towards the future quarters and providing guidance next year, we will continue to share more as we become a pure play healthcare company in our actual financial results.

But we remain committed to our visibility in the long term margins, EBITDA margin in the mid-20s and anticipate lower margins along the way as we continue to invest into the healthcare operations..

So it includes the whole business. And you mentioned the recovery business will be gone by next year.

So is it safe to assume the recovery business will step down again in Q4 or is it possible it could be leveled out or even have one last [bolus] of revenue before going to zero in ’22?.

We do anticipate revenue in the fourth quarter, but expected to be another step down along the way to zero..

So that implies a pretty nice margins for the health care business then, appreciate that.

And given the hiring constraint and COVID related delays, just kind of curious if you have an estimate for -- given the current organization structure and size what the capacity of revenue is right now? And what if anything beyond COVID and labor shortages is preventing you from growing faster now that you have a stronger balance sheet? Just kind of curious how things are trending and where you think they could go?.

So in terms of the capacity issues, I think we've indicated before, we're scaling out a number of our existing accounts, some of our new opportunities. So we absolutely have, we've stated before, we have a pretty aggressive cadence in terms of our hiring for production resources to kind of step through all the opportunity.

So it's something that we're flagging here in terms of just understanding some of the backdrop in terms of the industry as a whole and things that we're seeing from a competitive standpoint of trying to get folks to come into the organization, folks that are kind of leaving the traditional healthcare settings. So we're stepping through that.

We are being very mindful in terms of things that we can do to get creative to further incentivize folks. But it is something that we're keeping a very watchful eye on, knowing that we have some pretty aggressive hiring plans to support the growth for remainder of year and certainly into ‘22..

And then maybe lastly two questions, I'll just ask them both. Just curious for the smaller private payers that are providing a nice growth in the healthcare business. Is the margin profile more favorable for those clients that you kind of own the stack and don't really compete with others? That's the first question.

And secondly, just kind of curious any updates on your efforts to secure another CMS region..

I'll start with your second question. So we did respond to the opportunity for the RAC Region 2. So that response was in the early October time frame. So that's still in a procurement cycle with CMS. And CMS like they can take anywhere from as most federal agencies do three months, six months, we've seen it even longer, so the cycle continues.

And we'll certainly let you guys know as soon as we get an indication on that. With regards to the margins on some of the smaller payers, so I think that's a correct statement in terms of, we do see those as greater opportunities for us with regards to expanded offerings.

Those are the payers that it's a bit difficult for them with their infrastructure to deal with a whole portfolio of vendors. And so we can get more of our offerings procured in those environments. And we do get an opportunity to get some consideration on our rates, just understanding number of covered lives versus some of the national payers.

I hope that gives good context..

We have a question from Craig Melcher..

So for the first time in company history, it looks like the -- I mean, the healthcare businesses unconstrained from a cash perspective. I'm curious about the plans to accelerate investments so that’s quicker on boarding product development.

Any other areas that you expect can growth come forward?.

So look, for us, as we've mentioned here implementations are pretty significant. And we are at a very meaningful cliff of new opportunities from what we've announced in Q1. And what I just mentioned in terms of my prepared remarks and so I think we're looking at near 18 new implementations.

And so anything that we can do to compress the cycle in terms of getting clients onboarded, whether they're new clients, new logos or existing clients and just new opportunities.

So absolutely, we always are looking at ways in which we can invest to see if we can get those cycles compressed and move quickly or more quickly to our implementation in revenue opportunity. In terms of just thinking about it more at a wholesale level. As we've talked about we continue to win new opportunities.

We're getting a number of new opportunities to continue to scale current book of business.

And so finding ways in which we can move things into a more automated fashion, whether it's [bringing] in medical records and being more efficient with medical records for our reviews, taking some of the audits that we currently have today that are complex based artists that require human reviews and moving those more to an automated review, building out some of our data mining capability, et cetera.

So these are some of the areas that we're investing both in workflows and in technology to drive greater efficiencies as the business scales..

And just lastly, so the current outlook implies $25 million to $28 million of healthcare revenue in Q4, which is a lot of growth over the record Q4 of last year. And so -- but that’s already halfway through Q4, it sounds like things must be really accelerating despite what sounds like a bit of a difficult backdrop.

So I'm just wondering what is driving this pickup at the year end? Are you starting to see some flow through from the 10 programs launched in Q4 of last year, or some of the ones in Q1 of this year?.

Yes, that's largely what we're seeing here, as Rohit mentioned, in terms of giving you some color with what these programs drive, it really is just the ramping of the new opportunities.

So as I said, scaling existing clients and what these were clients that we'd have for some time that the programs are just continuing to scale or we're getting broader adoption into different markets.

And some of the new opportunities that we've talked about kind of that implementation cycle and it take them months to actually get these clients onboarded scale up the program. So it's really just seeing both existing and new opportunities largely ramping..

And to bolster on, I think, another important note is within existing implementing offerings, if you will, expansion on the lives themselves or just the volume growth, we would not consider an implementation. So we do see growth from that channel revenue as well, which would not be captured in sort of our announcement with implementations..

[Operator Instructions]. And our next question comes from George Sutton..

You mentioned two things I wanted to go in a little more detail on that certain clients slowed their collection cadence, and then a number of insurance are lagging your claims.

Can you give us a little bit more of a picture of how significant those drivers were and what kind of timeframe you would anticipate that to normalize, if expected to normalize?.

So look, first, it's important to note that, both our claims and eligibility based KPIs remain healthy and unchanged. And while we anticipated there was a possibility of certain aspects of our workflow could be impacted by the rising cases of the Delta variant, we were unsure in terms of how significant, and as I stated in my prepared remarks.

On the claims side, George, to your point, ultimately what happens is some of our payer clients really have to kind of balance their need for savings and also providing a bit of leeway to the providers that are providing care out there. And so, again, all of our KPIs, we have great visibility into the KPIs once we actually drive those findings.

But we are very dependent, exclusively dependent, in many cases, for the payers to actually do the recoveries initiate to offsets other means. And so, we saw more of that in Q3 than we anticipated. We worked very, very close with our payer clients to get some idea in terms of timing and course correction.

I do think we are going to see this extend a little bit into Q4 early Q1. But I think we should expect some course correction post Q1 and hopefully get back to pre-COVID based recovery cycles. And the same applies on the eligibility side of the business.

And so we issued demands for other responsible parties and some of those are automated, and many of them are manual. And so there is a workflow that has a human review component.

And so as I stated in my prepared remarks, I think the industry as a whole has done a nice job adjusting to being able to support our demands whether remote workforce or a hybrid workforce. And we saw some pretty much progress and again frankly, expected to see more progress here in Q3 than we did.

We’ve had a few of the key folks out that are still lagging a bit when we'd hoped that those cycles would compress. And so I don't think any at all dissimilar from what I mentioned on the claims side. I think this is going to have a bit of a cascading effect into Q4, early Q1.

And hopeful sometimes post Q1 we will see that back to the pre-COVID recovery cycles..

So you mentioned your production KPIs give you evidence of future growth.

Can you just give us a little more of a picture of what you are seeing that may not be obvious to us not seeing those KPIs?.

So for us, as Lisa points out, there's a number of factors. At the end of the day, it's ultimately what we have available to us. We drive the findings for our clients on the claims side based on auditing X number of claims based on dollar values of claims, et cetera.

And so for us hitting audit targets, et cetera, are things that we watch watching product performance. So important to make sure that, as I mentioned, we have the right staff, the number of resources to scale up to address that.

We also, as Lisa indicated with some of the core utilization being depressed, that certainly has a factor in terms of claim availability and actual dollar amounts of claims.

And so in terms of what we look for it's ultimately the claim looking at the velocity of claims that we can work through available claims and then understanding product performance based on savings that we're driving to clients..

Finally for me, you mentioned you are currently in implementation with 18 different clients. Can you talk about that? And I think you also mentioned you don't believe that your competitors have anything close to that.

Can you just discuss market share dynamics as you see them today?.

Look, we've mentioned this before that. The market has consolidated, the payment integrity market has consolidated dramatically. And so you've looked at 10 to 12 players that were pretty material players in the space has consolidated largely to two of our competitors.

Those competitors are currently working through the kind of consolidation of the various organizations. And so for us, its presented some opportunities for us as this is an industry that, that tends to like competition, payers like competition. So we've gotten a number of new opportunities in the sales type line.

I think they’ve demonstrated here through the conversion of implementations. And that the payers are looking to get a more competitive approach, if you will, to the number of vendors that are currently working in their portfolios.

And so for us, we've just seen a pretty material uptick here in our sales pipeline, again, we're pulling through as we’ve demonstrated in our Q1 and through numbers implementations here.

And I think a big part of that, A, has to do certainly with our performance, but to your point, I think market dynamics have certainly given us a little bit of tailwind on that as well..

And we have no further questions in queue at this time..

Thank you, operator. I would like to thank [Technical Difficulty] we thank our clients for allowing us to serve them, we want to thank our shareholders for their continued support and our team members for bringing their very best to performing every day. Again, we appreciate your time and your attention. Thank you..

This concludes today's conference call. Thank you for attending..