Good day and welcome to the Performant Financial Corp. First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please also note, this event is being recorded.

And I would now like to turn the conference over to Richard Zubek. Please go ahead..

Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2022 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, President 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, 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. 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. Our results in the first quarter are indicative of the potential that our healthcare business can achieve, and it should be noted that these solid results were despite some remaining COVID limitations we've previously discussed.

In addition to our strong results from the first quarter, we wanted to highlight awards of the HHS OIG. IDIQ Contract, as well as the CMS Region 2 Recovery audit contract. Both awards are statement twins that reinforce our differentiated approach and cement performance as the leading provider of healthcare payments integrity services.

As always, I want to acknowledge our hard working team members who have made the transformation to a pure-play healthcare organization a reality. Thank you for your continued hard work and dedication. With that, I'll turn things over to Simeon Kohl to discuss first quarter and other initiatives in greater detail.

Simeon?.

Thanks Lisa. Good afternoon, everyone. In the first quarter of 2022, we reported our strongest ever first quarter for healthcare revenues, driven by the continued growth from our fully implemented statements of work, as well as contributions from some of the 33 program implementations, we've announced over the past five quarters.

Overall, we reported healthcare revenue of $23.4 million an increase of over 75% when compared to the same period last year.

We are excited about our continued strong results and how we are tracking against both our near and long term growth strategies, though we cannot fully predict the future of COVID, we are currently optimistic that the headwinds and related audit restrictions will continue to abate alongside the sustained rebound in core utilization rates.

As Lisa mentioned, I would like to highlight two contract awards from the first quarter. The first is the HHS OIG IDIQ Contract for medical review and consulting services, which given the timing of this award, we discussed on our last earnings call. The second was the 8.5 year award for Region 2 of the Medicare Recovery Audit program.

Region 2 encompasses 14 states in the central and south central part of the country to include Texas, Illinois. It should be noted however, that the incumbent vendor filed a protest and as a result, the award is currently under review by CMS. So before we can take any further action, we need to let the review process play out.

Once everything is resolved, we expect to gain a better understanding of CMS's implementation timing in cadence to ramp the audit volume. This information will help us to better project revenue and EBITDA potential for 2023 in the years to follow.

As part of implementing a new region, we must establish joint operating agreements and data share connections with a number of Medicare systems and contractors. In parallel, we will need to conduct extensive provider outreach to inform providers about the change, new procedures, audit topics and timelines.

These activities are additive to more traditional efforts we engage, while implementing any new customer or statement of work. As we contemplate these tasks and depending on the outcome of CMSs review, we currently hope to get the contract operationalized in 2022 with revenues commencing in 2023.

We know folks are eager for more details, and I hope this information provides some helpful context about the process and anticipated next steps. We are honored and encouraged by this additional raft contract award.

Not only do we believe this further validates our differentiated capabilities, it also increases our expertise in the growing Medicare market and significantly expands our view of the US provider and supplier landscape. Taken together, we believe this further establishes Performant as a leading provider of payment integrity services.

Our highly innovative technology platform is attractive to both new and existing health plans as demonstrated by our expanding sales and implementation pipelines. We do anticipate that the new raft award will increase our necessary hiring targets and cadence for the remainder of 2022.

We've continued to retool our recruiting strategies, particularly as it relates to skilled nurses and coders who are key for these types of contract implementations. That being said, we acknowledge that we will need to hire at a faster pace.

We remain focused on adapting to what continues to be a challenging hiring market, the one we currently believe will ease as the year progresses Overall, we are excited by our record results and growth within all lines of our healthcare business and the significant momentum in both our sales and implementation pipelines.

Combined with our ongoing platform innovation and expanded product offerings, we remain focused on executing our growth strategy while continuing to pursue the finest talent in the industry. With that, I'll hand it over to Rohit Ramchandani, our Senior Vice President of Finance and Strategy for a discussion of the financials.

Rohit?.

Thanks Sim. As Sim mentioned, the first quarter of 2022 was a strong quarter for Performant. We reported total revenues of $27.1 million, which included healthcare revenues of $23.4 million, our largest first quarter of healthcare revenues in our history.

We are also excited to note that trailing 12 month healthcare revenues are currently north of $85 million as well. Our total customer care outsource services revenues were $3.6 million for the quarter, which was flat one compared to the first quarter of last year, consistent with our expectations.

The primary service that we offer within our customer care markets continues to be impacted by the federal student loan payment pause, which was set to expire April 30, 2022, but has since been extended to August 31, 2022. This marks the sixth time to date, this has been pushed back by the federal government.

As we mentioned on our last call, although we did not expect to report recovery based revenues in 2022, we acknowledge that there could be some de minimis spill-over into the first quarter. Accordingly total non-health care revenue -- recovery revenue in the first quarter of 2022 was $0.1 million.

As we continue to progress through 2022, we anticipate this number to eventually go to zero. Adjusted EBITDA in the first quarter was $0.3 million compared to a loss of $0.2 million in the prior year period. We had expected to have lower EBITDA in Q1 due to the seasonality impacts as well as the continued investments in our growth initiatives.

With our strong revenue performance in tandem with the hiring challenges we continue to face, EBITDA for the quarter was actually ahead of management expectation. As we look to the rest of the year, we anticipate that our operating expenses will increase in connection with catching up on hiring and continued new contract implementations.

Within healthcare revenues, claim space, also known as claims auditing revenues in the first quarter of 2022 were $9.2 million, an increase of over 70% of the $5.4 million in the first quarter of 2021, representing growth, both from new implementations, as well as volume increases from earlier depressed levels.

We maintain our expectation to continue seeing healthy growth trend for the claims-based revenues into the rest of 2022, based on the opportunities available to us. Revenue from our eligibility services for the first quarter of 2022 were $14.2 million representing roughly 80% increase from the $7.9 million in the first quarter of 2021.

We anticipate continued growth in our eligibility services in 2022 as well, but deflated based on our CMS eligibility work being closer to a mature state than the opportunities in front of us.

While we currently anticipate balanced growth trends in all our healthcare product offerings over a multi-year span, we do recognize that each year may look different.

Coming off the five implementations announced in the prior quarter, we had another five in the first quarter of 2022, a nice start as we look to build upon our implementations from 2021 and prior.

Within expenses, operating expenses in the first quarter were $28.6 million, which was $5.9 million lower compared to Q1 of last year, primarily driven by decreases in operating expenses related to the seating of activity within our recovery markets and offset by continued investment into our healthcare markets; specifically, the addition of human capital, which we expect to increase our expense and capital levels.

Last quarter, I mentioned that we expected cash usage in 2022 to be in the range of $4 million to $8 million, which would leave us ample flexibility between cash on the balance sheet and revolver availability to pursue additional product development and/or larger organic opportunities.

Given the award of rack Region 2 in tandem with some product development opportunities ahead of us, we anticipate that our cash usage may range higher, and we will look to amend this range as needed after the contract, sorry, protest has been resolved.

Even beyond this potential increased spend, we expect to retain flexibility between cash on the balance sheet and our revolver for further organic opportunities that may present themselves.

Given our achievements in the first quarter and known opportunities ahead of us that we believe we can execute upon, we are quite pleased with how we are tracking towards both our current year expectation and more importantly, our long term goals.

We remain optimistic about improving trends in core utilization and the return to normalcy from COVID, but do acknowledge that some of the larger MCOs are remaining cautious in expectations for utilization rates, driven by COVID variant uncertainty and uncertainty in the macro fare [ph] of an ever-connected world.

That being said, we are pleased to amend our views on healthcare revenue and believe that we can achieve $92 million to $96 million in healthcare market revenues for 2022 with customer care market revenues being flat to slightly down.

We do currently find it prudent to leave our EBITDA guidance intact at $2 million to $4 million for 2022, until we can gain further clarity on the timing and ramp speed of the Rack Region 2 contract to provide a more informed update. We're very encouraged by our Q1 2022 results and continued growth ahead of us.

We've learned from our past experience that our greatest success will be continuing to stem from [indiscernible] from remaining focused on the long-term goals and we are committed to scaling our operations and working through our implementation funnel, while bolstering additional growth opportunities via development and sales efforts.

By all accounts, this was a strong start to the year. Our long-term strategy remains intact and we are very excited about the future.

Operator, would you please open up the lines for questions?.

We will now begin the question-and-answer session. [Operator instructions] And the first question comes from Kyle Bauser with Lake Street Capital Markets. Please go ahead..

Great. Thank you. Hi good evening, everyone. Thanks for all the updates and congratulations another great quarter. Maybe I'll start with the guidance. So glad to see you, you bump up the healthcare guidance. Can you talk a little bit about cadence throughout the year? I know you've obviously provided full year, but was Q1 particularly strong quarter.

Did we see some strength from the recently implemented new projects? Are we anticipating any contracts to expire throughout this year? I'm just trying to understand if Q1 was kind of an outsized quarter and things might pick down and then back up, just trying to understand the cadence. Thank you..

Yeah, Kyle. This is really a good question. I do think that we -- as we mentioned, we were pleased with our results in Q1 and I think could have seen some bump from the increase in utilization rates kind of late Q3, early Q4 of last year and just seeing some good execution.

In terms of the cadence for the rest of the year, I think we still see it the same way we spoke about last quarter where you will see a lot of the sequential growth in the back half of the year with the first half kind of representing smaller amounts. So I think you're describing it well in terms of what you're expecting..

Okay. Got it.

And then, to the extent you can share -- if you're comfortable sharing should we anticipate any bigger contract to expire this year to kind of offset the acceleration of these new contracts that are ramping?.

I do not believe we have any larger contracts expiring this year. Though I would remind the way our healthcare contracts work, particularly on the commercial side. They're generally on auto or sort of recurring renewals and don't have committed claims volumes. So contract expiry is not necessarily something we manage to..

Okay. Got it. And maybe to that point, so in terms of like volume limits, maybe we can switch over to OIG contract.

Maybe this is a question for Sim, would love to hear any sort of thoughts on how that's progressing, the types of interactions you've had, are there volume limits types of projects, just kind of -- I would love a little bit more color around that contract..

Sure. Yeah. So still a little too early Kyle for us to give too much insight in terms of particulars. Although I will tell you the concept of limits with the OIG contract is different than as we think about at a traditional contingency audit contract.

OIG really has the purview of all of the programs for CMS and so they're looking at it from a bit of a different lens. And as we reminded folks last time, this is a fixed fee for our services and so we will essentially support the agency I'm sorry, HHS OIG, where they see fit in terms of some of their key areas of priority.

So we are in the midst of our operationalizing the contract and our efforts are well underway. So as I think we talked about it in the last quarter, we see this as an opportunity to operationalize the contract in 22, possibly some late revenue in Q4, but really see it as a 2023 revenue event..

Got it. And then in this last if I may and I know you can't talk too much about Region 2 in the appeal process going on, but I'm just kind of curious what this appeal process typically looks like.

I know every case is different but yeah, sorry if I missed this, but what's kind of the timing you look like on these types of things?.

Yeah, no, and it's really hard to perfectly handicap that, but I think to give you some context, right, CMS's decision to review the award is one of a number of scenarios following a protest very customary.

I don't have any additional color at this point in terms of that review, but we are confident with all aspects of our proposal as the same differentiators and value theme that allowed us to secure the region one compete last year, remain unchanged.

And look, it's worth noting that we competed against many of the same vendors for that Region 1 contract that we competed here for Region 2. So CMS is going through its review. I'm sure we'll get line of sight and call it the next 30 days or so. But it's just -- it's hard Kyle, to kind of handicap the ultimate timing.

But I know it's an important contract for the agency and I'm sure the Performant resources are going to work in an expedited manner to try to get the award finalized..

No, that makes sense. Great. Well, I'll jump back in queue. Congrats again on the great quarter..

Thanks Kyle..

The next question comes from George Sutton with Craig-Hallum. Please go ahead..

Thank you and nice results.

So I wondered if we could talk about your pipeline relative to when you get these very high profile wins with the HHS OIG and then the rack announcement, what happens to your pipeline at that point? You've got some activity and does that move things forward? Does that give increased encouragement to the folks you're talking to? Does it accelerate more things in your pipeline? Just want to get a better sense?.

Yeah, good question. So, look, I think any of these larger opportunities with CMS, HHS, they always are pretty visible. And it's something that the commercial clients watch pretty closely.

As I mentioned in my prepared remarks, giving us a broader landscape with these contracts, where we have greater visibility into providers and how they operate, same thing with suppliers, etcetera. So those are all benefits that we pick up and can create value for our commercial clients.

So I think to your point there any, of these contracts that do expand that visibility and broaden our capabilities are I think, value contributions that extend quite well into the commercial space. So it's definitely something that the sales teams leverage in being able to tell the story. I think it certainly helps us with our pipelines..

Relative to the commercial space, you probably saw Anthem lost a large hospital in Maine. They had tried to basically do an in-house payment integrity themselves.

Can you talk about what that kind of a loss might mean for other commercial opportunities and as you're looking at this landscape?.

Are you talking about trying to bring the PI services in house George?.

Yeah. Obviously one thing a commercial player can do is have their own internal PI. And our belief is that you're winning these large deals that are very well documented, very well researched and it makes a lot of sense for those to get turned over to you when you start to see ample market where they're losing that seems to be an opportunity for you..

Yeah, right. So if you think about, look conducting a PI organization, how to manage, it's not a simple process. There's a lot of moving parts. I think we see some of the health plans tackle some components of it.

Maybe some of the deterministic components called data mining we refer to it, but running a comprehensive program integrity department and having all of the resources and the skill sets and the scale that's required to support PI and [indiscernible], it's a difficult task.

And I think that's what Performant obviously has been able to differentiate ourselves with our technology, our unique technology approach, an incredible deep bench of subject matter experts that come from certainly different aspects of both payers and kind of the technology arena.

And so, I think to some degree you'll still see payers tackle some components of it, but when you think about prompt payment loss, just as one example of the need to be able to get these reviews done in a timely manner, make sure that you do it without provider abrasion, it's a difficult task and I think that's what really gives Performant an opportunity to provide these services across the whole multitude of payment plans -- healthcare plans from some of the smaller ones to the mid tiers, to the large national plans and certainly the things that we're doing with CMS on an absolute national scale..

That's great. As I look at my universe of companies, I don't see many that are likely to get better as the year goes on. So luck….

We appreciate it..

We have no further questions. So this concludes our question-and-answer session. I'll turn the conference back over to management for any closing remarks..

Thank you, operator. Once again, we want to thank our shareholders for their support. We want to thank our clients for letting us serve them this past quarter.

We're very excited about our growth and of course our team members at Performant who bring their best to us every day and we want thank you for the time that you've spent with us this afternoon..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..