Q3 2019 Earnings Call

Greetings and welcome to the performance Financial Corporation third quarter 2019 earnings call.

This time, all participants are they listen only mode.

Sure, that's especially with all the formal presentation.

If anyone should require operate at CES is doing a carpets. Please press star then one and the telephone keypad.

Reminder, discomfort with me recorded when I went to turn the conference <unk>, which has a back at Investor Relations. Thank you you may begin side.

Your operator and good afternoon, everyone. By now you should have received a copy of the earnings release for the company's third quarter 2019 results. If you if not a copy is available on the Investor relations portion of our website.

Today's call what we'd like for him Chief Executive Officer before we begin I'd like to remind you that some of the comments made on todays 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 FCC.

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.

So 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, but that's because I'll turn the call over till we said Lisa.

Thank you rich good afternoon, everyone and thank you for joining us spot earnings call.

Haven't already please find the financial supplement on their website that walks through our 2019 third quarter financial results in more detail form.

Our results in the third quarter demonstrates our successful execution on our plans to move back to profitability as we remain on track to achieve our internal long term goals of 200 million in revenue and 20% EBITDA margins in 2021.

We are confident that the successes we have seen the third quarter will continue into Q4 and beyond.

In Q3 of 2019, we reported revenue of nearly 36 million, which was in line with our internal projections and up over 30% versus the prior year period.

Adjusted EBITDA in the third quarter was a loss of just over 3 million compared to a loss of nearly 4.5 million in the prior year period.

Overall health care revenues in the third quarter of 2019 totaled 11 million, which was nearly 50% higher than it was in third quarter of 2018.

Unless related revenues in the third quarter of 2019 exceeded 7 million compared to just over 4 million in the prior year period, an increase of nearly 69% year over year.

Commercial health care revenues accounted for nearly 4 million in the third quarter of 2019 compared to just under 3 million into third quarter up last year.

On a year to date faces the results of our efforts to grow our health care operations or even more apparent as year to date revenues in 2019, well just over 29 million, which is 80% higher than they were in 2018.

After excluding the onetime CMS Appeals reserve of 28.4 million that was recognized in 2018.

Total recovery revenue in Q3, which includes our student lending tax IRS and treasury markets as well as Premier was just under 21 million, which was approximately 30% higher than the third quarter of last year.

Lastly, our customer care and outsourced services revenue of 4 million was flat when compared to the 4 million from the third quarter of last year.

Q3 expenses, a 42 million or approximately 7 million higher than in the prior year period.

Expense reductions over 10 million in our recovery operations were offset by increases in expenses related to higher headcount growth following our acquisition of Premier and the overall growth over health care operation.

We anticipate continuing to make sound investments to better position us to drive additional revenue into 2020 and beyond.

Finally, we are providing some incremental color on our fourth quarter expectations as well as a slight update to our 2019 revenue guidance ranges to reflect some of the decisions we made as well as challenges that we faced in Q3.

In the fourth quarter, we anticipate reporting meaningfully positive adjusted EBITDA as our contracts become more mature and we start to benefit from our investments over the past two years.

For the full year 2019, we are maintaining our EBITDA guidance, although lost between 6 million and a loss of 2 million, but we are updating our revenue guidance range to 147 million to 152 million, which is down from 158 million to 160.

8 million.

There are a few items behind our decision to lower our revenue expectations.

One was that we identified some data matching issues related to a single line of business within health care.

We've since identified the problem and are working with the client the correct the issue.

But we believe that the delay will impact revenues by 68 million in the second half of 2019.

This is not lost health care revenue, but it is also not revenue that will immediately be recouped in the first quarter. If 2020, rather any revenue associated with this issue is best described as being delayed as it gets re worked through the system.

Another piece impacting our revenue range is the payment of nearly 4 million for surface is already rendered that has yet to be paid although we believed that this payment was going to be made earlier. This year. It is becoming increasingly likely that a portion or all of the 4 million payment maybe.

Late into 2020.

But as we manage the business, we lowered expenses meaningfully in our recovery operation in order to partially offset these delays in revenue, which provides confidence around the EBITDA range.

Moreover, we believe we are well positioned for a profitable fourth quarter.

We are executing against the goal that we established entering 2019.

Continued successful transformation of the company.

Looking beyond the fourth quarter of 2019, we anticipate that 2020 will be a profitable year with revenue growth, particularly in health care as we continue to execute and build client contracts.

We want to reiterate the longer term confidence we have in our business strategy and the belief that our investments in these contracts will drive revenue and margins to our 2021 goals of 200 million in revenue and 20% EBITDA margin respectively.

With that I'd like to open up the call for questions.

Thank you at this time, we will conduct a question answer session. If you like to ask a question. Please press star one on your telephone keypad confirmation tone indicate your line is in a question Q.

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For participants you must be pretty quitman, it may be necessary to pick up your handset before president the Starkey once again that star one to ask the question at this time, one moment, while we pull for first question.

My first question comes from Brian Hogan with William Blair. Please proceed with your question.

Good afternoon.

Hi, Brian .

First question is actually on the commercial health care.

Business.

I guess a little slower.

Oh, you know it was down quarter over quarter up year over year, but I'm, just kind of the trends in the health care I think it that's a lot of potential there I'm just kind of.

Is that where they had some issues or the data or or it just kind of whats the trends in health care business.

Yes that was where we identified the data matching issue with one particular clients. They won't particular single line of business, but as I mentioned in the call. We we've identified what that issue is that we are working with our client to get that fixed or which we think will happen and this quarter, So where we're back.

Well, we think we'll be back on track, but it definitely delayed though the work that we were doing with his point in this particular line of business and that was all in commercial health care.

Okay can you discuss your commercial health care pipeline, what does it look like or I mean, what what can that business looks like in a year over the next several years.

Sure I'm, you know as as I mentioned earlier.

Well if you look at what are your today growth rate is it's in a pretty high double digit range well. They naturally with this particular line of business that we just discussed and with another contract behind it which we've also delayed some implementation just because they want to make sure that we get the done fixes our quiet, we think that there's a strong double digit growth.

Yeah. That's we look at all growth into 2020, <unk> and also into 2021. So these are contract that weve been implementing we are new contract with the same clients. So in terms of overall business build there really isn't much that the go get as much as we're just executing against the all and occasionally you know when.

Like with this particular line of business it could come across.

Something we have to work out with the quite well.

They have to delay some revenue, but we will work that out because we view. These are really really strong long term contract that provide a very sound based for growth.

Okay.

Looking within healthcare and the.

CMS you obviously have to you know two different contracts there, but my.

Yeah calculations, a looks like the the RAC contract today really nice quarter or is there anything.

The CMS or increased Oh.

Document reviews or is there anything they they've done there as they just execution.

Oh, it's really just execution. However, you know would that said we're cautiously optimistic that CMS will continue to work with US We think baby the program as being very successful all this time around particularly with respect to provider abrasion, which really hasn't been an issue. So you know part how does your execution, just making sure that we've got.

The enough.

Health of our what it's going and so were we feel pretty good about the brown work that we've laid there in terms of job executing against the current contract, but we're also cautiously optimistic that we're going to see a continued increase in our ability to conduct audits on the contract as well.

But we'll see that more into 2020.

Okay.

One of the shift over to the recovery business.

And the the placements you know fell again this quarter down to 574 does that include the Subcom con any subcontracting placements or is that just strictly direct.

Oh I don't think that includes the subcontractors.

I mean, just some contracting business that we have on the you're referring to the department of education.

That's correct.

Yeah, that's does not exclude those I mean, it does not include those.

Okay. So I guess can you discuss the subcontracting opportunity I mean is it compare that to your your existing guarantee agency opportunity and.

Sure.

You know the adult channel.

No no loans were made in the felt channel since July of 20, Karen So as we look at the adult business. We see the quality you know continued not going to improve in quality. The volume will decline over the next probably five to seven years. When we look at department of education on the small business contractors, we know that they're doing there but.

The service those defaulted borrowers and with our being able to.

Worked for several of those subcontractors you know we help overall just again be the underserved population, we helped quite a bit on and we actually think that from a.

From a sizing standpoint, we think that's probably the subcontract and couldn't be more meaningful as it as we continue to move forward in the direct home program. So you know we're you know obviously grateful for the opportunity you didn't work for the small businesses and also for the Department of Education has a subcontractor, we see that volume grow.

<unk>, obviously, you know you read the you you see the news as well this fall to borrower pool is increasing.

And there continues to be a need to service those defaulted borrowers in the direct one portfolio. So from a fighting sample. We actually think this provides maybe even a greater opportunity as we move forward.

Sure appreciate the commentary there.

Shifting to the to the balance sheet and I guess can you discuss your comfort level with the the covenants and it was you had a covenant waiver through mid next year and.

How much capacity do you have left to do you anticipate needing to.

Expand that.

Can you just a kind of discuss your balance sheet.

Oh sure I'm, So what you know our out when we.

Negotiated big fans of the credit line last year, we anticipated a need for a certain amount of cash I think we feel pretty comfortable with where we are with that and we also anticipated what our future flow would look like in terms of positive earnings and a positive EBITDA. So the covenant relief, which goes into the.

Half of next year, we feel pretty comfortable with.

And as we mentioned on the call we're going to start to see profitability. So we've done a lot of as you know a lot of investments in the contract, but as we see sort of fourth quarter and moving it to 2020, we do expect to see profitability. So we're I think at this point, we're pretty comfortable with where we are.

Sure.

Last one for me at the moment is actually on expenses are you mentioned it did a decent all of a cost cutting and the recovery business. How should we think about expenses going forward is there or is it going to be kind of flattish from here ramping a little bit as the business.

Rose or.

Is it.

What is a fixed costs less variable kind of.

Your mix.

Yeah, I think what we're going to see in health care is obviously as though as the revenue continues to grow strong high double digit we would expect to continue due to higher workforce than we expect to continue to have broken expenses. There on the recovery side I think what we're saying it's kind of a shift so so again as we look at where are they.

Areas of growth in our recovery, we'll see some growth in expenses in one place well be reduced in other places. So we keep on the recovery side. It will be relatively flat and then of course, all our customer care side, we would expect out to be flat along along with revenue. So I think well overall, we might see slight growth, but but I.

I think it's just really can be driven by the strong growth that we see in health care.

Okay.

Thank you for your time.

Thank you Brian .

Our next question comes from Alex Point Advisor investments. Please proceed with your question.

Hi, Lisa.

So first question.

Hi, So my first question is around guidance I think situation. They get caught in you know there's been a couple delays there's been some just cash burn.

It's it's sort of cleared up the growth just hasn't been exactly as forecasted and.

I just don't see how you can hit.

The 21 guidance or or maybe even come close and I guess, how confident are you in that can you show me you're going back to that.

Well I don't think I'm sure you're right a road map on this call, but we certainly can see a strong double digit growth in our health care business, which has a much higher margins than our recovery business. So we see we actually expect out to continue because our growth into 2020 in health care well, we're not providing guidance today our growth in health care is really hinged on.

Contracts you already have but we're just going to continue to expand and ramp up and yes. We have thought the Mrs. As you look at the past quarters and when we're implementing contract with clients that are fairly large into health care say not everything goes exactly as we would like and so we've had some delays in contract implementation, but these are not delays that.

We expect up with revenues to go away, we just need to continue to focus on getting these implemented with our clients. So we are cautiously optimistic that we can continue to execute with these clients who made a commitment to us.

Moved away from legacy vendors as a result of the kind of solution that we can bring to them.

So we expect going up coming out of fourth quarter to be profitable in the fourth quarter as well as moving into 2020, and we expect to see fairly strong growth in our health care business.

Okay.

And then.

Can you give me the true total shares outstanding fully <unk>, including all the warrants you see M.C. keeps ticking from equity holders.

Yeah, Yeah, Hi, this is even Johnston chief accounting officer.

The well weve diluted shares.

As we stand today are.

The same as our basic shares.

As a in a situation where do you have a a loss or is it would be anti dilutive to use a diluted shares.

So at the September Thirtyth balance sheet do we have 53.685 million shares outstanding.

And.

We don't.

At this current average share price, we don't have a lot and dilution why we do have a number of warrants outstanding with a strike price of $1.92 cents. A those are not currently is diluted but.

That would be about five and a half million.

Warrants outstanding.

Yeah.

Thank you.

Once again to ask a question that star one on your telephone keypad at this time.

There are no further questions in queue I'd like to turn the call back over to management closing costs.

Thank you operator.

Once again, we want to thank our clients for letting us or them this past quarter and I want to thank our employees for bringing their very best to perform in every day, we want to thank you for joining us for earnings call.

Thank you. This does conclude todays teleconference. You may disconnect. Your lines at this time and have a great day.