Q1 2021 Performant Financial Corp Earnings Call
Greetings and welcome to the pro forma financial corporations first quarter on.
And the 'twenty One earnings conference call at this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded on.
Now, let's turn the conference over to your host Mr. Richardson Investor Relations. Thank you you may begin.
Thank you operator, and good afternoon, everyone. By now you should have received a copy of the earnings release for our first quarter 'twenty 'twenty. One 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, Rumson, Danni Senior Vice President Finance and strategy.
Before we begin 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.
So on non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures and the table attached to our press release.
I would now like to turn the call over until the Sam Lisa.
Thank you rich good afternoon, everyone and thank you for joining us for our earnings call and you likely know we are currently going through a multipronged approach with regards to our company composition.
19 pandemic disrupted our legacy recovery business, which included the acceleration of already declining student loan recovery revenue and a broader recovery ecosystem that continues to face more and more regulatory pressure on.
Approach includes and agreements to sell a portion of our non health care recovery contracts to a buyer, that's specialized and outdoor and receivable solutions, while winding down and other aspects of our recovery operation.
That's part of the wind down we will continue to fulfill our correct recovery contracts, we do not plan to renew or restart existing contracts or pursue new non health care and recovery opportunity.
This decision reflects our plan to fully dedicate our resources and efforts unexpected thing our position and the health care market, where we continue to demonstrate success and taking business from long term industry incumbents.
We also plan to maintain our customer care outsourced services operation as we see them.
So for growth through a tighter integration with our health care market offering.
Furthermore, we expect a multipronged depressed with a recovery contracts well generate cash flows for the purpose of Delevering the company.
We continue to believe that our strength and focus on the high growth healthcare market isn't the best interest of our shareholders.
Although we have made the decision to focus on health care going forward, our quarterly results in 2020. One we will continue to reflect a blend of our health care and some legacy recovery operation.
For the first quarter of 2021 we had revenues of over $31 million and essentially a breakeven adjusted EBITDA. Both of these figures were lower compared to the first quarter of last year.
True to the impact of the Coke corner virus pandemic.
Okay.
We anticipate it you want to be a smaller quarter in 2020, one due to the trickle down of COVID-19 impacts, but are excited to share that the current and long term trends remain very positive further our 2021 targets remain unchanged and we are confident and our ability to achieve our previously stated guidance of annual.
Health care revenue in the range of 83 to 19 million and positive EBITDA.
Our recovery business served as a foundational backbone to launch our health care operations with CMS and the two thousands but since then we've developed a comprehensive offering focused both on health care commercial clients and we continue to expand our relationship with CMS.
And most recently awarded US a renewal of our region, one recovery audit contract Iraq for a base term loans eight and a half years. This Recompete Award and addition to our ongoing National CMS region, five durable medical equipment home health and hospice contract. We are excited to further focus on.
Our efforts within the health care market to build upon our position as an industry leader and payment integrity.
We're successfully winning new business and expanding our existing contracts through the combination of our client centric focus and.
And appropriate top proprietary and differentiated technology platform.
Within health care payment integrity, both of our operating categories, namely claim space and eligibility based services operate on the same day to play it platform regardless of the surface. This platform provides us a competitive advantage and churches capabilities processing time and flexibility.
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This allows us to center, our focus on driving greater value, while protecting our offering.
The health care payment integrity industry is not a new market or something that we created much of our success has come via our ability to effectively take market share from the existing incumbents.
We will continue to invest in technology and attract industry leading talent.
Further scale the business. We believe we have a solid foundation for meaningful growth in the short and medium term, we will always remain a client centric company to our core we are excited to strengthen our commitment to health care focused our resources on helping our clients manage the rising cost of health care services.
With that I'd like to introduce Rohit reaction Tani, our senior Vice President of Finance and strategy to walk you through the results of the quarter Rohit.
Thanks Lisa.
As Lisa mentioned and Q1 of 2021, we reported total revenues of 31, 4 million, which was lower and the $45 9 million that we reported and the prior year period due to the impact from the COVID-19 pandemic.
Adjusted EBITDA and the first quarter was negative <unk> 2 million or 7.1 and prior year period.
Overall, we remain excited about the continued growth and expectations of our health care business and in an effort to provide greater accuracy and clarity to the health and growth of this business. We have taken the step to reclassify how health care revenues are reported and your claims based versus eligibility based offerings and provide.
And this breakdown back through 2019, and you will better be able to see the significant progress we've made over the past two plus years, which evidences our history of consistent quarterly growth and both offerings.
We Additionally, anticipate that our customer care outsourced service revenues could expand on the back half of this year for activities return to pre pandemic levels.
Yeah.
Line space also need and claims on it.
Revenue and the first quarter of 2021 with more than $5.3 million, which was lower and the $6 $6 million from the first quarter of 2020, but sequentially higher and the fourth with $7 million, we reported from the fourth quarter and between we anticipate Queens based revenue to continue to trend upward as we immediately return to pre COVID-19.
And can you executing on new and expanding programs with these clients.
We can see some of these trends evidenced by the trends and the largest payers and the U S and having lower utilization rates and 2020, which are expected to normalize across the course of 2021 Tien.
Tangentially non COVID-19 related claims during the public health emergency, which have largely been untouched also represent an interesting future volume opportunity.
Revenue from our eligibility services from the first quarter of 2021 were approximately $8 million a slight decrease from the $10 $9 million from the first quarter of 2020 and sequentially lower at $14 and we reported in the fourth quarter and 20 of note our ongoing operations and related Kpis are demonstrating.
Rose year over year, but lower sequentially due to normal seasonality. We expect this to continue growing through the year as programs ramp.
Around me and of the first quarter, we detected discrete exposure on some of our eligibility work within and also there'll be you at one of our clients, who we do serve via multiple S. On adult use and based on this new information we have accrued a $3 3 million dollar liabilities against revenues, we expect that this liability will close out in the coming year or so.
<unk> B and future offsets and based on our analysis, we do not anticipate on cure future liabilities.
This charge is reflected and our total healthcare revenues of $13 3 million and the first quarter or 16 from six months prior to the charge.
While revenues were lower than the $17 $5 million on reported first quarter of 2020, we continue to make progress with our expansion efforts, including the 10, New health care programs that we announced last quarter.
Based on the progress that we've made thus far including leveraging our prior years and investment we expect that a majority of these programs will be through the investment on boarding fees by the end of 2021.
Oh, no we see the return to the pre COVID-19 levels and the short term with expected significant growth and the back half of 2021 from expansion of our current programs and the effects of the new programs we are implementing.
While we anticipate the second half 2021 will represent a significantly outsized portion of 2021 revenues as Lisa mentioned, we maintain confidence during 2021 expectations and at this stage over 95% of our 2021 and revenue expectations are contracted.
As we look forward to the remainder of this year and beyond our implementation pipeline and sales pipeline remains strong with a diverse mix of new clients and expansion of services and current customers for illustration, we launched an additional five programs and the first quarter of 2021 four of these are on it based.
Or claim space and one is eligibility base all of these programs were examples on land and expand opportunities within existing clients.
We're very excited about our health care business, and we believe our decision to channel future investments and to the health care payment integrity market.
And you to yield strong results revenue and EBITDA growth.
Total non health care recovery revenue and the first quarter of 2021 was $14 $5 million, while total customer care outsource services revenues were $3 $6 million for the quarter.
Both of these amounts were lower than the prior year period with the decrease and our customer care outsource services revenues and entirely driven by a temporary slowdown and activities related to the cares Act.
We anticipate.
And that our non health care recovery revenue will continue to decline throughout the remainder of 2021 as we worked through our multi pronged approach and we do not anticipate reporting and the such revenue at the start of 2022.
And Lisa and I have both mentioned earlier there is potential for growth from our customer care and outsource services revenues via returned to pre COVID-19 level or as a result, and tighter integration with our health care offerings.
Operating expenses and the first quarter were $34 4 million, which after excluding our goodwill impairment charge from the prior year period is $6 6 million lower and.
A decrease and costs were mostly due to expense reductions and response to deposits and slowdown and recovery activities reductions, which we anticipate to continue.
With that I'd like to turn the call back over to Lisa before we open up to your questions.
Lisa.
Thanks, Rohit, we continue to be very focused on health care growth opportunity as we move further into 2020. One we believe the solid traction that we achieved during the 18 months of contract implementation evidences our ability to serve health care clients with products that better meet their needs.
That offered by competitors as we've previously mentioned, we launched 10, new diversified programs and Q4 of 2020 several of which were based on competitive procurements, which is a key component of our growth strategy and is further bolstered by the additional five programs we.
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As we execute the streamlining of our business, we look to our future revenue growth improved margins and much stronger execution and focus from our growing health care brand.
We are also exploring renaming the company as we execute this strategy.
We are confident about the long term prospects of performance and believe that we will continue to grow and scale, our business and the coming years.
With that we'd like to open the call up and take your questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is and the question queue.
You May press Star two if you like true move your questions on the Q.
For participants using speaker equipment and may be necessary to pick up your handset before question. Mr. Keys, one moment, please as we pool for questions.
Our first question comes from the line of Chris Krueger, who channel Harbor capital. Please proceed with your question.
Fantastic quarter, guys Baidu program starts as Great and addition to the 10 last quarter I understand there is a natural time lag between when you start a program and when the revenue show up would you mind walking me through this time line.
Certainly price sure Rohit and yeah.
The growth so yes, so as we implement the programs as we mentioned we believe given the investments we've made in prior years it will be a quicker implementation and that these should all be fully up and running by the end of this year. So youll start seeing some some good impacts from these and Q4 real material impacts into 2020 two.
They're all at steady state.
Okay, great. Thanks, So based on that answer given that over the last few years, you've signed dozens of contracts you must have seen very clear usage and usage patterns and what does that mean.
Would that mean that you have and incredibly strong visibility into your revenue from the 12 months out.
Given that you know that.
The revenues from start ramping up and <unk>.
And next year.
Absolutely and I think that that is certainly what lends to the confidence we have and our guidance with over 95% of being contracted and then our projections based on that experience and history that you. Just described so we do have strong visibility into our next 12 months will play out.
Great great great and so the guidance of 30% this year, you're very confident about what about 2022 and beyond do you think 30% growth rate is sustainable and the future.
We are we do feel that strong double digit growth rates are sustainable and the future.
Think we b and a better position to opine on the exact growth rate from 22 and beyond as we continue progressing through this year and execute against our near term goals.
Okay that makes sense, so you're growing really rapidly.
How fast is the end market growth is it reasonable to assume that you are taking market share away from wave from HMS activity.
The overall healthcare market guide Lisa.
And I was going to say yoga health care, you can speak to where the market and spring, but I think I mean generally speaking the health care spend and the U S is.
And it's growing probably sort of mid single digits and I would say that you know as we think about market and who the players are.
Certainly HMS income activity or our large players that have a significant share of the market, but there are other players that are certainly have competed in the market I think what we've seen and the last probably.
12 to 18 months is a lot of aggregation of companies and so I think it'll be interesting for us to sort of step through the next coming months and and year or so and get a better and lay of land on exactly what will happen with that consolidation and the industry, but but generally speaking and then christa.
The rate of of payment.
Payment errors is that declining materially there's just a certain number and frankly, the commercial payers do a great job of course and markets is a great job already of controlling that.
But based on just the sheer volume of claims that are that are processed and submit it on a daily level. We think that the market will continue to be its nuts study will continue to grow at that sort of you know single.
Single digit.
Growth level, and then taking market share away well will be how do we enhance that growth for us.
Okay.
Bob.
No I think you've encompassed that well.
Okay. So HMS was just acquired by Berry costs were 17 times EV to EBITDA based on <unk> as well and they were growing top line single digits and at 30% EBITDA margins is it reasonable to assume because of the similarities between you and HMS net debt EBITDA margins at maturity would be and the same range.
30%.
Looking out 510 years.
I think that would be a reasonable reasonable approach.
Okay. Okay. So what im hearing is if you can grow well you said that you can grow at double digits, but over the next couple of years I mean, you could get close to $150 million of revenue my numbers, but by 2023 and then if you can do 30% EBITDA margins and steady state. If we use HMS has multiple of 17 <unk>.
<unk> EBITDA.
And EBITDA growing at single digits, and you could be growing this year at 30% that can be and and a couple of years, you could do $40 million to $50 million and steady state EBITDA, hopefully youre not youre not going to have 30% margins and couple of years, because you'd be growing but but I mean to me I mean, it seems like you could easily be trading at each of them.
And it's multiple of seven times EV to EBITDA and the market kept them would be somewhere around $850 million, which is almost eight times and what is today. So I mean.
That's great.
So moving on to the debt.
As with scale and recovery what does this mean that you said and one of the gross releases that you were going to use the proceeds to pay down some of the debt.
And on math is correct, you have something like $38 million and net debt and between free cash you generate this year on the sales recovery.
This is go on from in the end of 2019 O. If my math is correct $59 million and net debt to now 38, which seems extremely manageable is that correct.
Yeah, I think youre that math is tracking well and we do believe that we will continue being able to service our debt.
As well as growing our health care business, which relates itself to the other thing at the close and recovery transactions, we would be extending the maturity one year out to 2020 two.
Right right, Okay, well I don't know what people are missing there I think just great alright, thanks, again fantastic quarter.
Thanks, Chris.
And once again and if you would like to ask a question. Please press star one on your telephone keypad. Once again, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Craig Melcher with Tudor Investment Corp. Could proceed with your question.
Hey, guys. Congrats from me on a great quarter as well really really pleased with all the progress and continued share gains and health care and.
And thinking about the share gain opportunity.
If I were the incumbent and it might be tempting to maybe lower prices in terms of either take rate charged or offer other incentives to try to maintain my position can you speak to a bit about why this might not be enough to sort of maintain share or or put differently, how customers might be thinking about pricing versus qual.
<unk> when they when they're selecting among vendors.
Yeah, I think well I can start and you can jump in but thanks, Craig for that question. So so you know this this is a up.
And the industry and a business that has two types of different pricing right. There's sort of per member per month pricing and then there is the there.
There is the success fee based pricing and the success based pricing you know on.
Obviously and all she has a very simple example, so if if a competitor is currently returning $10 a.
A month and we returned 20, even if our fee even if they lower their fees, that's not quite to substantially improve the actual dollar return to the to the clients and the clients are sophisticated enough where one they don't they don't just sort of Willy nilly change vendors. It takes them a long time like part of the implementation.
The time line for US is really meshing with our clients data systems, which kicks while it takes a long time and so it's and it's not without cost and so as we think about our clients, they're very savvy. They don't they don't change vendors just on the fly if they don't change vendors because somebody is all.
With the lower pricing and we don't compete on that level anyway, and we think that we have to drive better results.
That our clients can feel they can they have that and their bank account, we have to provide great client service.
All of the constituents that our clients deal with so that there isn't any there isn't equation. There's a good explanation and that we can actually turn day activities and $10 sooner. So as we think about that climate and competitors. You know these are all respectable companies that we compete against all of them are are shattered company that all they are very rich.
Companies they've gained their share sales are done good work, but I think what we provide as a competitive.
Product or service is just is a product or service that is that it's just better from a from a return standpoint.
We also think that the way, we again as we interact with constituents and and all the constituents that have that deal with our clients. It's really important to have great customer service and that is has always been our philosophy and our company is that we're gonna be client centric. So so irrespective of whether if you're returning say $10 a month and you.
Reduce your and your fee and.
Unless you reduced it substantially you still never going to drive sort of $20 right versus I mean, our fees may not be our fees may be a little bit higher and some cases, there's certainly not you know probably and it twice as high but but I think our clients really based on a decision on what are the results that I'm, saying from performance.
What is the quality of work that they're doing how are they treating my constituents.
Payers and the commercial health care markets, you know, we wanted to be sure that we're being sensitive and and.
And very conscientious of the way we work with providers.
And we think that that is an extremely important role a role and a.
And aspect of the work that we provide so I think it's not a matter of pricing I think you know the incumbents have again, they're great companies they've been in this space for a long time.
What we're providing it's just something that is just a step above what happened and the market just all the way around so pricing concession I don't think it's going to drive a change back to a vendor and again given that that.
And then just switching costs are are pretty high.
I think as long as they can provide.
That level of sort of exceptional work that got us the contract and the first place. We think we can continue to as we you know our philosophy is land and expand continues to provide greater surfaces to our air clients.
[laughter].
That makes a ton of sense to me and so it really does sound like an industry where competition is.
Based on really exclusively on quality and that's good and it's a good kind of industry to be and when you have invested really a lot to create the highest quality product and I guess just as a follow up on that you mentioned, you sort of land and expand model and.
From the either the customer perspective or for yours, how easy is it I know you've mentioned this a bit day opening remarks, but how easy is it to expand within the existing customer base and as I understand it you might be brought on to kind of have a bit of a trial run and then get upgraded and the stack as you and.
As you continue to post better and better results. So I guess like in what.
Roughly like and how many of your clients or percentage of your clients or however, you think about it are you in the sort of non primary ore or trial position, where you could see upside as long as you can continue to drive these better client outcomes.
So I guess just to speak a bit about the pipeline opportunity on existing customers would be great.
Yeah, maybe you live and what can you really yeah, well at a real life example, and you can talk about some of the contracts are implemented recently.
Certainly and.
And so I would include that as well and so to your question. It really does vary client by client in terms of the pace of that expansion and it's it's typically just predicated on the performance and.
And what they have available or what's wishes and they're willing to make but for example, if you think about those 10, new programs from the fourth quarter and and looking at those it's roughly a 50 50 split between net new clients or expanding within our current clients and if we think about and the first quarter with the five new programs.
Almost entirely expansion within our current contracted client set.
And so with that in mind as we think about the base I think and almost every client we have there's still continued opportunity to expand further.
And their covered lives basins or within the eligibility and claims based product offerings and so it's something that we've demonstrated over the past few years and I think we still have a good amount of ramp ahead of us to continue doing so.
Awesome, that's super helpful and then.
The benefit of that as well I would imagine expanding within existing customers should come out.
All else equal on a higher incremental margin and so I guess just on on that last point on my side.
Anil question would just be so once you are plugged in and running with a client with your existing client base looks like and as.
And as far as the actual operations to bring.
$100 of revenue.
And to your company how much of the work is done by this technology and your algorithms versus how much is done by performance employees and I guess Im just trying to drill down a bit on the components of contribution margin and the incremental margin opportunity and that's it from me Firstly and so that's the first.
So in our and our eligibility based offerings.
And more of the and for your work is done on that implementation of medical setup and once it's operating needs primarily to technology at play and.
On the claims based side it was split so whether it's and automated.
Whether it's a more complex on it.
And so on the complex side I would say the initial heavy lifting assault on by the technology platform, and then a nurse or coder and will come behind to validate and if it is and automated audit who'd been on entirely by the technology platform.
So it varies between which specific product offering it is.
Great.
Thanks, a lot.
And with that we've reached the end of our question and answer session and I would now like to turn the call back over to management for any closing remarks.
Thank you operator.
Moving to thank you for joining us for our earnings call today, and we also want to thank our clients for once again, allowing us to serve you. This past quarter. We also want to thank our team members who have continued to bring their best every day to performance.
And even through changing the business composition, we appreciate all of the efforts and all of the productivity.
And again, we thank our shareholders for supporting Us.
And with that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day everyone.
Okay.
And then.
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