Q2 2021 Performant Financial Corp Earnings Call
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Greetings and welcome to the performance Financial Corporation second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question on answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Richard <unk> Investor Relations. Thank you Sir you may begin.
Thank you operator, and good afternoon, everyone by now you Should've received a copy of the earnings release for our second quarter 'twenty 'twenty..1 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 Cole Senior Vice President and General manager of Health care and Rohit round from Tawney Senior Vice President financing strategy.
Before we begin I'd like to remind you that some of the common share 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 on.
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.
Lisa.
Thank you rich and good afternoon, everyone and thank you for joining us for our earnings call.
The decision to streamline performance into our health care payment integrity company remains on schedule and was reinforced by our results in the second quarter with health care revenues growing by over 27% on a year over year basis.
The wind down of our recovery business is nearly complete and we anticipate exiting that business entirely by the end of the year.
As we see the world slowly we've worked back to pre pandemic levels and emerge from this COVID-19 call. We anticipate our quarterly health care revenues will continue to grow.
We are focusing our efforts to drive new business, while expanding our existing contract with a combination of innovative technology products and new services.
Despite the impact from Covid, our health care business over the past 3 years have progressed largely in line with our expectations.
As we indicated to you back in 2018, most of our large contract required a significant amount on upfront investment for people integrating systems et cetera, before beginning to turn profitable towards the latter stages this year too.
However, it really wasn't until year, 3 which would be where we are today that these contracts reach maturity and begin to show more applicable steady state margin.
But just to clarify not every new opportunity is going to have this long of a ramp up period.
If we are expanding our scope of services with an existing client we can implement that in 3 to 6 months since their systems are already integrated with ours.
We believe that there are multiple avenues for us to win new business and continued to grow our health care brands and operations, whether through our land and expand strategy or unseating a competitor and a new client.
On to that point, the competitive landscape within health care opinion integrity has dramatically changed in the recent past.
Our biggest competitor in eligibility was purchased by a private equity firm that previously purchased another large payment integrity competitor in 2018.
In addition, currently there is a separate pending merger among 2 of the other significant payment integrity company, but that transaction is under some additional scrutiny right. Now so we will have to wait and see what transpires.
Overall, we're excited about the prospects of our health care business growth and at this time I would like Debian coal, our senior Vice President and General manager of Health care to take you through the results and some of his outlook then.
Thanks, Lisa we remain focused on the execution of our healthcare growth strategy and delivering innovative cost management solutions to our clients.
Our healthcare revenues for over 27% higher when compared to the second quarter of last year and nearly 40% higher on a sequential basis. This performance continues to demonstrate the value of new programs will be implemented over the past 24 months as they mature from the initial implementation phase to fully operational programs.
Noting the 12 new programs, we already implemented in 2021.2021. These additional sources of revenue from both new clients and expansion within existing clients combined with our robust sales pipeline provide a meaningful line of sight into our growth opportunities.
As many of you know our health care business is divided into 2 product segments claims auditing and eligibility, which is sometimes referred to as third party liability of coordination of benefits performing is uniquely positioned as a national leader in both.
And on it performing as 1 of only 2 CMS recovery audit contractors and is the only 1 with a national jurisdiction.
<unk> also provides claim audit solutions to commercial payers in every state of the nation and eligibility performing is honored to serve CMS on this contract offer operate the national Medicare secondary payer commercial repayment center, and we provide commercial eligibility and providing recovery services in 45 states.
With this broad base of expertise performance is well positioned with invaluable insights to the national health care landscape.
Within claims auditing, we leverage our proprietary data platform to efficiently onboard diverse client and industry data sources.
Seamlessly apply our analytic and segment expertise to identify improper payments.
Our workflow and audit work on currently support the auditing of 30000 Medical records per month on line of sight to at least double that volume next year.
Our more recent investments in data mining audits that do not require a medical record have also yielded more than double the financial savings for our clients. This year over last.
As a result, despite the challenging operating environment as a result of Covid our revenues from claims audit clients more than doubled relative to the second quarter of last year. We anticipate claims based revenue will continue to trend upward as we returned to pre COVID-19 levels and we continue executing on new and expanded client program do.
He went to their due to their complex nature. Each program typically represents a multiyear revenue opportunity such as the 8 plus year contract. We were recently re awarded for the CMS Rack region..1. We then eligibility we continue to expand our Medicaid PPL service to cover more states and claim types and our CMS based MSP.
Commercial repayment center contract continues to set records.
Program recoveries. The pandemic has caused an industry wide decline in medical spending suppressing recoveries from the identification of third party coverage, yet we believe our growth in multiple new programs positions us to develop our eligibility business into the future.
Of particular statement, we recently announced our new MSP advantage offering, which leverages our extensive experience navigating the Medicare secondary payer market with MSP advantage, we partner with Medicare advantage plans to optimize their margins through a comprehensive suite of solutions premium accuracy carrier reclamation and provide a recovery.
We presently anticipate savings in excess of $30 million for our initial 2 health plans in just their first year of operations having.
Having grown healthcare revenue nearly 600 per cent in the last 3 years. We believe we have a solid foundation for continued meaningful growth in the medium and long term with strong visibility into our near term implementations and results. Our growth has been enabled by our proprietary data platform and the unmatched efforts of our dedicated team members as.
We are positioned to further expand our revenues performing is investing in the acquisition of additional key talent the expansion of our sales and marketing efforts and then the development of our advanced analytics to ensure we will always remain a client centric company at our core. We are also continuing to make investments in our account management and customer service teams build.
From a historical growth and with line of sight into expanded growth. We're excited about our accomplishments year to date and believe that our investments will commitment and commitment to helping our clients manage their rising cost of health care services will result in a strong second half of the year.
With that I'd like to introduce Rohit ramps on Dani, our senior Vice President of financing strategy to walk you through the results of the quarter from it.
Thanks Sam.
In Q2 of 2021, we reported total revenues of $32.8 million, which was lower than the $33.8 9 we reported on the prior year period due to the impact of the COVID-19 pandemic as well as our decision to wind down on a recovery markets and focus our attention on our growing health care operations of note health care revenues were $18.6 million.
Or 27% higher on the $14.6 million 1 year prior.
Adjusted EBITDA in the second quarter was $4.2 million compared to the $4.3 million in the prior year period, and a roughly breakeven Q1 of this year.
[noise] claim space also known as claims auditing revenue in the second quarter of 2021 with over $7 million, which was more than double the $3.3 million in the second quarter of 2020 and sequentially higher on the $5.4 million from your reported in the first quarter of 2021.
Revenue from our eligibility services for the second quarter of 2021 was approximately $11.6 million.
In line with the $11.3 million in the second quarter of 2020 and sequentially higher than the $7.9 million. We've recorded in the first quarter of 2021.2.
2020 revenues from our eligibility services benefited from a large backlog of recoveries due to the implementation of a new program, whereas 2021 now evidenced this on more diversified revenue base.
Similar to last quarter, our operations and related to health care Kpis continue to demonstrate growth year over year and we currently expect them to continue growing throughout the remainder of this year as both new and existing programs continue to ramp.
We maintain our anticipation that the second half of 2021 will represent an outsized portion of total 2021 health care revenues.
Total non health care recovery revenue in the second quarter of 2021 was $11.1 million down from the $16.2 million that we recorded during the second quarter of last year and the $14.5 million reported in the first quarter of this year.
Right the comparatively strong results from this business within the quarter. This revenue will continue to rapidly decline through the remainder of 2021 as a result of our planned wind down of our recovery markets. We anticipate that the revenue contribution from our non health care recovery business to be in the low to mid single digit millions of dollars.
In the second half of 2021, and we do not anticipate reporting any such revenue at the start of 2022.
Our total customer care and outsourced services revenue was $3.1 million for the quarter, which was slightly up when compared to the second quarter of last year and down compared to the $3.6 million in Q1 of this year, primarily related to cares act related loan forbearance.
Operating expenses in the second quarter were $34.1 million, which after excluding our goodwill impairment charge from the prior year period is $2.8 million higher.
The increase from expenses was primarily driven by impacts of a recovery wind down we had a spike in restructuring expenses in the quarter alongside an increase in amortization.
Amortization increase resulted from shortened the useful lives of certain recovery assets as well as the new debt issuance costs related to our recent credit amendment.
Looking forward, we expect that operating expenses overall will decline from Q2 levels. In spite of the continued growth in operating expenses from health care related expansion.
As Lisa mentioned, we expect to be done with the wind down on recovery market activities by the end of the current year.
With that I'd like to turn our call back over to Lisa before we open up for your questions Lisa.
Thanks Rohit.
Over the past 5 years, we have developed a strong brand as a cash.
Centric value added health care payment integrity partner.
We have grown our healthcare revenues from over just $7 million from 2015, it's almost $69 million from 2020 by driving almost $2 billion in health care client savings.
As we continue to deliver results to our clients.
Anticipate that we will also continue to grow in 2021 and forward.
We believe there is a tremendous opportunity for us to gain market share and continue to grow. However, the recent surge in the Delta variant of COVID-19 creates some uncertainty for potential slowdown or pause in activity in the coming quarters.
While we have not yet seen impact we are taking a cautious approach and opting to refine our health care revenue guidance to a range of $80 million to $85 million and maintain our confidence in achieving positive EBITDA result.
The long term prospects that performance remained sound and we believe that we will continue to grow and scale our business in the coming years.
With that we'd like to open the call up and take your questions.
Ladies and gentlemen, we will now have our question and answer session.
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1 moment, please moving now poll for questions.
Our first question comes from Kyle <unk> with Colliers Securities. Please proceed with your question.
Great Hi, everyone. Thank you for all the updates here I appreciate it maybe.
Maybe I'll start with some of the new contracts that we've heard about so I think 10 in Q4 and 5 in Q1, sorry, if I missed this.
Any new contracts in Q2 and in particular can you talk about maybe on average what the contract size.
Some of these new clients are and maybe what the average term length is.
Hey, Kyle it's Simeon.
So I think from a.
Just a quick level set so we announced 10 new programs that we implemented in Q4.2020.
We implemented an additional 5 in Q1 and then as I.
Reflecting on my prepared remarks, we implemented another 7 programs in Q2.
So the 7 programs, where a good blend of new logos and existing client expansion.
They are primarily claims based programs and just kind of from a <unk>.
Timing standpoint, as we think about the revenue component and I think we've previously shared this these programs do take a little bit of time to ramp. So we anticipate that the 10, we announced in Q4, we will start to contribute revenue later this year with a more material contribution next year and then programs that we implemented in Q1 and that we just recently.
Mounts, those primarily start to contribute in.
In 2022 from a revenue perspective so.
We continue to have a.
Pretty good cadence of new programs that we are implementing good line of sight into those is where we are.
Alright, what we've announced here show.
And so I think also to Lisa points out is we're executing here, both with new logos and land and expand we are seeing a good contribution from both.
Got it and I know that region, 1 for 8 and a half years is on the long end of the 2.
<unk> link.
Is it safe to assume that a lot of these new contracts are for a few years and maybe are in the single digit for in terms of millions of dollars.
Yeah, I mean, I think our.
You call out there.
The rack programs in this day contracts, our CMS contracts on our longer term the commercial contracts. So if you look at them. Those contracts are also very sticky contracts.
And and they have a pretty extensive time period.
In terms of revenue contribution.
Look it's a it's really depends on the size of the opportunity the number of covered lives et cetera. So it's hard to call out exactly quantified these opportunities from a revenue.
[noise] standpoint got it.
I appreciate that and.
In terms of EBITDA is very strong in the quarter on much higher than what we were modeling.
As the recovery business continues to wind down.
We should see more of these costs diminish.
And it looks like you sold off about $2.4 million worth of their recovery contracts.
And as you mentioned, we should expect that to be fully divested by year end are you able to provide any sort of color around.
The percentage remaining of the recovery assets or amount any sort of color here would be helpful.
Yes.
I think you categorized that well.
So from our perspective, I think that goes back to we expect low to mid single digit millions on revenue from a total of second half 2.
<unk> 2021 in terms of that recovery market wind down.
In terms of potential divestiture value there may be.
Small pieces from some of the structure of our transactions that come in but I think you've seen the lion's share of it already.
Got it.
Just a couple more here in terms of costs associated with this business going away.
Any weighted maybe quantify this on a quarterly or annual basis, just trying to get a sense of.
How much cost savings, we will see come out of Opex.
Yes, I think that there is still.
Probably a couple of million dollars on an annual basis that'll come out related to the recovery wind down.
But as we've discussed before.
And that will that will reset the floor. If you will as we continue to grow the health care operation.
Got it.
And then you know region 1 in 5 have been obviously significant drivers for the business Im just securing 1 region is a big deal. So having both is clearly validates your capabilities.
I don't want to get greedy by asking if you think you can secure a third region with region, 2 coming up for grabs but im.
Is that an opportunity that you're focusing on.
And any sort of thoughts here would be great.
Yes look we to your point, we have had a long standing relationship with with CMS on I think that 8 and a half year re award for reaching 1 is certainly underscores.
Our performance in so.
We will clearly look at all of the rebid opportunities on the other regions here CFA.
Net mapped out to our strategy and it makes good sense and at this point, we are firmly available to bid on these opportunities CMS hasn't restricted and the number of regions et cetera, and so we'll definitely look closely up pursuing some of these other opportunities as the Rebids open up.
Sounds great I appreciate it thanks for all the updates here.
Thank you.
Our next question comes from George Sutton with Craig Hallum. Please proceed with your question.
Thank you.
Your press release, you mentioned, there is a tremendous opportunity for us to gain market share within the healthcare space.
Space by our calculations and I know our calculations may be a little different.
We calculate your run rate currently at a 1% share of the market can you talk about extending this thought process on further how far do you think you can get in terms of a health care share.
Certainly I think as it's Dan go ahead Sir.
But.
As I was saying I think as it stands today at 20% market share is a goal that we have in mind as a company.
And I think if you were to extrapolate out the 2.
240 billion plus.
Waste and David on integrity that that could translate to a 5% to $700 million plus revenue opportunity for us with a fifth of the market.
We can certainly nothing restricting us from gone beyond that.
That's the current goal.
And as you're winning these contracts with existing customers.
And frankly, I guess I would ask the question on the commercial side with new customers as well can you talk about seat levels are you coming in at higher seat levels and another.
Another question relative to that is when you move up a seat can you just walk through the impact that you can see with that account.
Yes, we do.
As our solutions have matured as we've had more opportunity to demonstrate our capabilities in existing clients.
That clearly puts us in a better position to move up and I think in some of these new opportunities.
We're clearly coming in in that when that first or second position.
Because of our qualifications and again, how we've been able to demonstrate capabilities and quality of what we're providing for clients.
So in terms of moving up the stack.
The larger accounts the national accounts.
Theres opportunities there from some of the historical.
Early wins, and we're progressing and I think that does give us kind of a informed playbook. If you will as we think about growth opportunity because we know the account well we know how the product operates and then we see ultimately the covered lives in the claim volume that we have so it does give us good predictability in terms of growth opportunities.
So our work has suggested that there are not that many accounts out there there is let's call it 40 plus.
And it is a small universe and they talk and while we continually hear is that your technology is better than others.
Could you just talk about.
The pipeline from that context, and how much more opportunity youre seeing right now as a result of the technology advantage. It appears you have.
Yes, so look in terms of the number of accounts.
There are a number of accounts.
And across the peer right. If we look at the total number of insurers that are out there were 500 plus in terms of the ones that we focus on we focus on largely 2 segments. The national accounts per gives us great opportunity for penetration and growing with the covered lives and then there's a healthy amount of mid tier we refer to as kind of the regional payers.
Or is that on a 500000, a 4 million covered lives and so that's an area that we are also focusing on we've had some disproportionate success in that space largely because payers see the capabilities that we have to address kind of both ends im sorry, the kind of the end.
And if you will from identification of opportunities of Mr. Properly paid properly paid claims all the way to the to the recovery side.
And so we look at that as somewhat of an underserved market because of our technology capability to scale and support that in a cost effective manner that we've had some pretty material success in that space and then just to your point on the technology as a whole.
That continues to be a real differentiator in all the markets that we pursue.
Providing quality results being mindful in terms of provider abrasion, having high hit rates high findings that continues to be a real differentiator for us and allowing us to continue to take share from incumbents and also kind of expand in existing clients.
Great 1 more question if I could.
I'll ask Lisa if she could answer this way.
We are watching the infrastructure bill as closely as we can sitting here in Minneapolis.
And it looks to us like the eligibility age may fall for Medicare It looks like services covered may grow both of which would mean Medicare spending could be substantially higher can you talk about what impact that could have for you.
Sure George I think these are these are.
Clearly.
Wins that will help our overall business.
As you know CMS is a pretty significant part of the payer market and they're spending grows our opportunity to grow with them clearly growth. So.
We see we see health care industry opportunities growing in 2 ways right. There's 1.1 way is clearly taking share and growing within the accounts. The second is the increase in dollars and the amount of spending that will that will continue to be a part of our healthcare spend in the U S, which is significantly growth.
I think twice what GDP is growing at so we're pretty excited about what we're seeing and we think particularly as Tim said, we we've had a longstanding relationship with CMS.
And our I think we try our best to be 1 of their better partners.
On making sure that we work well with providers, we work well with day entire universe.
Interaction parties with CMS. So we're pretty excited about that we think it's another opportunity to continue to grow.
And we think that's the dynamic that.
We are well poised to take advantage of.
Great.
Thank you very much guys.
Thank you.
As a reminder, true audience, if you'd like to ask a question. Please press star 1 on your telephone keypad.
Our next question comes from Chris <unk> with Chatham Harbor Capital. Please proceed with your question.
Wow, great quarter, guys Im not sure why the strained down I know the guide down was by $3 million or whatever but I don't think anyone really cares COVID-19 long term picture on your your goal of getting 20% market share.
So health care revenue in Q2 of 2020 was $14.6 million in this quarter. It was $18.6 million, which is 27% year over year.
Is there seasonality on their health care revenue side on <unk> from from the presentation seems to be your weakest quarter, but this was your second highest print.
On the best being $18.9 million in Q4 of last year. So is there seasonality in Q2.
Hey, Chris Good question.
No. We generally don't see seasonality in Q2 I think in this market you do see seasonality sorry from our Q4 total Q1.
A lot of our clients try to clean up their books at the end of the year and typically seen in flight in Q4.
That could potentially decline in net into Q1. So in terms of our Q2 numbers I don't think there'll be anything seasonality wise artificially deflating or inflating them.
Okay. Thanks.
Thank you.
There are no further questions at this time I would like to turn the floor back over to management for any closing remarks.
Thank you operator, thank you for being with US today and tour for the good questions that we had on our earnings call.
We close this call I want to again, thank our clients for letting us serve them, we feel very honored to be your partners, we want to thank our colleagues.
At that performance for bringing their best to US every day and again, we appreciate your time and attendance on our earnings call. Thank you very much.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at this time thank.
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