Q3 2021 Performant Financial Corp Earnings Call
Welcome to today's performance Financial Corp, third quarter 2021 earnings call at.
At this time, all participants will be in a listen only mode.
Later, we will conduct a question and answer session.
I will now turn the call over to your host Richard Zubair Investor Relations you may begin.
Thank you operator, and good afternoon, everyone. By now you should have received a copy of the earnings release for our third quarter 2021 results. If you have not have copies available on the Investor Relations portion of our web site on today's call will be Lisa M. Chief Executive Officer, Simeon call signs senior Vice President and general manager of healthcare and Rohit Rafsanjani Senior Vice.
President Ah financial strategy.
Before we because I would like to remind you that some of the comments made on today's call are forward looking statements.
These statements are subject to risks and uncertainties, including those described in our filings with the SEC.
Our actual results may differ materially from those described during the call. In addition, any forward looking statements you made as of today and the company does not undertake to update any forward looking statements based on the circumstances or advised expectations also all non-GAAP financial measures discussed during this call are reconciled to the most of Rechtlich comparable GAAP measures and the tables as far press release I would know.
Like to turn the call over to Lisa.
Lisa.
Thank you rich good afternoon, everyone and thank you for joining us for our earnings call.
Right now so that third quarter included you over a year and sequential healthcare revenue growth.
Continued growth <unk> implementation.
Expansion as a number of audits conducted.
Tip of Thanksgiving by our clients century focused marketplace upgraded that continues to support our position with an ever consolidating industry.
We maintain our visibility into strong growth toward our long term targets.
Those are my existing and new clients.
Initially entered the healthcare market back in 2007 at what.
2017, when he made the commitment just focused on the commercial market that we truly answered the healthcare state.
Does that time, we have added numerous clients a contract.
Large and midsize healthcare payers.
We've also are multiple contrast, with these pairs.
Uhm throw pillows 200000 in annual revenue chmiel is across different services.
Additionally over the past couple of years, we have built wait healthcare of leadership team with some of the top talent in the industry.
The healthcare pear.
Integrity market is large growing and well structured.
In this market our gains have come from highly client centric focused services, what's your facilitator ability to take market share from a combat.
We believe our mid term and long term growth prospects remain very strong.
From a macro perspective, despite rising vaccine right Covid continues to impact Hospital Corps utilization rate.
Based on a study by Peterson K F F hospital admissions or below expected level too early April 2021, and health spending overall for hospitals and ambulatory care. They may some low expected level through at least June 2021.
Specifically.
No to the following are tested and to decrease in the number of hospital admissions in 2020.
Poor utilization remain fomo expect expected levels.
The persistence of lower than expected core utilization have chest that some of the care that did not occur early in the COVID-19 pandemic may have been forgone rather than simply delayed.
We will keep a close watch on how these core utilization trends will impact available claims volume in the coming quarters as this could cost temporary compression.
We have seven I'll leave it impacted within third quarter.
Go back.
Back as Covid slowed down and some Randolph implementation flip. It then we'll discuss.
Actually adapt to these temporary impact.
Have maintained our focus and excitement of a strong platform, we have and the long term focus of our company.
And that transformation into a predominantly healthcare payment integrity company is nearly complete.
And activate reflect back on our journey to this point.
It's humbling, how we've come from a company that was focused on the beds are in the studio in recovery markets with no healthcare experience to becoming one of the leading independent healthcare payment integrity providers in the country.
I want to thank everyone who's been a part of the performance family.
<unk> salt current and former.
Could not be the company that we are today without your effort and dedication and for that I'm truly grateful.
The long term prospects of perform it remains town.
Fundamentally we are making great progress toward our long term goals by continuing to capture additional market share and signing new clients.
At this point I would like to me a call our senior Vice President and general manager of healthcare.
Talking greater detail about third quarter, and other initiatives and our healthcare business <unk>.
Thanks, Lisa and good afternoon to three was a busy quarters, we implement another six programs representing both expansion with an existing clients and new logos demonstrating our continued dual strategy of diversifying our client base, while also expanding our offerings within each client healthcare revenue was 14% higher when compared to.
The third quarter of last year, and 7.5% higher sequentially. We're excited about the direction. Our business continues to trend in this success is a testament both to accomplish team of experienced industry leaders in our proprietary data platform.
I'm convinced offerings, we have seen expansion our audit volumes as programs implemented in previous quarters continued to mature.
Coupled with that organic grows you're also seeing steady strengthening in our production kpis collectively these trends provide visibility in the future revenue growth.
Holly or diversification strategy has yielded strong dividends within our eligibility business that can be seen on the growth of our MSP advantage offerings and are impressive resolved on the recovery of each provider that Adele.
Additionally, our development of eligibility assets continues to strengthen and we're able to confirm new contract awards and pending implementations and finally, our sales pipeline of new eligibility opportunities continues to grow based on our demonstrated ability to drive meaningful savings for our clients taken together healthcare chief strong year over year.
Your gross cause we obtained our highest quarter of organic revenue in the history of our healthcare business.
However, our anticipation for growth during the quarter was even higher but we experienced some revenue delays in Q3, largely correlated with industry concerns stemming from the COVID-19 Delta variance in our claims business. This delay was primarily exhibited by certain of our clients affording greater latitude to providers by slowing the collection cadence of our audit finding.
You know what your ability we anticipated a quicker returned to pre Covid recovery timeframe. Then we saw during the quarter and while the industry as a whole has made progress a number of insurers are still lagging and processing of our demands why we believe the challenges are more temporary than some stomach. We do anticipate further headwinds in queue for that we expect will.
Continue into 2022.
Specifically, our operations have been impacted by increased difficulty to source qualified applicants due to the unique combination of worker apathy as well as aggressive compensation packages that are being offered by healthcare organizations. Furthering this challenge the president recently signed an executive order, requiring <unk> requiring compliance with vaccine mandate.
We anticipate this mandate may have some impact to our existing workforce in queue for your consideration of all of these factors were updating our 2021 healthcare revenue guidance to arrange a 77 to 80 million with nearly double digit EBITDA. These challenges haven't changed our strategic outlook nor have the hamburger our.
City to win new business or bring new products to market, which I'll address now we.
We have several new implementations kicking off before the end of the year. One of these resulted from a competitive selection process at a national Payor performance coordination of benefits solution was selected over multiple vendors, including the incumbent vendor. The scope of this opportunity includes the payers commercial in Medicare advantage lines of business. We also lost our expanded offering.
Audit advantage for outpatient claims and I'm excited to announce the sustained performance of our MSP advantage products for Medicare advantage plans collectively these represent great enhancements to the continued growth and all of our offerings.
We are not aware of another vendor in our space with a similar portfolio of new program implementations. These successes demonstrator continued growth in the healthcare payment integrity industry through the combination of our superior client centered performance robust proprietary data platform and our ability to attract top level talent with that.
I'd like to introduce Rohit Rammstein, Donny, our senior Vice President Finance and strategy to walk you through the results of the quarter Rohit.
Thanks.
And the third quarter of 2021, we reported total revenues of $28.6 million, which is lower than the $36 to nine that we reported in the prior year period due to the decline in recovery related activities and associated revenues unexpected from previous announcements and commentary.
Of note in spite of the factors suddenly some mentioned that a constant delays and the pace of healthcare growth I'll turn revenues were still $20 million, representing our largest corner ever in the healthcare markets, excluding a quarter in 20th release to reserve account associated with the end of a contract.
These healthcare up reviews demonstrated 14% growth year over year compared to the 17th 21.
Adjusted EBITDA in the third quarter was $2.7 million compared to the $3.8 million in the prior year period. This is adolphus, reflecting the heart efforts and balancing reduction in operating expenses, while still in messy heavily into our healthcare operations to sustain expected growth.
Within healthcare market claim space also known as <unk>.
And the third quarter was 2021 was $7.3 million, which was an increase of nearly 8% over the $4.1 million in the third quarter of 2020 and sequentially higher than the $70 for the reported in the second quarter of this year.
<unk> indicated we've experienced backing process the way such as client recoveries, which are creating a delay timing between our audit keep your eyes and a reported revenues as we looked at the fourth quarter. We are unsure as to how quickly. These delays will clear out would not be surprised at the extent and timing out for me.
Revenue from our eligibility services for the third quarter of 2021 was approximately $12.7 million a decrease from the $35 million in the third quarter of 2020, but sequentially higher than the 11.6 million you recorded on the first quarter of 2021 and still represents I'm one diverse revenue based on the prior year period as an.
And Q2.
As I mentioned this is also a market we're experiencing some tiny slippage from Q3 to queue for and anticipate a ripple effect to play out in the coming quarters.
We remain quite excited as a grudge trajectory, we continue to see in our internal kpis as well as the continued bolstering of our implementation and future sales and implementation pipelines, while each individual implementation varies in expectation depending on a number of input from around $100000 on the lower end to a few million dollars on the higher end implemented.
Patients with completed in the last few quarters alone are anticipated to drive $8 million to $12 million each missile steady state revenues.
These efforts in tandem with the continued albeit slower than expected returns and pre COVID-19 norms are what sustain our visibility into the market penetration strategy and gross directory medium to achieve.
Total non healthcare recovery revenue in the third quarter of 2021 with $5.5 million down from the $15.4 million. We recorded during the third quarter of last year and a rapid decline from the $11.1 million airport in queue to up this year.
Expect this trend to continue to next quarter and maintain our anticipation of not having any recovery revenues in 2022.
Our total customer care outsource services revenues were $3 $1 million for the quarter, which was down slightly one compared to the second quarter of last year and flat sequentially consistent with our expectations.
Moving on to expenses operating expenses in the third quarter, where $25 million, which is 5.9 million lower.
Compared to Cuba, three of last year, primarily driven by the decrease in operating expenses related to diminishing recovery revenues and offset by transition expenses and continued investment into our healthcare market.
Looking forward, we expect that operating expenses overall will begin to level out in 2022 at the costs associated associated with our healthcare headcount growth will begin to outpace the offsets from lower expenses related to recovery.
Oh, no we do experienced a bit of corporate expense seasonality with Q4, and Q1 typically representing larger corporate expense from the company.
Finally from its financing Cashflow perspective, we completed and equity offering August 2021 in which we should just over 12 now you you shares including over a lot of it at a price of $3.80 per share. This resulted in net proceeds of approximately $42 million to the company.
Our plan is to use the majority of these proceeds from the deal for working capital and other general corporate purposes and to pay down and refinance our existing debt strategies, which we are currently pursuing.
With that we'd like to open up the call you take your questions.
If you would like to ask a question. Please.
Please press star one on your telephone keypad now.
You'll be placed into the queue in the order received.
Please be prepared to ask a question when prompted.
Once again, if you have a question. Please press star one on your phone now.
And our first question comes from.
Cow Bowser.
Your line is open.
Great. Thanks for taking the questions and for all the updates today.
Maybe not to start on that.
Healthcare business profitability can you provide a little bit more color around margins for at the core healthcare business in the corner right.
For the full year guidance of double digit EBITDA for the year would imply about 13%.
Margin I'm, assuming that's just for the healthcare vicious correct me, if I'm wrong, but in Q3, we obviously still had some sales that were around so I just wanted to get a better understanding of how the profitability of the healthcare business was looking in the corner.
Certainly thanks Pal.
So actually just to clarify that Guy is provided was for the margins of the entirety of <unk>.
And in similar to previous conversations <unk>, we do not actually have segment reporting on our individual segment Profitabilities and it's something as we look towards the future quarters, and providing guidance and next year will continue to.
Sure more as we become a pure play healthcare company in our actual financial results Uhm, but we remain committed to our visibility in the long term margins EBITDA margin in the mid twenties.
And anticipate lower margins along the way as we continue to invest into the healthcare operations.
Got it okay. So it it includes the whole business. So and you you mentioned that recovery business will be gone by next year. So is it safe to assume that recovery business will step down again in queue for them or is it is it possible it could be leveled out or even have one last bolus of revenue. This.
We're going to zero 22.
We do anticipate revenue in the fourth quarter, but it is expected to be another step down along the way to zero okay. Okay.
Okay. Good so that implies that pretty nice margins for the healthcare business then.
I appreciate that and given that the hiring constraint in COVID-19 related delays.
I'm just kind of curious if you have an estimate for.
Given the current organization structure in size, what what the capacity of revenue is right now.
And what if anything beyond Covid and and labor shortages Uhm is preventing you from from growing faster now that you have a stronger balance she just kind of.
I'm curious, how how things are trending and where do you think they could go.
Okay.
So in terms of the in terms of the.
Capacity issue you know it is I think we have indicated before we're scaling out a number of our existing account some of our new opportunities. So we we absolutely have you stated before we have a pretty aggressive.
<unk> in terms of our hiring for production resources to kind of step through all the opportunity. So you know it's something that we're flagging here in terms of just understanding some of the backdrop in terms of the industry as a whole and things that we're seeing from a competitive standpoint is trying to get folks that to come into the.
The organization posted it kind of leaving the traditional healthcare settings. So we're.
We're stepping through that where you are we are being very mindful in terms of things that we can do to get creative to further incentivize folks, but it is something that will keep in a very watchful eye on knowing that we have some pretty aggressive hiring plans to support the grocery remained review and certainly into 22.
Oh got it I appreciate that.
And then maybe lashley two.
Two questions I'll, just ask them both for just curious for the smaller private payers.
That are providing nice growth in the healthcare business is the margin profile more favorable for those clients since you're kind of on the stack and don't really compete with others that the first question. Then secondly, just kind of curious any any updates on your efforts to secure another CMS region. Thanks, so much.
Yeah.
Sure I'll start with your second question. So we did respond to the opportunity for the rack region too. So that response was in the the early October timeframe.
So that's still in a procurement cycle with C. M S Uhm and you'll see them. That's like they can take anywhere from cause most federal agencies do you know three months six months, we've seen it even longer so the cycle continues.
Suddenly, let you guys know that as soon as we get an indication on that with regards to the the margins on some of the smaller payers. So I think that's correct.
Statement in terms of we we do see those as is greater opportunities for us with regards to expanded offerings. Those are the payers that it's a bit difficult for them with their infrastructure to deal with a whole portfolio of vendors and so we can get more of our offerings pictured in those environments and we do get.
An opportunity to to get some consideration on our rights just understanding number of covered lives. There's just some of the national payers hope that good scouts to context.
Thank you.
We have a question from Craig Melchor.
Your line is open.
Hey, guys. Thanks for taking my question here.
So for the first time in company history. It it looks like the I mean, the healthcare businesses unconstrained from from a cash perspective, I'm curious about the plans to accelerate investment so that's.
Click Onboarding development any other areas that you expect can kill Griffith comfort.
Yeah, So hey, Craig. So you know look we you know for us as we as we mentioned here implementations are are are pretty <unk>.
Significant and we are at a at a a very meaningful clip of new opportunities from what we've announced in Q1 and.
What I just mentioned in terms of my prepared remarks, and so I think we're we're looking at in your 18, new implementations and so no anything that we can do to compress the cycle in terms of getting clients onboard and whether there new clients, new logos or existing clients and just new opportunities so absence.
<unk>, we always are looking at ways in which we can best to see if we can get those cycles compressed in and quickly or more quickly two two are.
Implementation and revenue opportunity in terms of just you know thinking about it I think <unk> no more at a at a wholesale level.
As we've talked about you know we continue to win new opportunities, we're getting a number of new opportunities to continue to scale current book of business and so you know finding ways in which we can move.
Move things into a more automated fashion, whether it's you know, it's bringing in medical records and being more efficient with medical records for our reviews, taking some of some some of the audits that we currently have today that are complex based audits that require human reviews and movie knows more to an automated review.
Building out some of our data mining capability et cetera. So you know these are some of the areas that we're investing both in workflows and and technology to drive greater efficiencies as as the business scales.
Got it that makes sense and just lastly, so the current outlook implies 25 to 28 million of healthcare Avenue Q4, I believe.
Which is.
Lot of grilled over the record Q4 of last year, and so with us already halfway through queue for it sounds like things must be really accelerating spike well it sounds like a bit of a difficult backdrop. So I'm just wondering what what is driving this pick up into your end or were you starting to see some flow through from the 10th programs launched Q4 of last year and or.
Some of the ones in Q1 of this year.
Yes, that's largely what we're seeing here is real get mentioned in terms of giving you some color with with what these programs drive. It really is just the ramping of new opportunities. So as I said scaling existing clients and what these with clients that we've had for some time that the.
Rams are just continuing to scale or were getting broader adoption into different markets and some of the new opportunities that we've talked about kind of that implementation cycle. It takes some months to actually get these clients Onboarded scale up the program. So it's really just seeing both existing and new opportunities largely ramping.
That's right and <unk> to bolster on I think another important note is within existing uhm implementing offerings. If you will an expansion on the lives themselves or just the volume growth and you know, we we would not consider an implementation. So we do see gross from that channel or Avenue, as well, which would not be cap.
And sort of our announcements of implementations.
Great. Thank you.
Thank you as a reminder, if you do have a question. Please press star one on your phone now.
And our next question comes from George sudden.
Your line is open.
Thank you you mentioned two things I wanted to go into a little more detail on that certain clients slowed their collection cadence and then a number of insurance are lagging. Your claims can you can you give us a little bit more of a picture of how significant those drivers were and what.
Kind of time frame, you would anticipate that to normalize if if sure expected to normalize.
Yep happy to do so so the first it's important to note that both our our claims and eligibility base keep your eyes remain healthy and unchanged.
And why are we anticipated there was there was a possibility of certain aspects of our workflow could be impacted by.
By by the rising cases of the Delta variant, we were unsure in terms of how how significant and as I stated in my prepared remarks, no I'm on the claim side George to your point ultimately what happens is our some of our hair clients really have to kind of balance there.
Their need for savings and and also providing a bit of leeway to the providers that or if they're providing care out there and so you know again all of our keep your eyes, we have great visibility into the Cape you eyes. Once we actually drive those findings, but we are very dependent exclusively dependent in many cases for the payers to actually.
Do the recovery initiate through offsets or other means and so we saw more of that in two three and then we anticipated we worked very very close with our with our payer clients to get some some idea in terms of timing and of course correction Uhm I I do think we're gonna see this extend a little bit.
Into into queue for early Q1, but I I think we should expect some course correction post to one.
And hopefully get back to you know pre Coca based recovery cycles and the same applies on the on the eligibility side of the business and so you know we issue demands for other responsible parties and some of those are automated.
And many of them are are manual and so there is a workflow that has a a human review components and so you know as I stated in my prepared remarks, I think the industry as a whole has done a nice job adjusting to being able to support our demands with a remote workforce or a hybrid work force.
And they saw some some pretty much progress again, frankly expect to see more progress here in two three then we did we've had a few of the key folks out there still lagging a bit when we'd hope that those cycles would comprise and so I don't think any at all dissimilar from what I, what I mentioned on the on the clean side I think the.
Is gonna have a bit of a cascading effect into in the queue for early Q1, and hopeful you know sometimes post Q1 will see that get back to the the pre COVID-19 recovery cycles.
So you mentioned in your production K P is give you evidence of future growth can you just give us a little more of a picture of what what you are seeing that may not be obvious to us not seeing those K P. I S.
Yeah. So you know so.
For us as Lisa points out there's a number of factors at the end of the day. It's ultimately what we have available to US we all we drive the findings for our clients on the claim side based on auditing X number of planes based on dollar values of claims et cetera, and so you know for us here.
An audit targets et cetera are things that we we watch watching product performance. So important to make sure that you know as I mentioned <unk>, we have the right staff the number of resources to scale up to address that we also is Lisa indicated with some of the core utilization being.
Depressed you know that certainly has a factor in terms of claim availability and actual dollar amounts of acquaintances and so in terms of what we what we look for it's it's ultimately.
The claim looking at the velocity of claims that we can we can work through available claims and then understand product performance based on savings that we're driving to clients.
Gotcha you. Finally for me you mentioned you are currently in implementation with 18 different clients can you talk about that.
And I think you also mentioned you don't believe.
That your competitors have anything close to that can you just discuss marketshare dynamics as you see them today.
Yeah.
We've we've mentioned this before the the market has consolidated the payment integrity market is consolidated dramatically.
And so you know you've left at 10 to 12 players that were pretty material players in the space is consolidated largely to put two of our competitors. Those competitors are are currently working through you know the the kind of consolidation of the of the various organizations and so.
You know for for US to you know presented some some opportunities for us as just as the industry that tends to like competition payers like competition. So we've gotten a number of new opportunities in the state sales pipeline I think they've demonstrated here through the some version of implementations and that you know.
The the payers are are looking to.
To you know get a more competitive approach if you will to the number of vendors that that that are currently working in their portfolios and so for US. We've just seen a pretty material uptick here in our sales pipeline. That's again, we're pulling through as he demonstrated in our 212 and three number of implementation.
<unk> here and I think a big part of that he has to do certainly with with our performance, but but to your point I think the market dynamics are certainly given us a little bit of tailwinds on that as well.
Gotcha, Okay. Thank you.
And we have no further questions in queue at this time.
Thank you operator.
I would like to thank you.
A <unk>.
We think our clients for allowing us to serve them.
We want to thank our shareholders for their continued support in our team members for bringing their very best to performing every day again, we appreciate your time and your attention. Thank you.
This concludes today's conference call. Thank you for attending.
The host has ended this call good.