Q4 2021 Performant Financial Corp Earnings Call
[music].
Greetings and welcome to your pro forma financial Corp, fourth quarter 2021 earnings call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Richard Xu back Investor Relations. Thank you you may begin.
Thank you operator.
Good afternoon, everyone by now you Should've received a copy of the earnings release for the company's fourth quarter and full year 2021 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, President and Robert Armstrong, Danni, Senior Vice President of Finance and strategy.
Before we begin I'd like to remind you that some of the comments made on today's call, including our financial guidance are forward looking statements.
These statements are subject to risks and uncertainties, including those described in the company's filings with the SEC.
So our results may differ materially from those described during the call and.
In addition, all forward looking statements are made as of today and the company does not undertake to update any forward looking statements based on new circumstances or revised expectations.
Also all non-GAAP financial disclosures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.
I'd 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.
This past year was transformational for us.
And we are pleased with where we landed today.
Performance is almost exclusively a health care company after effectively.
Timothy and recovery market.
In addition, we completed a public offering of common stock we financed our debt structure and are now well positioned with multiple new and energized to shareholders.
We accomplished this alongside continuing to provide top tier service to our clients.
Adding new logos and expanding our already established a statement of work.
We are excited for our growth and the path ahead and will provide a deeper discussion of the health care operational results in Q4.
For the year in a few moment, however, before I hand, it over to him I want to take a moment to acknowledge all of the hard work and effort that was put in by our team in 2021.
Your tireless efforts and contribution has allowed us to be positioned as they are today.
We worked hard throughout 2021, instead of felt foundational lead to be a health care pure play organization.
And while we continue to work through the Covid challenges, we are executing against that plan.
Thank you for everything that you've given to our company.
Yeah.
In addition, I want to thank our clients for allowing us to be their partner.
Their continued support and recognition of our platform and its capabilities.
2022 officially marks a new era for performance and we are looking forward to capitalizing on our market condition and growing the company.
Lastly, I wanted to officially announce the Indian coal is being promoted to president of performance.
Over the past 10 years than has worked tirelessly to build and mature our health care business.
A motion to president is a natural progression in our transformation to a health care pure play company and a direct reflection of his successful leadership and execution of our growth strategy.
It gives me great pleasure to introduce them to discuss the fourth quarter and other initiatives in our health care business in greater detail.
Tim.
Thanks, Lisa and good afternoon, everyone I too could not be more proud of our team members and their unmatched commitment to serving our clients.
Absolute honor to lead such a talented and passionate team.
The fourth quarter is typically our seasonally strongest in 'twenty 'twenty. One was no exception as most payers looked to reconcile their books ahead of yours that.
Our results in the fourth quarter punctuated a strong end to an expansive but somewhat tumultuous cheer as the nation's health care system address the impacts of the Delta in omicron variant waves.
For the fourth quarter compared to the same period last year healthcare revenue grew over 35%.
And again, while we fully acknowledge that Q4 is impacted by seasonality. It was a record quarter for the company, marking two strong quarters in a row for the full year health care revenues grew more than 13% and we maintained a positive adjusted EBITDA amongst the transition and continued growth and investment.
Given the challenging operating environment and persistent lower core health care utilization rates. We are pleased with these results.
For context, we consider utilization to be services rendered and either inpatient or outpatient health care setting with hospitalizations being among the largest spend core utilization are all services that are non COVID-19 based as most clients still prohibit us from audit and Covid related claims based.
The lag between the date of service and the time, we receive the claim for audit, we do anticipate that the lower core utilization rates associated with the omicron surge in the latter part of Q4 and early Q1 of this year will continue to impact results at least through the first half of 2022 however.
However, we do have early indications from several clients and efforts are underway to ease the COVID-19 based audit restrictions and we are currently seeing a rebound in core utilization.
We remain committed to achieve our long term goal of revenues in excess of $500 million.
With EBITDA margins in the high Twenty's and our current cadence of identifying new opportunities and new customer implementations remains robust and according to plan.
As part of our transition to a pure play health care company, we are maturing a number of internal construct and aligning our resources to best support our clients and foster a culture of accountability.
Within claims our focus isn't identifying findings and increasing the total savings that we drive for our clients. We actively track the number of medical records that we request the number of audits. We conduct are finding rate of those audits.
And the average amount of improper payment per claim. These are all measures of growing scale within the claims business.
Once we submit an audit finding it becomes the responsibility of our payer clients to seek to recover those dollars from providers. The recruitment of overpayments is often accomplished through a mechanism that we refer to as an onset.
So essentially when a provider submits a new claim they have a preexisting debt to the payer the payer will offset as part of the claim payment, enabling us to collect our feet.
While the continued waves of Covid variant strain the health care system throughout 2021 several hospitals and health care facilities to their credit.
Maintaining services for more elective care, but many of those same facilities lobbies payers to reduce the number of new audits and or the delay the offsets of improper payments, we experienced regionally focused payers acknowledge these please and grant providers additional latitude ultimately that did depress order potential and delayed.
Our ability to recognize revenue on previous claim findings.
The workflow to get these claims submitted through the appeals process and ultimately monetize is the line of sight that supports our expectation of growth and we believe our kpis remained on track and consistent with our goals.
For eligibility offerings, we don't have a findings workflow as we do with our claims business since we submit demands directly to insurers. This line of business is driven by the value of reclamation billing or debt recovery inventory that we submit on behalf of our clients.
Even though this business is more automated we experienced delay here is what we experienced delays here as well.
Some insurers lagged in their pace to adapt to a hybrid workforce of on site and remote employees and have yet to fully adjust as we've said before we can't exactly predict one insurers will completely adapt but we do have significant growth expectations going forward.
Before I hand things over to Rohit for him to review the financials I would like to briefly discuss our recent contract win with H H S. O N E.
There are over 30 awkward for this full and open competition and is the sole awardee for this national audit and consulting service engagement, we believe that our extensive knowledge of Medicare and Medicaid policies combined with our broad clinical expertise provides a solid foundation for performance to work in partnership with the O N E.
Worth noting that this is a fixed fee award and a 7.75 million published value as the <unk> estimate.
We are excited about this opportunity is partnering with the O N E underscores our commitment to serving our government health care client.
And our national leadership and policy expertise in delivering meaningful claim audits.
Historically, we've operated on a contingency based model. So this 60 award provides greater predictability and advances our goal to further diversify our offerings. Additionally, we believe this is a tremendous indicator of how our technology and national experience plays a differentiated role and where we can deploy our resources.
Beyond the traditional contingency fee model.
We think about operationalize this opportunity we expect first revenues in Q3 of this year.
We continue to win opportunities with commercial health care players, while also expanding our portfolio of work within our existing clients and these successes span our diversified products such as provider recovery T. P. L reclamation clinical audit and data mining.
And to put this all into context, we are still a relatively small an exceptionally nimble company competing against considerably more entrenched competitors and we feel that we are winning our challenge will be to implement things in a timely manner. So we can see a steady state revenue sooner than later.
With that I'll hand, it over to Rohit Rammstein, Dani, our senior Vice President of finance and strategy for a discussion of the financials right.
Yeah.
Thanks, Tim.
The fourth quarter of 2021 was a strong period for performance. We reported total revenues of $31 6 million, which included health care revenues of $25 6 million, yet again March in our largest quarter for health care revenue generation following up on a strong Q3 of 2021.
As we've discussed before we typically see some seasonality driving up the fourth quarter results, but as Susan mentioned, we are excited to reflect that compared to the fourth quarter of last year healthcare revenues were up over 35%.
Adjusted EBITDA in the fourth quarter was $5 million compared to the $5 2 million in the prior year period. This EBITDA is reflective of our efforts in balancing a reduction in operating expenses, while still consistently investing to our health care operations to continue scaling sustain expected growth.
For the full year, we reported total revenues of $124 1 million, including health care market revenues of 77, and a half million dollars adjusted EBITDA for the full year. It was $11 9 million.
Within the health care markets claims based also known as claims auditing revenues in the fourth quarter of 2021 were $9 $5 million, which was an increase of over 100 per cent compared to the $4 7 million in the fourth quarter of 2020 and sequentially higher than the $7.3 million, we reported in the third quarter of 2021.
We currently expect to see a strong growth trend for the claims based revenues into 2022, as we continue to execute on our sales and implementation pipelines.
We are also optimistic that we will see a meaningful to off the COVID-19 impacts in FY 2022 that we still anticipate some headwinds in the earlier parts of the year for some commentary.
Revenue from our eligibility services within health care markets for the fourth quarter of 2021 were $16 $1 million, an increase from the $14 $1 million in the fourth quarter of 2020 and sequentially higher than the $12 7 million, we recorded in the third quarter of 2021.
<unk> of our CMS eligibility work being close to mature state. We also anticipate healthy eligibility growth into 2022, driven by the continued ramp of commercial relationships and implementations.
Overall coming off of its implementation as announced in the prior quarter, we kicked off another five in the fourth quarter of 2021 and continue to maintain strong visibility to implementations throughout FY 2022.
As we mentioned last quarter, each individual implementation can vary and expectation from around $100000 on the lower end to a few million on the higher end Inc.
The implementations from the fourth quarter follow a similar expectation on average to those announced from previous quarters.
Total non health care and recovery revenue in the fourth quarter of 2021 was $2 $3 million down from the $17 5 million that we recorded in the fourth quarter of last year and the expected decline from the $5 5 million reported in the third quarter of this year.
As we've stated previously we do not expect to report recovery based revenues in 2022, though would note there can be some de minimis spillover revenue since the first quarter.
Our total customer care outsourced services revenues were $3 $7 million for the quarter, which was flat when compared to the fourth quarter of last year and up sequentially consistent with our expectations.
As a reminder, the primary current services within our customer care markets continue to be impacted by the federal student loan forbearance set to expire April 30 of this year. It is worth noting that this state has been repeatedly pushed back by the federal government. Most recently from January 30th 2022 to the current April expiry.
Moving onto expenses.
Operating expenses in the fourth quarter were $28 7 million or seven 6 million lower compared to the fourth quarter of last year, primarily driven by decreases in operating expenses related to the activity within our recovery markets.
Offset by transitional expenses restructuring charges and continued investment into our health care market. Specifically, the addition of human capital.
During the quarter, we also significantly overhauled our balance sheet and enter into a new credit agreement with them you have cheap Union bank that provided the company with up to $35 million in debt financing through a combination of a $20 million term loan and a $50 million revolving credit facility that remains undrawn we.
We used a combination of cash available balance sheet, and the new $20 million term loan to fully repay our previous credit agreement with E. C. M C.
Our new commercial banking relationship with them you have to Union Bank provides further stability to our balance sheet, while enhancing our ability to drive investments into our ever growing health care operations.
Compared to the previous facility, we estimated that this new agreement can yield over $8 million in relative cash savings in 2022 alone.
<unk> are expected to be achieved through a combination of lower required principal payments and a lower interest rate margin, which is tiered based on the company's consolidated leverage ratio.
We are excited for the flexibility that this new partnership will provide us chasing more organic growth opportunities.
Looking forward, we anticipate our operating expenses to start increasing on a quarterly basis associated with the continued growth of health Care's expenses now outpacing the offsets from lower expenses related to recovery markets. We do anticipate these to be lower on a year over year basis for the first half of the year and then show growth on a year over year basis in the back half of the year.
Leading into consistent growth in FY 2023.
Interestingly in the current fiscal year, we do expect a decline in our total expenses, primarily driven by lower interest and severance costs offsetting increases in depreciation and amortization.
From a cash standpoint, we anticipate the year to reflect a modest use of cash as we continue to invest in implementations and the scale of the business. We currently range from 4 million to $8 million, but note that subject to change based on opportunities that arise in our operational performance during the year.
This will still leave us with flexibility between cash on the balance sheet and revolver availability to pursue additional product development and or larger organic opportunities that may present themselves.
And we are excited at what we believe continues to be a tremendous opportunity for us to gain market share and continue to grow along our current short and long term strategies.
We do anticipate to see a lagging effect on our available volumes from the Cowen related hospitalizations spikes. This past winter some concentrated in regions that we do disproportionately Sir but as mentioned we are encouraged by the recent increases in core utilization rates seen across the country. As we continue to execute on a strong trajectory of implementations converting out of our sales.
Pipeline and other growth opportunities with consideration for the timing of this coming fall. We are introducing initial guidance of health care revenues of $90 million to $94 million for FY 2022.
We anticipate that we'll have an initial pullback from Q4 health care revenue peaks consistent with expectation and the trends of the prior year, followed by strong growth into the back half of 2022.
Definitely we anticipate that our customer care revenues will be flat to slightly down consistent with our expectation from last year. This could change depending on the exploration of the current federal forbearance is something we will be monitoring closely.
Do you expect in trending of health care revenues in combination with our continued investment into new contract ramps drives an expectation of negative EBITDA results in the first half of 2022 with stronger margins in Q3 and Q4.
As a reflection of our ability to continue tackling available opportunities to drive growth as well as the natural progression of programs that we have been ramping up throughout 2021.
As a result for the full year 2022, we currently anticipate an adjusted EBITDA of between two and $4 million.
As a reminder, when a cohort of new implementations in both claims based on eligibility based health care market revenues.
Steady state, they're contributing incremental gross margins well north of our long term goal of EBITDA margins in the mid twenties.
Ultimately we are extremely excited to execute on the currently known and potentially unknown opportunities ahead of us this year and make it yet another great year for performance, our customers constituents and employees.
Operator would you please open up the line for questions.
Yeah.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Kyle Bowser with Colliers. Please proceed with your question.
Hi, Good evening. Thank you for taking my questions and really nice results today, maybe I'll start with Ben and the health care growth strategy first of all congratulations on the well deserved promotion.
The guidance implies growth of nearly 20% so to the extent you can share would love to understand kind of the breakout of growth drivers.
You know, how how might we think about the contribution to growth from various buckets.
Kat new account adds or growth within existing accounts, new product offerings et cetera.
Yeah, Thanks, and thank you Paul.
So look for.
For Us I think as we think about the growth.
And as Rohit, you talked about the implementations of a good amount of our growth in 'twenty two is really based on.
Our current accounts that we have so expanding growing scale and some of our already established accounts.
So as we've been building out some of these implementations that we've been announcing quarter over quarter. We're starting to now see those implementations really start to contribute so ones that we've started the year or so ago, where we're getting a 'twenty. One they are starting to scale up quite a bit. So I think it's a healthy combination.
Of current book of business, where we have clients that are maturing and we're seeing greater scale. We do have some new logos that are beginning to will contribute.
Towards the back half of the year in terms of new opportunities and as I look at our kind of buckets.
Our services are.
I think it continues to be a good healthy mix between our eligibility and are in their claims based business.
Got it and I appreciate that and then given the seasonality in Q4 that we typically see in the comments around investments and debt.
New customer contracts are getting online this year, how should we think about opex cadence rohit I think to be clear you said that opex should step up sequentially each quarter, but be lower than.
And then 2021 annual levels is that right.
Yeah. So that's right it should step up sequentially on a quarterly basis, and then when looking at Q1 and Q2 or the first half it should be.
Lower on a year over year basis, but when looking at Q3 Q4 that actually should be.
Maybe a little greater on a year over year basis.
Got it Okay got it and then.
One last if I may in any sense as to when we'll be able to begin auditing COVID-19 claims and would it be fair to assume that the percentage of claims that are inaccurate within this bucket will likely be higher than the average.
Yeah, I think to your to your first part you know as I said in my prepared remarks, we are starting to see really across the portfolio of clients.
A it needs in terms of the restrictions on Covid based claims.
We see some of them are moving a little quicker than others, but I think it's fair to say across the board that I would expect towards the middle back half of the year, we will be able to to audit those claims.
In terms of how we might look at those claims in context of error rate.
I think its little bit too early to tell.
It's really going to be what type of diagnoses that we can focus on comorbidities theres a few things that I'm sure. We're still going to have some restrictions on in terms of what we actually look at.
But I think it's fair to say that we certainly would expect that they would they would have the consistent error rates that we see in other claims and across the portfolio.
Got it okay that makes sense well congrats again on the results and thanks for taking my questions.
Thanks Scott.
Our next question comes from the line of George Sutton with Craig Hallum. Please proceed with your question.
Thank you send my congrats as well so.
First on the Covid piece and I was thrilled that you threw that in your prepared comments that we were starting to see an ease of those restrictions would we be going back effectively to early 2020 with with some of the data is that or in other words, what we'd be able to look at the entire timeframe.
Yes.
So it depends.
George in terms of the space that we're in look back periods vary depending on the line of business, whether it's Medicare Cade or commercial.
But.
I do think that we will absolutely be able to go back to 2020 at a minimum.
So rohit in your prepared comments, you mentioned theres, a tremendous opportunity to continue to gain share.
<unk>, which is obviously a core thesis that we've had I wondered if you could just give us an updated thought process on your market share opportunity relative to the market you see today.
Certainly and I think at a core level.
We believe that our offer.
And sort of our goal to tackle 20% of the addressable market remains unchanged, which does translate to that long term goal of 500.
Plus in revenues.
So we believe that's still very much exists in front of us and that's still what we're changing and then I think regarding kind of the near term.
As I mentioned on the LNG and some of the other things we're seeing competitively.
<unk> been encouraged.
How we can continue to win business from kind of an ever shrinking number of sizable competitors.
No.
We'll continue to watch what happens in terms of some of that consolidation.
We're out there and particularly as we've expanded our sales team in the past year to 18 months, we're really starting to see some fruition the sales pipeline.
And in the middle and lower market strategies in the past as well.
Just a couple of things that are going on in the industry in terms of major players that had been talking about initiatives Humana has been talking about outsourcing more anthem has been criticized for their days payable claims outstanding growing and those with both seem to be areas that.
You could be helpful. With can you just talk about some of those broader opportunities that we don't normally discuss.
Yeah, you know look we we continue to have conversations with some of those same payers that you just mentioned George with regards to where performance capabilities can and support them.
Look I think and demand is a great example in terms of the no the focus now in Medicare advantage and.
And their core business right. So if you if you look at what they need to do to make sure. They are staying focused on the core business I think that does offer opportunities for companies like performance, where we can provide some flex for them. So even in the program integrity. We see some of these larger players they have a pretty big.
You know a sizable team internally that manages some of the program integrity as first pass.
And I think you know companies like performance demonstrating that we can drive equivalent if not better results for some competitive pricing and allow them to really focus on their core initiatives and so.
To your point, we're seeing it in NPI and in some other areas of analytics, where again as rohit points out the capabilities that performance has in terms of our policy expertise our clinical expertise and then a pretty powerful technology.
You know it it is it is leverage bowl and we can deploy that just outside of the traditional program integrity space.
So.
We're excited about exploring and looking at different product initiatives in terms of Hollywood how to apply the technology more broadly I think to the root of your question. Yes. We do also see that as an opportunity as payers really have to focus on core competency, how we can pick up some of the slack.
Got you.
Appreciate it thanks guys.
Okay.
There are no further questions I'd like to hand, the call back to management for closing remarks.
Thank you operator.
Thank you for joining us for our earnings call today and again, we're very excited about the growth that we have in front of us and vary.
We are pleased to to have stand at my side at the President's outperform and I think as we go through this year, we're going to continue to expand our business more aggressively and continue to invest so that we can have even more exciting growth as we move forward again they'd want to thank our employees for all that you do and all that you bring.
The performance and again, thank our shareholders for their continued support and our clients for letting us be their partners. Thank you again for joining us today.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.