Q2 2023 Performant Financial Corporation Earnings Call
Good morning, ladies and gentlemen, and welcome to the performance Financial Corp second quarter.
Earnings Conference call.
At this time all lines are any sand on them all.
Following the presentation, we will conduct a question and answer session.
If at any time during these calls Uruguay, Amit assistance. Please press star zero for the operator.
This call is being recorded on Tuesday August eight 2023.
I would now like to turn the conference over to Elliot.
<unk> Investor Relations representative.
Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us today.
Our press release was issued earlier this afternoon outlining the companys results for the second quarter of 2023 and can be found on the Investor Relations section of the company's website performance CT Dot com.
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.
They are fundamentals remained strong and set us up well for the second half of the year. Let me provide some additional context, we often refer to our government contracts as the pillars of our business.
These programs serve as Mark key initiatives, placing performance in a unique position of national leadership in health care program integrity, while also providing healthy revenue opportunities.
So this continues to hold true these contracts are subject to the dynamics of the broader CMS ecosystem, which at times are beyond our direct control.
And the CMS MSP program, we continue to operate the Premier National Center for identification and recovery of MSP payments from payer entities and our Q1 call. We reported having witnessed a decline in workable inventory stemming from section 111 reporting, but we also noted that demand volume had begun returning to.
Expected levels at the end of the quarter, while the decline from Q1 was still working its way through the demand lifecycle. During Q2, we are now seeing inventories in recoveries returned to historic levels.
Our rack CMS programs also had lower volumes due to the extended public health emergency which restricted inventories.
With the exploration of the public health emergency on May 11th we are seeing claims volume return return to our inventory and expect to be operating at pre phe levels. Later this year. Additionally.
Additionally, our newly awarded region to contract recently commenced operation and we anticipate being able to provide more detail on this program by the end of this year.
In terms of our commercial business, both eligibility and claims revenue enjoyed strong double digit year over year growth rates in the first half of 'twenty. Three I am also excited to report that our efforts to compress the implementation cycle continue to bear fruit as we implemented 11 additional commercial programs in Q2, bringing our <unk>.
Thousand 23, total to 22 implementations, which surpasses the total number of implementations we completed in all of 2022.
We believe this implementation cadence leads the market.
But more important is the value that these implementations represent.
We anticipate that these 22 programs will deliver an estimated $11 million in annualized revenues at steady state. These.
These commercial implementations along with the healthy pipeline of additional implementation slated for later half of this year provides clear visibility towards accelerated revenue growth.
We've discussed this previously brought our proprietary analytic technology remains a key driver of our differentiated results employing machine learning to deliver consistent high quality findings for our clients as our business continues to grow we are continuously investing in further product innovation to drive greater client value and to <unk>.
<unk> efficiencies the development of artificial intelligence AI is one such innovation, serving as a natural extension of our significant experience with machine learning. We are excited by the early results, we're seeing from integrating AI with our own analytic platform.
Current pilots have already shown promising opportunities for greater efficiencies, which should lead to increased margins without sacrificing our commitment to quality, which is central to maintaining performance brand.
As an aside given performance significant CMS rack footprint and a strong upward trajectory of our commercial business I want to emphasize that performance is optimally positioned to benefit from the expansion of the Medicare market, particularly through our Medicare advantage offerings. According to a recent publication by the <unk>.
Pfizer family Foundation total federal spending on Medicare is forecasted to grow 80% by 2032 Cups.
Coupled that with a 43% projected increase in Medicare advantage enrollment rates by 2030, and we are confident that performance as neatly situated to take full advantage of this shifting Medicare landscape in the years to come.
In closing our sales pipeline remains robust our cadence of new implementations to continues to underscore our ability to win and execute on opportunities in this large and growing industry and as our government programs leave the phe behind and are dozens of newly implemented commercial programs mature I am confident that.
Performance is well positioned for continued success with that I'll hand, it over to Rohit <unk>, our chief financial officer for a discussion of the financials Rohit.
Thanks, Tim.
<unk> shared we remain energized about the strategic traction in key wins, we continue to achieve.
While we did see some sluggishness in our government accounts. This is not reflected the fundamentals of those programs.
Anticipating these levels should bounce back and given the demonstrated success of our commercial accounts, we remain assured of our overall vision and progress toward achieving our long term goals.
With that let's dive into the quarter's results.
Total company revenues in the quarter were $25 5 million, which included health care market revenues of $23 9 million.
Our customer care outsourced services business accounted for $1 5 million in revenues for the quarter.
As a reminder, we anticipated our customer care revenues to decline sequentially until the restart of the federal student loan programs that being said this quarter's results reflected a steeper decline than both we and our client had anticipated.
On a positive note.
The programs are expected to restart in the latter half of this year.
With that we anticipate that our immune possibility of growth within customer care that will likely remain at the sub $2 million mark for each quarter for the remainder of 2023.
Though the margin impacts are quite muted in comparison to what our health care market revenues drive this near term expectation could have a modest impact to EBITDA call it roughly half a million dollars.
We believe we will have a much clear picture as to the future of our customer care market revenues as we closed the year.
Revenue from eligibility services for the second quarter were $14 1 million.
Representing an increase of roughly 14% year over year.
Our efforts to diversify our commercial eligibility offerings and implementations have continued to bear fruit as the commercial eligibility growth has significantly outpaced that of our mature eligibility offering with CMS.
As a reminder, we were re awarded this key government contract as the Medicare secondary payment commercial repayment center for a period of up to six years. This last December which is a key part of our government anchor strategy.
This coupled with the rapid expansion of our commercial programs currently provides us with confidence in our bright future for eligibility market offerings and results.
Revenue from our claims based or claims auditing business was $9 8 million for the second quarter.
This represents 5% growth year over year.
Similar to what we saw within our eligibility market revenues are claims based commercial programs showed much stronger growth than our government programs, which had continued impacts from deflated phe related volumes SM detailed earlier.
We may see this impact continue through the third quarter that we anticipate returning to higher volume operational levels later this year.
This in combination with the ramp up of <unk> and contributions from the HHS LNG contract should drive notable growth within government programs as we look to 2024.
While the first half results were a bit shy of expectation, we maintain visibility to achieving our healthcare annual revenue guidance of $105 million to $110 million.
We are excited about our strong growth rates and growth potential and our ability to deliver quarterly records for health care market revenues this year.
Furthermore, I'd like to highlight the continued run rate value additions from our ongoing implementations.
As Tim mentioned, the 'twenty two implementations from the first half of 2023 alone should be worth over an estimated $11 million in annualized revenues at steady state.
Overall, we have a lot of exciting revenue focused operational efforts underway.
The continued ramp of prior year commercial implementations alongside those newly announced the calendar of implementations ahead of US the growth from rack region to the HHS LNG contract and a return to normalcy of existing government programs. These all provide a solid foundation for continued growth into 2002.
Four and beyond.
At this stage of the year. We are also comfortable in providing annual guidance for the customer care market revenues of $6 $75 million to $8 million for FY 2023.
This combines with health care markets for total revenue guidance of $111 $75 million to $118 million for 2023.
Operating expenses in the second quarter were $29 $1 million, which is roughly flat in comparison to Q2 of last year.
We have seen year over year growth in salaries and benefits as our investments into our health care market growth, primarily take the form of head count increases.
As we look to future quarters, we expect our salaries and benefits expense line to continue growing alongside healthcare revenue growth.
With regard to our other operating expenses one of the biggest drivers of the year over year decrease has been our initiative to manage our physical footprint as we continue to adapt to working in a remote world and manage our expenses.
Our EBITDA for the quarter was negative $1 3 million, which was slightly below expectations, given the slowdown impacts from our healthcare and commercial customer care market revenues.
Estimate that gross margin remains around 40%. This is in line with what we have previously shared and we continue to see room for expansion.
We remain well capitalized to tackle our organic growth initiatives with roughly $15 million in unrestricted cash in addition to a strong base of current assets we.
We do have our eye on flexibility for all avenues of growth and will continue to take steps to ensure we maintain flexibility and available capital should the right opportunities present themselves.
As you'll note from Sims commentary and what we are seeing financially within our growing health care operation. We are very excited to continue delivering growth enhancing our product offerings broadening our market footprint and expanding our EBITDA margins.
All of this is well within our reach as we continued executing against our contracted offerings and is further bolstered by our growing sales pipeline and business development initiatives.
Operator would you please open up the lines for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star one.
You want to withdraw your question. Please press star two.
Questions will be booked in the order they are received.
Using a speaker phone please lift the handset before pressing any keys.
One moment. Please for your first question.
Your first question comes from George Sutton from Craig Hallum. Please go ahead.
Thank you.
Tim I wondered if you'd walk through these 22 implementations and talk about it in a broader sense competitively why are you winning this amount of business what is unique about what youre doing versus what's happening more broadly in the macro.
Yeah. Thanks, George look I think it's a combination of a few factors and we've talked about this before I think the first is I think payers generally appreciate our vast relationship with CMS and how that provides just such great visibility into the national landscape of claims and emerging trends.
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The second is our technology and you heard that in my prepared remarks, our technology and its ability its ability to consistently produce.
High quality findings and as we talk to payers.
Often discussed how high quality and low provider abrasion as the number one priority for most program integrity initiatives and then finally.
It's our ability to add value regardless of the size of the payer so whether it's a national plan of 10 plus million covered lives or a small plan with under 100000, we can adapt our offerings to drive meaningful value regardless of the number of covered lives and so.
We've talked about it before with kind of these bespoke solutions and being able to leverage that national landscape and drive value to two in under 100000 member plan.
And so I think the momentum that we have in the industry and some of these payers are recognizing the unique capabilities that performance has amongst its competition.
Relative to that adapting your platform can you talk about where things stand on your middle market effort in terms of pipeline and.
With respect to the SaaS offering.
Yes, so look I'll take the latter one first we continue to as we talked about innovation I mentioned AI we've.
We've talked about previously how we think that a self service state of mining option is going to be very valuable we're hearing more and more feedback from payers.
Payers in the industry that are looking for that type of a solution we continue to invest in that.
Building out that capability working through actually a pilot.
Informing some of the investments that we're making on that front George I don't have a specific date yet in terms of our launch timing, but it is and continues to be our number one priority for us.
And we will continue and are in terms of focusing on the mid market as you heard the announcement, we had a while back with priority health that continues to.
I'll go quite well and helped us with regards to thinking about tailoring that type of an offering to other similar payors.
So we're seeing more and more opportunity for our sales teams to share the success of those types of opportunities and it's driving.
Our broader pipeline opportunity for us in the small and the mid tier.
Okay. Finally for me you mentioned compression to the implementation cycle and things Youre doing to compress that can you just talk about what you've been able to accomplish there what does that mean in terms of numbers like the timing of an implementation.
Yes, so look right when we talk about 'twenty two implementations in the first half of the year 'twenty. One all last year, we said coming out of Q4 that one of the things that we're focused on internally is just just driving greater efficiencies. We've got a good pipeline of both sales opportunities and already.
To implementation signed contracts and so for us getting those products launched getting those opportunities launched as soon as we possibly can aligns well with our client objectives and so as we think about making efficiency gains. It really is about how do we adapt our workflows, how do we drive greater efficiencies and all the things.
We do internally with client data client Onboarding, how do we get our account management teams educating payers for some of their internal initiatives that they need to tackle on their end and then we're making some investments in technology, just pure block and tackle technology that allows us to do things more quickly and so.
All of those things have come together nicely and I think underscore our ability to deliver 22, new implementations in the first half of the year and we expect that cadence to continue.
Perfect. Thanks, guys.
Thank you.
Thank you.
Your next question comes from Jake of Steven from Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions.
Congrats on the nice implementation progress here.
When we think about kind of the 500000 annually per commercial implementation.
Is that a good way to think about the 'twenty implementations you completed in 2022 or is that different.
Hi, Jacob.
Yes, that's not a terrible way to think about it I think.
As we have shared historically given implementation can range on the hundreds of thousands on the low end to a few million dollars on the high end.
And so I can't tell you that it's exactly the same average, but its probably pretty close for the 'twenty one implementations from 2022.
Okay and.
So the $11 million annualized.
Can you just help us think about how that kind of lays out over the model.
Sure.
The implementations you completed earlier this year.
Maybe just kind of the revenue breakdown, how do we see that progress quarterly.
Yes, I think.
At its core rate, but what it does is I think hope to serve for more proof points against our growth expectations and our guidance now and what we will be guiding in 2024.
In terms of how they layer and it will depend on the type of implementations.
We've discussed.
If it's a net new logo.
The ramp up may take a little longer versus an existing client and then for claims based.
Opportunities, it's probably somewhere in the year, two or three mark that you've reached a steady state.
Whereas on the eligibility side, it's probably more like a year, one and a half to two.
Where youre seeing it reset a state point. So do you think about it given the quarter's implementations that ramp up will reach steady state kind of a waterfall it won't all be at once.
Got it thank.
Thank you.
Okay.
Thank you.
There are no further questions at this time.
I'll turn the call over to Simon Coles, Mr. Carl You May proceed.
Thank you and thanks to everyone for attending today's call. We always appreciate your continued interest in performance and we look forward to speaking with you again at our third quarter earnings call in November . Thanks, So much.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines. Thank you.