Q2 2019 Earnings Call

Thank you David and good afternoon, everyone. By now you should have received a copy of the earnings release for the company's second quarter 2019 results. If you have not a copy is available on the Investor relations portion of our website.

Today's call will be led by <unk> <unk> Chief Executive Officer.

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 Companys filings with the FTC.

Actual results may differ materially from those described during the call. 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 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 let's turn the call over to be Sam Lisa.

Thank you rich good afternoon, everyone and thank you for joining us for our earnings call. If you haven't already please find the financial supplement on our website that walks through our 2019 second quarter financial results in more detail form.

Our business is built on the core foundation of analytics innovation compliance audit and recovery.

Over the past several years, we spent a lot of time during our earnings call discussing our focus on cost containment and investing a strong competitive differentiators.

Specifically, we have been focused on our technology with the objective of creating capability that exceed currently available market services.

We have also invested in best in class talent, focusing on the correct mix of people to execute our longer term growth strategy.

The result of our ongoing investment is that our platform performance insight is proving to be a highly disruptive health care technology. So much. So that we are actively taking a meaningful market share for more established players across the health care market.

As discussed on previous calls during 2018 or 2019, we have been implementing master service agreements with multiple large national payers and have made significant penetration into the blues network.

Health care revenue was beginning to evidence the strong growth opportunity that we are projecting it to 2020 and 2021.

As we continue to execute on our existing contract and expand to serve clients across a wider spectrum. We believe the true depth and potential of our platform will be recognized this is driving contract wins and growth in the health care peer market, we expect that our strong double digit growth will continue well into the mid and long term future of the company.

Additionally, our recovery and customer care market pressure continues to be solid with strong contribution to the overall business.

The second quarter of 2019, we reported total revenue of nearly 36 million, which was in line with our internal projection and up over 14% versus the prior year period.

Adjusted EBITDA in the second quarter was a loss of approximately 3 million compared to a profit of just over 119000 in the prior year period.

Overall health care revenues in the second quarter of 2019 exceeded 9 million, which was 52% higher than it was in the prior year period.

Federal health care quite revenues in the second quarter were approximately 5 million compared to approximately 3.5 million in the prior year period, an increase of nearly 40% year over year commercial healthcare revenues accounted for over 4.4 million in second quarter of 2019 compared to just 2.6 million in the prior year period.

But first half of 2019 health care revenues of 18.3 million are up 90% over the prior year period, excluding the one time, yeah. That's reason they contract Closeouts in Q1 of 2018.

Total growth is coming from both federal and commercial health care clients.

Last quarter, we also mentioned a plan to expand our CMS recovery audit contract recurring one and we can fight audits during 2019 and that plant is still underway. We continue to make great strides with our health care business and believe that our solution, which combines analytical technology with competitively better services, it's causing significant disruption in the market, providing us the opportunity to take share away from well established legacy company.

Total recovery revenue in Q2, which includes our student lending track IRS and Treasury markets as well as Premier was just over 22 million, which was approximately 8% higher than the second quarter of last year.

Year to date recovery revenue of 43.5 million is up 1.1 million or 2.6% versus last year period.

Lastly, our customer care and outsourced services revenues of nearly 4.5 million were down 6.1 million versus last year. However year to date revenue of 8.9 million is up 424000 or 5% versus prior year period.

Q2 expenses of 40.1 million were 5.4 million higher than the prior year period, increasing costs were mostly due to head count growth and expenses related to premiere.

As we have stated in previous calls the investments in our business are expected to drive additional revenue if you're 2019 2020 and beyond with most of that growth attributable to health care contract growth and its limitations during 2018 and 2019.

Overall, our results demonstrate our continued success in transforming from a company that just a few years ago was heavily dependent on the student lending industry to one today that has diversified its offerings and serves clients across a broad spectrum of industries, including health care agencies state and federal taxing authorities other federal agencies and commercial clients.

Finally, we are reiterating our 2019 revenue and EBITDA guidance of 158 million to 168 million and a loss of 2 million to 6 million respectively.

We continue our work and focus on growing the company to a technology differentiation to drive results that exceed client expectations and competitive offerings. This progress would not be possible without the hard work and dedication of our talented team as we continue marching towards our targeted long term 2021 goal of 200 million in revenue with margins in excess of 20%.

We anticipate most of this growth actually come from our health care business.

With that I'd like to open up the call for questions.

Thank you at this time, we will be conducting a question and answer session. If you like to ask a question. Please press star one on your telephone keypad, a confirmation so indicate along as in the question queue.

You mean for start to feel lets remove your question from a Q for participants using speaker equipment. It may be necessary to pick up your handset before person Starkey.

Our first question comes the line of Brian Hogan with William Blair. Please proceed with your question.

Good afternoon.

Hi, Brian .

Oh My first question is actually on the the cost basis.

Obviously your expenses as you ramp up for proceed your revenues.

Nature of the business. So just curious as you have all your stuff in place of all your people your technology already or are you still need to ramp some more.

And so we should eventually.

I mean, she revenues crossover there I'm sure.

We actually see our expenses at a fairly steady rate as you go into the third quarter, there's a little bit of an uptick but again largely because there's one large health care contract that we are ramping up starting in third quarter. So we don't expect to see that revenue necessarily hit this year until sort of late this year, but it's really going to be 2020, it's a fairly large contracts. It does look like there will be a little bit of an uptick, but I think as we get into sort of third quarter, we're going to see a stabilization of our investment and go forward expenses.

All right that's helpful and then on the revenues.

Proceed.

The catch up them from Arizona.

Yes, that's correct.

Alright, and shifting over to the federal rack and MSP contracts it was down quarter over quarter.

Oh I guess.

What are the drivers are being down obviously, it's up year over year, and then as a follow up to that.

And discussions with CMS to with some of the caps.

Right.

Yeah, so on the M.S.P.O., sometimes you'll see a little bit of delay depending on what we've actually got build out. So as you know the the broad swath of payers in both group health plans not group health plan.

Receiving information from us with respect to what they owe Medicare. So occasionally we'll have a little bit of lumpiness, but we do expect that to be a continuing upward trend as we go into the third quarter and beyond and with respect to the CMS recovery audit contract. We are actually executing against the increasing the number of wells and CMS is working with us on that as well. So as we go forward, we actually see the span of the contract and our ability to to audit providers to actually increase as we go into the back of the third quarter and into the fourth quarter, we see that program expanding and we see I see them as being very hopeful in that effort. So we will we have to sort of primary areas in which we're probably our commercial health care. One is obviously complex thought. It then and also automated audits. We use we're very depended on our proprietary analytical platform to drive way to add value to payers in the market. So as you know the health care market.

It is.

Plenty of of vendors, who provide audit capacity, what we're trying to do and again what were successful at doing is utilizing our analytics platform in order to drive incremental value for not doing the same thing everyone else is doing with finding ways that the health care the health care provider or the payer is able to find additional errors that are over and above what others are finding for them and then in the in the coordination of benefits or third party liability market. Its not just analytical platform, but we have a really we have an exceptional I would say up customer outreach and service.

Organization that we built in order to make the process platform provides a service that exceeds what the returns have been in the market to date. So that's you know and these are large contract for us. So when we say were implementing were implementing dozens of programs under one particular payer. So it does take some time to get that up and running but we're very pleased with where we are so far we think our clients are excited about what value, we're bringing to their program.

All right. Thanks, and then moving on to the <unk> the student loans HM placements, obviously, they can be very lumpy by quarter.

Or I guess what are your what is your outlook for.

The month or the.

Placements going forward.

What's kind of a nice range to expect.

And then.

Obviously, it's mostly with GE is today.

How long does the D.A. Munley last and obviously the federal government took over those two.

I mean im.

Who knows where it's going.

I'm going to go in the future but.

He's talking much runway with the new years.

Yeah, I think you know depending on on you know who you talk to in the in the former.

Stop market and the guarantee agencies I think folks are thinking there's probably seven plus years of servicing still left in that felt funnel as we've mentioned before you know we're partnered with some of the larger clients. So that as we see that market consolidating and keeping in mind that there are still 24 guarantee agencies, who are actively engaged in managing the remainder of their portfolios. We do believe that our market share and will continue to be consistent. We also work as a subcontractor to some of the small businesses under the direct loan program or the capacity of the small contractors requires that they try to partner with some of the larger organizations. So we're pretty excited about that work its a way for us to participate in the direct loan program as well. So we see continued opportunity for stability as a potential growth in that student loan market, but on the other side were also grow.

Early in the commercial market and in our tax markets as well as our work for the for the IRS continues to increase so I think the program. If you read all the publications continues to be a very successful program for the government.

Where do you I mean, obviously you have a covenant waivers I believe through early next year, but can you just talk about your comfort level with the balance sheet.

Sure.

We have we have a couple of relief through second quarter of 2020, and as we look at the at what the covenants are based on where we currently are projecting we actually feel pretty confident that we will be a good win the covenant as you see from the loan if its a the term is.

And August 2021, and I believe there are two one year extension that we can.

Also.

We can also you know extending the term by those two one year extensions. So you know from a balance sheet standpoint, I think as we get into 2020, we feel really good about where our business is going to be we know we're going to see the the revenue and earnings and the cash come from the work that we've done this year and last year. We knew these were a investment years and that we were in the process of transforming the company. We fully expect that as you get into the back part of this year and that's your 2020, we're going to see some really good results and the fruits of our labor. So we do expect our business to continue to grow and as we look again at sort of Q2 look 2020, and the covenants coming back into play we are at this point confident that we'll be fine.

Yes, So you know what when we look at our our health care business today, and we understand obviously, what the contract cycles are so year, one year two year, three and we see year three of some of the contracts already in place.

As we move toward year, two and going into year three of some of these contracts. We have it we have a pretty good understanding of the workforce of the.

The volume that the total addressable market, we have our client volumes that were working with and then we also have technology improvements that we continue to make during our health care in our healthcare practice. So we actually feel pretty confident that we can achieve those margins I would say you know if there were something that that impacted those margin targets. Overall would just be continued investments. So if we for example, we've got a few more very large contracts for which we would have to put more heavy investments in place then we might see that change.

From a 20% plus to something a bit less but but again, if we're implementing large contracts. We would expect to see some pretty strong revenue growth as we move into 2022 and that margin. We should actually continue to see as we move forward in the business. So the the.

Again large contracts require heavier investment and so that could certainly impact where we are but outside of that we are pretty confident that that are that our technology and work process is achieving what our targets are.

Alright.

Thanks for your time today.

Thank you Ryan.

Ladies and gentlemen that seems to be no further questions I want to turn the floor back over to management for any closing remarks.

Thank you operator.

I want to thank you for joining us for our call today I also want to thank all of our dedicated employees, who bring their very best to performance.

I want to thank our clients for letting us serve you in the past quarter. Once again, we appreciate your business. We appreciate your dedication and thank you again for joining us.

This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.