Performant Financial Corporation (NASDAQ:PFMT) Q4 2022 Earnings Call Transcript March 14, 2023
Operator: Greetings, and welcome to the Performant Financial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Zubek, Vice President, Investor Relations. Thank you, Richard. You may begin. Richard, your line may be on mute.
Richard Zubek: Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for our company’s fourth quarter and full year 2022 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 Kohl, President; and Rohit Ramchandani, 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. Our 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 all non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in table attached to our press release. Lastly, please mark June 20th on your calendars as we will be hosting our inaugural Investor Day event. More details will follow as our event approaches. I would now like to turn the call over to Lisa Im. Lisa?
Lisa Im: Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. I’m proud of the efforts that this entire team gives us each and every day as we continue to pursue and grow our Healthcare business in ways that many Thank you for your dedication and hard work. With our first year of operating primarily as a Healthcare company behind us, this is a prime opportunity for us to reflect on our successes and areas of opportunity as we continue to grow and take share in the payment integrity base. With that, let me turn things over to Simeon and have him walk you through our results of the fourth quarter as well as for the 2022 year. Sim?
Simeon Kohl: Thanks, Lisa, and good afternoon, everyone. 2022 is a remarkable year as Performant achieved numerous strategic milestones. Within the government space, we were awarded a highly coveted contract in the Department of Health and Human Services Office of the Inspector General, provide claim audit and consultant services via a full and open procurement and Performant was the sole awardee for this national engagement. Our proprietary technology, extensive knowledge of payment policies and vast clinical expertise have allowed us to forge this multiyear partnership with the OIG, and I am pleased to share that this program is operational and expected to contribute to our 2023 revenue targets. In addition to the HHS OIG award, we further expanded our long-standing relationship with CMS with the award of the RAC Region 2 contract.
This 14-state region builds upon our expansive recovery audit relationship with CMS as the existing contractor for Region 1 and the existing national contractor for Region 5. It should also be noted that the RAC Region 2 award was twice confirmed following a protest from the incumbent contractor that was ultimately ruled in our favor. I’m pleased to announce that the most recent protest was withdrawn and contract activities have commenced. Staying with the government focus and within our eligibility business, we were re-awarded the national CMS Medicare Secondary Payer Commercial Center contract via a highly competitive federal RFQ process that included multiple bidders. This contract has a term for up to six years, and though we are the incumbent vendor, there are a number of contract transition activities to be addressed during relationship with CMS.
It’s important to note that CMS administers approximately 1/3 of the 4.3 important anchor client and a key proof point in our discussions with commercial health plans. For example, our experience is CMS’ national audit contractor for durable medical equipment, home health and hospice reviews was significant in Performant becoming a market leader for similar audits in the commercial payer space. Our national perspectives and independently attested quality provide commercial payers unique comfort in entrusting Performant with these sensitive audits. Our tenure in RAC Region 1 offers commercial payers similar confidence. Our strong provider relationships and demonstrated audit success have resulted in contracted engagements with nearly 1/3 of the commercial payers within those states in Region 1, and we are in active discussions with many others.
![Work, Office, Business](https://imonkey-blog.imgix.net/blog/wp-content/uploads/2022/12/30190622/jose-vazquez-Q5RBHz9cu1A-unsplash-1.jpg?auto=fortmat&fit=clip&expires=1756080000&width=480&height=320)
Photo by Jose Vazquez on Unsplash
As the newly awarded audit contractor for RAC Region 2, we are hopeful for the same alignment with the 40 unique payers within the 14-state region, and we have seen some early interest as payers seek a knowledgeable and trusted partner. 2022 was also a breakthrough year for our work in the commercial payer market. We announced the first of its kind strategic engagement with Priority Health, where we are providing a bespoke end-to-end solution that is tailored for priorities payment integrity needs. We share Priority Health mission to make health care more affordable, and this engagement reflects our commitment to deliver innovative solutions for payers where a multi-vendor our one-size-fits-all approach may not be the most effective strategy.
Our thesis of a quicker path to wallet share is evidenced by our operationalized initial with Priority Health, and we believe this model will provide similar value to other payers. Finding a vendor who can be entrusted with sensitive data and expertly managed key provider relations is not easy and sourcing and managing multiple such vendors can be quite a distraction for small and mid-market health plans. Judging for market interest, this element of our thesis seems to be gaining traction. Additionally, we announced the unique strategic partnership with CAQH. CAQH is an industry alliance of nearly 1,000 plans, 2 million providers and other health care stakeholders working to solve health care challenges and improved payment integrity and coordination of benefit programs for health plans.
Through our strategic partnership with CAQH, we will be able to better support health plans with their coordination of benefit initiatives, provide comprehensive data services and serve as an extension of own operations team to help drive savings that would otherwise be lost. We are excited about this partnership and we believe that it will produce fruitful results for both Performant and the CAQH alliance. In fact, we have already implemented our first health plan into COB Smart, which has delivered ROI positive results. Overall, during 2022, we have completed 20 commercial implementations, and we anticipate that cadence to continue into 2023. We believe our sales pipeline is strong, and we believe our ongoing growth investments toward long-term revenue goals are well supported by our forecast of existing and new implementations.
This past June, we introduced our new trade name, Performant Healthcare Solutions, amending our decision to place our full attention and focus on health care revenue growth and leaving no doubt direction. Today, considering our accomplishments in both the government and commercial space, we believe that we are better positioned than ever to achieve our long-term revenue and market share targets, growing into a multi-hundred million dollar revenue business. We do have our notes on market conservatism, particularly amongst MCOs along with the decision to extend the public health emergency until May 11, 2023, and has caused some delays in implementing and expanded expanding contracted programs. These, alongside the transition to a new CMS MSP contract could have a direct impact on 2023 revenue growth.
Accordingly, we are forecasting 2023 revenues to be in the range of $105 million to $110 million, and we will continue to invest in our growth initiatives and remain laser-focused on driving internal efficiencies and to bolster our margin expansion objectives. We operate in a dynamic and complex market. Health care spending represents nearly 20% of the U.S. economy and is expected to grow to nearly $7 trillion within the current decade. Coupled with a system that has ever-increasing complexity, the industry offers tremendous opportunities for companies that are willing to embrace the competitive edge. Performant has weathered the myriad of challenges related to COVID, successfully navigated the strategic divestiture of our legacy recovery business, won or rewon every strategic government contract that we pursued this past year, continued to show year-over-year commercial revenue growth and implemented several disruptive initiatives.
We are on track toward our long-term market share goals and remain committed to achieving strong EBITDA margins as we further scale the business. With that, I’ll hand it over to Rohit Ramchandani, our Senior Vice President of Finance and Strategy for a discussion of the financials. Rohit?
Rohit Ramchandani: Thanks, Sim. Our results in the fourth quarter reflect our successful efforts of continuing to grow our health care market operations, and we remain pleased and excited with the trajectory that we are on. Total company revenues in the quarter were $29.2 million, which included record quarterly health care revenues of $26 million, increases on both a year-over-year and sequential basis. Our customer care outsourced services revenues were $3.1 million for the quarter, a decline from last quarter, but in line with our expectations for this business. Our expectations for the future of this customer care market will be guided by the expected restart process of the federal student loan programs. During the fourth quarter, we also reported $76,000 in non-health care recovery revenue.
And overall, for 2022, we had $241,000 of such revenues. Our adjusted EBITDA in the fourth quarter was $2.3 million, stronger than we had originally anticipated, in part due to lower-than-expected spend related to the CMS RAC Region 2 contract award. For our first year as a health care-driven company, we had overall revenues of $109.2 million, including health care-specific revenues of $94.7 million, an increase of 22% compared to the 2021 health care revenues. We also achieved adjusted EBITDA of $944,000 engagements and work with commercial health plans. The results of our commercial growth strategies and continued implementation is proving out well. We had $58 million in government-related health care revenues for the year and $37 million in commercial payer health care revenue.
The commercial payer revenues represent 66% year-over-year growth. Overall, we are quite pleased with these results, which were also squarely in line with our prescribed annual guidance ranges of $92 million to $96 million for health care revenues and negative $1 million to $1 million for EBITDA. Within health care, claims based, also known as claims auditing revenues in the fourth quarter of 2022 were roughly $12.5 million, which was an increase of nearly 32% compared to the $9.5 million in the fourth quarter of 2021. This represents strong growth from both implementations we’ve been sharing as well as continued growth from existing statements of work. For the full year, claims based revenues totaled $41.4 million, or an increase of over 42% compared to those of 2021.
Revenue from our liability services for the fourth quarter of 2022 were $13.5 million or a decrease of just under $16. We had a year-over-year decline in relation to our government eligibility work as we had some large volumes of year-end recruitments in late 2021. As Sim mentioned, we were re-awarded the CMS MSP CRC contract for up to six years and the new contract vehicles should take over in early 2023. As a reminder, last quarter, we also called out a fairly sizable eligibility implementation that was delayed, which we anticipated would delay our expected revenue ramp as well. Despite this implementation delay, we are still seeing strong progress in our commercial eligibility growth and diversification efforts, which we anticipate to continue.
For the full year, we reported eligibility revenues of $53.3 million or an increase of more than 10% as compared to 2021. Operating expenses in the fourth quarter were $29 million, which is $0.3 million higher compared to Q4 of last year. This was driven by increased salaries every year from our ongoing investment into headcount for growth. Full year operating expenses for 2022 were $116.1 million, and inclusive of ongoing expense related to recovery market activities of $3 million. Looking ahead to 2023, we expect claims space revenues to continue seeing a strong growth trajectory. And for eligibility based revenue to continue on similar trends as commercial revenues continue to grow alongside our mature CMS eligibility contract. These expectations are based on the execution of our sales and implementation pipeline over the past 18-plus months.
As Sim mentioned, we also have visibility into our implementation cadence continuing and we are excited that our contract activities for RAC Region 2 have commenced after a lengthy protest process across 2022. I would also like to mention that in light of the current macro environment and in response to our current growth initiatives, we have been working with our existing lenders to amend certain terms of our credit agreement, the details of which will be included in our Form 10-K to be filed later this week. For 2023, as Sim mentioned, we anticipate health care revenues to be in the range of $105 million to $110 million. Separately, we anticipate that our customer revenues will decline quarter-over-quarter. And as I mentioned earlier, our precise expectations for these market revenues will be tied to the restart process of payments on student loans.
In terms of EBITDA, we anticipate full year 2023 adjusted EBITDA to be in the range of $2 million to $5 million, which reflects our ongoing investment initiatives and an improvement of our operational efficiencies. This is specifically inclusive of expected operational investment spend of $10 million to $14 million. That will largely support revenue growth into 2024 and beyond, drive program implementations and overall scale and efficiencies. We are excited to continue growing the business, but also have our eye on the goal of achieving EBITDA margins in the 20s. Aside from operational improvements as we continue to scale, we anticipate seeing a natural expansion of these margins. This is supported by management’s estimated gross margins of our various markets in the 40s as it stands today with room for expansion.
We are encouraged at the prospects of some of the key initiatives Sim mentioned, notably the work on lessening the time it takes to operationalize new implementations, which a positive long-term impact on the time frame contracts to revenues. Ultimately, we believe 2023 should be another strong year of execution and wins for Performant. And as we continue on the path toward our long-term goals, we remain excited to deliver results for all our constituents. With that, operator, would you please open up the line for questions.
See also 14 Best Falling Stocks To Buy Now and 12 Best US Chemical Stocks To Buy Now.
Q&A Session
Follow Performant Financial Corp (NASDAQ:PFMT)
Follow Performant Financial Corp (NASDAQ:PFMT)
Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from George Sutton with Craig-Hallum. Please proceed with your question.
George Sutton: First, congratulations on the finalization of RAC Region 2. Our work suggests that there’s a start date for that contract of March 24, I just wanted to confirm that. And can you just lay out how you are rolled out over ’23?
Simeon Kohl: George, yes. So, we are starting — we did start activities commenced, as I said in my prepared remarks. And so, we now will be engaging with CMS quite regularly on all of the activities that I’ve shared previously with regards to operationalizing these programs. And so, there’s a decent amount of work that we have in place in terms of setting up the various systems, getting the data inputs over to us, remapping some of the concepts. I think most specifically the big lift is what we refer to as provider outreach. And so, Performant — our win theme has historically been our quality scores with providers. And so, we spend a lot of time making sure that we appropriately communicate with those providers, make sure they’re aware of the ramp that CMS is expecting, et cetera.
So, I think we’re going to be heads down with those initiatives for the next few months minimally. And then, I think we’ll see some time, I’d say, late Q3, early Q4, we might be in a position to start moving towards actually starting our audits for the program. So, a good amount of time on these types of contracts just to make sure that we get everything right and get all of our systems aligned and our coordination with the various providers in place.
George Sutton: You mentioned there were, if I heard you correctly, 40 unique payers in the RAC Region 2. Could you talk about what you mean by that in terms of further opportunities that you might see?
Simeon Kohl: Yes, of course. And so look, as we’ve said all along, CMS really is the pillar — we call it our pillar strategy. CMS offers so much guidance to these various programs. They control an enormous amount of that $4 trillion spend when you think about them in terms of the Medicare Advantage plans, the fee-for-service plans, their contribution, 50% level of state and Medicaid MCO. And so, as we think about our alignment with CMS in terms of our various offerings, we have our eligibility offering, which aligns to our MSP program with CMS. We have our RAC audit, which aligns to our commercial audit pursuits. And so for us, our sales teams use that as a key determinant, as a key differentiator, when we go out and talk to the commercial plans, we share all that we’ve made in terms of our investments to support these national plans with the programs with CMS.
And that really resonates. It really resonates they clearly are in partnership with CMS, where they’re running an MCO or a Medicare Advantage plan. So having the benefit of a contractor that is really in lockstep with CMS around integrity is something that’s super important. And then if you think about it from a jurisdiction from a regional standpoint, there’s a lot of dynamics with particular providers and suppliers within the various regions. And so, as we’ve showcased and demonstrated, evidenced in our Region 1 and how that’s translated to a good number of commercial plans in that same region, we’re super excited for the opportunity for the sales folks to start conversations with those 40-plus plans that are aligned in that same jurisdiction for Region 2 jurisdiction.
George Sutton: Finally, if I just understand in your press release, you talked about a pipeline that supports a similar cadence for 2023 versus 2022. I believe you were referring to the — on the call, you said ’20; in the release, you said ’21 implementations. Is that what you’re referring to? Could you just give us a little more picture there?