Performant Financial Corp

NASDAQ:PFMT

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Performant Financial's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, August 7, 2024.

I would now like to turn the conference over to Jon Bozzuto, Head of Investor Relations. Please go ahead.

[Jon Bozzuto, executive]

Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's second quarter 2024 results. If you have not, a copy is available on the Investor Relations portion of our website. On today's call will be Simeon Kohl, Chief Executive Officer; and Rohit Ramchandani, Chief Financial Officer.

Before we begin, I'd like to remind you that some of the comments made today, 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. 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 like to turn the call over to Simeon Kohl. Sim?

[Simeon Kohl, executive]

Thank you, Jon. Good afternoon, everyone, and thank you for joining us for our earnings call. This afternoon, we reported second quarter results, highlighted by 17% growth in health care revenues compared to the second quarter of 2023, and positive EBITDA of $0.5 million. I will share our operational accomplishments, followed by Rohit, who will walk you through our financial results.

In the second quarter, our double-digit year-over-year revenue growth and positive EBITDA demonstrate our effectiveness in penetrating the significant market opportunity that lies before us as well as our disciplined approach to driving profitability. Our strategy to deliver these results has remained unchanged: prioritized client needs, continuously innovate and achieve operational excellence. I'll touch on each of these as we highlight our second quarter results.

Demand for our services remains strong as we continue to effectively demonstrate our value proposition to both current and prospective clients. This past quarter, we implemented 10 statements of work, including adding 2 new clients to our roster. And year-to-date, we have implemented 20 new statements of work, which we estimate will collectively generate approximately $9 million in annualized revenue at steady state.

And despite the significant client bandwidth required for implementations, it is encouraging to see our clients continue to switch from their legacy partners and choose Performant, a testament to our ability to deliver timely and meaningful returns on their trust and investment.

Our business started with a single CMS RAC engagement, and government contracts remain an important backbone of our operations today. We have built credibility through our strong relationship with CMS, and we are optimistic about growing our business with the federal government as we continue to ramp RAC Region 2.

This election year, however, presents potential uncertainty for our industry. We are seeing several agencies take a more conservative approach with oversight programs. So we anticipate this more measured approach will be limited to the current election cycle. Having navigated multiple prior elections, we are confident that both the state and federal government's commitment to payment accuracy and transparency will likely remain unchanged, no matter the election outcome.

Staying on the government theme, we continue to see an opportunity in the $300 million to $500 million state market. We have been active with state RFPs and continue to refine our strategy as we wait for the first contract award for both our recovery audit and third-party liability solutions.

Change is constant within health care, and our clients face numerous challenges, including adjustments and reimbursements and evolving risk pools due to Medicaid redeterminations. One challenge we would highlight is the Change Healthcare outage, which has had a meaningful impact on claims processing, adjudication and care delivery. The Change Healthcare outage has fortunately only had a minor impact on Performant to date.

From an implementations and new sales standpoint, we are seeing slower decision-making by clients as they adjust their near-term priorities. While we have seen isolated delays, the strength of our services continues to drive positive results for our clients, and we do not expect the Change Healthcare incident to impact our long-term growth strategy.

We initially anticipated the operational impact of the Change Healthcare outage to be temporary delays in receiving claims, likely resulting in quick restoration with no loss in opportunity for Performant. And the results we have seen to date on our existing operations continues to support that assessment. We will continue to monitor for downstream impacts to our operations, but again, to date, we have seen minimal operational disruption.

On the topic of data security, I'd underscore our dedication to safeguarding the data entrusted to us through our robust multitiered security strategy. This includes encryption, role-based access controls, anomaly detection and comprehensive vulnerability and vendor management. We undergo regular internal and external audits and penetration tests to ensure compliance with industry standard data protection requirements and best practices.

And Performant's rigorous security standards are validated by certifications, including HITRUST, SOC and SOX, along with annual CMS control audits. While there will always be challenges for our clients to contend with, I firmly believe that our value proposition remains consistent as we help our clients more accurately pay claims, yielding greater predictability and allowing them to focus on what matters most: ensuring the delivery of high-quality, cost-effective patient care.

Turning to our operational efforts. In the second quarter, we achieved positive EBITDA of $0.5 million, $1.8 million ahead of the prior year's quarter. To achieve this, we have prioritized productivity and efficiency to drive profitability. Rohit has often shared that while our primary path to profitability is through increased revenues, we do have opportunities to drive greater efficiency, particularly in our claims-based business.

The acquisition of RecordsOne technology earlier this year, which has folded in nicely to Project Turing will be one of the major components in achieving these margin gains. As a reminder, this artificial intelligence-based solution integrates into our audit workflow, improving the accuracy and efficiency of our medical auditors.

The integration plan for this technology has been progressing according to plan, and we are pleased to be doing so alongside key team members from RecordsOne who have joined Performant and remain active in the integration, adoption and development process. We remain highly encouraged by the prospects of this powerful AI technology.

As we continue our journey to becoming a best-in-class, pure-play health care company, I am thrilled that our shareholders have approved an employee stock purchase plan. This initiative is a significant step towards fostering a culture of ownership, which is one of our core corporate pillars. By encouraging an ownership mentality, we empower our employees to deliver the best results for our clients.

And there's palpable excitement when I speak to our team about the direction and growth of our company. This plan will enable a greater number of team members to share in that growth, aligning personal success with the company's accomplishments. I couldn't be prouder of this development, and I am confident that it will strengthen our commitment to excellence and accelerate our collective success.

Overall, I am encouraged by our second quarter results. We continue to deliver for our clients, which has led to more opportunities for future growth. Operationally, our technology investments to increase productivity and efficiency gains are paying tangible dividends. And finally, from a macro perspective, the need for payment integrity solutions to help control costs within our health care system remains as strong as ever.

With that, I'll hand it over to Rohit Ramchandani, our Chief Financial Officer, for a discussion of the financials. Rohit?

[Rohit Ramchandani, executive]

Thanks, Sim. Our results in the second quarter of 2024 have exceeded expectations, and we remain encouraged by our prospects for the remainder of the year. Total company revenues in the quarter were $29.4 million, which included health care revenues of $27.9 million.

Our customer care/outsourced services business accounted for $1.4 million of the revenue during the quarter, a decline of $0.1 million from the previous year. We are eagerly anticipating a resumption of numerous federal student loan programs, which would allow us to achieve our guided targets and the future growth expectations for this service line.

Our second quarter health care revenue grew 17% year-over-year as a result of successfully ramping prior year implementations. Our claims-based business, also known as claims auditing, led the way with revenues of almost $14 million in the quarter, representing an increase of roughly 40% year-over-year. Both our government and commercial clients contributed to this growth.

Within commercial, existing implementations scaled as expected, contributing to this strong top line growth, while the RAC Region 2 contract in the government sector continued to successfully scale. We anticipate continued growth with our commercial clients as well as continued scale of RAC Region 2, though we do recognize the more conservative approach that federal oversight programs have taken as the election draws near.

Looking forward, we continue to anticipate healthy growth with commercial clients, alongside a strong CMS foundation, state RAC or other federal RAC region wins would support meaningful growth in the government beyond the ebbs and flows of existing programs and the ramping of RAC Region 2.

Eligibility revenues for the quarter were $14.3 million, representing an increase of roughly 1% in comparison to last year. As we think about 2024, a reminder that the eligibility business includes our mature relationship with CMS MSP, now on our new CRC contract.

With our commercial eligibility clients and opportunities, we continue to refine and optimize our data assets, aiming to use our data more effectively. Additionally, we leverage advanced analytics and additional services to eliminate false positives from our workflow, further improving our operational efficiency. This approach not only streamlines our processes, but also ensures we deliver high-quality, accurate results to our clients.

We are setting ourselves up well for sustainable future growth. As Sim mentioned, we are now at year-to-date implementations worth approximately $9 million in annualized revenues at steady state. As we've often discussed, the value of these statements of work can fluctuate on a quarterly basis.

This quarter, we did welcome 2 net new clients, continuing to support our value thesis amongst middle market players. Our ongoing efforts to secure and execute these sticky contracts are a testament to our strong market position and commitment to growth. We remain confident in our anticipation that the total annualized revenues from new implementations in 2024 will match or exceed the $18 million in estimated annualized revenues from 2023 implementations.

Shifting to operating expenses. These represented $32.1 million in the second quarter, or roughly $3 million higher when compared to the second quarter of last year. This was primarily driven by an increased spend to scale implementations, IT investments related to Project Turing and investments in sales and business development, all of which we discussed earlier this year.

We are encouraged by the early results of Project Turing as we see positive scale and incremental margin growth and adding roughly $4 million of revenues year-over-year, while only adding $3 million of operating expense. We have strategically positioned our business to drive profitability and sustainable growth. We are pleased to report an adjusted EBITDA of $0.5 million in the second quarter or $1.8 million ahead of the prior year period.

Over the past several quarters, we have emphasized our commitment to efficiency and productivity initiatives, notably through Project Turing, which, as Sim noted, is progressing well. We have een focused on this operational efficiency without compromising our capacity for top line growth. This balance ensures that while we streamline processes and reduce costs, we continue to expand our market presence and seize new growth opportunities.

We are confident that these initiatives will not only sustain but accelerate our profitability trajectory. As we reflect on our strong first half performance, alongside taking the consideration in direct impacts of the Change Healthcare outage and this tumultuous election cycle, we are excited to reaffirm our guidance for revenues and profitability.

This confidence is bolstered by the success we are seeing in our commercial growth strategies and operations. To be clear, we are reiterating our guidance for 2024 health care revenues to be in the range of $117 million to $122 million, full company revenues to be between $124 million and $129 million and for the full year 2024 adjusted EBITDA to be in the range of $4 million to $5 million.

And looking at our balance sheet, as anticipated, we have marginally drawn down on our debt facility in support of our ongoing implementation ramps and a recent technology acquisition. We are pleased to see our credit relationship with Wells Fargo continuing to grow in a positive manner.

The investments we are making in our people, technology, sales and business development efforts are on track with what we communicated earlier this year. This measured approach is already showing progress as we push toward our 20%-plus adjusted EBITDA margin targets. From a scale perspective, we anticipate being able to achieve such margins if health care revenues reach $150 million to $160 million.

We maintain our goal of hitting our EBITDA inflection point in the near term and achieving self-sustaining cash flows at some point in the next year without sacrificing the ability to invest in future growth. I'm very pleased with the revenue growth and the profitability scale we have demonstrated, thus far, in the first half of the year, giving me confidence in the remainder of 2024.

Operator, would you please open up the lines for questions?

[Operator]

[Operator Instructions] Our first question is from George Sutton with Craig-Hallum Capital Group.

[George Sutton, analyst]

So I wondered if you could walk through the Medicaid opportunities more broadly that you're seeing now. You mentioned some activity there. Obviously, we know New York is coming up. So has there been any changes to the New York timing? I assume not. And I'm just curious about other opportunities outside of New York.

[Simeon Kohl, executive]

Yes. George, so specific to New York, to your point, that did get rebid, and we went ahead and submit our proposals. The time frame on that is -- it looks to be what they originally committed sometime early September for decisioning, with implementation early next year. So that looks to be on track.

We remain excited about that. Look, any time you go through a rebid, there's things that you have to step through, et cetera. But I think we were pretty confident on the first round for good reasons, and we continue to be cautiously optimistic on the rebid. And yes, we are actually seeing quite a bit of activity with other states.

And so our team is working very closely in responding. We have a few proposals out right now with other states. We're watching closely with additional states, et cetera. So as we've indicated on the last call, our team is really focused and making sure that we are closely watching new opportunities as well as kind of refining our proposals and our responses.

[George Sutton, analyst]

Great. I wondered if you could explain the conservative oversight that we might see relative to the election, just what's happened in past election cycles. And what exactly do you mean by the more conservative oversight?

[Simeon Kohl, executive]

Yes. So -- and look, we've seen this before, right? Any time there is an election period, especially when you're dealing with some of these oversight programs that the agencies are managing through. You have legislative constituents that are involved. You have folks that are being audited pushing back a little bit. You have policy determination. You have concepts that get reviewed, et cetera.

And so history has shown that when you get into those cycles, things tend to delay a little bit more. There's some more sensitivities. There's lots of eyes on things, if you will. And so as you move through that cycle, it gets a little bit more and more focused around some of those concerns and having the eyes on the agency.

And I think this particular cycle is just how unique it is, which, I don't think anyone will doubt that. I think it's disproportionately driving it. But as I said in the prepared remarks, and we've been through this, regardless of the administration change. We fully believe that whether it's CMS, HHS or any federal government agency, that the focus on payment accuracy and transparency is likely always to remain.

[George Sutton, analyst]

Got you. One other thing, I wondered if you could give us a broader update on Project Turing and, in particular, any impact you're starting to see from the RecordsOne integration?

[Simeon Kohl, executive]

Yes. I think as Rohit called out, we have a number of initiatives underway that are kind of grouped under the Project Turing, all driving all aspects of our business, right, trying to drive greater efficiencies. The RecordsOne AI piece, the team has done a fantastic job tightly integrating that into the overall architecture of Project Turing.

And so as we've talked about, it's not just simply 1 claims aspect. We're really excited about how this technology could be broadly applicable to our business. And so we're already seeing it's going to be a bit of an iterative process, right? There's not a big bang. It's complete on ex-dates, right? We are working through a process really trying to prioritize areas that we think we get the largest bang for our buck.

And I think Rohit noted that the claims business probably is the first one out of the gate. And we are already seeing some impact and some value props in terms of how we are selecting claims and how the technology is helping us just improve the process. But again, we're -- we have lots of areas of spend. And so we're prioritizing where we think we get the largest bang for the buck out of the gate.

[Operator]

Our next question is from Kyle Bauser with B. Riley Securities.

[Kyle Bauser, analyst]

Great. Thanks for the updates. So you implemented 21 commercial programs in 2022 and then 41 in '23 and 20 year-to-date. So really strong tailwind that should just get stronger over time, given the ramp to scale is about 12 to 24 months. Going forward, can we expect kind of quarter-over-quarter step-up in earnings leverage? I know there's seasonality, but perhaps the tailwinds are strong enough that we could potentially see a step up? And maybe a follow-up to that is, do you expect to kind of continue at this clip of 10-ish per quarter? Just kind of curious on how we should think about that, too.

[Rohit Ramchandani, executive]

Yes, Kyle, good questions. Happy to take those. So in terms of your first piece of the question, I think, yes, we do anticipate that leverage to start clipping up. It kind of aligns with what I was mentioning in the prepared remarks about getting close to an EBITDA inflection point at some point next year if the self-sustaining cash flows. What that means, right, is as we continue to sign up new implementations, the old existing ones have generated enough profitability to start paying for itself.

And so we do see that coming in the near-term horizon here with some of those older implementations. As we think about the go-forward implementations, we have been sort of reorienting due to the fact that they can range in size and scale of focusing more on the dollar impact of the estimated SUVs.

And so that's where, as I shared last year, our estimate was $18 million in annualized revenues added from implementations this year, with $9 million in the first half. We remain committed to meeting or beating that $18 million as we think about what we bring on this year and then into next year. So I can't tell you whether it's going to be $10 million a quarter. But as we do look at the year, we're committed to getting ahead of that $18 million number.

[Kyle Bauser, analyst]

Got it. I appreciate that. And maybe just following up there. Is capacity an issue? I mean it's a lot -- a really impressive number of new implementations over the past couple of years. Do you feel like you've got the ability to add head count and you've got the infrastructure to kind of support this clip?

[Rohit Ramchandani, executive]

Yes, we do. And I think you might be remembering, I know some previous years, hiring would come up from time to time, but we're not having any of those capacity issues in the current macro climate. And as we think about the implementation, I think we've already seen a lot of good work and the fact that we were able to hit that 40 plus, with a similar-sized team that was doing the 20s in the other areas you mentioned.

And so I think from that standpoint, we're seeing pretty good from a capacity point as well. Now if you were to say, go do 80, 90, 100 implementations a year, then I think that will require the completion of some of the pieces of Project Turing to be able to handle, but it's well underway.

[Kyle Bauser, analyst]

Okay. I appreciate that. Maybe just lastly, your goal of 20% EBITDA margin on, I guess, in the next few years. Will the commercial side of the business have an inherently higher profit margin on the government side? Just curious if you could talk about how these businesses differ from a margin perspective at scale.

[Rohit Ramchandani, executive]

Yes, great question. I think we generally view them similar. Now I think one typically would have expected that our government side would have a slightly lower margin. But I think, where that balances itself out is, the efficacy of how much of our work converts into a final dollar back in the door, if you will, and that's where the government tends to follow a stricter rules engine than some of the commercial plans. And so they tend to end up pretty balanced.

[Operator]

Our next question is from Jacob Stephan with Lake Street.

[Jacob Stephan, analyst]

Apologies if I double cover something here. But I just kind of wanted to get an update on Project Turing. Obviously, RecordsOne, it sounds like things are integrating nicely. You're kind of finding new things that may provide kind of synergies across the business. But I'm curious what -- is there any kind of additional things that you're finding that may -- you may not have expected originally? And any color there?

[Simeon Kohl, executive]

Jacob, not at this point, right? I mean I think we have a pretty good handle on how the technology can help us as we think about kind of our core offerings that we have today, as we've discussed, kind of driving efficiencies in various selections and then how the technology can help us decision, if you will. There's some interesting opportunities downstream, but I think it's too early in the game yet. And we're so focused at really trying to apply the technology, where we know there's some immediate benefit.

[Operator]

If there are no further questions from Jacob, we will conclude the question-and-answer session. I would like to hand the conference back over to Simeon for closing remarks.

[Simeon Kohl, executive]

Thanks, operator. Look, as we wrap our Q2 earnings call, I really want to extend my gratitude to our dedicated team, our customers, our shareholders for their unwavering support, and we're so proud of the accomplishments this quarter, and we remain super focused on driving growth, innovation and continued value to our stakeholders.

So thank you, again, everyone, for joining us, and we look forward to reconnecting in Q3.

[Operator]

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.