Performant Financial Corp

NASDAQ:PFMT

Earnings Call Analysis

Performant Financial Corp. Reports Solid Growth Amid Industry Challenges

Performant Financial's Q3 2024 results showcased a 6% growth in healthcare revenues year-over-year, totaling $30.3 million. Despite facing delays in sales cycles linked to the Change Healthcare breach, the company implemented 32 programs expected to yield $13-$14 million in annualized revenue. Anticipating Healthcare revenues between $117-$122 million for 2024 and adjusted EBITDA between $4-$5 million, Performant remains focused on expanding its market share. The recent win of the New York State recovery audit contract positions it for double-digit millions in revenue, further enhancing prospects in the burgeoning Medicaid market.

Strong Q3 Performance and Revenue Growth

In the third quarter of 2024, Performant Financial Corp. posted total revenues of $31.5 million, highlighting a 6% year-over-year growth in healthcare revenues. This positive trajectory has been supported by the company's mission to reduce payment waste and abuse in healthcare, marking a key accomplishment in their operational strategy.

Robust Implementation Strategy Fueling Future Revenue

The company demonstrated the effectiveness of its business model by implementing 32 programs year-to-date, which are expected to generate $13 million to $14 million in annualized revenue at steady state. This reflects a commitment to enhancing operational efficiencies and demonstrates significant traction with both existing and new clients.

Addressing Challenges and Delays

Despite some sales and implementation delays, primarily attributed to the Change Healthcare breach, management remains optimistic about overcoming these challenges. The narrative suggests that while decision-making is slower than expected, this delay is seen as temporary and should not negatively impact long-term relationships with clients.

Strategic Focus on Healthcare Payment Integrity

Performant's strategic shift to focus solely on healthcare payment integrity is expected to enhance profitability. This decision comes as nursing care services experienced volatility and fluctuating demand. By concentrating resources on this sector, the company aims to leverage its strong reputation in the payment integrity space.

Exciting New Contracts and Market Expansion

Performant has made significant inroads by securing the New York State recovery audit contract, which could generate double-digit millions in annual revenue. This contract, beginning in early 2025, is poised to position Performant strongly in the state Medicaid market, estimated to hold a $300 million to $500 million annual revenue opportunity.

Guidance Highlights for 2024

Looking ahead, Performant has reiterated its guidance for 2024, projecting healthcare revenues to fall within the range of $117 million to $122 million, with adjusted EBITDA expected between $4 million and $5 million. This guidance reveals a firm commitment to achieving operational targets even amid industry uncertainties.

Enhanced Technology and Innovation Initiatives

The integration of advanced technologies, including a data engine and natural language processing, is central to Performant's scaling and innovation strategy. These technological enhancements aim to improve the company's offerings and operational efficiencies, ensuring a competitive edge in the healthcare market.

Navigating Market Obstacles

Economic and political factors, particularly surrounding the ongoing election cycle and security concerns in the healthcare sector, have moderated some aspects of contracts and negotiations. Nonetheless, the conclusion of this election cycle is anticipated to ease these constraints, reinforcing Performant's strategic position.

Commitment to Long-Term Growth

The leadership expresses confidence in the company's future, emphasizing a dedication to innovation and operational excellence. The ongoing corporate transformation is designed to scale their capabilities, thereby supporting sustained long-term growth and value creation for stakeholders.

Concluding Thoughts

Overall, Performant Financial Corp. appears well-positioned to capitalize on market opportunities while overcoming short-term hurdles. The focus on healthcare payment integrity, combined with strategic technological investments and a robust pipeline of contracts, signals a bright future for the company in an evolving healthcare landscape.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Performant Financial Corp.'s Third Quarter 2024 earnings conference call. [Operator Instructions]. This call is being recorded on Wednesday, November 6, 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 third quarter 2024 results. If you have not, a copy is available on the Investor Relations portion of our website. Joining me on today's call are 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 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. 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, John. Good afternoon, everyone, and thank you for joining us for our earnings call. Earlier this afternoon, we reported third-quarter results, which were highlighted by 6% growth in healthcare revenues compared to the same quarter of 2023 and positive adjusted EBITDA of $2 million. Our team continues to deliver on our mission to reduce payment waste and abuse in the healthcare system. I'll begin by sharing our operational accomplishments, followed by Rohit, who will walk you through our financial results.



In the first 9 months of the year, we successfully capitalized on market opportunities, advanced our organizational transformation, and expanded our technology footprint, all while scaling a record number of new contracts. This has been achieved despite several challenges in the healthcare industry. As a disruptive player in the payment integrity space, our client-centric philosophy remains the primary catalyst to growing our market share.



In the third quarter, we implemented 12 statements of work, primarily with existing commercial clients who continue to purchase additional services from Performant. Year-to-date, we've implemented 32 programs that we currently expect to deliver between $13 million and $14 million of annualized revenue at steady state.



Our journey began with our first healthcare contract with CMS, which established our strong reputation in the industry. Since then, we've expanded to serve the majority of the largest commercial payers in the country, albeit still with a small wallet share. We've also carved out a solid foothold in the middle market payer space by staying laser-focused on meeting our clients where they are and partnering to expand their payment integrity efforts.



While the commercial market remains our largest growth opportunity, we've experienced some delays in our sales and implementation cycle. We believe these delays are largely due to slower decision-making resulting from the Change Healthcare breach earlier this year.



As we've discussed previously, this indirect impact has affected the market, but we remain confident that our strong compliance and security credentials demonstrated by our rigorous controls, which are regularly tested by CMS and our commercial partners, will continue to reinforce our commitment to safeguarding client interest and ultimately help to increase market share over the long term.



I am happy to report that our RAC Region 2 implementation, which began approximately a year ago, continues to scale well, helping to counter the election-related tamp-down in our overall RAC auditing business. We are excited that the end of the election cycle is upon us in the hope of moving past this distraction. Our other federal contracts are performing to expectation, rounding out a continued strong partnership with CMS and its parent organization, HHS.



Fortunately, our diversified base of clients has allowed us to achieve our year-to-date revenue targets despite the macro challenges. Looking ahead, we anticipate CMS will issue RFPs for RAC Regions 3, 4, and 5 by the end of the year.



As the current contractor for Region 5, we expect CMS to initiate the standard contract wind-down process, leading to a decline in work and revenues associated with this contract in early 2025, regardless of the RFP's outcome. RAC Regions 3 and 4, which encompass the Western and Southeast portion of the United States, present potential opportunities for Performant to expand our footprint with CMS, and we are carefully evaluating our options as the procurement nears.



Turning to the state Medicaid market. We've recently made inroads into this space, which we estimate to be a $300 million to $500 million annual revenue opportunity across both audit and TPL services.



In early September, we were excited to announce the tentative award of the New York State recovery audit contract. This award is significant for 3 key reasons. First, the award was made based on overall value with Performant's technical qualifications being the primary factor behind the award. Second, I'd like to highlight that this is the second time New York has awarded Performant the RAC opportunity following a protest from the incumbent after our initial award in 2023, which led to the RFP being reissued. This reinforces our ability to successfully navigate and withstand protests when replacing a long-standing incumbent both at the federal and state level.



Finally, New York boasts one of the largest and most sophisticated Medicaid programs in the country. Our entry into this market has been both strategic and deliberate with years spent expanding our product offerings, refining our methodologies, and positioning ourselves to effectively meet the needs of state Medicaid agencies.



Securing Performant's New York RAC award is a significant achievement and should resonate across the industry. We're excited about the anticipated contract start in early Q2 2025, which will provide us with the opportunity to demonstrate our capabilities in a state market eager for a fresh approach.



Staying on the state market, in Q3, we sponsored the NAMPI Conference, which gave us an opportunity to hear from many state Medicaid programs to better understand current gaps. For those unfamiliar, NAMPI stands for the National Association for Medicaid Program Integrity and includes representation from all 50 states.



Given that this market has primarily been served by a single program integrity vendor for decades, it was encouraging to receive direct feedback from state stakeholders on how Performant can differentiate itself in the marketplace.



Gaining market share and expanding our influence within the payment integrity industry was our primary goal when we transitioned to a pure-play healthcare company in 2021. We achieved this by recruiting influential leaders from payers, providers, vendors, and government organizations, each contributing their unique expertise to support our vision and reinforce our position in the payment integrity industry. Our growth and success since then speaks for themselves, and our team remains focused and committed to achieving even greater achievements in the years ahead.



As I look ahead, the next phase of our organizational transformation is centered around scale to innovate, one of our 4 core pillars alongside client centricity, ownership culture, and operational excellence.



Scale to innovate is a theme that is woven into the very fabric of our organization. Importantly, we now have company-wide initiatives that support this theme. Through our focus on scalable infrastructure and workflows, particularly as part of Project Turing, we are strategically positioning ourselves to drive greater innovation and value for our clients while also advancing our margin expansion goals.



Technology has always been central to scaling capabilities. We've developed a world-class data engine and recently integrated natural language processing technologies to enhance both our solutions and scalability. I'm pleased to announce that we have successfully incorporated the assets from our recent acquisition into our technology stack and are now optimizing it for our workflows with plans to deploy it across our broader client and product suite.



Our commitment to a data-driven approach remains unwavering, and this thoughtful integration is a key part of that strategy. Our goal is to equip our auditors with cutting-edge tools that efficiently address the payment, waste and abuse burdening our Healthcare system.



Finally, amid our ongoing business transformation and following our expansion into the state Medicaid market, we have made the strategic decision to reduce services within the customer care line of business. This decision is guided by 2 main considerations.



First, while we have successfully managed our customer care revenue to a positive margin contribution, this industry has experienced significant volatility due to regulatory and oversight changes that have continued to make it difficult to effectively plan and operate. Second, it aligns with Performant strategy to concentrate on the Healthcare payment integrity market, which we believe offers the most effective path to achieving long-term profitability and sustained growth. We believe focusing entirely on this Healthcare market opportunity continues to be in the best interest of our shareholders.



Rohit will dive into some of the financial updates and implications associated with deemphasizing these services.



Before I turn it over to Rohit, I want to take a moment to express my gratitude to all our employees. Your dedication and hard work have been the driving force behind our success, particularly as we have collectively navigated a transformative period for our organization. This transformation fueled by technology and our relentless pursuit of innovation has not only strengthened our operations, but also positioned us to capture significant market opportunities.



While this year has been atypical due to the impact of increased security breaches and the conservatism surrounding the election, we have successfully managed the business to maintain guidance within our range. Despite these challenges, we have fulfilled our commitments, showcasing the resilience and adaptability of our team and business strategy. With the momentum we've built and the exceptional team we have in place, I am confident in our ability to continue delivering strong results and creating long-term value for our stakeholders.



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. Another solid quarter of results amidst all the uncertainties from this past year. In the third quarter 2024, our total company revenues were $31.5 million, which included Healthcare revenues of $30.3 million, delivering year-over-year growth of 5% and 6%, respectively.



Our customer care outsourced services business accounted for $1.2 million of the revenue during the quarter, a decline from the previous year. As Sim mentioned, we are adapting to reduce services in this market. While this line of business was projected to generate approximately $7 million in annual revenue, its estimated impact on Performant bottom line has always been minimal.



As Sim mentioned, the continuous tumultuous changes in expectation have made this market difficult to plan for and operate in. With the decision to pull back, the run rate revenue for the remaining services in this line of business in the quarter ahead is expected to be less than 1/4 of previous expectations.



There will be corresponding impacts on near-term margins. But again, as Sim mentioned, we anticipate those will be minimal and have no impact on our overall margin expansion strategy. Healthcare remains our sole growth strategy, and we remain excited about the long-term prospects of this business. Our third quarter healthcare revenue grew 6% year-over-year. And through the first 9 months of the year, we've grown 12% compared to the prior year period. These healthcare results continue to demonstrate our ability to gain market share and scale new opportunities.



Within healthcare, our claims-based business, also known as claims auditing, led the way with revenues of $14.2 million in the quarter. Our claims-based business has grown over 30%, both in the third quarter and through the first 9 months of the year when compared to the prior year period.



Once again, both our government and commercial clients contributed to this growth. In particular, our commercial claims-based portfolio showed strong KPIs, helping to offset the impacts from election-related tamp downs in the governmental RAC programs.

Eligibility revenues for the quarter were $16.1 million, representing a decrease of roughly 12% in comparison to last year. In the third quarter of 2023, we mentioned a large implementation, which resulted in meaningful initial revenue as a result of a back sweep, leading to a known difficult comp year-over-year for our eligibility revenues. We currently do not see any meaningful indication of weakness in this market, and we continue to expect growth, both in the near term and long term. And though admittedly not the best way to analyze our business, I do note 17% sequential quarterly growth in eligibility revenues.



As we think about 2024 thus far compared to the previous year, our commercial clients are scaling well and slightly offset by our mature relationship with CMS MSP now on its second CRC contract. A portion of our commercial eligibility success is stemming from a further enhanced product suite as a result of some of the early achievements of Project Turing.



As we look toward the building blocks of future growth, we continue to build off the momentum of our record commercial implementations in 2023. We have implemented 32 programs year-to-date, which collectively currently are expected to deliver $13 million to $14 million in annualized revenues at steady state. We are encouraged by the high volume of programs amongst new and existing clients, particularly considering how sticky these opportunities can be. While these are slightly below internal expectations, we are encouraged by the continued wins and traction.



As Sim mentioned, clients are balancing other priorities and pressure testing their information security posture following the Change cyber breach earlier this year. We still currently expect our 2024 implementations to clear the $18 million hurdle we set in estimated annualized revenues from last year's implementations in spite of these external factors.



Shifting to operating expenses. These represented $33.7 million in the third quarter or roughly $3 million ahead of the prior year. This was primarily driven by increased spending to scale implementations, IT investments related to Project Turing and our acquisition and investments in our sales and business development teams that we discussed earlier this year.



We are encouraged by all of these investments in the road map of Project Turing, including its early indicators of proving out the ability to drive incremental margin gain. With that, we are pleased to report a positive adjusted EBITDA of $2 million in the third quarter, approximately flat to the prior year period as expected.



Achieving this alongside the increased investments in 2024 compared to last year was no small feat. And I'd also like to thank the Performant team members for all their contributions toward this achievement. The 9-month year-to-date adjusted EBITDA comparison is also showing well at roughly $2.5 million ahead of the prior year.



We've talked about remaining focused on these operational efficiencies without compromising our opportunity to expand top line growth. A great example of top line growth is the New York State RAC win. I've previously talked about how government opportunities will have a stair step function in revenue due to their size and immediate scope. We believe at steady state, the New York RAC contract can indeed generate double-digit millions in annual revenues. We are hesitant to provide a more definitive range until we can work more closely with the New York-only team to understand the specifics of their program scope and implementation, something that we have begun to do now. We will endeavor to provide updates as this implementation progresses.



With the support of our $25 million credit facility with Wells Fargo, we strategically have managed to a lower cash balance and draw on the facility as needed. We remain focused on managing our business to support strategic organic investments and meet ongoing working capital needs for implementations within our current capital framework as we approach our goal of self-sustaining cash flows.



Reflecting on the first 9 months of 2024, Performant has executed on our operational initiatives to drive efficiencies. We've scaled new and existing clients. We've implemented new opportunities, and we were awarded the New York State RAC contract for a second time, opening the doors to a new state Medicaid market for Performant.



We have executed on what we can control. We've successfully navigated what we cannot, and I'm so proud of the team and their efforts to get us here.



As Sim discussed, there are some industry challenges that have impacted our commercial clients' decision timing and conservatism within our government clients due to the tumultuous election season. We do find it prudent to continue articulating some of these less predictable market factors that directly and indirectly impact our business, though remain very strongly positioned with our overall portfolio of client relationships.



With that, we are pleased to reiterate our guidance for 2024 Healthcare revenues to be in the range of $117 million to $122 million and for the full year 2024 adjusted EBITDA to be in the range of $4 million to $5 million. Our ability to deliver within the range of goals established early in the year in spite of industry challenges continues to make me confident in our position and approach.



Accordingly, we will continue our efforts to make investments to improve our efficiency and to support the scale and long-term growth of our numerous contract wins.



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

[Operator]

[Operator Instructions] Your first question comes from the line of Kyle Bauser from B. Riley Securities.

[Kyle Bauser, analyst]

Maybe I'll start with the state business, Medicaid. So nice New York contract win that is set to begin early next year, I think, in April. And you mentioned at steady state, this could generate in the kind of double-digit millions, which is great. Given this is a new opportunity set and you're just starting in this new vertical, can you talk about any expectations on how long it might take to kind of hit steady state and operationalize that contract?

[Rohit Ramchandani, executive]

As we stand today, I think we anticipate it will follow generally the normal course we typically describe with commercial clients and other of that 2- to 3-year ramp cycle to a full steady state. That being said, we will update that as we progress forward as if we do end up with a more motivated client similar to what we experienced a bit on the implementation with RAC Region 2, there could be avenues to compress that, which we'll certainly be looking to tackle, but just don't know today.

[Simeon Kohl, executive]

Yes, Kyle, I think just one add-on to that is if you think about our solutions suite and ultimately, our product offering, although this is kind of a new market, state-based market for us, we have spent a significant amount of time, and I think it was a big factor of the win in New York in terms of our qualifications working with large national Medicaid managed care plans. So our product offering absolutely applies, and we have a significant amount of experience. And so a new market for us, but not in terms of our experience and our product suite in terms of how we think about applying it.

[Kyle Bauser, analyst]

Got it. Appreciate that. And maybe just sticking on this topic, and maybe this is a little bit of an unknown as well, but do you expect the margins to kind of be similar at steady state to your existing federal and commercial business. And then part 2 of that is, Sim, you mentioned getting some great feedback at NAMPI and how Performant can differentiate from the current marketplace. Any specific color on gaps that Performant can address would be appreciated?

[Rohit Ramchandani, executive]

Yes. So on the margin front, I mean, the quick answer is yes. We do anticipate it to be a similar margin profile of some of our other opportunities, similar to how we've talked about, some of the CMS programs. Government typically gets a better fee rate, but then the efficacy of our results turning into those dollars is typically higher with government contracts. So we expect it to net out to similar to what we currently have in the portfolio.

[Simeon Kohl, executive]

Yes. And then feedback, Kyle, that we're hearing from other Medicaid agencies, state directors, et cetera, really is frankly quite similar to another win theme that we had in New York, and that's just what Performant brings to the table in terms of innovation.



As I shared in my prepared remarks, this has been an industry that's largely been served by a single program integrity vendor for the last 10, 15 years. It's really taken a cookie-cutter approach. And as we've shared consistently, Performant's really looks at everyone's business quite uniquely. So whether it's a large national plan, a regional payer, a government entity, et cetera, we believe that there has to be more customized approach available to address just the particular needs of those particular markets.



And so we talked a lot about innovation. It was something that New York State built into part of their evaluation to bring things to the table that they weren't aware of in terms of how we might be able to move the program integrity needle. And so that was something that, again, I think was a big part of the win theme for us in New York State and something that's been resonating as we've talked to other Medicaid directors around their future plans.

[Kyle Bauser, analyst]

Great. Appreciate that color. Maybe if I could just sneak in one more. In terms of the commercial side of the business, you've had 32 implementations year-to-date compared to 41 last year and 21 the year before and 23 in 2021. Do you have a number of active programs in place since presumably some of these projects have been completed?

[Rohit Ramchandani, executive]

We don't have a sort of disclosed number of active programs. But if you're tracking, as you mentioned and alluded to those years of mentioning how many we've been adding and the fact that we generally haven't lost a client, that number is certainly 100-plus in terms of number of programs across the board and growing, which we're excited to see.

[Operator]

Your next question is from the line of Jacob Stephan from Lake Street.

[Jacob Stephan, analyst]

Maybe just focusing on some of the sales cycle delays that you guys had talked to on the commercial side. Kind of what point did you start to see some of these delays? Was this recently? And then maybe if you could just kind of help us think about what you're seeing at a month into Q4 here?

[Simeon Kohl, executive]

Yes, happy to address that. That's a good question. So look, we've seen it for a little bit now, certainly following the Change data breach. I think more and more as payers have become a bit more cautious in terms of security. So in some cases, it's led to kind of a more comprehensive security views and that's for both new and existing vendors. And so as a result, decisions on a few of our pipeline opportunities have been delayed, and we've also seen some implementations have kind of been put on hold as the payers just take their time to kind of complete the expanded reviews.



Jacob, we definitely see this as temporary, however, and don't have any concerns in terms of its long-term impact on our relationships with existing clients or current prospects. And in many ways, it's important to note that as a government contractor, we are held to an exceptionally high standard when it comes to security framework and controls.



And look, no doubt that some of the delays are a bit frustrating. We've been able to absolutely manage them through, as Rohit mentioned, but it's actually provided us with a valuable opportunity to kind of demonstrate just how robust our security credentials and controls are. And we're convinced this is going to further reinforce our competitive advantage and serve as yet another kind of key differentiator for us as we move forward.

[Jacob Stephan, analyst]

Okay. That's helpful. But kind of just one more around kind of the same topic here. Do you see any kind of difficulties filling up kind of the top of the funnel? It sounds like a lot of the decisions were just delayed. But what does the kind of top of the funnel look like? And are customers still interested in pursuing things just initially?

[Simeon Kohl, executive]

Yes. No, absolutely. Just no impact to the top of the funnel. Just somewhere in the sales cycle where we had anticipated we'd be getting close to a decision. You had a few opportunities where those have been paused, and we saw similar with some of the implementation just to allow the payers to kind of complete those expanded reviews.



And I think as we talk about the pipeline in general, look, whether a lowered stars rating, increased utilization or a decrease in payers kind of Medicaid population as a result of the recent redetermination process, these all are headwinds to payers' bottom line, which in turn, in many cases, creates potential opportunities for cost containment vendors like Performant. We're absolutely seeing the same in context of a very healthy sales pipeline.

[Jacob Stephan, analyst]

Okay. Just last one for me. You guys mentioned RFPs going out for 3, 4 and 5. Obviously, you guys have 5. What is kind of the size differential look like between 3 and 4? And how meaningful could this be to the top line?

[Rohit Ramchandani, executive]

Yes. I don't think we disclose those specifically. But just to give you some context, RAC Region 4 is a 16-state region that includes California. And comparatively, RAC Region 3 is an 8-state region. I think one of its primary states is Florida. So I think historically, if you just go look at the figures, RAC Region 4 is probably one of, if not the largest RAC A&B region. And then RAC Region 3 probably somewhere close to our Regions 1 or 2 for context.

[Operator]

Your last question is from the line of George Sutton from Craig-Hallum.

[George Sutton, analyst]

Sim, you had mentioned the success you've had in beginning to work with many of the large commercial payers. But at the same time, you start with a small market share. Can you just walk through what you anticipate to see with some of those larger players? What kind of market share opportunities exist for you over a reasonable period of time?

[Simeon Kohl, executive]

Yes. Look, thanks, George. As we've said even in our prepared remarks, right, we continue to do very well with all types of payers across the spectrum, certainly have a significant number of the largest payers in the land. We've talked about all of these implementations, but we still think we have a very small percentage of the wallet share, if you will, with those large payers.



We have demonstrated over and over, I don't have the particulars here, but as Rohit talks about those 100-plus, whatever these programs, many of them are part of our land and expand strategy. And so while we certainly are excited about the mid-tier opportunities, we may get more opportunities out of the gate when we sign up those for more comprehensive offerings, but we have demonstrated in every single one of our national client relationships that we have the ability to win additional business. And I think that's underscored by the fact that this quarter with those implementations that we talked about, the majority of those are with current clients.



And again, to us, while we like to increase logos, et cetera, many times just seeing that you have these current and existing clients continuing to expand, I think, just underscores our capabilities because look, in some cases, we're bringing some net new capability to the payer. But in many cases, we're taking share from some of the very large established incumbents. So whether it be on a federal space with CMS and the RAC program, taking the largest state Medicaid program in New York or taking share in these national payers, we're taking them from the key established incumbents out there. So again, further indicative of just how Performant can differentiate itself in terms of our offerings.

[George Sutton, analyst]

So you mentioned distraction relative to the election cycle, which I completely understand. Can you walk through for us what some of those distractions are that now get removed? And how quickly do you think they begin to work to your favor?

[Simeon Kohl, executive]

Yes. So I mean, let me first say this because I've gotten a lot of questions on this, right? I think the change in administration could certainly have an impact on CMS priorities and policies and certainly including the RAC program. It's a little too early to tell and to predict any specific changes, and we'll be monitoring that very closely for any early signals. But at this point, don't have anything concrete.



But as I said, and I think, George, you point out here, the RAC program plays such an important role in safeguarding the Medicare trust fund. And as I highlighted in my prepared remarks, right, we're relieved to have this election cycle behind us, and it absolutely should help address some of the conservatism that we've seen over the past few quarters.



And to answer your question specifically, George, look, this is a critical program for CMS, no different from any other large cost containment program and another agency. From time to time, your [ intra-year ] you're challenged on having to make some tough decisions, sometimes on volumes, sometimes on pushback that you might have from a lobby organization or a particular large provider with a particular topic, et cetera.



And we've seen it before. It's not unique to this particular cycle. We've seen it before that during an election cycle, some of those challenging situations get kind of put on the back burner until the kind of cycle gets completed and closed. And so we've just labeled that as a more conservative approach. And so all of that in aggregate, I think our comment that we put in terms of tamping down the program, it hasn't -- has had an aggregate impact on driving volume ultimately. And so I don't think it's going to change overnight, but we certainly do believe that as the new administration gets its legs under, there'll be a new, I'm sure, HHS nominee, the Secretary that will be nominated. You'll see some of those slowdowns, et cetera. And then we're just excited about people getting back to work to support the charter of the RAC program to safeguard the trust fund.

[George Sutton, analyst]

Great. And last for me, you mentioned you have now integrated Records 1 into your platform. I'm curious because that's really a cost-centric benefit that you should start to see. When would we start to see those impacts flow through down the EBITDA line?

[Simeon Kohl, executive]

Rohit, do you want to tackle that?

[Rohit Ramchandani, executive]

Yes. So I think as part of the guidance we'll endeavor to put out in the beginning of next year, you'll see some of the margin expansion in our '25 expectations as a result of some of those early pieces. And I think you'll really start seeing that increment up in '26 and '27 when a lot of those projects come to fruition.



And on the RecordsOne integration, right, I think we're pretty excited to have that technology now fully in our ecosystem so we can actually start plugging it in kind of to each client and really seeing those gains.

[Operator]

Ladies and gentlemen, there are no further questions. This concludes today's conference call. Thank you very much for your participation. You may now disconnect.