Performant Healthcare, Inc.

Greetings and welcome to the Performant Financial Court fourth quarter 2020 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Richard Zubek of Investor Relations. You may begin.

Thank you, Operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release for our company's fourth quarter and full year 2020 results. If you have not, a copy is available on the investor relations portion of our website. On today's call will be Lisa M., Chief Executive Officer, and Rohit Ramchandani, 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 are forward-looking statements. These statements are subject to risks and uncertainties, including those described in our filings with the SEC. Actual results may differ materially from those described during the call. In addition, any 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 tables attached to our press release. I would now like to turn the call over to Lisa Im. Lisa?

Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. Coming into 2020, we were on course to report a transformative year following multiple years of hard work, transitioning performance from a company's arriving at success from a small number of large recovery contracts into a highly dynamic company with diversified healthcare offerings. We've previously shared during investor meetings as well as on our investor website the multi-year investments required to bring major contracts to steady state margins. With those years of investment completed and the share gains that we have grown across our markets, we had line of sight to exceptional 2020 results. While the impact of the global pandemic brought material disruption, we were still able to report a very strong year. In the fourth quarter, we had revenues of over $40 million and adjusted EBITDA of $5.1 million. Both of these figures are lower as compared to the fourth quarter of 2019 due to the impact the pandemic had on our recovery business. However, the resiliency of our business is seen in our full year 2020 results as we reported revenues of nearly $156 million with corresponding adjusted EBITDA of over $20 million This is the first time we have reported annual adjusted EBITDA in excess of $20 million since 2016. This compares to revenue of $150 million and a negative EBITDA over $3 million in 2019. Our results in 2020 are a testament to our exceptional workforce and their steadfast commitment to our clients, even in the face of numerous disruptions. To all our associates, Thank you for helping us reach these successes and for bringing your very best each and every day. While we are happy with our results, we also know the potential that exists and what our results could be in a COVID-free environment. While the pandemic depressed operational results across all of our business, our healthcare operations were less impacted in 2020, and the majority of our healthcare contracts resumed operations by September of 2020. Furthermore, I'm happy to report that many of our healthcare clients are expanding their scope of services, and we continued to renew contracts by way of competitive procurement. We believe this growth trend will continue as our suite of payment integrity services further matures and scales. More specifically, we launched 10 new healthcare programs during the fourth quarter of 2020. These implementations represent a mix of new logos and the expansion of both audit and eligibility services within existing clients. As we look forward, we have a steady pipeline of implementation for much of 2021 with a similarly diverse mix of new clients and expansion of services within our current customers. Overall, revenue from our healthcare business in 2020 increased nearly 60% over 2019, and accounted for almost half of our total revenue in 2020. This marks a dramatic increase from 2017 when our healthcare business accounted for just 7.5% of our total revenue. Going forward, we anticipate that our healthcare business will drive the majority of overall company revenue and growth. Conversely, our recovery operations accounted for 47% of total revenue less than half of total company revenues for the first time due to the continued growth of the healthcare business as well as COVID-19 related impacts. As healthcare revenues continue to grow at a strong rate, we anticipate that the recovery business revenues will continue to decline for the foreseeable future. As a reminder, some of our recovery clients, including federal and state governments, requested that we implement the complete stoppage of our outbound recovery services in that spanned multiple quarters of 2020, which had a negative impact on our operating results. Due to these continued delays within our recovery business, we took the necessary steps to furlough employees from contracts and found ways to reduce our expense footprint, such as moving our workforce fully remote with the exception of a handful of essential employees. These pauses on activity and furloughing employees did not negatively impact student loan revenues, and related cash flows during 2020 because we earn revenues for a number of months from existing in-process borrower rehabilitation agreements. However, the prolonged student loan payment pause is expected to have significant impacts on our real-over-year recovery revenue results in 2021. With that, I'd like to turn the call over to Rohit Ramchandani, our Senior Vice President of Finance and Strategy, to walk you through the results of the quarter. Rohit?

Thanks, Lisa. As Lisa mentioned, in the fourth quarter of 2020, we reported revenues of $40 million, which was in line with our internal projections and 9% lower versus the prior year period. Notably, this includes almost $20 million in healthcare market revenues for the quarter. Adjusted EBITDA in the fourth quarter was $5.1 million compared to $6.5 million in the prior year period and $3.8 million in the third quarter of this year. For the full year 2020, we reported revenues of $155.9 million as compared to revenues of $150.4 million for the full year 2019, an increase of 4%. Adjusted EBITDA for the full year 2020 was $20.4 million compared to an adjusted EBITDA loss of $3.2 million in 2019. Overall, our operations benefited as key investments in healthcare contracts began to achieve stronger contribution margins, including future growth potential, and as other mid-tier ones continued to build as well. The healthcare revenues of $18.9 million in the fourth quarter of 2020 represented 32% growth compared to the fourth quarter of last year. The continued increase reflects positive strides we've made relative to the aforementioned investments across our healthcare operations and the continued expansion of both of our payment integrity lines of business, audit and eligibility, or coordination of benefits, which also enjoyed some seasonal uptick in recovery as providers and carriers looked to clear their books before the end of the year. For the full year 2020, healthcare revenues were 68.5 million, or an increase of 58% year over year, compared to the 2019 healthcare revenues of 43.3 million. We're very excited about the progress we've made in driving growth in our healthcare markets. As Lisa mentioned, these healthcare markets now represent almost half of our revenue stream versus just 7.5% three years ago. And we anticipate this trend will continue as we continue to channel our investments into the healthcare payment integrity offerings. Total recovery revenues in the fourth quarter were 17.51, down 31% relative to the fourth quarter of last year. For the full year 2020, we reported recovery revenues of $73.4 million, or a decrease of 18% versus 2019. As Lisa reminded us, our recovery business was adversely impacted by the COVID pandemic during 2020. Following the passage of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, in March of 2020, the U.S. federal government suspended payments, ceased accruing interest, and stopped involuntary collection of payments wage garnishments for student loans originated by the Department of Education. This policy was subsequently followed by our guarantee agency clients and other recovery clients to varying degrees. Of note, the U.S. federal government collection stoppage has been extended through September of 2021. While we are able to continue to recognize student loan-related revenue throughout 2020 due to our existing in-process borrow rehabilitation agreements, We have not processed any material new loan rehabilitations or student loan related revenues since the stoppage order went into effect. As a result, as we look ahead to 2021, we anticipate that approximately 40 to 50% of our annual recovery revenue will be adversely impacted. However, our long-term overall diversification strategy will help offset these potential declines. We've made traction in growing our diversified consumer and commercial debt service offerings evidenced by student loans no longer representing the supermajority of recovery revenues. Furthermore, given our continued operations and expectations with growth in our healthcare market, as mentioned earlier, we expect those to drive an increasing majority of our financial results and investment going forward. Operating expenses in the fourth quarter of $36.3 million were $9.8 million lower than the prior year period. The decrease in costs were mostly due to our reduced headcount, our commitment to improving our productivity, and thoughtfully engaging in expense restructuring. With that, I'd like to turn the call back over to Lisa before we open it up to your questions. Lisa?

Thanks, Rohit. Pandemics change the world forever. Changes happen to countries, economies, families, people, and companies. As we reflect back on 2020, as much as we want to say phew, Let's get 2020 behind us. We know that 2021 isn't going back to pre-pandemic normal. Forever changed is the world as we knew it. One of those changes is how the public will perceive us as a company going forward. Based on the demonstrated gains that we've made in the healthcare industry, we have made the decision to focus our long-term strategy on growing this business. We have already successfully taken share from long-term industry incumbents and proven the superior nature of our technology platform, even if we are in a second or third position behind those incumbents. In an industry that continues to undergo consolidation, we are well positioned and viewed as the leading independent healthcare payment integrity provider. Long before the pandemic and the CARES Act, our recovery work with defaulted student loan borrowers had steadily been shrinking. The pandemic only accelerated this process. While it's premature at this moment to share specifics, we are working on a multi-part solution for our recovery business that we believe would result in our ability to continue driving our investment capital toward the healthcare markets and achieve the best possible outcome for the company and all of our clients and our employees. As we look ahead, beyond an expectation of continuing to report positive EBITDA for the full year, we are not providing a more detailed outlook for 2021. Fearheaded by the continued impacts from COVID-19, there is still too much uncertainty with respect to our recovery operations in order to provide a meaningful outlook. We are confident about the long-term prospects of performance and believe that we will continue to grow and scale our business in the coming years. With that, we'd like to open up the call for questions.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And it looks like that there are no questions for the Q&A session. And I will now turn the call over to management for closing remarks.

Thank you, operator. Thank you for being with us today on our earnings call. We want to, again, thank our associates for their continued effort. We want to thank our shareholders for your continued support. And, of course, thank our clients for letting us continue to serve you. And, of course, essential workers for all that you have done. Thank you again for being with us.

This concludes today's conference and you may disconnect your line at this time. Thank you for your participation.