Performant Healthcare, Inc.

Greetings and welcome to Performant Financial Corp. Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Zubek, Investor Relations. Thank you.

You may begin. Thank you, Operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's fourth quarter and full year 2021 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, Simeon Cole, 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. 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 disclosures 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 Lisa Im. Lisa?

Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. This past year was transformational for us, and we are pleased with where we landed today. Performance is almost exclusively a healthcare company after effectively ceasing activity in recovery markets. In addition, we completed a public offering of common stocks We financed our debt structure and are now well positioned with multiple new and energized shareholders. We accomplished this alongside continuing to provide top-tier service to our clients, adding new logos, and expanding our already established statements of work. We are excited for our growth and the path ahead. Then we'll provide a deeper discussion of the healthcare operational results in Q4 and for the year in a few moments. However, before I hand it over to him, I want to take a moment to acknowledge all of the hard work and effort that was put in by our team in 2021. Your tireless efforts and contributions have allowed us to be positioned as we are today. We worked hard throughout 2021 to set us up foundationally to be a healthcare pure play organization. And while we continue to work through COVID challenges, we are executing against our plan. Thank you for everything that you've given to our company. In addition, I want to thank our clients for allowing us to be their partner and for their continued support and recognition of our platform and its capabilities. 2022 officially marks a new era for performance, and we are looking forward to capitalizing on our market position and growing the company. Lastly, I wanted to officially announce that Simeon Koh is being promoted to President of Performance. Over the past 10 years, Simeon has worked tirelessly to build and mature our healthcare business. His promotion to President is a natural progression in our transformation to a healthcare pure play company and a direct reflection of his successful leadership and execution of our growth strategy. It gives me great pleasure to introduce Sim to discuss the fourth quarter and other initiatives in our healthcare business in greater detail. Sim?

Thanks, Lisa, and good afternoon, everyone. I too could not be more proud of our team members and their unmatched commitment to serving our clients. It's an absolute honor to lead such a talented and passionate team. The fourth quarter is typically our seasonally strongest, and 2021 was no exception. as most payers look to reconcile their books ahead of year's end. Our results in the fourth quarter punctuated a strong end to an expansive but somewhat tumultuous year, as the nation's healthcare system addressed the impacts of the Delta and Omicron variant waves. For the fourth quarter, compared to the same period last year, healthcare revenue grew over 35%. And again, while we fully acknowledge that Q4 is impacted by seasonality, it was a record quarter for the company, marking two strong quarters in a row. For the full year, healthcare revenues grew more than 13% and we maintained a positive adjusted EBITDA amongst the transition and continued growth investment. Given the challenging operating environment and persistent lower core healthcare utilization rates, we are pleased with these results. For context, we consider utilization to be services rendered in either an inpatient or outpatient healthcare setting with hospitalizations being among the largest spend, core utilization are all services that are non-COVID-based, as most clients still prohibit us from auditing COVID-related claims. Based on the lag between the date of service and the time we received the claim for audit, we do anticipate that the lower core utilization rates associated with the Omicron surge in the latter part of Q4 and early Q1 of this year will continue to impact results at least through the first half of 2022. However, we do have early indications from several clients that efforts are underway to ease the COVID-based audit restrictions, and we are currently seeing a rebound in core utilization. We remain committed to achieve our long-term goal of revenues in excess of $500 million with EBITDA margins in the high 20s, and our current cadence of identifying new opportunities and new customer implementations remains robust and according to plan. As part of our transition to a pure-play healthcare company, we are maturing a number of internal constructs and aligning our resources to best support our clients and foster a culture of accountability. Within claims, our focus is in identifying findings and increasing the total savings that we drive for our clients. We actively track the number of medical records that we request, the number of audits we conduct, the error finding rate of those audits, and the average amount of improper payment per claim. These are all measures of growing scale within the claims business. Once we submit an audit finding, it becomes the responsibility of our payer clients to seek to recover those dollars from providers. The recoupment of overpayments is often accomplished through a mechanism that we refer to as an onset. So essentially, when a provider submits a new claim, they have a pre-existing debt to the payer. The payer will offset as part of the claim payment, enabling us to collect our fee. While the continued waves of COVID variants strain the healthcare system throughout 2021, Several hospital and healthcare facilities, to their credit, maintained services for more elective care, but many of those same facilities lobbied payers to reduce the number of new audits and or to delay the offsets of improper payments. We experienced regionally focused payers acknowledge these pleas and grant providers additional latitude. Ultimately, this did depress audit potential and delayed our ability to recognize revenue on previous claim findings. The workflow to get these claims submitted through the appeals process and ultimately monetize is the line of sight that supports our expectation of growth, and we believe our KPIs remain on track and consistent with our goals. For our eligibility offerings, we don't have a findings workflow as we do with our claims business since we submit demands directly to insurers. This line of business is driven by the value of reclamation billing or debt recovery inventory that we submit on behalf of our clients. Even though this business is more automated, we experience delays here as well. Some insurers lagged in their pace to adapt to a hybrid workforce of on-site and remote employees and have yet to fully adjust. As we've said before, we can't exactly predict when insurers will completely adapt, but we do have significant growth expectations going forward. Before I hand things over to Rohit for him to review the financials, I would like to briefly discuss our recent contract win with HHS OIG. There are over 30 offers for this full and open competition. And as the sole awardee for this national audit and consultative service engagement, we believe that our extensive knowledge of Medicare and Medicaid policies, combined with our broad clinical expertise, provides a solid foundation for performance to work in partnership with the OIG. It is worth noting that this is a fixed fee award and the $7.75 million published value is the OIG's estimate. We are excited about this opportunity as partnering with the OIG underscores our commitment to serving our government healthcare clients and our national leadership and policy expertise in delivering meaningful claim audit savings. Historically, we've operated on a contingencies-based model, so this 60 award provides greater predictability and advances our goal to further diversify our offerings. Additionally, we believe this is a tremendous indicator of how our technology and national experience plays a differentiated role and where we can deploy our resources beyond the traditional contingency V model. As we think about operationalizing this opportunity, we expect first revenues in Q3 of this year. We continue to win opportunities with commercial healthcare players while also expanding our portfolio of work within our existing clients. And these successes span our diversified products, such as provider recovery, TPL reclamation, clinical audit, and data mining. And to put this all into context, we are still a relatively small and exceptionally nimble company, competing against considerably more entrenched competitors, and we feel that we are winning. Our challenge will be to implement things in a timely manner so we can see a steady state revenue sooner than later. With that, I'll hand it over to Rohit Ramchandani our Senior Vice President of Finance and Strategy, for a discussion of the financials. Go ahead. Thanks, Sam.

The fourth quarter of 2021 was a strong period for performance. We reported total revenues of $31.6 million, which included healthcare revenues of $25.6 million, yet again marking our largest quarter for healthcare revenue generation, following up on a strong Q3 of 2021. As we've discussed before, we typically see some seasonality driving up the fourth quarter results, but as Sim mentioned, we are excited to reflect that compared to the fourth quarter of last year, healthcare revenues were up over 35%. Adjusted EBITDA in the fourth quarter was $5 million compared to the $5.2 million in the prior year period. This EBITDA is reflective of our efforts in balancing a reduction in operating expenses while still consistently investing into our healthcare operations to continue scaling and sustain expected growth. For the full year, we reported total revenues of $124.4 million, including healthcare market revenues of $77.5 million. Adjusted EBITDA for the full year was $11.9 million. Within the healthcare markets, claims-based, also known as claims auditing revenues, in the fourth quarter of 2021 were $9.5 million, which was an increase of over 100% compared to the $4.7 million in the fourth quarter of 2020 and sequentially higher than the $7.3 million we reported in the third quarter of 2021. We currently expect to see a strong growth trend for the claims-based revenues into 2022 as we continue to execute on our sales and implementation pipelines. We are also optimistic that we will see a meaningful thaw of the COVID impacts in FY 2022, though we still anticipate some headwinds in the earlier parts of the year per CIMS commentary. Revenue from our eligibility services within healthcare markets for the fourth quarter of 2021 were $16.1 million, an increase from the $14.1 million in the fourth quarter of 2020 and sequentially higher than the $12.7 million we recorded in the third quarter of 2021. In spite of our CMS eligibility work being close to a mature state, we also anticipate healthy eligibility growth into 2022, driven by the continued ramp of commercial relationships and implementations. Overall, coming off the six implementations announced in the prior quarter, we kicked off another five in the fourth quarter of 2021 and continue to maintain strong visibility to implementations throughout FY 2022. As we mentioned last quarter, Each individual implementation can vary in expectation from around $100,000 on the lower end to a few million on the higher end. The implementations from the fourth quarter follow a similar expectation on average to those announced from previous quarters. Total non-healthcare recovery revenue in the fourth quarter of 2021 was $2.3 million, down from the $17.5 million that we recorded in the fourth quarter of last year and the expected decline from the $5.5 million reported in the third quarter of this year. As we've stated previously, we do not expect to report recovery-based revenues in 2022, though we'd note there could be some de minimis spillover revenues into the first quarter. Our total customer care outsourced services revenues were $3.7 million for the quarter, which was flat when compared to the fourth quarter of last year and up sequentially, consistent with our expectations. As a reminder, the primary current services within our customer care markets continue to be impacted by the federal student loan forbearance set to expire April 30th of this year. It is worth noting that this date has been repeatedly pushed back by the federal government, most recently from January 30th, 2022 to the current April expiry. Moving on to expenses. Operating expenses in the fourth quarter were $28.7 million, or $7.6 million lower compared to the fourth quarter of last year, primarily driven by decreases in operating expenses related to the ceasing of activity within our recovery markets and offset by transition expenses, debt restructuring charges, and continued investment into our healthcare markets, specifically the addition of human capital. During the quarter, we also significantly overhauled our balance sheet and entered into a new credit agreement with MUFG Union Bank that provided the company with up to $35 million in debt financing through a combination of a $20 million term loan and a $15 million revolving credit facility that remains undrawn. We used a combination of cash available in the balance sheet and the new $20 million term loan to fully repay our previous credit agreement with ECMC. Our new commercial banking relationship with MUFG Union Bank provides further stability to our balance sheet while enhancing our ability to drive investment into our ever-growing healthcare operations. Compared to the previous facility, we estimated that this new agreement could yield over $8 million in relative cash savings in 2022 alone. These savings are expected to be achieved through a combination of lower required principal payments and a lower interest rate margin, which is tiered based on the company's consolidated leverage ratio. We are excited for the flexibility that this new partnership will provide us in chasing more organic growth opportunities. Looking forward, we anticipate our operating expenses to start increasing on a quarterly basis associated with the continued growth of healthcare expenses now outpacing the offsets from lower expenses related to recovery markets. We do anticipate these to be lower on a year-over-year basis for the first half of the year and then show growth on a year-over-year basis in the back half of the year, leading into consistent growth in FY 2023. Contrastingly, in the current fiscal year, we do expect a decline in total expenses, primarily driven by lower interest and severance costs, offsetting increases in depreciation and amortization. From a cash standpoint, we anticipate the year to reflect a modest use of cash as we continue to invest in implementations on the scale of the business. We currently range this from $4 million to $8 million, but note it's subject to change based on opportunities that arise and our operational performance during the year. This will still leave us with flexibility between cash on the balance sheet and revolver availability to pursue additional product development and or larger organic opportunities that may present themselves. To that end, we are excited at what we believe continues to be a tremendous opportunity for us to gain market share and continue to grow along our current short and long-term strategies. We do anticipate to see a lagging effect on our available volumes from the COVID-related hospitalization spikes this past winter, some concentrated in regions that we do disproportionately serve, but as mentioned, we are encouraged by the recent increases in core utilization rates seen across the country. As we continue to execute on a strong trajectory of implementations converting out of our sales pipeline and other growth opportunities, With consideration for the timing of this COVID saw, we are introducing initial guidance of healthcare revenues of $90 to $94 million for FY 2022. We anticipate that we'll have an initial pullback from Q4 healthcare revenue peaks, consistent with expectation and the trends of the prior year, followed by strong growth into the back half of 2022. Separately, we anticipate that our customer care revenues will be flat to slightly down, consistent with our expectation from last year. This could change depending on the expiration of the current federal forbearance, something we'll be monitoring closely. The expected trending of healthcare revenues in combination with our continued investment into new contract ramps drives an expectation of negative EBITDA results in the first half of 2022 with stronger margins in Q3 and Q4. This is a reflection of our ability to continue tackling available opportunities to drive growth, as well as the natural progression of programs that we've been ramping up throughout 2021. As a result, For the full year 2022, we currently anticipate an adjusted EBITDA between $2 and $4 million. As a reminder, when a cohort of new implementations in both claims-based and eligibility-based healthcare market revenues reach a steady state, they are contributing incremental gross margins well north of our long-term goals of EBITDA margins in the mid-20s. Ultimately, we are extremely excited to execute on the currently known and potentially unknown opportunities ahead of us this year and make it yet another great year for performance, our customers, constituents, and employees.

Operator, will you please open up the line for questions? Thank you.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 key. Our first question comes from the line of Kyle Bowser with Colliers. Please proceed with your question.

Hi, good evening. Thank you for taking my questions and really nice results today. Maybe I'll start with Sim and the healthcare growth strategy. First of all, congratulations on the well-deserved promotion. The guidance implies growth of, I think, nearly 20%. So to the extent you can share, we'd love to understand kind of the breakout of growth drivers. How might we think about the contribution to growth from various buckets? you know, like new account ads or growth within existing accounts, new product offerings, et cetera?

Yeah, thanks, and thank you, Kyle. So, look, for us, I think as we think about the growth and as Rohit's talked about the implementations, a good amount of our growth in 22 is really based on our current accounts that we have, so expanding, growing scale, and some of our already established accounts. And so as we've been building out some of these implementations that we've been announcing quarter over quarter, we're starting to now see those implementations really start to contribute. So ones that we've started, you know, a good year or so ago or beginning of 21, you know, they are starting to scale up quite a bit. So I think it's a healthy combination of current book of business where we have clients that are maturing and we're seeing greater scale. We do have some new logos that are beginning to or will contribute kind of towards the back half of the year in terms of new opportunities. And as I look at our kind of buckets of services, I think it continues to be a good healthy mix between our eligibility and our claims-based business.

Got it. I appreciate that. And And then given the seasonality in Q4 that we typically see in the comments around investments into new customer contracts getting online this year, how should we think about OPEX cadence? Rohit, I think to be clear, you said that OPEX should step up sequentially each quarter, but be lower than 2021 annual levels. Is that right?

Yeah, so that's right. It should step up sequentially on a quarterly basis. And then when looking at Q1 and Q2 or the first half, it should be lower on a year-over-year basis. But when looking at Q3 and Q4, that actually should be equal to or maybe a little greater on a year-over-year basis.

Got it. Okay, got it. And then one last, if I may, in any sense as to when – we'll be able to begin auditing COVID claims, and would it be fair to assume that the percentage of claims that are inaccurate within this bucket will likely be higher than the average?

Yeah, I think, Kyle, to your first part, as I said in my prepared remarks, we are starting to see really across the portfolio of clients an ease in terms of the restrictions on COVID-based claims. We see some of them are moving a little quicker than others, but But I think it's fair to say across the board that I'd expect towards the middle of that half of the year, we will be able to audit those claims. In terms of how we might look at those claims in context of error rate, I think it's a little bit too early to tell. It's really going to be what type of diagnoses that we can focus on, comorbidities. There's a few things that I'm sure we're still going to have some restrictions on in terms of what we actually look at. But I think it's fair to say that we certainly would expect that they would have the consistent error rates that we see in other claims across the portfolio.

Got it. Okay, that makes sense. Well, congrats again on the results, and thanks for taking my questions.

Thanks, Kyle. Our next question comes from the line of George Sutton with Craig Hallam.

Please proceed with your question.

Thank you, Sim. My congrats as well. So first on the COVID piece, and I was thrilled that you threw that into your prepared comments that we were starting to see an ease of those restrictions. Would we be going back effectively to early 2020 with some of the data? In other words, will we be able to look at the entire timeframe?

Yes. So, it depends, George, in terms of the space that we're in. Lookback periods vary depending on the line of business, whether it's Medicare, Cade, or commercial. But I do think that we will absolutely be able to go back to 2020 at a minimum.

So, Rohit, in your prepared comments, you mentioned there's a tremendous opportunity to continue to gain share. which is obviously a core thesis that we've had. I wondered if you could just give us an updated thought process on your market share opportunity relative to the market you see today. Certainly.

And I think at a core level, we believe that our opportunity and sort of our goal to tackle 20% of the addressable market remains unchanged, which does translate to that long-term goal of 500 million plus in revenues. So we believe that still very much exists in front of us and it's still what we're changing. And then I think regarding kind of the near term, right, I think what Sim mentioned on the OIG and some of the other things we're seeing competitively, we're continuing to be encouraged at how we can continue to win business from kind of an ever-shrinking number of sizable competitors. And so we'll continue to watch what happens in terms of some of that consolidation, but as we're out there and particularly as we've expanded our sales team in the past year to 18 months, we're really starting to see some fruition in the sales pipeline in the middle and lower market strategies we've had as well.

Just a couple of things that are going on in the industry in terms of major players that have been talking about initiatives. Humana has been talking about outsourcing more Anthem has been criticized for their days payable, claims outstanding growing. And those would both seem to be areas that you could be helpful with. Can you just talk about some of those broader opportunities that we don't normally discuss?

Yeah, you know, look, we continue to have conversations with some of those same payers that you just mentioned, George, with regards to where performance capabilities can support them. Look, I think, and Jimena is a great example in terms of the focus now in Medicare Advantage and their core business, right? So if you look at what they need to do to make sure they're staying focused on the core business, I think that does offer opportunities for companies like Performance where we can provide some flex for them. So even in the program integrity, we see some of these larger payers. They have a pretty big, sizable portfolio. team internally that manages some of the program integrity as first pass. And I think companies like Performant are demonstrating that we can drive equivalent if not better results for some competitive pricing and allow them to really focus on their core initiatives. And so to your point, we're seeing it in PI and some other areas of analytics where Again, as Rohit points out, the capabilities that Performant has in terms of our policy expertise, our clinical expertise, and then a pretty powerful technology, it is leverageable and we can deploy that just outside of the traditional program integrity space. So we're excited about exploring and looking at different product initiatives in terms of how to apply the technology more broadly. I think to the root of your question, yeah, we too also see that as an opportunity as payers really have to focus on core competency, how we can pick up some of the slack.

Gotcha. Appreciate it. Thanks, Ben. There are no further questions.

I'd like to hand the call back to management for closing remarks.

Thank you, Operator. We want to thank you for joining us for our earnings call today. And again, we're very excited about the growth that we have in front of us. And I'm very pleased to have Sim at my side as the president of Performance. I think as we go through this year, we're going to continue to expand our business more aggressively and continue to invest so that we can have even more exciting growth as we move forward. Again, we want to thank our employees for all that you do and all that you bring to Performance. And again, thank our shareholders for their continued support and our clients for letting us be their partners. Thank you again for joining us today.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.