Performant Healthcare, Inc.

Greetings and welcome to Performant Financial Corp. 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. The 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce John Bizzuto, Head of 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 2023 results. If you have not, a copy is available on the investor relations portion of our website. On today's call will be Simeon Cole, 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. 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 the 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 Cole. Simeon?

Simeon Cole Thank you, John. Good afternoon, everyone, and thank you for joining us for our earnings call. Reflecting on 2023, our second full year operating as a healthcare-focused business, and my first year as chief executive, I am incredibly proud of our accomplishments. We've achieved markable success, evidenced by double-digit revenue growth in our healthcare for the full year, resulting in adjusted EBITDA of 3.4 million, which represents a significant increase of over 250% from last year. In addition to our operational success, we continue to execute on our strategic goals, add seasoned talent to our team, and scale our business support our growth initiatives. A major focus since I became CEO has been to evolve our corporate culture from our legacy debt recovery business to that of an innovative and mission-driven healthcare company. The recent appointment of Dr. Shatnu Agarwal to our board of directors emphasizes that evolution. Dr. Agarwal's sterling reputation and extensive payment integrity experience make him an ideal addition to our board. His tenure as deputy administrator for CMS, where he played a pivotal role in reshaping the recovery audit program, speaks volumes about his commitment to payment integrity. In his current role as chief health officer at Elevance Health, he oversees Elevance's corporate strategy related to medical policy, clinical quality, and health equity. Dr. Agarwal's experience and values align perfectly with our mission, and we are looking forward to his contributions to the board. Furthermore, throughout 2023, we significantly added to our team with over 200 new healthcare hires. We have bolstered our management team by identifying and recruiting industry experts with payment integrity experience across the entire claims lifecycle. And for existing team members, we focused on providing opportunities for career progression and rolled out numerous appreciation initiatives. Our commitment to our team members is unwavering. exemplified by our inaugural employee engagement survey conducted in 2023. The positive results it revealed serves as a benchmark, motivating us to further enhance our culture and provide incentives to employees, equipping them with the tools necessary to propel our organization forward. These early efforts led to the recognition by Comparably as the best company for work-life balance. In terms of our business, Performance healthcare solutions continue to gain notable traction in the market. In 2023, we experienced unprecedented commercial growth of 55% driven by implementations expansion. We implemented a record 41 commercial opportunities during 2023, including seven in the fourth quarter. This achievement nearly doubles the 21 opportunities we implemented in 2022. Our implementation success rests on two pivotal elements. First, we optimize the speed of our implementations through continuous refinement of workflows. Strategic adjustments such as prioritizing data intake and adopting a more concurrent approach enable us to further streamline and expedite our implementation methodology. Second, as a testament to the reputation we've cultivated in the industry, our clients are increasingly motivated to accelerate the implementation cadence to expedite their return on investment. While we still occasionally see client-driven delays, our ability to work with customers to synthesize and simplify complex processes into collaborative, digestible experiences sets us apart from the competition. When engaging with a client, our objective is not solely to maximize savings. Instead, we focus on cultivating long-term value that aligns with their organizational goals. This involves collaboration with provider networks to minimize administrative frictions. Our client-centric reputation is one of our greatest assets, and it continues to elevate our standing in the industry. This positive momentum has translated into one of our most robust pipelines to date. As payers recognize the value of partnering with Performant, I am so proud of the progress we have made with our commercial clients. Our capabilities and approach have positioned us as a leader in the industry, allowing us to consistently capture market share. As a reminder, the commercial segment represents our largest growth opportunity with more than 75% of the $4 to $5 billion annual addressable revenue opportunity attributed to commercial clients. Allow me to illustrate how our approach to innovation, nimbleness, and operational excellence has translated into success across each line of our healthcare business. On the eligibility front, we demonstrated strong revenue growth for approximately 15% in 2023. We continue to hear that our solution is more effective than our competitors, fueled by our data assets, matching technology, and quality validation. A good example of our value emerged when we recently partnered with a national payer. After identifying gaps in their eligibility workflow with their existing vendor, we conducted a successful proof of concept, securing the first pass position and eventually being entrusted with a multi-year look back. The client initially questioned the look back considering the incumbent had been reviewing the same claims for years. We subsequently uncovered tens of millions of dollars in inappropriately played claims within the first three months. Our roots in healthcare trace back to the audit business where we were one of the original CMS recovery audit contractors when the program commenced in the 2000s. Our years of work with CMS has made us a trusted partner. In 2023, we worked closely with CMS and several MACs to develop a new solution for hospice audits to address a nationwide gap in waste and abuse oversight. This novel audit type, born out of data mining, analytics, and policy expertise, not only aids CMS in expense management, but also exemplifies the success of our collaborative, nimble, and innovative partnership with CMS. The positive results of this pilot, launched in late 23, is now in production for 2024. This example underscores the efficacy of our strategic collaboration with CMS. This collaborative and innovative style led to our audit business growing 9% in 2023, despite restrictions imposed on the RAC program during the public health emergency. Within our government clients, 2023 was very successful in terms of both contract wins and implementations. We generated revenue from two new federal contracts, RAC Region 2, and our HHS OIG contract. While still in the early stages of these engagements, we anticipate each to reach an improved steady state in 2025. A notable achievement within our government portfolio was the award of our first state Medicaid recovery audit contract from the New York State Office of the Medicaid Inspector General. This opportunity, into a previously untapped market for performance, demonstrates our ability to add value to many types of clients across the payment integrity landscape. Despite facing a protest from the incumbent, we are working closely with the Office of the Medicaid Inspector General to uphold the award. In the interim, we have commenced discussions with the state on how to optimize workflows in hopes of hitting the ground running once the protest has been resolved. The award from New York State is especially significant as it provides us with the opportunity to collaborate with the largest Medicaid fee-for-service state in the country, further expanding our reach and impact. We are excited by our entrance into and for the opportunity to grow within the state market, which we believe represents an industry-wide annual revenue opportunity of $300 to $500 million. Being with our government clients, revenue declined 14% for the full year. As discussed on previous calls, challenges emerged in 2023, including the timing of addressable claims under the public health emergency and reduced demand inventory within our mature CMS Medicare payer business. Despite these hurdles, our fourth quarter performance has shown a rebound, pointing back toward baseline figures. We have significant optimism for our government business, despite these PHE-related challenges, with a rebound in volumes post-PHE, the New York State RAC win, and our ramping federal contracts. Our team's recent success in both government and commercial implementations has laid a strong foundation for future growth, and I take immense pride in their accomplishments. Equally as vital to our growth narrative is the improvement of our operational efficiency. Throughout 2023, we embarked on a series of strategic initiatives aimed at improving efficiency and automating manual processes. Last quarter, we talked about reconfiguring the factory workflow with a claims-based client which yielded increased savings, pulling fewer resources. This quarter, I'd like to touch on an initiative within our eligibility business. The service offering requires that we connect with other payers to include medical, pharmacy, dental, and property and casualty to orchestrate more accurate billings. Historically, this process was highly manual with no transactional feedback loop and was most often completed via paper billings. We made the strategic decision to partner with a leading electronic data interchange organization to serve as the intermediary to aggregate billings on our behalf. Through this partnership, we have significantly reduced friction, accelerated data collection, and notably reduced our use of human capital resources. Another key internal achievement from the past year was the reshaping of our overall approach to technology and workflow enhancements. Although some of our technology initiatives scheduled for 2023 were deferred to 2024, we dedicated the necessary time to develop a unified and comprehensive development strategy. This strategy encompasses completing the overhaul of our implementation process and shoring up our audit workflows to integrate artificial intelligence or AI via natural language processing, all without losing sight of our central data strategy and related competitive advantages. Looking ahead, With this comprehensive plan in place, we are optimistic about being able to operationalize these advanced technologies in 2024. We refer to this plan as project touring, and projected completion timeline is 18 to 30 months. We are excited as these projects are positioned to fuel both scale and efficiency. These efforts also support our goal to achieve our long-term EBITDA target of 20% in a timely fashion as revenues continue to demonstrate incremental growth. Our diverse portfolio of products and clientele provides a strong foundation for performance to achieve steady organic revenue growth. Looking at 2024, we expect government to lead the way while commercial continues to build upon its strong historical growth. The scaling of CMS RAC Region 2 and the HHS OIG contracts underscore this trajectory, as does our New York State RAC win pending resolution of the protests. While the government portfolio experienced some challenges in 2023, we are largely past those trials and expect to build off the 2023 trough. As a result, we are forecasting healthcare revenues to be in the range of $117 to $122 million for 2024. While our business has the potential to exceed these growth targets, we remain grounded, focusing our efforts on strategic initiatives that will fortify our long-term market position, enhance our product offerings, and allow us to aggressively pursue new opportunities. We have learned that implementation timing can vary, and we are therefore charting a course that is in the best interest of our stakeholders, and equally important, places Performant on a sustainable path for long-term success. In considering our outlook, it is important to address the recent change healthcare outage. While as of now, Performant has not been directly impacted by this outage, we are mindful of the challenges faced by payers and providers navigating through claims and payment processing difficulties. The strain on our system coupled with potential processing delays could affect payers' behavior and the timing of available claims for our review. Although the situation is fluid, with information updating daily, we deem it necessary to bring attention to this issue. Despite the challenges posed by the outage, we perceive any resulting disruptions as temporary. Reflecting on our achievements, we attribute our current position to how we collaborate with clients to address both short and long-term needs. Our commitment to such collaboration remains steadfast, providing support for the decisions our clients make to navigate through uncertainty. Collectively, we've accomplished more in 2023 than I could have imagined. Without our amazing team, we would not have been able to implement 41 commercial opportunities, build our most robust pipeline to date, undertake multiple projects to become more efficient, and most importantly, deliver on our mission to reduce waste in the healthcare system and redirect those funds to improve health outcomes. Our clients recognize Performant as a leader in the payment integrity space, knowing it is our people who live and breathe our client-centric philosophy. I want to wholeheartedly thank our team, and I remain confident in our strategy to grow through our unparalleled commitment to our clients. as we strive to be the most innovative and adaptable partner in the healthcare payment integrity industry. With that, I'll hand it over to Rohit Ramchandani, our Chief Financial Officer for Discussions of the Financials. Rohit? Thanks, Tim.