Performant Financial Corporation Announces Financial Results for Third Quarter

On Thursday, November 3rd, Performant Financial Corporation (PFMT), announced financial results for third quarter ending September 30, 2016. The company also hosted a conference call to discuss the results.

PFMT is one of the few publicly traded companies in the ARM space. The company has also historically been one of the Department of Education’s (ED) top performing private collection agencies. However, the firm’s contract with ED expired in April of 2015 and they have not received placements from ED since the contract expired. The ED RFP remains in a delayed re-bidding process. (Editor’s note: See multiple prior insideARM stories - including this one - on the delay in the ED RFP.)

Third Quarter Financial Highlights

• Total revenues of $31.2 million, compared to revenues of $38.5 million in the prior year period, down 19.0%
• Net loss of $0.7 million, or $(0.01) per diluted share, compared to a net loss of $0.3 million, or $(0.01) per diluted share, in the prior year period
• Adjusted EBITDA of $4.7 million, compared to adjusted EBITDA of $6.5 million in the prior year period
• Adjusted net income of $0.8 million, or $0.02 per diluted share, compared to an adjusted net income of $0.8 million or $0.02 per diluted share in the prior year period

Student lending revenues in the third quarter were $23.8 million, a decrease of 16.6% from $28.5 million in the prior year period. The U.S. Department of Education and Guaranty Agencies accounted for revenues of $3.9 million and $19.9 million, respectively, in the third quarter of 2016, compared to $6.0 million and $22.5 million in the prior year period.  Student loan placement volume during the quarter totaled $0.7 billion, compared to $0.5 billion in the prior year period. This figure reflects the lack of placements from the Department of Education a 28% uptick in placements from Guaranty Agencies.

Healthcare revenues in the third quarter were $3.0 million, down from $5.1 million in the prior year period, as the Company's healthcare revenues continue to be adversely affected by the limitations on the scope of recovery activities and wind down of the current contract that have been imposed during the Centers for Medicare and Medicaid Services ("CMS") contract transition. Medicare audit recovery revenues were $1.7 million in the third quarter, a decline of $1.8 million from the prior year period. Commercial healthcare clients contributed revenues of $1.3 million, a decrease of $0.3 million from the prior year period.

Other revenues in the third quarter were $4.4 million, down from $4.9 million in the prior year period.

On the positive side, the company discussed new contract awards. In the earnings announcement PFMT CEO Lisa Im stated:

“We are very fortunate and excited to be able to announce that CMS recently awarded Performant two regions under its Medicare Fee-for-Service Recovery Audit Program contract, which includes Region 1, the reconstructed Northeast Region and Region 5, the newly created National Durable Medical Equipment and Home Health region.  We believe this dual award is a reflection of the hard work and dedication of our employees, as well as our ability to work effectively with all of our hospital partners, and we look forward to continuing our relationship with CMS.

Additionally, in September, the Internal Revenue Service announced that Performant was selected as a contractor on a new initiative to collect, on the government’s behalf, outstanding inactive tax receivables.   Work under the new contract is anticipated to begin during Spring 2017 and is expected to have a favorable impact on our fiscal 2017 revenue.”

insideARM Perspective

As noted above, PFMT has historically been one of the strongest performers on the ED contract.  PFMT has had the ED contract for years.  However, they were not one of the five PCAs that received extensions in March of last year. As a result, they have not received any new placements since last April.  Still, without new placements for 15 months, ED revenues for the quarter were still $3.9 million. That number dramatically illustrates why so many ARM companies are participating in the ED RFP.

In the PFMT quarterly reports and conference calls interested parties listen carefully for updates on the ED RFP. However, management did not provide any newsworthy updates.

During the earnings call Im briefly discussed the ED contract,

“On the Department of Education procurement update, the complete RFP responses were submitted at the end of February. At this time, there are no commitments from ED on when the contracts will be awarded, start or how many vendors they will select.”

When asked by an analyst for additional color, Im responded:

“I think the only thing we can -- that we know is, they continue to make sure that they are going through the process, so just specific questions, administrative kinds of details. So we do believe that they are going through a very thorough and good process and they are still progressing through that.

Obviously, we're hopeful that it will be soon, but that's about it all the information we have at this time.”

Management was positive about the IRS contract and the new CMS contract, but also clear that both would require investment to properly ramp up. Im discussed the IRS opportunity:

“I think the overall opportunity longer term is fairly substantial. We look at -- I think in 2011 was the last sort of published estimate, but about $160 billion or so of delinquent taxes at the IRS. Initially, we do expect there to be a slower start, we want to make sure that the program is successful that we are working again, as I mentioned, very collaboratively with IRS that we're being very sensitive to consumers and any concerns that there may be about ensuring a very, I would say, programs with high regulatory compliance.

We want to make sure that we and the other vendors are stepping through how to make that program more successful. So I think at this point, I don't think we have a projection yet for 2017, it will be a bit of a slower start simply to make sure that we are getting off on the right foot. But we do think longer term that there is a fair, I mean, it's a big opportunity, if we can get this right.”

On the ramp up of both projects, Hakan Orvell, PFMT CFO commented,

“So as we look at next year, next year which will be an investment year, as you look at these contracts, but let me take them one by one. So first of all, as you look at the IRS contract and we have a fair amount of tax clients that we do this type of work with. So we have been -- we have a good appreciation for what the revenue cycle is.

And that typically lot of the revenue is achieved, obviously we get a contingency fee based on what we recover and a lot of it is payment plans that we enter default to taxpayers into. So what you're looking at is that you're building that funnel up and the full lump rate -- the full ramp you can see until maybe 9 months to 12 months later and it's actually going to be investing in -- we will have people that will be investing into do this work.

So it's very similar to the student lending business from that perspective as look at the kind of the investment stage and then we cloud actually start seeing some of the revenue. So again, that contract would be an investment here in next year.”