Performant Financial Corporation (NASDAQ:PFMT) Q1 2024 Earnings Call Transcript May 7, 2024
Performant Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings ladies and gentlemen and welcome to Performant Financial Corporation’s First Quarter 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Tuesday, May 7th, 2024. I would now like to turn the conference over to Jon Bozzuto, Head of Investor Relations. Please go ahead.
Jon Bozzuto: Thank you, operator. Good afternoon everyone. By now you should have received a copy of the earnings release for the company’s first quarter 2024 results. If you have not, a copy is available on the Investor Relations portion of our website. On today’s call we will be we’ll be 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: Thank you, Jon. Good afternoon everyone and thank you for joining us for our earnings call. We are pleased with our first quarter results and are encouraged by our prospects which gives us the confidence to reiterate expectations for the remainder of the year. I will share our operational accomplishments and then Rohit will walk you through our financial results. Our double-digit year-over-year revenue growth as well as our double-digit implementations for the first quarter of 2024 are result of the consistent execution of our growth strategy. We recognize that we need to be innovative and disciplined in order to penetrate our large addressable market. Quarter of our strategy has been our client centric and technology-driven approach.
I will dive into each as we highlight our first-quarter results. Being client-centric at Performant means that we partner with our clients to build and optimize payment integrity programs tailored to their respective needs today and into the future. Our commitment to partnership as the market shifts and evolves has led to Performant having completed 10 new implementations in the first quarter collectively expected to generate between $5 million and $6 million of revenue on an annualized basis and all 10 implementations were additional opportunities within existing clients. I often tell our team that acquiring new clients is certainly rewarding, but expansion within existing clients is a testament to the value of our services and our ability to cultivate enduring partnerships.
Our consistent cadence of implementations is proof that our client-centric approach and results-driven culture are effectively serving our clients. Partnering with clients to navigate the complexities of the healthcare industries lies at the heart of Performant’s value proposition. When navigating the Payment Integrity landscape, numerous factors influence decision-making. Amongst these is the recent change healthcare outage, a complex challenge that disproportionately strained the payer/provider relationship. Throughout this period of instability, we worked with our clients to delicately navigate the situation, while also minimizing provider abrasion. We continue to see evidence that the impact of the outage on Performant should be temporary.
Certain products that are introduced early in the claim life cycle experienced several weeks of decreased volume but then return to normal levels as claims processing restarted. For some clients, we can quickly catch up on volumes. For others, we would redeploy resources to work aged inventory to minimize impact and there may be a few that will take longer for us to catch up on production volumes. Our Eligibility business continues to perform well with growth of 7% in the first quarter. Certain commercial clients have shown significant expansion in addition to new clients coming on board. Our MSP premium solution, which supports Medicare Advantage programs and identifying the most suitable payer, has seen noticeable success in this industry challenges.
Medicare Advantage has faced many industry headwinds including adjustments to star ratings and reduction in Medicare Advantage reimbursement rates, with each putting additional pressure on MCOs operating Medicare Advantage plans. Demonstrating our client-centric approach, we quickly identified this challenge for certain of our MCO partners by leveraging our MSP premium solution as an avenue to further contain costs. Furthermore, our expansion into cost avoidance solutions within the Eligibility business has proven successful leveraging our robust data assets and expertise and in response to clients requesting that we coordinate benefits earlier in the payment cycle, we’ve successfully launched new cost avoidance offerings to the commercial market.
Our ability to work closely with clients to understand their evolving needs has been instrumental in driving our growth. I am confident that this strategic approach will continue to reap dividends as the performance story progresses, while also providing a welcome product diversification and growth to offset the gross headwind of our long-standing CMS MSP contract. Demand for our clinical audit business has been strong with a 19% increase in the first quarter, through continued scaling of commercial client implementations and our CMS RAC Region 2 contract. We continue to capitalize on efficiency gains in this segment of our business. In previous quarters we have discussed reconfiguring the factory workflow with larger audit based clients to optimize workflows, data exchanges and client collaboration and communication.
This effort began with a select group of clients, primarily with readmission audits. Encouraged by the outcomes, we’ve expanded our Scope to include outpatient audits as well. The strategic shift not only enhances our operational efficiency, but also offers our clients a more streamlined experience, enabling them to optimize their allocation of resources. Turning to technology, I’m excited to welcome the RecordsOne team’s performance. Cutting Edge Technology has been core to both performance identity and strategy. And while our existing technology uses machine learning to effectively manage and score large clusters of data, the addition of RecordsOne technology incorporates more advanced AI Technology that uses large language models and natural language processing.
We’ve previously piloted and licensed this technology to enhance our audit workflow process and quickly realize its potential to improve our accuracy and efficiency. The use case today centers around our ability to ingest and score large amounts of claims identifying those with a higher likelihood of findings and equally as important those without. We are also exploring how natural language processing may improve the speed and accuracy with which our audit teams review medical records. Today, nurses and coders spend a significant amount of time, combing through data necessary to assess clinical outcomes. We believe this technology will empower our clinical teams to review claims and extract pertinent information more quickly. We see numerous strategic benefits from bringing this technology in-house.
We believe being able to, coupled with technology with performance rich data assets should provide numerous opportunities to expand the technology well beyond its current scope. And perhaps more importantly, we can now guide the development of this new AI platform to align with performance existing technology roadmap. Our core plants principles of client-centricity and technology-enabled solutions have driven results and afforded us unique credibility in this industry. We continue to make significant inroads with commercial payers, our largest opportunity. We have also expanded our operations and bolstered our credibility to can be competitive in the State Medicaid market, a new space for performance and one with significant upside. This new State market opportunity is only made possible through well proven solutions, highly adaptable workflows and a robust information security infrastructure that our clients can rely on.
Our ability to compete was illustrated by one of the largest State Medicaid RAC programs, New York awarding us their Medicaid recovery audit contract in October 2023. While the award was protested and ultimately overturned, the decision to do so it was not based on performance capabilities or qualifications. It was a technicality relating to a reference, that we cited in our proposal. The good news however, is that New York State has decided to reissue — reissue all three cost containment RFPs, including the RAC, TPL and Subrogation. We are actively pursuing the RAC and TPL opportunities, applying the lessons learned from our original proposal submissions. While the protest outcome was unfortunate, we’re confident in our ability to demonstrate the value of our services and overall partnership to New York State, once again.
Meanwhile, we continue to pursue other state RFPs. And we maintain significant enthusiasm for the potential this market holds. Our commitment to client centricity and innovative technology is the bedrock on which performance value proposition stands. These principles are not just integral to our culture, that have also been instrumental in driving our strong first quarter growth a trend we anticipate continuing throughout 2024. It’s crucial to note, that financial metrics are just one aspect of our growth narrative. Our strategic approach has improved our efficiency. We’ve implemented new opportunities for future growth and are aggressively pursuing new market opportunities. I’m excited about our present standing and the promising trajectory we’re charting for the future.
With that I’ll hand it over to Rohit Ramchandani, our Chief Financial Officer for a discussion of the financials. Rohit?
Rohit Ramchandani: Thanks, Sim. As Sim mentioned, we are encouraged by our results in the first quarter of 2024. Total company revenues in the quarter were $27.3 million, which included healthcare revenues of $25.8 million. Our customer care outsourced services business accounted for $1.5 million of the revenue during the quarter, a decline from last year, which is in line with our expectations for this business. We expect this business to remain flat to the first quarter results in the second quarter. Last quarter, we spoke about this business having the potential to grow but we remain conservative with our expectations as we are beholding to a turbulent regulatory environment within this market. Turning to healthcare. Our first quarter revenues grew roughly 13% year-over-year, displaying all around solid growth.
Our eligibility markets within healthcare for the first quarter were $13.4 million of revenues, representing an increase of roughly 7%. Commercial clients led the way, as Sim highlighted, through the adoption and scale of newer products that are relevant to market trends. These helped to offset the eligibility growth anchor of our longstanding CMS MSP contract. We expect overall positive results to continue as we feel we have a best-in-class offering, especially within our commercial clients, as we leverage learnings from our long-term government relationships. Within our claims base business, also known as claims auditing, revenues in the first quarter of 2024 were $12.4 million, representing an increase of almost 20%. Commercial operations continued to perform well as existing implementations scaled in line with our expectations.
Government in particular also performed well, as CMS RAC Region 2 continues to grow. As I’ve previously noted, we expect this contract to hit steady state in late 2025. We believe that all of our claims based offerings will continue to bear fruit of efficiency efforts from our project touring initiative, which itself will be further bolstered from our latest venture of adding natural language processing technology through the acquisition of technology assets from Records 1. We maintain our enthusiasm for commercial growth having implemented 10 opportunities in the first quarter with a robust schedule still ahead. As Sim mentioned, all 10 are new statements of work with existing clients. We have previously detailed that our most significant opportunity lies within commercial clients, with a great deal of our growth strategy stemming from a land-and-expand approach.
We have existing relationships with five of the top seven commercial plans, and we believe it’s a strong validation of our continued value proposition that all 10 implementations this quarter came from existing clients. Our implementation momentum is promising, with these Q1 implementations carrying an estimated annual contract value of $5 million to $6 million. We maintain our outlook for the 2024 implementations to match or surpass the estimated annual contract value from those that we did in 2023 of $18 million. In addition to revenue growth, we maintain our commitment to expand margins through scale and efficiency gains. I’m encouraged by the early pace of our IT teams and the project touring initiative. And as Sim discussed, the conversion of Records 1 from a partner into a key technology asset for performance healthcare solutions.
I won’t rehash the details of that technology, but I do want to touch on the dynamics of the acquisition. As I stated on the fourth quarter call, project touring included IT improvements to increase efficiency as we intentionally expand spend in the short-term to streamline and reduce our overall IT footprint in the long-term. This acquisition fits squarely into that strategy to ultimately make our workflows more efficient. We have strategically structured this deal to fit within our capital needs and ultimately feel comfortable having financed the transaction between our cash on hand and current credit facility with Wells Fargo, without sacrificing the ability to continue tackling organic growth opportunities. Shifting to operating expenses.
These represented $31.3 million in the first quarter or roughly $2 million higher compared to the first quarter of last year. This was primarily driven by increased spend to scale our record implementations as well as investments into sales and marketing to drive further growth. Our adjusted EBITDA for the quarter was negative 1.2 million or approximately 0.5 million ahead of the prior year period. This was slightly ahead of expectations led by revenue growth. We feel confident reiterating our guidance for 2024 healthcare revenues to be in the range of $117 million to $120 million. Total company revenue to be between $124 million and $129 million, and for the full year adjusted EBITDA to be in the range of $4 million to $5 million. As mentioned last quarter between project touring and our investments in the sales and business development, we are still on track to add $3 million to $3.5 million in discrete increased operating spend on top of our typical investments into contract implementations.
We continue to have a strong pipeline of sales and implementations ahead of us and we are excited to reap the expanded opportunities and scale efficiencies that will come from these tactical investments. We made the decision three years ago to become a pure-play healthcare company and we expect to hit an adjusted EBITDA inflection point later this year and a cash inflection point in the next. We were diligent to renegotiate our revolving credit facility that would safely support our growth efforts until we flipped into self-sustaining cash flows. We continue to feel confident about our ability to increase revenue and expand our footprint with our market positioning and capital structure we have today. Operator, would you please open up the line for questions.
Operator: Thank you. [Operator Instructions] Our first question is from George Sutton with Craig-Hallum Capital Group. Please proceed.
See also 25 Best Kept Secret Places to Visit in Florida and Luxury on a Budget: 12 Affordable Smartphones with Premium Features.
To continue reading the Q&A session, please click here.