Lisa C. Im; Chairman, CEO & Secretary; Performant Financial Corporation
Richard Zubek; IR Professional; Performant Financial Corporation
Rohit Ramchandani; SVP of Finance & Strategy; Performant Financial Corporation
Simeon M. Kohl; President; Performant Financial Corporation
Jacob Michael Stephan; Research Analyst; Lake Street Capital Markets, LLC, Research Division
James Maxwell Rush; Assoxiate Analyst; Craig-Hallum Capital Group LLC, Research Division
Good afternoon, ladies and gentlemen, and welcome to the Performant Financial First Quarter 2023 Earnings Conference Call. (Operator Instructions) This call is being recorded on Tuesday, May 9, 2023. I would now like to turn the conference over to Richard Zubek, Vice President, Investor Relations. Thank you. Richard, 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 first quarter 2023 results. If you have not, a copy is available on the Investor Relations portion of our website. On today's call will be Lisa Im, Board Chair; 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. Our 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 disclosed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release. Lastly, I'd like to formally announce that the company will be hosting its inaugural Investor Day event on June 20 in New York City. Please contact me via e-mail if you'd like additional information or have interest in attending. I would now like to turn the call over to Lisa Im. Lisa?
Lisa C. Im
Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. We are announcing several changes today, which make the future of Performant even more exciting. I'm proud of the effort that this entire team gives each and every day as it has allowed us to pursue and grow our health care business in ways that many thought impossible. Thank you all for your dedication and hard work.
As you already read in our press release, I am stepping down as CEO of Performant. I intend to continue as our Board Chair. But given that the transition to becoming a pure-play health care company is complete, it is the right time for me to hand over the reins to Simeon Kohl, who will continue to execute his exciting vision for the growth of Performant Healthcare Solutions. This should come as no surprise to anyone given Sim's dedication to the company and the growth that he and his team have achieved thus far in the health care payment integrity space. From the time I first met Simeon, it was very clear to me that he was a visionary with a bright future ahead of him. Simeon has served as the head of our health care operations since joining Performant and was promoted to president in March of last year. Simeon drove the significant and notably fully organic growth in our health care revenues and led our health care business to become the focus of the company.
We are also pleased to announce the promotion of Rohit Ramchandani to Chief Financial Officer. Rohit has been with Performant for over 9 years and most recently served as Senior Vice President of Finance and Strategy for the past 2 years. In that role, Rohit successfully navigated the actions to transform Performant away from its legacy recovery business and continue investing into the health care markets. With that, we want to congratulate both Simeon and Rohit on their promotions. I turn the call over to our new CEO, Sim.
Simeon M. Kohl
Thanks, Lisa, and good afternoon, everyone. I am truly honored for the opportunity to lead this amazing organization of dedicated and talented professionals. With our clarity of vision and a relentless commitment to delivering value to our clients, I am confident that we can achieve our goals and take Performant to new heights.
From the time I joined Performant in 2012 through our first quarter of 2023, I have been fully invested in our long-term success. As I previously shared, our ability to expand services within existing clients remains a key pillar of our success. And our sales pipeline of new opportunities continues to grow as a result of our increased focus on mid-market payers.
However, key to achieving our growth objectives is the timely conversion of these new opportunities into revenue-producing engagement. During first quarter of 2023, we successfully delivered on this objective by completing 11 new commercial implementations. And for context, the 11 new implementations during the quarter is more than half as many as we did in all of 2022, which was an impressive year of new implementations in its own right. As impressive as our implementation cadence was in the first quarter, there is still room for improvement. We are making investments into our platforms and workflows, and we expect these investments, coupled with the demonstrated commitment of our team to yield dividends during this year and into 2024.
With regards to the public health emergency, we were encouraged that President Biden ended the national emergency last month, and we expect the public health emergency will officially end later this week. Following the end of the PHE, it is expected that the health care industry could face a number of administrative challenges. Our clients, however, indicate that these challenges could be minimal and temporary. We will continue to be a strong partner to our clients during this transition period and hopefully, the final step toward a return to normalcy from the era of COVID-19.
Our revenues in the first quarter of 2023 were lower compared to the first quarter of 2022 due primarily to a decline in demand inventory within our CMS MSP business beyond what we could have anticipated. Demand volume under this contract is driven by industry-wide Section 111 reporting. This reporting can ebb and flow according to a myriad of factors, many of which are beyond our control. It is worth noting, however, that the demand volumes have already returned to expected levels, and we anticipate that there is a potential to recoup roughly $0.5 million of revenue over the remainder of the current year associated with the Q1 dip.
Our audit or claims-based business continued to achieve double-digit year-over-year revenue growth, a trend we anticipate continuing as previously implemented contracts mature, combined with the ramping of new programs and our current expectation for future implementation. We are also seeing early results on our initiatives to increase scale and drive greater efficiency within the claims-based business. And speaking of implementations and future revenue growth, we are happy to report that during Q2, we completed certain implementation activities for our new RAC Region 2. Our teams have made amazing progress in tandem with CMS' dedicated effort, and we anticipate the commencement of some operations this quarter. We believe this speedy implementation marked a milestone for the CMS RAC program, demonstrating that Performant has the knowledge and capability to facilitate the transition of any RAC region or other similarly large audit program.
Within the eligibility business, we continue to make progress with our commercial growth initiatives. In particular, the implementations we completed during Q4 of last year and Q1 of 2023 will be key in supporting our growth expectations for the remainder of 2023 and beyond. Within our government eligibility work, the renewed CMS MSP contract is now fully operational. And as I mentioned, the available inventory of demand is trending back to the norm.
Though the first quarter was weighed down by a dip in available MSP inventory, we remain bullish on 2023. Our sales pipeline is robust and our cadence of new program implementation is progressing at or, quite frankly, at times greater than expected. Both our eligibility and claims-based businesses are exceeding milestones in the rollout of new mid-market opportunities as well as the expansion of existing national programs, and our initiatives to improve scale are showing strong promise.
Before I hand the call over to Rohit to go over the results of the quarter, I wanted to take a moment to congratulate him on his promotion to CFO. Rohit has served as a trusted partner during our years of health care growth and company transformation. I'm excited to continue our partnership as we progress into the next chapter of Performant Healthcare Solutions. With that, I'll hand it over to Rohit, our Chief Financial Officer, for a discussion of the financials. Rohit?
Thanks, Sim. I'm really excited to continue serving the company and our many constituents as Performant's CFO. It's remarkable to have been a part of the journey thus far and have an inside view to all the strategic and financial momentum we have made, and I'm here to continue contributing toward our ongoing progress.
With that, let's dive into the quarter's results. Our first quarter 2023 results reflect our continued efforts to grow our health care market operations, and we remain pleased and excited with our trajectory. Total company revenues in the quarter were $25.7 million, which included health care revenues of $22.9 million. Our customer care outsourced services business accounted for $2.8 million during the quarter, a decline from last quarter but in line with our expectations for this business as we continue to anticipate shrinking customer care market revenues, short of the restart process of federal student loan programs.
As Sim noted, our health care revenues in the first quarter had a downward trend, primarily driven by our eligibility government programs, specifically our CMS MSP work. But we continue to see strong performance within our commercial clients, a key growth channel. As a result of the government volume declines, revenues from our eligibility services for the first quarter of 2023 were $12.5 million or a decrease of just over 12% when compared to the roughly $14 million reported in the first quarter of 2022.
As Sim mentioned, we've seen the volumes return and anticipate the potential to recoup a portion of the missed revenues across the remainder of the current year. I'd also like to note that the rest of our eligibility programs are currently displaying growth consistent with the efforts of historical implementations.
Overall, we expect the 2023 annual revenues from eligibility services to meet and likely exceed those of 2022. Within our claims-based business, also known as claims auditing, our revenues in the first quarter of 2023 were roughly $10.4 million, which was an increase of nearly 14% compared to the $9.1 million in the first quarter of 2022. We anticipate this growth trend to continue.
Moving on to expenses. Operating expenses in the first quarter were $29.5 million, which equates to approximately $1 million higher compared to the first quarter of last year. This was primarily driven by increases in headcount and salaries and partially offset by lower other operating expenses. We currently anticipate that the increases in salaries and headcount will continue to drive growth in operating expenses in the upcoming quarters, as we continue with new implementations and are pleased that we are not experiencing the hiring headwinds we experienced early last year.
As Sim mentioned, we're excited about our current implementation cadence and the potential for margin expansion as a result of our various investment activities. I would like to reaffirm our guidance for 2023 health care revenues to be in the range of $105 million to $110 million and for the full year 2023 adjusted EBITDA to be in the range of $2 million to $5 million, which is reflective of our ongoing investment and growth initiatives as well as improvements in our operational efficiencies. We are excited to continue growing the business and have our eye on both our revenue targets and the expansion of EBITDA margins.
Aside from operational improvements as we continue to scale, we anticipate seeing a natural expansion of our margins through operating leverage. This is supported by management's estimated gross margins of the blend of our various markets around [$40 million] as it stands today with the room for expansion. We are encouraged by what we are seeing thus far in 2023. Our long-term strategy remains steady, and we are excited to continue delivering results as we march toward a larger and stronger future. Operator, will you please open up the line for questions?
Question and Answer Session
(Operator Instructions) Your first question comes from the line of George Sutton from Craig-Hallum.
James Maxwell Rush
Hey, Simeon and Rohit. This is James on for George. Congratulations on the promotions. So first off, the 11 commercial implementations really stood out. I think your expectations were basically for similar cadence as you saw last year, which means about 5 a quarter. So what sort of drove the strength there? Can you talk about the mix between audit and eligibility? And then could you talk about sort of the cadence that you expect throughout the remainder of the year?
Yes. James, it's Rohit. Thank you. And I think I can hit your latter question and then Sim, if you want to comment on sort of the driving of the 11. But in terms of them, the split is actually pretty healthy between audit and eligibility. And we're pleased to see this because I think as we've shared in the past year, we had a little more skewing towards claims auditing implementations adding into our pipeline across '22. So happy to see that return to more of a healthy split in this year. And I think we do anticipate that this strong cadence, similar to last year or better, as you've seen, should continue.
Simeon M. Kohl
Yes. And James, it's Simeon here. So look, I think it's also a reflection of what we've been talking about in terms of a healthy sales pipeline and the efforts the team has in terms of converting those sales to signed deals. So we look at some of the opportunities, and we have a focus right now on trying to push them through the pipeline as quickly as we can to get them to contracted opportunities. And then once they're contracted, it really is around what we've discussed and you've heard in the prepared remarks around how we have an internal initiative to really try to move from contracting to revenue. And so in doing that, we have a focus around just trying to expedite the time frame of getting data in-house, getting audits or eligibility, depending on the service, ramped up. And so that ultimately, seeing a larger number there is just a pure reflection of we've made some progress in expediting that kind of onboard process.
James Maxwell Rush
Great. And then some of the larger payers and CMS have sort of made moves to reduce pre-authorizations. I would assume that would be a positive for your business, particularly on the audit side. I'm just kind of curious if that's come up in conversations.
Simeon M. Kohl
Yes, it's a good call out, right? So I think historically, depending on policy of the various payers, anything that's pre-auth is something that we typically can't look at from an audit perspective, as you might imagine. And so again, it depends payer-to-payer and various policies. But certainly, removing that pre-authorization does give us more opportunity to look at claims that would otherwise be designated as a no review.
James Maxwell Rush
Great. Last one for me. Are you able to sort of speak to any success that you've seen so far through your relationship with CAQH? And I will hop back.
Simeon M. Kohl
Yes. No, we appreciate it. We are both on -- in terms of opportunities, as we anticipated, I think the payer community is recognizing the value that both organizations, CAQH and Performant, bring together in terms of leveraging their asset, their data asset, through the capabilities and skills that we have. So we're seeing increased opportunities in the pipeline as we anticipated. And though still a little bit in the early innings here, but we are meeting or exceeding expectations in terms of just some of the operational components with a few clients that we have underway.
Your next question comes from the line of Jacob Stephan from Lake Street Capital Markets.
Jacob Michael Stephan
I'd like to extend my congratulations as well. I guess, first, just focusing in here. Could you talk about the commercial payer revenue? I know last quarter, you guys had broken it out, growing 66%. But just wondering if you could update us on revenue from commercial payers?
Jacob, thanks. And yes, so last quarter, we've broken that on an annual basis, and we will endeavor to do so again this year. I think particularly, the way we guide to an annual number and the cadencing between quarters, we believe that split is more meaningful to dig into on an annual basis, something we'll continue to evaluate if it ends up becoming a different view. For now, what I can share is I think the commercial programs are still showing a very strong growth rate, double digits, and should drive the expectations we'd shared last quarter of sort of a lot of our current year growth continuing to stem from the commercial side.
Jacob Michael Stephan
Okay. That's helpful. Maybe just focusing on the public health emergency ending here. Have you guys heard any more kind of -- any way to quantify maybe how many claims may become available and kind of how those may, I guess, bleed out over the coming years?
Simeon M. Kohl
Yes. So to answer the question specifically, the answer is no. We have not been able to quantify that. And I think in context, we're talking 2 components, right? One is a historical look back, right? So is there any tailwinds associated with claims that were untouchable because there was a COVID diagnosis. And once the PHE expires, do some of those claims get moved back into the system as long as statute of limitations haven't expired, et cetera?
And so we've been working with the CMS and the various payers to just try to understand what the appetite for those claims are and what the policies are going to be. We're looking forward to trying to get greater clarity around that once this PHE at the end of this week is finally expired. But we don't have any real good indication to share with you what that might look like in terms of upside.
I can tell you though that it's beyond just the historical claims that have been "turned off" because of COVID in terms of our access to them. But there is also claims that would otherwise be in our system that were also kind of put to the sideline because they had some correlation with COVID. So if you think about our concepts and what we ultimately look at, they could have things such as oxygen and DME, durable medical equipment, that are tied to a COVID diagnosis.
And we had many of our payers also restrict some of those particular concepts, which impacted inventory. So it's a two-prong. We are going to start learning more. I'm certainly more bullish on the fact that we'll see those concepts turn on quicker than we'll get access or an understanding of what possibility are for historical inventory. But look, overall, as we've been saying, having this PHE behind us is only a helpful component of our business.
But I think it's important to point out that these things don't happen overnight, and we're just going to have to work through with the payer communities to understand how they're going to kind of apply policies and then what the impact and timing is for our business.
Thank you. There are no further questions at this time. I'd now like to turn the call back over to management for any closing remarks.
Simeon M. Kohl
We thank you for joining us today, and we appreciate all of the support of our investors. I appreciate all the hard efforts of the Performant team members, and we look forward to rejoining you on next quarter's conference call. Thank you.
Thank you, sir. Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.