Performant Reports Q1 Earnings; Offers Take on ED Contract Cancellation

On Tuesday Performant Financial Corporation (Nasdaq: PFMT) reported financial results for its first quarter ended March 31, 2018. As one of the two firms that had been awarded a Department of Education student loan collection contract in January, the company's CEO comments on ED's cancellation of the large company debt collection program.

Highlights

• Total revenues of $57.0 million, compared to revenues of $33.1 million in the prior year period, up 72.2%
• Net income of $8.5 million, or $0.16 per diluted share, compared to a net loss of $3.0 million, or $(0.06) per diluted share, in the prior year period
• Adjusted EBITDA of $(3.4) million, compared to adjusted EBITDA of $2.8 million in the prior year period
• Adjusted net loss of $4.3 million, or $(0.08) per diluted share, compared to an adjusted net loss of $1.9 million or $(0.04) per diluted share in the prior year period

The company provided the following update regarding its Department of Education defaulted federal student loans award:

On January 11, 2018, the Department of Education announced that Performant Recovery, Inc., and another company had been awarded contracts to provide debt-collection services on defaulted Federal student loans. Those contract awards have been the subject of protests by unsuccessful bidders at the U.S. Court of Federal Claims and performance under the contract has been stayed pending the protest process. This past Thursday, May 3, 2018, the Department of Justice, on the Department of Education’s behalf, notified the U.S. Court of Federal Claims that the Department of Education has decided to cancel this procurement and, as a result, will terminate for convenience the contracts awarded to Performant and the second awardee. The notice states that the Department of Education has decided to cancel the current procurement as part of its plan to make substantial changes in the collection and administrative resolution of defaulted Federal student loans, which the Department of Education concluded would eliminate the need for this procurement.

“We disagree with the Department of Justice’s decision, particularly given that the Department of Education held over $120 billion in defaulted student loans as of September 30, 2017. Moreover, between 2015 and 2017 over $62 billion in student loans defaulted, which coincides with the wind down of the old unrestricted contract,” stated Lisa Im, Performant’s Chief Executive Officer. “However, we will continue to stay close to this situation because default rates are going to necessitate that actions be taken before long. As a reminder, our previously stated comments regarding 2018 guidance and the snapshot of our view of Performant in 2021, which reflects a business with over $200 million of revenues and 20% EBITDA margins, excluded any potential impact of an award from the Department of Education.”

The following data was provided regarding first quarter 2018 results:

Student lending revenues in the first quarter were $19.1 million, a decrease of 22.0% from revenues of $24.5 million in the prior year period. Guaranty Agency clients, U.S. Department of Education subcontracts and the U.S. Department of Education accounted for revenues of $17.9 million, $1.2 million and $0.0 million, respectively, in the first quarter of 2018, compared to $22.9 million, $0.4 million and $1.2 million in the prior year period.  Student loan placement volume (defined below) during the quarter totaled $0.9 billion, compared to $0.7 billion in the prior year period.

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Healthcare revenues in the first quarter were $31.3 million, up from $1.6 million in the prior year period. Medicare audit recovery revenues were $29.1 million in the first quarter, an increase of $29.0 million from the prior year period, primarily due to $27.8 million in revenues from release of liabilities on our balance sheet related to the 2009 CMS Region A contract, which terminated on January 31, 2018. The Company began work on the MSP CRC programs in February 2018, so the quarterly revenue from that contract of $0.9 million is really the result of about five weeks of activity. Commercial healthcare clients contributed revenues of $2.2 million, an increase of $0.6 million or 37.5% from the prior year period.

Other revenues in the first quarter were $6.6 million, down from $6.9 million in the prior year period. There is a delay in the U.S. Department of Treasury contract start up, which is causing a delay of revenue from Q1 (and likely Q2) to the back half of the year. Adjusted for this contract start up delay, other revenue is up $1.7 million, or 25% versus prior year period.

Net income for the first quarter of 2018 was $8.5 million, or $0.16 per share on a fully diluted basis, compared to net loss of $3.0 million or $(0.06) per share on a fully diluted basis in the prior year period. Adjusted EBITDA for the first quarter of 2018 was $(3.4) million as compared to $2.8 million in the prior year period. Adjusted net loss for the first quarter of 2018 was $4.3 million, resulting in $(0.08) per share on a fully diluted basis. This compares to adjusted net loss of $1.9 million or $(0.04) per fully diluted share in the prior year period. The adjusted amounts in the most recent quarter do not reflect the $18.8 million net benefit from the release of liabilities, net of related expenses, resulting from the termination of the 2009 CMS Region A contract.

As of March 31, 2018, the Company had cash, cash equivalents and restricted cash of approximately $10.5 million.

Click here for more background and information regarding the Department of Education student loan contract.