Performant Earnings Announcement Hits Three Hot Topics

Performant Financial Corporation (PFMT), historically one of the Department of Education’s (ED) top performing private collection agencies, yesterday announced financial results for its third quarter ended September 30, 2015. The company also hosted a conference call to discuss the results.

Third Quarter Financial Highlights

Total revenues of $38.5 million, compared to $39.6 million in the prior year period, down 2.9%
Adjusted EBITDA of $6.5 million, compared to $5.7 million in the prior year period
Adjusted net income of $0.8 million, or $0.02 per diluted share, compared to $0.7 million and $0.01 per diluted share, respectively, in the prior year period
Student lending revenues in the third quarter were $28.5 million, an increase of 1.6% from $28.1 million in the prior year period.
- Revenue attributed to the guaranty agencies was $22.5 million (vs. $15.1. million in Q3 of 2014) or roughly 58% of the total revenue for the company.
- Q3 revenue attributed to the ED contract was $6.0 million (vs. $13.0 million in Q3 of 2014) or roughly 15% of the total revenue for the company.
Student loan placement volume during the quarter totaled $0.5 billion, compared to $1.7 billion in the prior year period. This figure reflects the lack of placements from the Department of Education and fluctuations in placement volume from Guaranty Agencies.

As always, the earnings report and press release provide the raw numbers. The investor’s conference call, and specifically the Q&A portion of the call, provides additional color. As we have noted in our prior quarterly reporting on Performant’s quarterly earnings reports, the investor’s conference call provides the ARM industry with a detailed view of the company’s experience with government contracts, and specifically, the Department of Education contract.

Highlights from the Conference Call

Investment analysts covering Performant are very in tune to current events that could impact the company. It was no surprise that many of the audience questions focused on three primary topics:

Status of the Department of Education RFP - During last quarter’s conference call, Lisa Im, Perfromant’s CEO, offered her best guess that the ED RFP results would have been announced by the end of September. Obviously, that time frame has come and gone. Ms. Im was much more guarded in her comments yesterday regarding any timing of an award. Analysts tried to get her to predict the contract award by the end of 2015, but she did not take the bait.
Autodialing of cell phones - Analysts were also aware that the latest budget deal includes a provision allowing the use of an autodialer for federal debt collectors. When asked about it Ms. Im commented: “We’re very excited about that. We think that will actually be — it is finally sort of bringing the TCPA into the modern age. And so with respect to how it will impact our business, it will certainly be helpful in allowing us to work better with borrowers, to help resolve their obligations for any of our federal agencies. So we think it will definitely be a productivity enhancer.”
Possibility of IRS Outsourcing Collections to Private Agencies - One of the analysts asked about the pending house transportation bill that contains a provision requiring the IRS to outsource collections to private agencies. Ms Im commented: “There is legislation and it’s been in the press with respect to the IRS and the legislation from what we’ve read is to have the IRS actually contract with vendor partners. So of course, with any legislation, we don’t know what the outcome of that will be. It is being supported in a bipartisan fashion. We hope that it will pass and it will provide an opportunity for the growth for experienced tax collectors and we certainly provided those services to state agencies in the past.”

For those interested in listening to the entire earnings call, a replay of the call will be available on the Company’s website or by dialing 877-870-5176 (domestic) or 858-384-5517 (international) and entering the passcode 13622730.

insideARM Perspective

Performant’s Third Quarter Earnings Announcement sheds considerable light not only on the financial impact of the ED contract generally, but also on the impact of ED’s decisions earlier this year regarding the ED contract and the ongoing RFP saga.

It has been now been 6 months since Performant has received any new placements from ED. Even if the contract awards were announced by the end of 2015, and assuming Performant receives a new contract, management was very candid that ED revenue under any new contract would be negligible in 2016 as most of the ED revenue takes 9 months or more after placement to develop.

The company’s ED revenue in Q3 was $6.0 million. That is less than half of ED revenue in the same period last year ($13.0 million). One can assume that the ED revenue will continue to decline unless and until the company is awarded a new contract and placements are received under that contract.