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Edited Transcript of PFMT earnings conference call or presentation 9-Aug-18 9:00pm GMT

Q2 2018 Performant Financial Corp Earnings Call

Livermore Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Performant Financial Corp earnings conference call or presentation Thursday, August 9, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian A. Johnston

Performant Financial Corporation - VP, CAO & Acting Principal Financial Officer

* Jeffrey R. Haughton

Performant Financial Corporation - President & COO

* Lisa C. Im

Performant Financial Corporation - Chairman & CEO

* Richard Zubek

Performant Financial Corporation - IR Professional

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Conference Call Participants

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* Brian Dean Hogan

William Blair & Company L.L.C., Research Division - Associate

* Michael Matthew Tarkan

Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to Performant Financial Corp. Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Richard Zubek, with Investor Relations.

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Richard Zubek, Performant Financial Corporation - IR Professional [2]

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Thank you, operator. Good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's second quarter 2018 results. If you have not, a copy is available on the Investor Relations portion of our website. Today's speakers are Lisa Im, Chief Executive Officer; and Jeff Haughton, President and Chief Operating 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 Jeff Haughton. Jeff?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [3]

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Thank you, Rich. Good afternoon, everyone, and thank you for joining us for our earnings call. If you haven't already, please find the financial packet on our website that walks through our financial results for the second quarter in more detail. We also have posted a slide deck related to the agreement we announced today to acquire Premiere Credit of North America, referred to as Premiere, from ECMC Group, one of our largest clients and our lender.

We are excited about the Premiere transaction as we believe it is financially attractive and supports our strategy of growth and diversification. Importantly, the transaction enhances Performant's strategic value while supporting our goal of $200 million plus of revenues, with 20% plus margins in 2021.

Before we discuss our results for Q2, we would like to discuss the transaction in more detail. Referencing the slide deck posted on our website, there are 3 components to the overall transaction as detailed on Slide 3. First, we are acquiring Premiere, which is the diversified provider of recovery services across state and municipal government, student loan, commercial and healthcare clients. Premiere's client mix is highly complementary to Performant, and approximately 60% of its revenue come from nonstudent loan clients. Premiere generated approximately $23 million of revenues for the trailing 12 months ended July 2018.

Our philosophies of ethical and compliant consumer care and client-centric focus are completely aligned with Premiere's dedicated 330 employees located in Indianapolis and Nashville. Additional detail regarding Premiere's business is summarized on Page 4 of the materials.

Continuing on Page 3 of the materials, the second transaction component is our multiyear agreement with ECMC, where the combined Performant and Premiere will service ECMC's primary student loan recovery provider, creating meaningful current and future opportunities to grow our recovery business with ECMC as they increase their managed student loan portfolios.

The third component of the transaction is the beneficial amendment to our credit agreement with ECMC, which includes a 1-year extension of the initial maturity term out to August of 2021, while retaining the two 1-year extensions at Performant's option, that if exercised, would extend maturity out to 2023. In addition, the amendment includes a $10 million expansion of our additional borrowing capacity to $25 million total, which will give us more flexibility, if needed, as we execute on our growth and strategic alternative.

Moving to Page 5 of the presentation, in exchange for these 3 transaction components, ECMC will receive $1 million Performant shares at closing. In addition, there is a 5-year earnout that is based on achieving revenues through Premiere and the expanded ECMC relationship. We expect the earnout to deliver approximately 1 million additional shares to ECMC over 5 years, assuming 100% achievement of targets. The total share consideration, reflecting the upfront and potential earnout, represents approximately 3.9% of currently outstanding Performant shares.

Turning to Page 6 of the materials, there are numerous significant benefits of this transaction. Premiere has a meaningful diversified revenue stream, generated by highly complementary clients, while expanding and diversifying our call center footprint. The acquisition accelerates and enhances our growth strategy in providing recovery services for state and municipal government, commercial and healthcare clients. There is meaningful value and revenue opportunity in the expanded client relationship with ECMC, which is one of the largest managers of student loan portfolios and is well positioned to be an aggregator of additional student loan portfolios in the future. We are honored to be a trusted vendor partner to ECMC, and look forward to serving them in a larger capacity in the future. Also, the amended creditor agreement expands our borrowing capacity while extending the maturity of our capital structure.

Finally, the deal structure is financially attractive. There is a strong alignment of objectives as ECMC is incented to support Performant and Premiere's success through the earnout, which represents an estimated 50% of the transaction value.

In addition, Premiere's revenue contribution represents approximately 16% of the midpoint of Performant's 2018 estimated revenue guidance, while the expected shares to be delivered to ECMC represents approximately 3.9% of our current outstanding shares.

As shown on Page 7 of the materials, we expect the transaction to provide $7 million to $8 million of revenues in 2018, while reducing 2018 adjusted EBITDA by $800,000 to $1 million, assuming the September transaction close.

The EBITDA impact reflects both the timing of realization of cost efficiencies from the transaction, but also additional investment required in 2018 to support new recovery business from the expanded ECMC relationship that won't generate meaningful revenues until 2019. And note that there is a reconciliation of adjusted EBITDA in the appendix of the materials on our website.

For 2019, we expect the transaction to deliver $28 million to $32 million of revenues and adjusted EBITDA on the range of $500,000 to $1 million. Beyond 2019, we expect the transaction to deliver run rate revenues in the $30 million to $35 million range and adjusted EBITDA of $3 million to $4.5 million per year. We are happy to answer any questions about the transaction during the Q&A session and after our review of Q2 results.

So moving on to our results for the second quarter, in our student lending business, placements of $476 million were $415 million less than prior year Q2 due to the loss of the Great Lakes portfolio managing contract in late 2017. Q2 placements are also lower than Q1 2018 by $438 million, which is due to an artificially high Q1 number. That Q1 volume increase was attributable to 2 large clients, accelerating a routine reshuffling of inventory among vendors. It includes a recall of existing inventory, and it was also included in guidance given during our last earnings call.

As a reminder, Great Lakes terminated our student loan recovery contract last year due to a strategic decision to bond the loan servicing and recovery for their entire portfolio. The transition of our Great Lakes student loan inventory began in October 2017. Since the termination of our contract with Great Lakes, we have become a subcontractor for Great Lakes' new prime recovery contractor and servicer, Navient. In Q2, we received Great Lakes placements of around $468,000, which is $255 million below prior year when we worked as exclusive vendor partner to Great Lakes.

Student lending revenue in Q2 was $17.5 million, which was down $10 million or 36.4% below the prior year, largely due to a $7.6 million decrease in revenues from Great Lakes. Offsetting the declines in student loan recovery, we continue to build momentum in our healthcare operations across both government and commercial contracts. The MSPCRC contract is ramping as we anticipated and in line with our previously provided guidance of $10 million to $16 million of revenues in 2018. For the Q2 period, our revenues were just under $3.1 million for this contract.

For Q2 2018, our commercial healthcare revenues of $2.6 million were up $600,000 or 30% year-over-year and up $400,000 sequentially. We continue to ramp up several of our large commercial healthcare programs, which also entail coordination of benefits recovery for the Medicaid program, although we expect those revenues will become more material in the back half of this year.

On the CMS recovery audit programs, we began work under our Region 1 and 5 contracts during Q2 of 2017. Due to CMS' slowness in scaling up claims' volumes for the RAC program and a lower volume of audits in the first half of the year as a result of some internal technology enhancements, revenues were $400,000 during Q2.

In the other revenue category, revenues of $7.7 million were up $1.3 million versus last year and up $1.1 million sequentially. Our customer care operations generated Q2 revenues of $4.7 million, which was up $1.8 million versus prior year and $1 million sequentially. In addition, our other revenue line reflects growth from our IRS contract and other state tax recovery contracts, which are on growth target at $2.5 million, up $1 million versus prior year. These increases were enough to offset delay for -- of revenue from the new treasury contract, the start-up of which has been delayed by several quarters, but which we expect to begin soon. Again, this is a timeliness versus loss business as we think about the treasury contract.

So with that, I will turn it over to Lisa.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [4]

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Thanks, Jeff. Expenses of $34.7 million were below prior year by $1.8 million or 5%. The decrease was primarily due to decrease in third-party collection fees related to Great Lakes, which were larger in 2017, commensurate with revenue, partially offset by investment expenses and salaries due to ramp up in several large contracts.

As we discussed in our last call, several large contracts require investments up-front. These investment expenses in Q2 were about in line with our expectation for a total year investment cost estimate of between $9 million and $12 million.

As I mentioned in our last earnings call, we continue to increase the investment to support our healthcare contracts, including the MSPCRC contract. It is expected to be a significant contract, which will have a positive revenue and EBITDA impact this year, despite this being a ramp-up year.

During Q2, revenue from this contract was $3.1 million, which we believe will continue to grow during Q3 and Q4. We are still ramping up on this contract, and achieving strong 2018 results will depend on successfully hiring, training and engaging our healthcare employees. We will have much better visibility into the timing of the full ramp-up process as we push through Q3.

We expect that investment in the first half of the year will drive greater revenues in the back half of the year, particularly Q4, and expect to continue investing in ramping these contracts for the balance of the year. We remain cautiously optimistic that total health care will build significant momentum and be in the range of guidance we have provided for the full year.

With Q2 completed, we are adjusting our full year guidance to include the acquisition of Premiere, which is expected to have a positive revenue impact in Q4 but a small EBITDA loss, and an additional investment for a new student loan contract, which will have a positive impact in 2019, but be an expense in the back half of 2018.

Excluding the impact of the termination of the prior CMS Region A contract, we narrow our 2018 revenue guidance range to $130 million to $150 million. This remains a broad range due to the potential that we have in executing on both commercial healthcare contracts and the MSP start-up. Adjusted EBITDA guidance is between $2 million and $3 million. Including the impact of the terminated CMS Region A contract, which impacted revenue by $27.8 million, expenses by $9.0 million and EBITDA by $18.8 million, updated guidance for the full year for revenue is $157 million to $178 million and adjusted EBITDA is in the $21 million to $22 million range. We look forward to having Premiere join the Performant family, and thank ECMC for their trust in our service.

With that, I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Michael Tarkan with Compass Point.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [2]

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A few on the student lending side. First, on Premiere. Do they currently work with any of the collection agencies, whether it's small business or the other 2 that are operating under the 2017 ED? Do they work with any of those as a subcontractor?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [3]

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Yes, they do. They have a relationship there that is new and growing and complements the relationship that we have there as well.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [4]

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Okay. Can you touch on -- you mentioned there's new student lending opportunity. Can you just kind of elaborate on that a little bit?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [5]

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Yes. It's an additional small business relationship that we have added to, again, the portfolio that we've developed over time. So it's a way for us to work Department of Education business, while the unrestricted contract is still in this undecided term, I guess.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [6]

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Understood. Okay. You mentioned the -- last one on the student loan side. You mentioned the relationship with Navient as a subcontractor. Can you just kind of walk us through a little bit more on that sort of what kind of work are you doing for them? And is that sort of new Department of Education volume? Is that legacy volume? Just any kind of color there.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [7]

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Yes. So last year when Great Lakes transitioned their servicing over to the Navient platform, I think we talked about having a subcontract with Navient. And so this is actually the Great Lakes business that we're receiving under the Navient management.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [8]

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Got you. Okay. That's very helpful. On the -- just a couple of the other businesses. The commercial business, I've heard, I guess, it's a little bit delayed, commercial health care. Is anything changed in your outlook there? Or is it just taking a little bit longer to ramp up?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [9]

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Yes. I wouldn't say we call it delayed, and I don't think anything's changed in the outlook there. It is, as we've said along, back-half-loaded in 2018, given the timing of some new audit contracts that come in as well as some of the newer Medicaid reclamation contracts that we've launched as we see that inventory come in. It's just the timing, the revenue recognition, and everything goes -- that goes into it, it's really Q4 where you start to see some of that additional lift on the commercial side. So I wouldn't characterize it as anything's changed. There's a lot of new opportunities that we've been executing on, and we're heads down focusing on making it happen.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [10]

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Got it. Okay. The IRS contract, just -- I think you talked about it in connection with another business. Just kind of curious where that one stands this quarter.

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [11]

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Yes. So with regard to the IRS contract, look, I think, if we take a step back, we'd say that there is good growth in the program. We feel good about how the program has ramped up. As we talked about the opportunity, and we haven't talked about, I think, specifics in terms of what we expect for IRS, specifically on revenues this year in total. But we feel good about the momentum in that program as we think about the opportunity longer term and the size of what that contract could be.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [12]

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Yes. And Mike, I would say, as we've talked in the past to IRS contract, the agency itself has been pretty cautious in the ramp-up of the contracts, just making sure that everything was working, that the quality of service that the vendors were providing was spot-on. Because it's important to them that this program was executed in a methodical and cautious way to ensure that the program was rolling out in accordance with their objectives, which is, obviously, to get delinquent taxpayers paying taxes but also to make sure those taxpayers were cared for in a way that is consistent with what the IRS objective is. So with that said, we think, as we head into sort of Q2, what we believe is that the IRS is now in the black. And as we look forward, we think that there's probably an objective to increase the size of the program on the IRS' part. That's what we're thinking.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [13]

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Okay. Fair enough. I got 2 more. The run rate EBITDA that you're projecting here for Premiere, it looks like that's coming on the expense side for the most part. Is there a sort of big plan to kind of rationalize the expenses there to squeeze out more economics? And then, at what point -- how long does it take you to get to that run rate? Is that in connection with kind of the 2021 talk as well?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [14]

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Yes. I could probably say is, certainly, there's cost efficiencies, right? One of the benefits of this transaction as you think about combining our business with theirs and how they complement each other, there's certainly scale, right? There's a lot of IT and info sec and compliance, and things that we've done for years that you have to manage. So there is certainly scale here. And I think we've got a very strong feel for what those efficiencies could be. So I think that's certainly a positive. As we talked about that guidance, we don't take into account any productivity gains or things like that, that I actually think and I think we still would believe -- we think it's certainly out there as we look at both of the businesses together. What are best practices from them and the best practices from us. That's not exclusively in there. But to answer your question specifically, we feel very good about our ability to integrate the platform, drive growth beyond the 2018, 2019. And as we think about that run rate, that's basically saying, look, after 2019, with the platform they have, with some of the growth opportunities that we certainly see in that platform, that's how we get to those run rate numbers of $30 million to $35 million of revenue and adjusted EBITDA of $3 million to $4.5 million.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [15]

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Yes. And Mike, I would say, at this point, we're still at the very -- we're kind of at the tip of the iceberg in terms of understanding what synergies exist between both the organizations. And certainly, as we look at the locations of Indianapolis and Nashville, which are more cost-efficient than some of our current locations, we look at the opportunity, and we say, "As we look forward, let's be cautious in the way we think about it, but let's be aggressive in how we look at the businesses and how we maximize cost structures in both Performant and Premiere." So not to say we're rationalizing Premiere costs, but we're really going to look for efficiencies and figure out a way where's the best place to do something, who is the best at it, and try to really get our arms around, creating just that sort of best practices around the -- more of the overhead cost and as well as production. So we're kind of at the tip of the iceberg because we've done, obviously, work-around it. But we're really eager to embrace the organization and the businesses. And we think there is additional business opportunity on the platform that they have. As Jeff mentioned, it's not just working for student loans, but they have a fairly decent state and municipal practice as well as commercial recovery. And they are also in the healthcare collections business, which is a terrific platform for us to grow business on.

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Michael Matthew Tarkan, Compass Point Research & Trading, LLC, Research Division - MD, Director of Research & Senior Research Analyst [16]

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Okay. That's helpful. And last one for me, just on the debt facility. I'm assuming that the coupon stays the same, and then, is there anything -- it sounds like you have the option to extend the maturity dates. Anything that you would give up to -- for that option?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [17]

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Yes. So nothing in terms of the pricing structure the deal has changed, for the interest rates, the coupons, nothing changed there. The options we have -- so we extended the initial maturity out by 1 year. So it was initially 3 years. We're a year into it. We extended it by 1 year. The options to extend past that continue, right? At the end of the new maturity period. The terms at which we can extend it are the same as well. In terms of what we need to actually pay back to ECMC for that, that hasn't changed either. So that's effectively just keeping those option years in place.

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Operator [18]

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Our next question is from Brian Hogan with William Blair.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [19]

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Would you consider Premiere a former competitor, if you will? Or is this...

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [20]

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Yes. I -- in the past, look, they've been on the ED contract. We've seen them in the student loan space and in other spaces over time. So you could consider them a competitor. They're one that we would consider a very strong and good competitor. It's part of how they have been on our radar over the years and what they've been able to do as a business, a stand-alone business we've always seen from the far, and their approach to compliance and clients and everything along those lines we have been impressed with. But yes, there's certainly overlap in terms of what they pursued historically and what we have done as well.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [21]

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But that said, Brian, there's a strong enough part of the business that's actually not overlapping, where -- and again, we talk about tax and municipal contracts, and while we have a handful, it's great to continue to grow that. And these state agencies and municipalities, they're fairly particular in terms of who they want to do business with. It's not always easy to just take away a tax contract, and so it's nice to have added business in that part of our combined businesses as well as in the healthcare space. As you know, all of the work that we do is really on the payer's side. And this is an interesting platform that works more on the provider side. So there will be a way for us to grow in a different path, but really leveraging our core capability of consumer care and recovery.

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [22]

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Yes. And just -- the last thing to add, I guess, to that is, we talked a moment ago about some of the ED subcontracting relationships that we have and they have, and there's a nice complement there. So Lisa's point on the state, municipal, government side is very similar, right? So we've got a portfolio of those clients that are important and good clients to have as do they. And so combined, it really helps bring a nice scale to it and an ability for us to go out in the market together and pursue new business in a pretty effective way.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [23]

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How did the deal come about? I mean, was it a competitive process? Or what was talking about ECMC and...

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [24]

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Yes, I mean, I don't want to get into specifics of ECMC's processor or thoughts in terms of the business. Needless to say, it's a business that's been out there. And it was an investment that ECMC made some time ago. And so they get -- have gotten calls, I think, over time, and they had discussions with folks. More broadly speaking, I think, for us, it was a good opportunity and something we've had our eye on for some time, and now was the right time to pursue it.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [25]

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Yes. And Brian, their -- ECMC's objective as a holding company of Premiere, their objective was to grow Premiere. And as we think about scale and growth and the investment needed for growth, their objective of achieving growth in Premiere seemed to be more readily available with a combination company like ours. Because they know what our objectives are, and clearly, they understand what we've been working through in terms of trying to get through that growth. And so to achieve their growth objective, they really felt like combining Premiere with us was probably the best way for Premiere to achieve that growth. And so we were very, very happy to engage in those discussions. And of course, we have a great deal of respect for ECMC and the works that they do, and very excited about how we can help Premiere grow. So it seemed -- it was just a good match of philosophy, of objectives, and then, of course, in terms of platform, I think, ECMC knows all the players in the market, and it was a -- for them, it was just choosing the right player, and we were very honored to be part of that.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [26]

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Yes. Transaction makes a lot of sense. The incremental shares, assuming the earnout, is that going to be a pro rata over the course of the 5 years? Or, I mean, how does the share count come in?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [27]

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So it's based on revenue targets that are met over time. And then those get converted to a value amount, that then gets converted to shares. And the share price at which they are converted at is -- has been fixed prior to announcement of the deal. So a high level, that's the mechanism, so I think, a little different than when you say pro rata.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [28]

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Yes. All right. The incremental investment tied to the additional student loan opportunity, how much is that investment?

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [29]

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Look, if you look at the -- so you're talking about the new opportunity for us, stand-alone, excluding Premiere?

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [30]

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That's right. Yes, you just mentioned that as an investment opportunity...

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [31]

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Yes. I would say it's a relatively sizable piece of the impact to EBITDA as we look at...

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [32]

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Yes. I think we're estimating just based on the volumes that we're seeing. We're estimating somewhere between -- it could be between sort of $1 million and $3 million, just depending on how quickly we can ramp up.

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [33]

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But -- yes. And then you got to adjust that for what happens in '18.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [34]

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Sorry, a little confused on that last statement.

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Jeffrey R. Haughton, Performant Financial Corporation - President & COO [35]

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So what Lisa is saying is, over the course of that contract, right, it ends like any other student loan contract, you have to invest for several months, as you know, before you get the significant portion of revenue, which comes from rehabs. So Lisa was estimating that, call it, $1 million to $3 million, $2 million to $3 million over the life of that investment period. What I was specifically talking to was breaking down. When you think about the guides we gave as part of the adjustments to our guidance for this year and some of the impacts of that. Some of that was Premiere, as we talked about, right? The impact of Premiere, $800,000 to $1 million impact to EBITDA, and then there is a component of that tied to this contact, that was the point I was making.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [36]

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Okay. And as for your guidance, I understand that's a wide range, and I think I heard you mention that like execution on some of the contracts. But what gets you to the high end or the low end of your guidance? And if I -- looks like back out Premiere, you -- is it -- do I look at it right as you lower the midpoint slightly? Is that true or...

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [37]

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No. I think the -- our original guidance is somewhere between $125 million to $150 million. So we're just bringing it into sort of the $130 million to $150 million range. I think -- as we think about what gets us to the top end, Brian, just so you know, I mean, we -- to Jeff's point, we were working through a lot of the work on the reclamation for Medicaid. We're also, as you know, ramping up Medicare, MSPCRC, and we're just -- we're still in the early part of ramping that up, but we're seeing some really good productivity. And so our objective is to significantly ramp that progress with our clients as we head into the third quarter, which would actually get us to a very strong fourth quarter. And so the top end of that range really comes about being able to not only get the work completed, but also to book the revenue. So as we think about end of Q4, sort of, rolling into Q1, what we're hoping is that we can get all of that revenue into Q4. Certainly, there's a risk that some of that could slip into 2019.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [38]

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Okay. And the tax rate, is it still around 27.5%? Or is it what?

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [39]

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I'm going to ask Ian, our Chief Accounting Officer, to answer that question for you.

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Ian A. Johnston, Performant Financial Corporation - VP, CAO & Acting Principal Financial Officer [40]

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This is Ian. For the 2018 year, our expectation of effective rate is about 21%. And we have revised our full profitability rate from 27.5% up more in the range of 30% to 32%. That has to do with mainly looking at our state tax structure and the states in which we're doing good business with our subsidiaries. But 21% for 2018, and as we move into full profitability in the future, a range of 30% to 32%.

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Operator [41]

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(Operator Instructions) There are no more questions at this time. I would like to turn the conference back over to management for closing remarks.

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Lisa C. Im, Performant Financial Corporation - Chairman & CEO [42]

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Thank you. We thank you for being with us today. We're very excited about welcoming Premiere to the Performant family of companies. We want to thank ECMC for their trust, and we look forward to servicing them in a larger capacity. We also want to thank the rest of our clients for their trust in us. And as you know, our objective is to provide the best service to them at the best value. Yes, I want to thank our Performant employees for bringing their best and Premiere employees for bringing their best to the workplace every day. And again, we thank you for being with us today.

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Operator [43]

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Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.