Performant Financial Corporation
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Performant Financial Corporation's 2013 Second Quarter Earnings Conference Call. During today's presentation, all parties will in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) As a reminder this conference is being recorded today Thursday, the 8th of August 2013. I would now like to turn to conference over to Mr. Richard Zubek with Industrial relations. Please go ahead.

[Richard Zubek:]

Thank you, operator. Good afternoon everyone. By now you should receive a copy of the earnings release on the company's second quarter 2013 results. If you've not the copies are available on our website www.perfromantcorp.com. Today's speakers are Lisa Im, Chief Executive Officer; and Hakan Orvell, Chief Financial Officer. Before we begin I would like to remind you that some of the comments made in today's call including our financial guidance are forward-looking statements. These statements are subject to risks are uncertainties described in the Risk Factor section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from described during the call. In addition, all forward looking statements are made as of today and the company does not undertake any responsibility to update any forward looking statements based on new circumstances or by its expectations. Also 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 Lisa Im.

[Lisa Im:]

Thank you, Rich. Good afternoon everyone and thank you for joining us for our earnings call today. The second quarter was particularly strong for performance. Today we are reporting revenues of approximately $69 million, which is a year-over-year increase of over 26%, driven by the strong performance at all of our markets. Adjusted EBIDTA in the second quarter was approximately $27 million. Adjusted EBIDTA margin for the second quarter was 39%. Adjusted earning per diluted share was $0.27 in the second quarter. During the second quarter, Student Lending represented over 65% of our total revenues. Revenues from this segment were up 35% sequentially and 25% year-over-year. Our results were fueled by the strong loan placements we received during the third quarter of 2012. Additionally, as we have indicated on our last quarter's call, we benefited from the favorable timing of some large placements from the latter portion of the second quarter of 2012. We also benefited from a placement that we received early in the fourth quarter of 2012. In addition to the favorable timing of these loan placements, our second quarter 2013 results also reflect about $4 million in revenue from a new specialized portfolio contract that we were awarded with one of our leading guarantee agencies. Moving forward, we will continue to recognize revenue from the contract, but it will be at a lower run rate. Loan placements during the second quarter totaled $1.3 billion. Although this total was a decline from the $1.7 billion in placements that we received during the first quarter, we do not view this as a negative or unusual. Loan placements from the Department of Education have been lumpy over the past 18 months, and it's possible that it may remain lumpy for still some time. In fact, we received over $600 million in placements from the Department of Education in the month of July alone. On a longer-term perspective we believe that the Department of Education still has a significant amount of defaulted student loans that are awaiting placements and we believe that we should continue to see many such placements from the Department of Education for the remainder of the year and into 2014. The Department of Education recently issued its RP for the new recovery project and is employing a two-phased approach to narrow the list of potential vendors. We are in the process of submitting our response to Phase One, which has the initial due date of mid August. We expect a relatively quick decision from the Department of Education on those companies that make the Phase One cut and the Phase Two proposals are expected to be due in November. Ultimately the Department of Education has announced that they expect to award the new contracts in January of 2014. Though we cannot comment on the specifics of our planned response, we are confident that our strong performance on each and every contract for the past four contracts over 22 years will serve us well in being reselected as one of the vendors on the new contract. Turning to our health segment, as you may be aware we have received an updated from the CMS regarding the current contract which I will discuss momentarily. But first I want to discuss our results from the second quarter. Our healthcare business had revenues of approximately $18 million, up 75% sequentially and 33% compared to the second quarter of 2012. Revenues during the second quarter benefited from delays in revenue recognition during the first quarter, caused by the suspension of certain audit and claim activities due to Hurricane Sandy, and the temporary interruption in claim processing during the first quarter. Also in mid June, CMS resolved a technology constraint that had previously prevented the automated processing of claims to periodic in term payment providers. As we mentioned on prior calls, at the start of 2013, the lack of automated processing of claims involving PIP providers have prevented us from submitting claims that would generate revenue estimated at approximately $6 million. First quarter revenues attributable to PIP claims was about $200,000. With the technology issue resolved late in the quarter we were able to recognize approximately $3 million of revenues from PIP claims during the second quarter. While we were waiting for the technology patch to be implemented, we continue to perform audit work on PIP hospitals for the medical records requested. As a result, on a year-to-date basis, we identified an additional approximately $6 million of revenue from PIP providers. As it relates to the Medicare RAC contract and renewal process, CMS continues to work through the transition from the first to the second contract. Although we do not have a definitive time for the award of the new contract, we have received a modification to the current contract that extends our ability to request medical records from providers through November 15th of 2013. While we view the work period extension as a positive, there are a few items that we expect to negatively impact our results. First CMS has restricted all of the RACs from sending medical record requests to the PIP providers until further notice. This action has a significant impact on our healthcare revenues as approximately 20% of the hospitals in our current region are PIP providers. Second, our inability to submit new record requests during the month of July will impact our fourth quarter, as there will be a noticeable lag in the number of new medical requests available for our nurse auditors to process. Lastly, CMS implemented some additional limits on the number and type of claims, which we can make during this transition. Under the revised contracts, the review of any one particular claim type is now limited to 70% of the providers limit. When we spoke to you last quarter, we did not have sufficient information to accurately adjust our guidance. However, we said that our full year top-line results could be adversely affected by $10 million to $15 million, should we not be able to operate under normal conditions due to potential transition constraints initiated by CMS. Given the revised transition procedures implemented by CMS earlier this month, we now have much better visibility on the remainder of 2013, and as a result we are revising our full year guidance expectations. Based on our current operating environment, we are revising our revenue and adjusted EBIDTA forecast to $247 million to $252 million, and $77 million to $81 million from earlier guidance of $252 million to $265 million, and $81 million to $85 million respectively. However, if CMS opens up our ability to send PIP providers medical record requests, we will evaluate our full year revenue and EBITDA forecast respectively. Finally, while we do not provide explicit quarterly guidance, these ranges also imply that we expect the third quarter revenues to be a little bit softer than Q2. Furthermore the fourth quarter will be even softer still primarily due to the current limitations on sending medical record requests to PIP providers and our temporary inability to submit medical record requests in the month of July. The bottom-line is that we have a contract extension, which not only benefits us, but also CMS, and we have complete confidence that they will take appropriate steps necessary to minimize any disruptions to the recovery stream. On the new business front, we continue to have strong pipeline activities in both government and commercial markets. We cannot divulge our clients due to confidentiality at the time, but have a major program integrity win with one of the largest commercial payers in the United States, and a significant contract expansion with an existing commercial software clients. With that, I would like to turn the call over to Hakan, who will now walk you through the financials. Hakan?

[Hakan Orvell:]

Thank you, Lisa, and good afternoon everyone. As Lisa mentioned revenues in the second quarter were $69.2 million, an increase of 26.1% from the prior year period. The largest component of our revenue mix is Student Lending, which grew by $8.9 million or 24.7% to $45 million, compared to the second quarter of last year. Second quarter placements were $1.3 billion, down from 2.6% year-over-year. As a result of the decreased placement volumes, revenues as a percentage of placement volume were 3.58% compared to 2.79% in the prior year period. This percentage is especially high because no placement volume from the Department of Education during the second quarter combined with a high revenue recognition. The second largest component of our revenue mix is healthcare, which increased by $4.5 million or 33.2% to $18 million, compared to the second quarter of last year. Net claim recovery volume increased by $41.2 million or 34.8%, to $159.8 million. Our claim recovery fee rate was 11.3% compared to 11.4% in the prior year period. The increased capital revenues in the quarter is a reflection of the key factors. First, our ability to resume auditing healthcare providers in regions that were impacted by Hurricane Sandy. Second, the implementation of a data patch that corrected temporary delay in claim processing last quarter, which delayed the recognition of revenue from last quarter into the second quarter. Third, for the past three quarters we have discussed with U.S. challenges regarding the recognition of revenue from PIP providers. At the start of the year we have just over $6 million in delayed revenues related to PIP providers. As Lisa mentioned, CMS fully resolved this issue in mid June, and we're now able to submit all the mediclaims to PIP providers. Although our window for being able to submit these claims was limited, we were still able to recognize approximately $3 million of this delayed revenue during the second quarter. As a reminder, we've already incurred the expenses related to this delayed revenue, which is the primary reason behind our strong adjusted EBIDTA growth this quarter. In total, we now have approximately $9 million in delayed revenues remaining to be recognized related to PIP providers as of the end of the second quarter. Based on our response from using the updated automated system during the second quarter, which we expect to be able to recognize a large part of this revenue during the third quarter. Revenues from our other markets grew by $8.9 million or 17.7% to $6.2 million compared to the second quarter of last year, primarily as we continue to execute on a recently won default-aversion services contract. Moving to our expenses, salaries and benefits expense was $23.9 million, an increase of 20.8% as compared to $19.8 million in the prior year period. While other operating expense for the quarter was $22.9 million, an increase of $4.2 million. The higher operating expenses are consistent with the growth of the company's recovery activities over the past year. In addition, the company had expenses approximately $1.3 million associated with its public offering completed in April, and these expenses are not deductible for tax purposes. For the second quarter of 2013, our reported net income was $11.2 million or $0.23 per diluted share, compared to net income of $8.1 million or $0.16 per diluted share in the prior year period. Adjusted net income in the second quarter was $13.1 million or $0.27 per diluted share, compared to $9.7 million or $0.21 per diluted share in the prior year period. Totally diluted average outstanding shares increased to 49.4 million shares in the second quarter of 2013 reflecting the exercise of stock options. Lastly, our adjusted EBIDTA in the quarter was $27 million, compared to $20.2 million in the second quarter of 2012, while the adjusted EBIDTA margin in the second quarter of 2013 was 39%, compared to 36.9% in the prior year period. As I previously mentioned we recognized a significant amount of our delayed revenue during the second quarter for which we had already recognized the expenses. With that, I would like to open up the call for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Ed Caso from Wells Fargo. Please go ahead.

[Ed Caso:]

Could you talk a little bit about some of the headlines we've seen lately around student loans? There seems to be a lot of moving parts. If any of them may have a shorter or long-term impact on your market opportunity?

[Lisa Im:]

Would you be a little more specific Ed? On the kinds of, student loan, defaulted student loan program has gotten a lot of positive press coverage. They are largely because we are moving into fairly, a fairly good recession period if you will. So I'm not sure as to what a specific area.

[Ed Caso:]

Well, the Consumer Protection Agency has made some noise. There's always noise around changing the default rules. There's been noise around the interest rate on the next -- at the July 31 deadline. I guess all of those together, are you hearing anything from your various clients as to whether that might impact your ability and the pricing and so forth?

[Lisa Im:]

The short answer is no. But since it kind of separates some of the categories, the student loan interest rate change, really has nothing to do with that. So that's really that effect more of the borrowers who you're going to repayment. With respect to any of the dialogue on changing default rules et cetera that that has to be done through a legislative, which would include scorings, and we have at this point, even though there's a lot of enough program we do not believe any of it is actually in serious legislation. But interest rate surely is an issue that the Congressional folks would like to resolve. But again that really doesn't affect us.

[Ed Caso:]

My other question is around PIP, just sort of trying to understand why that was sort of pulled out here during the interim period, why that seems to have been targeted, particularly given all the challenges you've had and the lack of ability to execute in that market, was there something special about those kind of hospitals that they aren't letting you sort of do your job, you know? I guess that's my question. Thanks.

[Lisa Im:]

Well Ed if I believe that because so much of the PIP volume was so recently processed. So if you think about all the adjustment for the incorrect payments that were made, it's all pretty recent for all the PIP providers and we know that CMS is very, of course very sensitive to how they deliver care, which is again to the provider group. With so much of the volume metric changes happening with the PIP, it provides more recently we think our clients, are just more sensitive to providing a little bit of cushion for those providers until the audits resume. So there's nothing special in terms of category at hospital, other than just the processing, a lot of processing has happened fairly recently, which is again why we say in our comments that we believe it's temporary and that it's possible that we would be allowed to begin auditing PIPs again soon.

[Operator:]

Thank you. The next question is from Bob Napoli of William Blair. Please go ahead.

[Bob Napoli:]

Question on the CMS contract, I don't know if there is anything else you can say about the process that they're going through? I mean they keep delaying, what is taking, in your opinion is taking so long for them to come to a decision on awarding the contracts and having kind of taking up the uncertainty surrounding this whole process?

[Lisa Im:]

Well this is obviously our speculation. But given the facts around the HMS protest, which we recall happened in April, and then was withdrawn, and CMS at that point made the comment they would self-correct. We believe that they are -- that one of the issues clearly was the protested issue of appealed management and HMS from what it appears did not believe that they would be responsible for appeals beyond the term of this contract. So that being the new RQ was the protestable item, which I believe is all public. Once having resolved that, now that CMS has resolved that through the contract extension, we believe that they are going to prepare whatever sub-correction it was and then, we initiate the process in Ernst. And so, just as you know, we always assume we would be responsible for appeal. So that in no way, actually affects any of our outlook on the contracts or our financials around the contract.

[Bob Napoli:]

And so when you say reinitiate the process, Lisa, so you're saying you're expecting at least several more months before any decision is made that they're going through and kind of reinitiating the process, if you would?

[Lisa Im:]

Again Bob, I'm speculating but I don't think they would want to make that long once they have a resolution. And again, we've always believed the CMS, in their best interest to have the least amount of destruction in the program. It's very good payment integrity program, one that has driven great results for them. So it has always been our belief that they would like to minimize contract condition time and be able to continue the program with quality trusted vendors, partners who can conduct the work. So we like to speculate on timing, it is tough to speculate on timing. But I think once having gotten again the contract extension done, it give them some opportunity to again reengage their part of the process and move forward.

[Bob Napoli:]

The new contracts that you got, I understand you can't say which commercial client, you said a Healthcare client and a major program integrity win with a commercial client, and what type of commercial client, can you tell me what industry? And I think can you give some feel for the revenue you would hope may be in 2014 from those contracts?

[Lisa Im:]

Well, at this point, we are starting the implementation, so I don't think we have a good -- we have a range, but I think what we've no more is that we implemented what a more definite number will look like in 2014. The existing commercial helped our client. We had a very small contract with. And now, that's expanded to cover a variety of different types of integrity audits in their processing and it's a healthcare commercial client. It's another healthcare commercial payer.

[Bob Napoli:]

On the student loan side, the $1.3 billion of placements, how much of that was government and GA?

[Hakan Orvell:]

Approximately, $300 million of it was Department of Education, the rest being the GAs. And again, as Lisa mentioned, we had approximately in excess of $600 million worth of placements under Department of Education that we received in the month of July. So again, that we don't see the lower number for Q2 being any indication at all, as far as lower amounts to some of the lumpiness that we're experiencing in this area.

[Bob Napoli:]

And the last question, the limitation on the number of collectors, which is -- I mean I think is good news because I think you guys with your long track record are likely to be -- do you have any idea how -- what number -- how much they're looking to reduce the number of collectors?

[Lisa Im:]

Again, it is the Department of Education contract?

[Bob Napoli:]

Yes, I'm sorry, the Department of Education contract, you said -- companies.

[Lisa Im:]

I don't think we said we would be looking to reduce the number of vendors.

[Bob Napoli:]

Okay. I thought that's what you had said.

[Lisa Im:]

I don't know if that's somewhere -- no, I don't know if that's somewhere out in public venue. But we do not know if they will or will not. If you know that they will -- that their process include experience and a lot of experience in managing defaulted student loan volume. And it's important for them to continue to have a strong program. So we believe that they will make good selections of reliable vendor partners who have driven strong results on their portfolios overtime.

[Operator:]

Thank you. The next question is from Michael Tarkan of Compass Point. Please go ahead.

[Michael Tarkan:]

Thank you. On the Healthcare side, now that the Medicare Part A to Part B rebilling rule looks to have been finalized just wondering if you can touch on may be what kind of impacts we can expect in 2014, if you know it at this time, and may be how the final ruling compares to the initial proposal?

[Hakan Orvell:]

Sure, Mike. As we look at this ruling I mean, first of all, we don't see that it's a bit changed from how we have been operating. Again, I mean, as we look at this process, CMS is -- and the related proposal that is making there, supposedly it is making -- it's reaffirming their position as it relates to Part A and Part B. So from our position again, we don't see that it is going to have any impact on us here as we look at this going forward.

[Michael Tarkan:]

And then just back on the PIP issue a little bit. You had mentioned I think that you would evaluate guidance if CMS may be adjusted the treatment of these -- the PIP providers during this transition period. I guess are you currently having discussions with CMS about this, I mean with 20% of your exposure here it seems like it would impact you may be a little bit unfairly relative to your peers. I'm just wondering if this is something you were having ongoing discussions with CMS about?

[Lisa Im:]

Well, we just received this information. So we believe that they are willing to work with us. And in the past, when we've had challenges we worked on them with our clients and come up with a good solution that they support, so we will initiate some dialogue with CMS around this issue and we believe that they will be very reasonable. And as long as we're sensitive to providers again, providers' entire care is delivered by CMS. So we fully understand that and we respect that and we will again work with CMS to affect this so that it is hopefully a more positive outcome for us.

[Michael Tarkan:]

And then on the education side, I know you've been using IBR to rehabilitate loans, I'm just wondering if we saw any contribution from that this quarter and may be what your outlook is on that revenue as a percentage of placement line going forward? I know historically you've talked that the number being a little bit north of 200 basis points, just curious if IBR affects that, at all?

[Hakan Orvell:]

As we look at this quarter Q2, there was minimal impact in this quarter, since this program was really being initiated in September timeframe of last year. So as you look at the nine months in a rehabilitation process, there was a minimal amount that came through this quarter. And we do expect to see an impact during Q3 and Q4. And what you should remember here is, that this -- IBR just pertains at this time to one client being Department of Education. So and the GA clients we're not doing IBRs with them. So again, you need to kind of -- you just make sure that I just want to make sure as you're aware of that part of it.

[Michael Tarkan:]

Sure, and I mean on the revenue as a percentage of placement, if you're utilizing IBR and that's driving may be stronger recovery rates would we expect that line to may be trend higher or is it going to still stay roughly in that 200 basis point range?

[Hakan Orvell:]

We would expect that it is going to be north of 2%. So it's going to be -- right now, if you look at it, what you'll see on that I know that we've had some choppiness as you look at the quarterly numbers. And the 2% number on the more annualized basis right now is around 2.2% and we would anticipate and expect that this percentage is going to slightly north of that.

[Operator:]

Thank you. The next question is from Julio Quinteros of Goldman Sachs. Please go ahead.

[Julio Quinteros:]

Hi, guys. Just to come back to the CMS situation, first of all. It sounds like there's two pieces here. One that you guys are sort of considering as good news and then, two, one that feels like it's a little bit more delayed and more negative. Can you just walk us through real quick the pieces that you guys are actually comfortable as being positives coming out of the second quarter? And then, secondly, related to that where are the most incremental developments that are more negative and that would continue to be a drag as you think about the revenue usability going into the back half of this year?

[Hakan Orvell:]

Sure, Quinteros. First of all, as we look on the positive side, having the PIP automatic fix finalized during the month of June, it's a big process, which enables us to recognize again $3 million worth of revenue in Q2, when we've now $9 million of revenue that we expect to raise productivity during Q3 and Q4. So again, that's positive. Another positive is that, as we look at the ADR hold, the document request hold that we have been under for the month of July that is listed based on its extension that we can continue to request medical records through the mid November timeframe. On the not so good side, as we talked earlier, the kind of limitations that we have on not sending our document request to PIP providers, so that's something that we have taken into consideration as you look at the revised guidance that we gave herein. And then, there is a limitation on document limits to 70% versus the provider's limits that we had before. So that's also having a negative impact. And so again, it is a PIP volume and the ADR hold during July that is going to impact us primarily in the Q4 timeframe and then the -- a slight reduction in revenue related to these limitations to 70%.

[Julio Quinteros:]

And just as a reminder when you guys think about the work that you're putting in how much of your work would actually be sort of single recovery efforts, if you will, so that you will essentially be against this, you'll be hitting this ceiling of 70% limitation?

[Hakan Orvell:]

I mean, you're not probably clear on your question. I mean, we're not going after any single issue I mean, we're going after again a large number of different issues. But we do have a limit that we cannot do more than 70% of the limitations that we have -- that we have been under before.

[Julio Quinteros:]

So that wouldn't be an additional component to think about is the 70% number by itself?

[Hakan Orvell:]

70%, yeah. So again, it's a reduction of 30% on the medical records we would otherwise request.

[Julio Quinteros:]

And then I mean at this point may be, Lisa, what gives you confidence that November is really going to be the end of this? I mean you can continue to go through November, where is the confidence beyond November that this isn't going to continue to drag on and so therein by the time you start looking at early 2014 you've got the overhang of the CMS contract possibly still running its course and then you have the Department of Education award also being a question in investors and whether you're going to be able to sustain that over the terms won't actually go through? So it's just sort of like a perfect storm right now of developments on two of your larger contracts where the visibility right now seems like there's not a lot to really hang our hats on. So CMS by mid November, can you answer that one first, and then may be the Department of Student Lending, pardon me, Education of Student Lending, side second?

[Lisa Im:]

So, Julio, so in the extension language CMS gives themselves room. And so, as we look at the November 15th date, if they have to extend the date, they have given some leeway to be able to extend the ADR timeline. So there is flexibility for CMS, the client to do what they believe will be best for the objective of the program. We do not anticipate -- we would not -- based on that we would not anticipate downtime. And hopefully -- again, this is obviously speculation but hopefully the new contract process will reengage here fairly quickly and so, there would be more visibility. But that said, again the contract extension gives them flexibility to negotiate an extension on the ADR timeline. So that's the CMS contract. And on the Department of Education contract, the contract itself will continue to run. The current contract, well it technically turns at the end of September. In 2014, there is a six months extension that they can invoke. At the same time, January is the targeted timeline for selecting vendors. We believe that our performance and our -- again, if you remember, we're the only vendors who have been in the program since the inspection of the program from contract number one. For great result contracts on to our bills, great partner on to our client, we believe that we have every opportunity and we will again participate in the department of that contract.

[Julio Quinteros:]

I guess it's just not -- it's not your execution as much as it is not knowing what these bodies inside the agencies, the CMS and the Department of Education has any urgency, right? And that's what probably the more frustrating part because the business, itself, as far as your execution is concerned is fine, but it's just the kind of the noise in the background of how these agencies work and the time limits that they tend to operate under, so you know that's --

[Lisa Im:]

Yeah, I think it is a little bit of nice scenario but again, I think from our business standpoint, the continuity of the program and the work that we're providing to the client should diminish some of that noise. So yes, we're waiting for the new contract award, where we continue to have the opportunity to work on the contract and generate returns for our clients, in turn be able to generate revenues and continued growth in our business. So it would be great if all things were timely. But as you know, in the real world we don't get that always. So our important priority is, we continue to provide the best work that we can to our clients, to have continuity in that work, which we do and then, to do our best to again re-compete and provide continuity in our service to those clients.

[Julio Quinteros:]

Now, just to be clear the November date could that actually slip again or is that something you guys feel is a fixed date as far as the CMS contract is concerned?

[Lisa Im:]

Well, that is the current run rate for ADRs. But as I mentioned, CMS has given themselves a little room. So if they need to extend ADRs under the current contract, they can continue to do so and they have the right to do so.

[Operator:]

Thank you. The next question comes from Suzanne Stein of Morgan Stanley. Please go ahead.

[Suzanne Stein:]

Hi, I just want to go back to the student loan revenue for the third quarter. I know that you had talked about the third quarter being a big quarter because of the placement volumes from fourth quarter of last year, is -- how much of that did you recognize in second quarter? I'm sure we expect third quarter to be kind of similar in terms of revenue to second quarter?

[Hakan Orvell:]

Hi, Suzi. We would expect that Q3 is going to be somewhat softer and the reason for that as we stated in our script at the beginning is the specialized portfolio works that we did during Q2 that benefited us with about $4 million. So that was one of the components of making Q2 strong. We also accelerated some revenue based on -- not accelerated, but based on the placement that we received, the large placement we received in October of last year, some of that revenue was recognized during Q2. I will not say that it's a material amount but there is few million dollars that we're able to recognize in Q2. So our expectation for the rest of the year as we look at Student Lending is for Student Lending to be strong in the second half and slightly stronger than what we saw during the first half.

[Suzanne Stein:]

Okay, and then on the Healthcare side, just as we think about the quarters I just want to kind of put it altogether. So Lisa I think said that sequentially we should look for a decline from 3Q, from 2Q to 3Q, and then 3Q to 4Q, but with the $9 million in PIP revenues that you are expecting to recognize is that included in that or we should kind of net that out as we think about the sequential decline?

[Hakan Orvell:]

It's included in there, as we are projecting that to all we recognized in Q3 and Q4. And then, the important part as you look at Q4 is, now the implications of this one month delay that we've been under and also the accounting ability to request documents from PIP providers, that we have incorporated into our guidance. So Q4 is going to be quite a bit softer than the Q3 based on those facts.

[Lisa Im:]

And Suzi that my comments about Q3 being a little bit softer than Q2, was for the total revenue, not for healthcare.

[Operator:]

The next question is from Brian Hoffman of Avondale Partners. Please go ahead.

[Brian Hoffman:]

You've mentioned the specialized portfolio contract with the GA; can you elaborate on that as to what that contract is?

[Hakan Orvell:]

Yes, sure, what this contract is that we have a, as you look at the work that we do on in Student Lending side, well we the portfolio that we've sold a default of student loan through rehabilitation. If in fact a borrower has rehabilitated, there are other ways that we can resolve that default status and so we have different tools available should we call that, at that point, and that's the work we were doing primarily with this kind, say people had in acquisitions.

[Brian Hoffman:]

And then looking at the payment recapture contract with the Department of Education, can you give us an update on that is that coming along better or worse than anticipated?

[Lisa Im:]

It's slower than what we had hoped which is a little bit not exactly what we hoped for, obviously but we're starting to continue to get information from Department of Education, some of it has been, as I mentioned, a little slow in coming, but the good thing is that we are gaining traction of the clients and getting some opportunities keyed up with them. So we actually believe this will be a very positive outcome but it has been slower getting information out of that part of it, Department of Ed.

[Brian Hoffman:]

Okay, and if I'm not mistaken that contract ends in January of 2014 so would you -- and if that's correct would you expect the majority of the revenues from this contract to be recognized in the last few months of that contract?

[Lisa Im:]

Actually they have the opportunity; they have the ability to extend the contract without a process necessarily. So we are obviously with the Department of Ed to do the very best kind of process and outcome for Department of Ed. So that's -- it has to be determined.

[Brian Hoffman:]

And then also on the contract that was announced with Magellan, do you have any update on that?

[Lisa Im:]

We are continuing to work with Magellan clients and we are in the early, early stages of dialogue with three or four of the Magellan clients. So we have not gotten to be part of implementation yet.

[Brian Hoffman:]

And then one last question, regarding the limitations that CMS put on audit requests going forward over the next few months, with the limitation of not sending requests of PIP providers and the 70% limit what's their rationalization for this? Why put these restrictions on the reqs over the next few quarters?

[Speaker:]

Well, on the PIP provider as I mentioned a little bit earlier a lot of the profits have come through in a very short period of time. The CMS we believe is clearly sensitive through the impact on the providers and with the volume that has come through in the last couple of months and will be processed here in the next couple of months. We believe that that CMS just wants to assure that there is some breathing room for the PIP providers. So again, we're not in dialogue with CMS yet so we believe they are open to that question. Basically that's a 70% don’t really know.

[Operator:]

(Operator Instructions) The next question is from Toby Wann of Obsidian. Please go ahead.

[Toby Wann:]

Yes, my questions have been answered. Thank you. My questions have been answered.

[Operator:]

Thank you. The next question -- I'm sorry the next question is from Don Destino of Harvest Capital. Please go ahead.

[Don Destino:]

And let me just ask one final PIP -- well, maybe it'll be the final PIP question -- are these -- do you suspect that these are or do you understand this delay to be deferred audits and so next year we're going to be talking about kind of catch-up with the thing that you weren't doing in August and September and October or are these lost revenues or lost opportunities over the next six months?

[Hakan Orvell:]

First of all this is not delayed revenue. I mean as we looked at the PIP provider situation that we've discussed that that is what that we've performed at that -- with delayed revenue recognition.

[Don Destino:]

I'm sorry, I'm talking about the -- this loss of audits going forward in this extension, is that -- do you suspect that at some point you'll be able to make those requests and that revenue will end up having been just kind of deferred and it'll be a timing difference or are PIP providers living in a world in which they don't face the risk of audit for the next couple of months and can operate accordingly?

[Hakan Orvell:]

What we would expect and again we expect as we look at it right now without being able to request as documents from providers that we will do 36 months rolling the different issues that we want to pursue for audit, so that continues. So, from that perspective it's not lost revenue, we would pursue that.

[Don Destino:]

Okay, so all else being equal this is just going to be a timing difference as opposed to revenue that you would never, that you'll never see again?

[Hakan Orvell:]

Yes, that's correct.

[Operator:]

Thank you. The next question is from Sam Sekine of ALJ Capital. Please go ahead.

[Sam Sekine:]

Maybe you can help me understand the limitation on the requests, the record requests, with the 70%, I mean are you guys are you seeing 100% of -- are you going up to 100% of the limit today or I guess in the past, and how do you really see that affecting you?

[Lisa Im:]

It was a very minor impact. So that had a less impact on our business. It has impacted a little bit but we will continue to buy new issues so it's highly probable that it could be temporary again, small impact.

[Sam Sekine:]

And then with the appeals, the reserve that you guys have, do you guys have it on the books for two years, is that correct?

[Hakan Orvell:]

Yes, based on the contract extension that we have agreed to continue to service and provide support for the appeal resolutions over a period of two years. Again this has no financially impact on the way we're dealing with this. At least I mentioned earlier people will expect could say that's the entity appeals are something that we're going to be, how it is accountable for, and we've appropriately reserved it on our balance sheet.

[Sam Sekine:]

And just is there any commentary or anything you guys can share the recent bills in the House and Senate just towards the RAC program, just your thoughts on that?

[Lisa Im:]

Sure. As you know the Hospital Association will continue to have this on the radar screen but any proposed bill in Congress must be scored. So if the bill is scored and it's paid for then Congress will have a tough time passing the bill when there are no extra dollars. So when we look at the legislation that's been proposed that has a cause to it. There are components in the legislation that for example one of the aspects of the legislation is only allow recovery auditors to audit errors that are in excess of 40% 4-0 percent. So when we have legislation that proposes those kinds of parameters we can discuss the fact with various political folks, and when we think about the concept that we would only be auditing errors in excess of 40% seem to be a pretty big burden on the tax payers. So our view is that legislation is -- they continue to be politically active but on the other side there's a lot of education effort that we put forward and any legislation must be scored if it's a paid for legislation, it will have to come out in public what's the cost of that legislation is.

[Sam Sekine:]

And just a last one for me, on the PIP hospitals, would you say I guess compared to the other incumbents that there's a special skill that you guys have that better suits you to service or to audit these hospitals?

[Lisa Im:]

No. Those hospitals are very similar in errors and types of errors from other hospitals. It's just that in the Northeast in the Region A area we happened to have the largest portion of PIP providers versus other hospitals than any other RAC region. So that's why we have the 20%.

[Sam Sekine:]

So it's not like CMS looks at it, your experience with PIP and so they most likely award you the same region, is that something you guys consider or think about?

[Lisa Im:]

We would -- obviously we're speculating on what CMS might think with respect to awards. But in terms of the program itself each of the recovery auditors has developed a network, a relationship with all of the hospitals, the providers, and the association. We all need to understand the nuances of our region and every region is just a bit different. So to the extent that there is continuity and care for the providers and understanding on how the work flows, we think it would be important for continuity, quality, and service, and in turn of what CMS thinks about who should go into what region.

[Operator:]

Thank you. There are no further questions in queue at this time. I would like to turn the conference back over to Ms. Im for any closing remarks.

[Lisa Im:]

Great, thank you. So just in closing we have a very strong momentum so far this year, but although we made a slight downward adjustment in our guidance for 2013. I want note that our business trends are very positive and at the midpoint of our revised range we're still projecting full year revenue growth of 19% compared to last year, with an EBITDA margin of 32%, and we discussed, we believe that the PIP provider audit exclusion is the more frequent contract expansion is only temporary and that if CMS does allow us to audit for post-June it is possible that our results will exceed what we have given you today. With that, we want to thank you very much for joining us, and as always we appreciate your time and attention.

[Operator:]

Thank you. Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.