Staying on top of the latest market news with Performant (PFMT) and following pundits in the media is helpful in educating us on large companies and broad themes. However, these sources of information rarely lead us to identifying early stage opportunities, with potential for multi-bag success.
The company has recently turned a new page in its own story and the market conditions have presented an entry point at deep discount levels. This is not a sexy business, quite boring in fact. However, a good investment should be boring. Hopefully you will appreciate the new path management has coursed, and see the potential upside in this turnaround story.
PFMT is a technology-based provider of audit, recovery, payment accuracy, coordination of benefits (COB), and outsource services in the United States. PFMT solutions analyze claims and identify, prevent and correct inaccurate payments.
Using their proprietary analytics platform and industry expertise, PFMT helps to reduce losses on billions of dollars’ worth of improper healthcare payments, state/federal/and treasury tax delinquencies, defaulted student loans and other receivable’s. Primary customers include government commercial health plans, CMS, Blues plans, regional Insurers, private/commercial programs, etc. that operate in complex and highly regulated environments that rely on PFMT’s innovative and disruptive approach.
Revenue is generated based on a percentage of validated recoveries for clients. Contracts are negotiated on case by case basis, fees may range from 10-30% of recoveries and the duration of contracts may last 3-5 years+. These are high margin, recurring revenue contracts, expected to provide multiple years of prolonged double digit growth.
Historically, PFMT was known for its legacy business as a collection agency for student loans, federal/state tax delinquencies and other receivables. Since the taking over of student loan originations by the Federal government a decade ago, PFMTs student loan collections have seen a diminishing contribution to revenues over time.
Currently, the student loans collection business accounts for about 22% of revenues. While Other legacy collections still account for about 26% of revenues. Growth in Other legacy collections has remained relatively flat over the years. A smaller business segment derives marginal revenues from first party call centers and licensing of hosted technology solutions to clients.
The diamond in the rough refers to PFMT’s up-and-coming healthcare business segment, composed of claims auditing and eligibility reviews. After seeing losses in 2018/19 due to high ramp up costs and standard implementation time lags, this segment appears to finally be set up for robust growth going forward.
Management has been clear that from 2017-2019, adjusted EBITDA has witnessed a slowdown to reflect a period of transformation in the company to establish itself in the Healthcare space. This also reflects a lost contract for student loans collections. Management has confidently reiterated their belief in successfully reaching a 2021 goal of achieving $200M revenue with 20% EBITDA margins, with double digit growth continuing for years to come.