New Issue America: Debt Collector Performant Financial In Best Of Times

  • August 6, 2012

By Amy Reeves

Of all the issues getting people out marching in the streets the last few years, health care reform and student-loan debt rank high on the list. But however the politics turn out, Performant Financial seems bound to benefit.

Performant is a government contractor that collects and restructures loans for the Department of Education and also an auditor that identifies and collects Medicare overpayments. Both of its services stand to save the federal government money, making them popular with both political parties. A Performant competitor on the Medicare side, HMS Holdings (HMSY), is one of IBD's top-rated stocks, thanks to investors' confidence in the model.

This has given Performant steady, noncyclical revenue from from $88 million in 2007 to $163 million last year. On the IPO road show, management projected revenue and profit growth upwards of 20% for a few years out.

Still, investors' decisions will likely depend on how they feel about Performant's predominant customer.

"Some investors might like (Performant's) future risk/reward ratio, but IPOdesktop in general doesn't like companies that are heavily dependent on the federal government," wrote IPOdesktop chief Francis Gaskins in a report last week.

THE COMPANY

Performant launched in 1976 under the name Diversified Collection Services. The current entity was incorporated in 2003 and gained its current name in 2005 after a buyout by private-equity group Parthenon Capital Partners.

The student-loan business provides 65% of revenue, thanks to Performant's 22-year relationship with the Department of Education. The firm also provides its services for other institutions engaged in student lending.

Performant's employees track down and contact delinquent debtors and work out a payment structure that seems most likely to be met. The company uses its proprietary technology platform both to analyze data and to speed the work flow processes, which it claims as an important competitive advantage.

Performant got into health care after an act of Congress created Medicare Recovery Audit Contractors in 2003. The RACs analyze Medicare claims to detect fraud and payment errors. There are only four of them in the U.S., and they monopolize their territories. Performant's turf is the Northeast. In the first half of this year, this business provided about 25% of revenue.

The rest of the company's revenue comes mainly from collecting delinquent taxes. Nearly all of Performant's businesses use a contingency-fee model, where the company collects a percentage of whatever money is recovered from the debtor.

RISKS/CHALLENGES

Working for the government has led to a highly concentrated customer base, making Performant vulnerable to its leading clients' behavior. A DOE technology upgrade started last September has delayed a number of student-loan placements and could continue to delay revenue recognition in the future.

Another, larger factor affecting Performant's customer base is the 2010 passage of the Student Aid and Fiscal Responsibility Act, which ended the federal subsidization of private student loans. Currently, those private loans are backed by 32 guaranty agencies, 12 of whom are Performant clients. Gaskings notes that expected consolidation among the GAs may cause some of Performant's clients to be bought by non-clients.

Total debt is $153 million, causing a constant bleed of interest expenses. The IPO won't do anything to alleviate this, as most of the shares are being sold by insiders, often the case with private-equity deals.

Performant's Medicare contract will expire in 2014 and the firm expects competitive bids for the re-up process.

THE RESULTS

In the most recent quarter ended June 30, Performant's revenue rose 26.8% over the year-ago quarter to $54.8 million. Net income rose 21.3% to $8.1 million.

USE OF PROCEEDS

Performant expects to net $21.5 million from the offering of 11.5 million shares. It will pay a few million in fees and use the rest for general corporate purposes.

THE MANAGEMENT

Lisa Im
Chief executive and director

Joined the company in 2002 and became CEO in 2004. Before that, she spent six years in various positions at Bestfoods Corp. She holds an MBA from California State University, East Bay.

Jon Shaver
Chairman

Joined the company in 2000 as COO and attained his current position in 2007. Before that he spent a year as a senior executive at Great Lakes Higher Education and two years as CEO of EdFund. He holds a doctorate of education from the University of California, Los Angeles and an MBA from Pepperdine University.

Harold Leach
Chief operating officer

Joined the company in 1982 and led the development of its proprietary technology platform.

Performant Financial
Livermore, Calif.
(925) 960-4800

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