Yet Another Value Podcast - Chris Krug from Chatham Harbor Capital on Performant $PFMT

Episode Date: July 28, 2021

Chris Krug, President of Chatham Harbor Capital, breaks down his thesis on PFMT, including why he thinks the stock could be a multi-multi-bagger.Chris's twitter: https://twitter.com/chcap2016My thread on PFMT notes: https://twitter.com/AndrewRangeley/st...Chapters0:00 Intro1:05 PFMT Valuation Outline4:40 PFMT business overview15:15 How PFMT "lands and expands" verticals18:55 How PFMT integrates and ramps up new contracts27:55 Why can't a start up come and displace PFMT?32:05 What PFMT's financials look like once all their new clients onboard35:40 Quantifying PFMT's margin outlook37:25 Why can't HMS respond to PFMT?40:20 Why is Parthenon selling so aggressively?44:20 PFMT's capital allocation47:25 Would healthcare reform hurt or help PFMT?49:15 What could kill this investment?53:10 Closing thoughtsSHOW LESS

All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Chris Krug. Chris is the president of Chatton Harbor Capital. Chris, how's it going? Pretty well. Thanks for having me. Great. Well, hey, let me start this podcast the way to every podcast. First, we'll just give a quick disclaimer. Everyone should remember nothing on this podcast is investing advice. Go to your own diligence, consult a financial advisor, but nothing on here is investing advice. And then the second thing I'm going to do is start this podcast with a pitch for you, my guest. you and I've been talking off and on for a few years. I've always found you to be a very sharp investor with very interesting ideas. But actually the pitch I think that works best is I told a mutual contact of ours who's going to remain undisclosed that you were coming on. And he said, oh, I cannot wait for that episode. Chris is one of my favorite people to swap ideas with. He is super sharp. So if that's not a good pitch for you, I don't know what is. But that pitch out the way, let's just jump right into it. The company we're talking about today is performant.

The ticker is P-F-M-T. So I'll turn it over to you. Chris, what is performing and why are you so interested in them? Okay, so performance is a very complicated story. So this is going to take a little bit, but I'm going to walk through everything. So it's a company that's going through sort of a gigantic change. So first, I should probably start off of the valuation. Market caps about 200 million, 220 million.

It's down a little bit today. then there's about $35 million in net debt, $38 million in net debt. That's going to be coming down over the course this year. So the EVs somewhere around $250 to $275 million. This year, they expect revenues between $83 and $90 million just from the health care side. So you've got something that's trading at a little bit over two times revenues, more or less, to EV to revenues. I think longer term, they're going to get about 40% EBITDA margins, and I'll explain later why.

And I think in a couple of years, let's say two years, 2023, revenue should be between 160 and 200 million, depending on certain situations. So you have something that's trading at almost one-time revenues in a couple of years. Longer-term, even out margin should be above 40%, or not above 40%, about 40%. There's evidence, well, Cotivity is one of the biggest competitors. They did 35% even at margins. HMS, 28% even in margins.

This is more of a tech business, and those are Cotivity secret sauces there in the Philippines so that they have cheaper labor. performance is going to go to that as well. But, okay, so what is performance? So I've, I, hopefully I made it clear that this thing is extremely cheap. It's growing extremely quickly. Trading it one time's revenues growing at. It's going to grow at between 30 and 50%.

Pretty much, I don't know how long for a very, for a good amount of time. So what they do is it's a legacy student loans collection, an IRS collection business. So think about how if you have a bunch of student loans and you miss payments and you have to collect $5,000 from you. performing had a call center that they would they would basically collect that money and they get paid after a nine-month program okay same thing with irs they're not going after big people they're going after people for five thousand dollars two thousand dollars something like that claims okay that business was just sold but over the past let's call it uh they

they went public in 2012 uh parthenon took in public they originally made their investment in 2004 so over the past let's say uh since 2014 they had $3.4 million in health care revenue. Now that's going to be 83 to 90. Okay. The student loans business was their biggest portion of the business. I forget what the numbers were in 2014, but it's something like $100,200 million, something like that. But over time, the business has absolutely gotten decimated, as all your listeners can probably assume, with the Biden administration and COVID, with COVID, even the Trump administration cut off, you didn't have to pay your student loans anymore. So last year, revenue for the student loans portion of the business was down, I believe, 39%, and they were guiding towards down

45 to 55%. But remember, that's gone. Okay? They haven't announced what they sold it for, but it's going to be for something. Before previous conversations with management, they were talking about selling their contracts for about two to four times EBITA. So I'm thinking that they can sell these things for $5 to $10 million. And that's sort of helping that deal leveraging. Last year, $60 million in debt, now $38 million in debt, I think by the end of the year, $25 million a debt. But the real juice is the healthcare business. So when I first found this thing, I didn't know what the healthcare business was. I just saw something grew 65% last year.

It was trading at one and a half times EBADA on the equity stuff. Very cheap situation. Those are the situations I like. I like situations where there's a good co and bad co. And then the revenues and EBITDA are stabilizing. So that was this type of situation. But over time, and I've been following the company for about a year now. And I've been doing calls every single week with management and IR.

Sometimes they probably are sick of me. Sometimes call them three or four times a week. But, um, but, this business is. is they audit insurance claims. So there's two different sort of verticals within the healthcare business. There's the audit portion of the business. So the audit portion of the business

is more or less if you do knee surgery. And you get knee surgery and the coders because this is all done by the hospitals and it's not all automated. I don't think it's ever going to be all automated. It's a lot of human touch to it. And from what I understand, they're lower paid workers for the most part.

And there's a lot of turnover with the people that actually all these claims, or not all of these kinds, that code the insurance claims. But someone might mess up a knee surgery and they might charge you something for brain surgery. And then it slipped through the cracks that the insurance company, their insurance company pays for it first. And then performant is a third party vendor that comes in and audits these claims. And they basically have teams of nurses and doctors that go in and say, oh, this area,

knee surgeries, for example, are likely that they've been coding it mispropically because the code for a right knee surgery is very similar. to a code for brain surgery or like one type of knee surgery is very similar to another type of knee surgery but the other type of knee surgery you charge five times more even though and so a lot of the hospitals may think oh we can get more money if we can try to go after that higher price knee surgery so that's one portion another portion of the business can I just add one thing I mean and correct me if I'm wrong but this can be as simple as you know the code for knee surgery is zero nine four three and the person putting it in puts zero nine four and as

As you said, I mean, it's not always, because I just wanted to clarify, this is not always the hospitals as bad actors. No, no, no, no, not at all. It can be all sorts of things that they're getting. Right. There's a little bit of fraud, but most of it is just like people just miscoding, not on purpose. And the hospitals aren't directing them to do it on purpose. But it's just one knee surgery is very similar to another knee surgery.

One coat is very similar to another going. It just happens. I mean, it's impossible. I mean, there's what, hundreds of thousands of different types of insurance claims. So, I mean, error just happens and it always will happen. So that's the audit side of the business. And they work for the insurance companies to help them get money back. So they're a profit center for the insurance companies.

The insurance companies don't pay them. They take a portion. They take between 15 and 25 percent of the money that they recover from. They work for commercial and CMS. On the other side of the business is eligibility. Eligibility is if you slip and fall inside of a Walmart. Let's say 26-year-old male slips and falls inside of a Walmart. who's responsible for paying the insurance claim?

Is it his parents' insurance? Is it his company's insurance? His Walmart's insurance is one of their 50 other insurance? What is what, which insurance is actually, which insurance should be actually paying this claim? Another example would be if you get to a car accident and you break your leg, let's stick with the leg examples. Is it the car insurance that might have a $10,000 deductible or something like that?

umbrella coverage and then it goes to the health insurance like what which insurance is supposed to to um to pay for this so that's what insurance that's what perform it does they they're a third-party vendor to help the insurance companies and the CMS to do that so went through that okay and they get paid a percentage of the money that they recover so the way this is this is important the way the industry works is let's use united healthcare for an example so united in-house The industry is gigantic. If you include all the claims both refuted by United and the third-party vendors, it's gigantic. But performance going after with two other players in space, more or less, they're going after about $8 billion.

The TAM is a little bit difficult to really pin down because a lot of it is blue sky on the commercial side. But it's about $8 billion that performance going after. And there's only really three players, three independent players in the United States. mystery and it's very hard to get into. But they basically get different passes. So every insurance company hires every single vendor. So there's human, or there's not human, sorry, there's coativity, there's HMS, there's discovery healthcare, there's, um, there's Optum and Change Healthcare for the most part, and then perform it. Optum and Change Healthcare are both owned by United. And so they're not, they're not in that they're very small portions of Optum and Change

Healthcare's actual business. So those. really aren't players in the commercial side anymore. Then you have discovery, which is public. It's a subsidiary of about a $10 billion company as well for $155 million. So it's hard to find too much data of them. Which company owns them? Metaplan, I think. MPLN is the ticker.

It was a SPAC that just merged. So I know less. I have some familiarity with multi-plan. Yep. Okay. Multi-planned. Sorry, multi-plan. And then Veritas owns Cotivity, and they just watched HMS for 7,000.

15 times even EBITA, and they're growing at 4% a year. So cotivity and HMS are the biggest competitors. So the way the industry works is like, let's say, for durable medical equipment, so DMA, that's performance actually has a national contract for that phone, the CMS side. But they also do that, that's usually how they get into the insurance companies. So United might be, they have a DME vertical. They 100% do have the DME vertical. They don't might have a DMA vertical.

So United might do, they might in-house get the easy claims. So they have teams in their house. A lot of people misunderstand this business and they ask, why don't the insurance companies do this itself? They do do it themselves. And then you hire third-party vendors to try to get other claims. So at the beginning of every month, perform it gets all the data, all the claims that Unite paid out in the DME. And there are different passes. So the first pass is obviously the insurance company, the United Healthcare.

They're going to do as much in-house as they possibly can because they don't have to pay out 15 to 25%. Then there's a almost like a tech stack or pass system. So the person in the first place gets to look at the claims on day one. Then they decide which claims and they get paid 15% of the money that they get. They get to look at all the claims. They get to decide which ones out of all these different claims are they able to actually refute and they can get the money back. You can't refute every single claim because it makes the insurance companies look bad. So you have to have to have some degree of accuracy here.

You can't just blanket every single claim with the hospitals because it decreases the relationship between the hospitals and insurance companies. And insurance companies are going to be like, why waste my time with these things that are clearly right. Okay. So first company gets first pass. Let's say it's perform. Performer gets first pass. And HMS gets a look at the rest of the claims. They get to audit the claims that perform it didn't look at.

Then Cotivity, which is actually owned by the HMS and Cotivit, the same company, but they still work independently. Cotivity gets a third pass. Discovery might get a fourth pass. Discovery gets 25%. Performing gets 15%. Because Discovery is in the last position. They're incentivizing them to do that. So, yeah. Do you mind? I just wanted to find the 15% just to make sure, because I can be very blunt. And we said 15%. I just want to make sure we hammered home. The 15% is United paid a $10,000 claim, right? And then performance. is going to go and say, hey, you pay 10,000. You should have only paid 5,000. Or let's make it 6,000. So the math is a little different. You should have only paid 6,000. So we're going to save you $4,000. And of that $4,000, you're going to write us a check for 15%. So $600, so net they're saving

$3,400 because they get the $15,000, just so everybody can. That's perfect. Sorry, I didn't explain properly. So what is important here is that if you can deal with the insurance companies, the insurance companies have no reason not to use you. They want to use every single vendor that is out there, for the most part. I mean, it seems as though the commercial insurers only use the, that I know of, they only use the providers that have contracts with CMS, and you have to have a license with CMS to actually deal with their verticals. But the commercial insurance, this is newer for the commercial insurers.

Performant is a newer company. They only had $3.4 million in 2014 now they're growing. So a lot of the growth and a lot of the continued growth is just going to be signing on to different verticals within, let's say, United. So you grow three different ways. And we'll just keep United as an example.

There are 45 different verticals within United conservatively. Some are prepay, some are post pay. Those aren't as important right now, so I'm not going to explain them. We can talk about this for five hours. But we'll just go over that. And then some of them are eligibility.

Eligibility is five. prepay and post pay are about 40. So Performant now has, on average, five verticals within all the large insurance companies. They have four of the five largest insurance companies. And then Blue Cross Blue Shield, they don't count. That's a mid-level insurance company. A large insurance company is over 10 million covered lives. So you can grow by getting a new customer. So they might get Humana. That's one way to grow. And when you get Humana, you might get one or two verticals. Usually perform it gets it by getting DMA or home health because that's what they have the national contract on the government side. And the reason why I'm talking about the commercial side, even though the commercial side has more, or the government side has way more revenues is because the growth is going to come from the commercial side.

So they have the national contract. It's called RAC Region 5 for the government. So they usually get the DMB contract and they go into the first pass. Usually you go into the fourth pass because going forward. because the legacy players have been there for a while, but Performant has gone into the first pass in DME because they have the national contract and they're clearly the best,

because they have the national contract. So they're going to give them a look at all the claims at first. So you go in, you get a vertical. You get a new customer. Then you might grow by going into different verticals. So you might get home health. You might get hospice. You might get skilled nursing.

You might get brain. You might get knee. You might get DMG, like all these different verticals. And then there's 40 of them. Okay. That's another way. grow. That's in, like I said, Performant has on average five out of 45 so far. So there's going to be a lot of growth going

forward. But they have four the five largest insurance companies. And I'm guessing once you're in, right, so United Health approves me to do their DME, I'm guessing it's not hard to get approved for all the other verticals. I mean, obviously they're only at 545. So it takes time. But it's not going to be crazy hard because as you said, these are non-exclusive contracts. So you just, you've just really got to go to the, whoever the decision maker is and be like, hey, we're already on your systems. Let us be the fourth pass guy for you. And it costs you nothing.

You only pay us when we save you money. So it really costs you nothing as long as we're not raising a huge headache or just filing all sorts of crazy claims. Exactly. Exactly. So it's hard initially when you have very little revenue to actually get the insurance companies to take a look at you. Because number one, it's hard to create these systems, right?

You need the actual data. You need, and insurance companies don't want to give you the data. So one of the advantages the third parties have over the insurance companies doing it themselves is that the third parties, they have data from CMS, EDNA, Humana, small insurance companies, large insurance companies, insurance companies in New Jersey, insurance companies in California. So if all this data together and someone might be coding something wrong at EDNA, and then they can use that data to help someone at Humana catch that, where they wouldn't have done

in-house. Okay. So you grow by new customer, new vertical within the customer, and then moving up in the tech stack, in the past stack. So perform it actually for every single the vertical they're in. So their largest customer, they have 12, the big insurance company. And then of the five large insurance companies. And then the average is five. They're in the first or second pass, which is actually very rare because usually go into the fourth pass. Okay. So they're in the first or second pass on every single one of their their, their, their large insurance companies. The real, so you're going to grow on the larger insurance companies over 10,000 covered lives and you can get into 45 different verticals within each. And then there's the mid-level insurance companies that are between 500,000 covered lives and 4 million covered lives. They include Blue Cross Blue Shield in that. So there's 50 right there with 50 states because those are states, Blue Cross Blue Shield, Carolina, Alaska, whatever. Okay. So the large, the large players, so I said there's Cotivity, HMS, Discovery. There's Optum, and,

change, they don't play in the mid-sized space. They're a smaller competition there, but from what I've heard, they're not as good. One of performance keys to growing is they're entering the mid-level insurance level, where there's less competition. But it's economical for them because most – I've heard that HMS hasn't changed their technology since 1995. I'm sure that's a little bit of an exaggeration, same quotivity. these companies have grown by acquisitions.

So they're less integrated, they're lumpy. It takes them a day to process claims where it takes perform in five minutes to process claims. It's less efficient. Performance like the next level of technology, next generation of technology, because most of these other companies started in the mid-90s, the early,

or mid-to, in the 80s and 90s, we'll put it that way. I think HMS was started in 1995 or something like that. I can't remember exactly. But yeah, so performance is going to go off to the mid-level one. They're creating a SaaS solution for the lower insurance companies, and those are less than 500,000 covered lives. So that's that. So that I hope I explained well enough what the business model actually is and how the

company can actually grow. Do you have any questions? No, I think that was great on the business model. Were there other stuff you wanted to hit? Yeah, a few more things. I just want to make sure that I, before we ask, I think you explained it. really well. So that's how the revenues work. Also, oh, I should talk about the integration process. So perform it, it takes them six to nine months to actually integrate into the insurance

company. So if they win a program now, it takes them six or nine months before they can start running tests on the on the audits. Then it takes them three to six months to actually get paid off those. So performant has very good revenue visibility. And they know what the revenue is going to be a year to a year and a half out. And then if you go take a step back, the way they win a program is they do tests for about a year beforehand. So they go into United and they say, oh, let us do this vertical or something like that. So they basically beg them to like let us compete. They get in. It takes a year. They see if they're winning. They know if they're going to actually win a program or not and get into the actual tech stack.

Then they get into the tech stack and then the 1.5 years actually begins. So you really have revenue visibility because they know how they're doing. So they basically make money for the insurance companies for free in the beginning. They know how they're doing probably two to two and a half years ahead. So when the company comes out and says that we think that we're going to do X amount of revenue in the future, they know at least a year and a half ahead. It's already booked. And then they know another six months, nine months out, whether or not they're winning these programs. They're likely to win these programs. So they have this. for another six to nine months into the future.

Okay. So that's, I think, a very important aspect because you had some questions on revenue. So like I said, the TAM is something like $8 billion. You can say $4 to $8. It's unclear because the insurance companies aren't sure what they're paying improperly. So if from anecdotally from the company, from expert calls, from a lot of different sources, we've heard that performance is by far the best, that they can come in and increase the amount of money

the insurance company is getting back in the first round by 75%. So they're very, very good. And it's key here to understand that if HMS is not catching some claims, the claims that they're missing perform it if they're good, if they have a really good software, they can get those and they have no competition on those because they are winning claims. And the claims are constantly changing.

They're winning claims that the other. insurance company or the other vendors aren't even noticing exist. So and if you get the first pass, you can get a look at every single one of claims first before anyone looks at it and you can win a bunch of different claims. So that's sort of what they're doing. They're basically getting into the fourth position and then increasing the total amount of claims by 75%. That was a united quote actually. So and then they're moving up in the first position and then they get the 75% plus the other claims that the first pass was taken before. So that's that's an important aspect to the business as well. So the CEO, who I think is absolutely fantastic,

she basically had this dying business and she reverted all the capital to start investing in this healthcare business and grew up $90 million in revenue. Let's just use the high end. Or midpoint is 25 times in seven years. She thinks that they can get 10%. The company also is thrown out 30, 40%. They think over time of that entire market because, and I've heard it from many people. The products unbelievably, it works unbelievably well. You can, there are government documents I can send over later that talk about how the performance rate of performance compared to the competitors.

They're getting around 20% of the claims correctly versus that's called their quality score. The quality score is about 20% they're getting where their competitors are getting like in the low teens like 11 or 12th. They're almost two times better. The company says that somewhere between 8% and 10% is where the competitors are and they get between somewhere between like 18 and 25%. But I'm sure for different situations, this is data from 2018 that I found,

but that's anecdotally from the company. So performance clearly better than the competitors. On top of that, Cotivity, which is one of the biggest competitors, is rumored to go public at 15 times a revenue. Remember, this thing's trading at, and Cotivity was apparently growing at 10%. So this thing is trading at one times revenue is a couple years out.

People apparently think these are very good businesses, which I think they're absolutely great businesses. HMS got taken out for 17 times, growing at 4%. Cotivity is talking about going public at 15 times revenues, which is, I don't even know how that's true. And they're only growing at 10%, even if they were going, they were getting going public at 7.5 times revenues, half that.

Maybe that number's wrong. It's still absolutely fantastic at 35% EBITM margins. I think performance is going to get better EBITO margins than Cotivity over time. They're talking about possibly going to the Philippines and basically you would have your doctors and nurses that basically assist the software, have them based in the Philippines and the labor is cheaper because that's a big portion of the cost as well. But a lot of this is AI. They have a very good engine and it's purpose built for this.

So the CEO thinks that they can get 10% market share, which would be $800 million in revenue and 40% EBITA margins. Even you can use 30% EBITA margins. And what's that $240 million in EBDA? I think they're sandbagging it and they could get 40%. I don't think they could get really about 50%. Maybe they can get 30%, something like that on an $8 billion company. Let's say 30% with 30% EBITDA margins. You get $2.4 billion of revenue.

30%. What's that? Close to $750 million in EBDA for a $250 million market cap. It's pretty crazy when you think about it. It's actually pretty silly that this company's trading is such a low of multiple. And why the growing, I said, Better Tech, they use more AI than their competitors, built from scratch versus acquisition. The lowering the price isn't an issue because, I mean, HMS can lower the price all they want.

If they don't get the claims their performance is finding, then it doesn't matter. So when the price is an issue, like I said, there's really only three other players or two other players. There's Cotivity and HMS, which are owned by Veritas. Cotivis is about to go public, so it would be interesting to read that S1. we have optimum change health care which don't compete in the commercial side of the business discovery which is a small portion of a bigger company which you can you can probably make the assumption that they don't really care about it too much but even if they did still you have essentially two other competitors in a billion dollar industry does even matter they're going

there's a big runway and they have 1% of the market right now so it's crazy um very high bearers entry like i said on the CMS side you need a license to work with CMS and So there's five rack contracts. Performant has one in five. One is the West Coast. Five is the National DME Home Health Hospice. Two is coming up this month in August. So that's big.

That's double the size of one. And performance has frankly been kicking Cotivity's ass. So maybe they win that. That could be a $25 plus million dollar contract and run rate revenue each year. Three is coming up next year. Four is coming up the year after then. Five's coming up in 2024, I believe. So that's their risk.

They just won rack one again for 8.5 years. I'm not sure exactly how much revenue that was. I think it's somewhere between the $10 to $15 million range. So on the commercial side, the government side, that's the majority of their revenue right now. But that's not going to be a thing in the future. It's mostly going to be commercial. But you have these short-term catalysts that, God forbid, if they win rec two or three, they might get $25 million for each of those.

And then that's how you get to the $200 million in 2023 number versus the 160 or if things go tragically wrong, maybe they get around 150. The government led, I'm not sure if the government would let someone have more than two rack contracts. Everybody has two and HMS has one. So that's. Yeah, so I'm saying if Performant has one and five, I don't think they could win two or three because I'm not sure the government will what one person auditing across the contract. My point is that HMS and Cotivity have three together in their same company. Oh, okay. Okay. So you think they could get up the three. All right. I think they could get. I'm not saying they're going to win all three of them, but they could win another one.

And I'm just saying maybe, maybe. You know what I mean? That's not even built into my analysis at all. But I'm saying if they do, they might win another $25 million for revenue. But the real key here and the reason why I'm bringing up that up at the end, it's not important, is they're going to really grow on the commercial side of the business. So that's where the majority of the growth is coming from. the future. So I hope that was helpful. And I just wanted to do it. That was super helpful. Yeah. Let me turn to question. And, you know, as I was researching this and, you know, I'm really interested in the idea, but as you mentioned when you were going through this, you've done a ton of expert calls. And one of my big things is it's, you've got to do the work, right? You've got to

build the diligence. But the thing that I kept, that kept jumping out to me is the big question. You mentioned it in your overview, right? There are three, there are really three kind of focus companies competing here. And you said, okay. quote was, it's very hard to get into all the competitors for the most part of from the 90s. And I just keep in my head thinking, Performant really started the healthcare, getting serious in the healthcare business in 2012. And in eight or nine years, they built up this company that is winning tons of market share, growing faster than competitors, performing better than competitors. And that's awesome. But at the same time, it made me wonder like, oh, if they could do this this

quickly kind of starting from almost nothing, what's to stop the Cotivity from going and really upgrading their systems and turning it all around or a new competitor who, you know, there are all these fintechs with great AI and great. What's to stop them? Because growing this quickly, great margins pretty uncorrelated with the healthcare side. Like everyone would love to be in this business. So why, I know you said that they've got a barrier and it's hard to get into. But when I look at how quickly they go to it, it does call that into question. So can you help me there? Okay. So I think that's a very good question. But I think at these prices, it doesn't, I think that in the medium term, there's not much risk.

I'm not arguing that in 10, 15 years that there could be a tremendous amount of risk in another company coming in. But in the media term, we know what revenue is going to be really in the next two years, right? We don't know, we know in a range, but we know they're growing extremely quickly. In Q4, their run rate revenues increased by, in terms of this, this revenue is going to show up in 2022. They increased those revenues by $9 million or $8 million or something like that. you won. It was something similar, I believe. So they're growing. They added in six months, $20 million in run rate revenue. You have the revenues that are going to show up later this year.

They should be at 25 run rate or something like that. So you're going to be, you're going to be at $100 million run rate by the end of this year. First quarter was about 17. Then there was a charge off. And we can go into that later. It's not really important, but we can go into that later. But my whole thesis is around. I'm not arguing this business is going to be around for 50 years. I'm seeing at current prices and the current growth rate and the current momentum that they have and from doing calls and talking to people, it doesn't sound like the competitors that are even remotely aware that perform. They're aware, but they don't view performing as huge risk and they're not doing anything to do anything to compete with them. I think that HMS probably could change your software, whether or not they can do it well with six different types of systems doing it. Maybe. Maybe you have to build it from scratch. I don't really think, nine, I think nine years is kind of a long time, actually. So, I mean, if in the medium term, I just think there's very little risk to competition. The longer term, yeah, it could possibly happen.

I don't think VC, I don't think this is sexy enough for VC. I think it's hard to actually, it's not impossible the Barry's entry, but I think it's hard to actually get these licenses. It's hard to convince the insurance companies. It took perform forever to actually start winning these contracts. I mean, Hops has been around since the 90s. and they had one or two on-off contracts through the years. And then they started really growing in 2014. So, I mean, I'm sorry that's not the best answer to your question,

but I think that, I mean, if we get over $150 million of revenue in 2023, companies are $250 million market cap. The debt's going to be completely paid off. There are a few warrants or $5 million. There's $5 million warrants. There's $55 million shares outstanding. So it's really $60, let's call it. But they have some cash.

If you include the cash at the end of this year, they're going to be, I don't know, they'd be closer to $20 million in that debt after the sale of the other business. But I'm saying in two years, I mean, you have something that one of the competitors potentially could go above like a 15 times of revenue. This thing's trading up basically one times of revenue in two years. I don't really see that much risk there in the truth. I think it's kind of silly. I'm not saying that forever there's never going to be competition, but I think it's kind of silly in the short term, silly truth. evaluation. So let's talk about the growth a little bit real quick. So I just want to pull two different threads together, right? You mentioned exiting the year run rate 100 million in revenue in the health

care division, which I guess is something like this point. And then, but you also mentioned, and I love this point earlier, you said, hey, when they get a new client, like they've got great visibility because it takes a year to get someone to sign up as a new client. And then once you get them, it takes another six to nine months to kind of get integrated and maybe a couple months after that to really get rolling in the system. So it's a two year process. They could land every insurance company in America today, and it wouldn't affect their numbers probably to the end of 2022 at this point. Right. So I just wanted 100 million run rate revenue, but they landed 10 new programs in Q420. That's probably not really hitting the numbers at that point. Five new

programs in Q121. So if I was talking about, you know, if you just rolled those programs in and talked about what the run rate in mid-2020 look like, how different would that be versus the 100 million? And that's sort of what I'm saying. So it looks like that that's going to be around like $115 to $120 million. Okay. That's just in, and that's assuming that they don't win any more programs. But as we discussed before, it's once you get in, and I wanted to make a point that they have an average of five programs within these companies. And they have 45 total conservatively verticals.

That those, that's a low hanging fruit. And the insurance companies want to use them because with United, they increase their revenues by 75%. Yep. in the first round. So the barriers, there was a barrier to get into the actual insurance company. And then there's, and then also as they get into the mid-level insurance companies, they're expecting three to five program wins. Granted, these are smaller programs. But three-to-five programs wins. And this is basically a completely wide-open strategy in the, in the, there's no, there's very little competition for the mid-level insurance companies. And for the small insurance

companies, no one can even deal with them because they're so small and it doesn't make economic sense to audit 15 claims. So they have created, from what I understand, assess business for the lower insurance companies. So that's basically how you're getting to those revenues. Perfect. So 100 million run rate revenue by end of this year, maybe sometime next year they're on 150 million runway pace.

Let's just take that 150 million. How much of that is from the Medicare program versus how much of that will be from the commercial programs? Most of it's going to come from the commercial. I mean, Most of it's coming from. I don't think health, the government revenues are going to grow that much unless they win a Ract 2, a Ract 3 contract. That's just free money.

I mean, if they win one of those, that just boost the thing and you get five extra dollars on the stock price. Of the $100 million right now, how much of that is government? Government, what was it? Let me pull up the financials. I think government was like 40 last year. Okay. 20 commercial, and then commercial is going to be the majority of the growth this year. So you're going to be closer to – it's going to be – the majority is going to be commercial.

It's going to be maybe 6040 commercial, and then it's going to keep growing on the commercials. I'm just teasing out because, you know, the Medicare – probably a little growth, but that's pretty steady. And it's just crazy, right? As you said, hey, they're going from 100 to 150 million run rate, which is huge. But if you actually broke that down into Medicare and commercial, the commercial is growing exponentially faster because the Medicare is pretty steady. That's pretty crazy. Exactly. So commercial is just growing at huge clips.

Like absolutely huge clips. But the CMS, obviously, like, there are only so many contracts. I mean, they're just going to grow a GDP plus. But that's not the way. So you bridged me to run rate 100 million in revenue this year, run rate hopefully probably 150 million in revenue by sometime next year. EB 275 million, we'll call it. So trading net kind of under two times next year.

year's run rate revenue. So I guess my question is, you mentioned several times 40% EBDA margins. And if you put that on two times EV to revenue, it's eight times EV to EBDA. This is going to be a great cash flow business because it's pretty much all data, very capital light. So my next pushback would be 40% EBDA margins. Where is that assumption coming from? Okay. So the company saying mid-20s to low 30s, even at margins for the most part, or around 30% of the margin. But if you ask them the question,

why can't you do better than you, they're way more, it's a way more software, sort of AI intensive business than HMS and Cotivity. And I suggest your listeners to call the company and ask, why can't you do better than Coteivity? And they'll laugh. And Cotivity has 35% even in margins.

And there's way more tech involved. They're going to start moving their stuff to Philippines. But it should be. Maybe they don't get 40. But I think it's possible that they can actually get 40% even in margins. Even if you say 30, they could do it. There's evidence HMS, they did 28% even in margins. Cotivity did 35% of margins.

These are the same business models, same business. But the only difference is performant is more tech enabled than these other companies. So that's where it's coming from. Yeah. It's difficult to understand. It all makes so much sense to me. It's still, there's something in my mind that's saying like this company, What was HMS revenue before they got bought out?

I think 400, something like that. Maybe HMS got taken out for $105 million in EBIT or something like that, if I remember correctly. It strikes me as so strange. I know larger competitors can be slow to respond. This is why sometimes you grab a smaller company by the tail and they grow and they just destroy it. But it just strikes me a strange. HMS, a company with 400 million in revenue, 100 million in EBDA.

I know it's going to take while six different systems to integrate itself. It just strikes me as strange that they. couldn't make a reinvestment. When PFM, when Performant is clearly taking so much share, they couldn't make a reinvestment and go hire a bunch of data engineers and do something to kind of try to keep their share at least, you know? Yeah. So this is, this is my response to that. So performing grew up 65% last year to get to 67 million. So if you look at 2019 revenues, they were like in the 30s. And that is, people barely even know they even exist. So I think that HMS is getting to the point where they're realizing

that performance is actually a player. And I'm not disagree with you. HMS and Cotivity probably could make some a better type of product. But they might have to gut it to tell you true. They might have to build something from scratch and it could take a while. But my whole thesis is not that performance

is going to be, they could get a 10% market share. And there's really only whatever, three players, right? I mean, they can get a 10% market share and be the loser. in the game. And they could still be worth a tremendous 50 times what it's worth right now. But yeah, I don't disagree with you. I mean, HMS could. I mean, that is a risk, but I don't think it's a midterm risk. I think it's a longer term risk. And they have to actually care that performance exists. It's the innovator's dilemma as well, right? Why not just milk what you

have? And they probably don't think that they had a product development there probably doesn't think that performance any good. And that's, that's why he does what it is. You know what I mean? Yeah. Hey, I'm with you. It just, it strikes me as crazy a company, a publicly traded company in an industry with, you know, kind of three pure plays could report revenue growth this good and take this much share. And then HMS can just kind of sit on their hands. And, you know, it's the, it's the dog sitting sitting in a house while fire burns around. I'm saying, this is fine type thing. It's like, it's so clear they're taking so much share. It just seems crazy to me that they're not going to respond. I mean, they probably will respond. They'll do something. But, I mean, at this point, does it, I mean, performance already have so much, they have so much momentum that, I mean, the stock's so cheap. I mean, that's a question when the stock's $30, right now it's at $4, $450 or whatever it is.

I am not watching it right now. When the stocks are $30, that's a very relevant, like, important question to answer. Like, why won't HMS crush them? But right now, I just think it's so cheap. It's like, it's the most silly thing I've ever seen. Let me ask you my next question. This transitions, it wasn't going to be my next question, but it transitions perfectly to one of the key risks that, you know, I think I had a couple other people threw up.

You said, stocks at four. You're going to ask that question when it's $20, $30 per share or something, right? You've laid out this great growth track, this great growth story, cheap valuation, once you standardized the number, taking huge shares. So the next question is clearly, their majority shareholder is, it's Parthenon, very, respected private equity firm with great returns historically, they've been blowing out of their shares, right? I posted on Twitter, people can go find it. They've sold shares constantly every day this month, starting in the threes, the stock, as you said, $450. I mean, they're pulling out of

$2.338 was the first sale. Yeah, I'm only looking at the July one so far, but I'm now looking at the June's and you're 100% right, 238. And they've blown out of millions of dollars. of this thing. You know, I'm doing the math in my head, right? I think they've sold over 5% of the company within the past month. So if this growth story's this good, Parthenan's been in here, understandably you've been here a long time, but obviously they've got visibility into the growth story. They've got board seats. Why are they blowing out right now when the growth story is this good, the company's this cheap? I've tried to talk to them. They won't talk to me, but this is what I've heard. I've heard that they made the investment in 2004.

And you worked in private equity and I know a bunch of guys private equity. I don't think many people want to hold an investment for 17 years. The company didn't trade for the last five years. I mean, what was the ADV like $50,000 a day or something like that? It literally didn't trade. So, I mean, I think it got to a point that people started really realizing what this was and they got a free $50 million or more than that. and I think they just are going to sell it.

So you're thinking this was a write-off to them, right? They had ridden this thing off. Yeah, I think so. Healthcare wasn't even a big portion of the business until a couple years ago. I mean, when you look at the numbers, the student loans portion of the business was like 90% of the revenues in like 2018. And healthcare, they might have known about healthcare, but they invest in this business when it was a student loans collector.

It's not. So, I mean, I can't give you a good answer. If I was in their situation, I wouldn't be selling this. thing. But teach his own. I mean, they probably have a new fund that they're raising money for. And they just 50 million bucks. Yeah. And the stock as recently as, you know, last September was this was a 60 cent stock. Today it's a 440. So I'm sure I'm sure you are right, right? They had written this darn thing off. And then the stock 5X on them, they said, oh, we can close this out, get some money. It does make sense. But at the same time, you know, like they've just been in it

so long. And they have, they've been in it for a long time, you know, in two, I'm, looking at the chart. In 2014, this was a $10 stock and they held their shares and just it's I always get a little hesitant when there's a big private equity player and everything seems to be going right and they sell kind of right before the payoff seems to come. But I told you the last time we talked, this has been wrong for me before, right? BXC, which is a lumber distributor, Cerberis was the owner. They held, they saw, they blew out of their whole stake maybe five years ago at $7 per share. And two years later, BXC was a $30 stock. So the private equity guys definitely get it wrong, much like everyone can get it wrong.

But that's just one thing I know that jumps out to me. And on top of that, I mean, do you really think, I mean, there's a real possibility of the person that made the investment in 2004 is probably not even with the company anymore. At one point, it was less than a $10 million position. I mean, like, these guys are good. I mean, like, do you think anyone really cares about $10 million bucks? I mean, it could be a junior analyst that could be running the show. Who knows?

You know, the person who made this investment, Not only is he not there, but his associate is no longer there. His analyst, analyst, analyst is no longer there. His analyst, analyst, analyst is no longer there. His analyst, analyst is no, at that point. Yeah, so. So, 100 million dollars in revenue this year, 30 million. Run rate. Run rate. Run rate. They're not had 40% EBIT odd margins yet, but they're going to get there, 150 million. This thing's going to be throwing off a lot of cash. They've got about 40 million in net debt right now, a little bit under it, just throwing the numbers out there. By the end of next year or two years from now, I think, think all the net debt will pretty much be gone. These businesses, as you said, a lot of them are private equity owned. They can handle a lot of debt because they've got great visibility. They've got great margins. They don't have a lot of cap X. So in a year or two, what they're going to do with their cash flow and their capital allocation is going to become a high quality problem, but it's going to become a problem and it's going to become a question. What do you think the company's capital allocation strategy is going to be as kind of the cash flow really starts pouring

in? Because that's going to make a big difference. Obviously, if they can get to $100 million in EBIT and it's $200 million stock right now, it'll be fine either way, but it will make a big difference on the margins. Yeah, so just to take a step back, there was a shelf that was filed last night. And it looks like the stock is down today because of the shelf. I'm talking to company, and I haven't heard anyone get a different response to them. On the shelf, I will just let you know two people email. He was like, of course, the company heard there was a podcast coming out and they're like,

we've got to get that shelf offering right now. Exactly. So to be clear, the company had a shelf in 2014. 2017, 2019, 2019, 2021, they share count

has increased from $50 million to $55 million. It's like negligible in six years. I mean, it's probably just

stock options. So the company to me seems like they're allergic to issuing shares. So, I mean, from our conversations,

they're going to buy back shares with the cash. They think their company is so cheap. It's like ridiculous. And they understand what's going on. I'm still,

I wish Parthon would stop selling and they could make some money for themselves, but, but, I guess, teach you something. They're better at making money in other ways.

But it sounds like the company's going to buy back shares when this cash flow came through. That was a big question I had a couple, like a couple months ago. Like, what are you going to do with this? And they were like, honestly, there's not that much competition. We could go into different verticals. Like so Optum went into a bunch of different articles, change could. But they like what they're doing.

And I think they're just going to keep buying back shares or they're not going to keep buying back shares. They're going to start buying back shares. Yeah, I wonder if there's a deal to be done, you know, do a block purchase. of some of Parthenon's shares, take that overhang out, deploy some cash early, keep the leverage at a level that's kind of consistent where peers are at. Yeah. Well, the company, well, people have been buying the shares.

I think there's been four or five different buyers of Parthenon shares. They're down to $7.000 something million, $7.5 million. They were at $14 million a couple months ago. Yep. I mean, the next thing we know, those could be gone. I mean, Craig Hallam and Collier's just pick up research coverage. Apparently, people are extremely interested. people are seeing what I'm seeing, I think.

So I think that's going to be gone. And I don't even know. I mean, this could be a crazy situation when Portland is done selling. What, one other thing on PFMT, you know, there's always going to be, there's always going to be, we mentioned earlier, this is not all fraud. A lot of it is fat finger writ, fat finger you put in the wrong billing total, a lot of different stuff. But I do wonder, you know, a lot of this comes down to America's medical. system is flat out wasteful, very fragmented. And I do wonder with this, like, how much of this is, it's not a bad back to take because betting on health reform has proven to be pretty

difficult, but how much of this is kind of, hey, you are short any type of health care reform or major overhaul or anything? No, not at all, actually. If there was single-payer health care, here's a stat from one of the decks. The government is like 88% efficient. in finding claims. Okay? So there's 12% error rate. Commercial is like 6% error rate. So they're 94% of it, whatever, 94% effective.

So actually the government would, and they probably do less in house at the government as well. So if they went to a single payer, the market might triple because they would outsource more and more of this because that's the third party vendor's jobs where the commercial, they're in the business of saving themselves money. You know what I mean? where the health care, the United States health care is very, like you said, very inefficient.

So, I mean, it would be to an extent a very good thing if we went to single payer in terms of performance business. That's great. Yeah, you get what I'm saying. Oh, yeah. No, I get. And it might even be better because they've got the two rack contracts. Obviously, it might not be Medicare for all or whatever, but they've got two rack contracts.

So they've clearly got government experience. They'd be a major beneficiary. That's great. Because in my head, I thought that was kind of the kill shot for them, right? Like, you get some. No, it seems terrible. Yeah. Yeah. Give me a post-mortem on this. Obviously, you're hugely bullish. I think people can tell when you said, I will worry about that problem when this is $30 stock and this $4 stock right now. So you're maybe not dreaming. You're rationally thinking big, but give me a post-mortem. What destroys this company? What kills this investment for you?

Oh, I think that you brought up some good points. I think HMS or creativity creating something better. I just don't know how possible that is. But that could be. And I'm not arguing that this company is going to be here in 50 years. So over the medium term, a kill shot, well, there could be, there could be volatility, right? Parthenon is selling on the open market. They could decide they want to just dump 7 million shares and you could get absolutely obliterated in the short term. So buy them. That's a short term risk, right? But obviously, that's more stock price movement and volatility than the business actually missing what you're saying.

Yeah, the company talks about execution being the biggest risk and them actually executing the stuff. But from people that have talked to, I just don't really see how that's going to be a problem at $4 a share, at $20 a share, and they stop executing as well. It's not like they're going to kick off one of their, once they're in one of these verticals, it's not like they get kicked off. They used to get dropped down to number four because they can still find some. claims for the government. They have Iraq region five coming up. That's in three years or something like that. That could be a problem.

Yeah. The debt, I just don't think the debt's going to be a problem. I think this is pretty much as perfect a situation as you could possibly. I mean, I don't know. Have there been any rack vendors who've gotten hit with big fines or anything? So there was, well, perform it didn't get hit with a big fine. Well, Performant didn't get a fine, but they had, they have this MSP contract where there was a $3 million write off. That was an issue, but it's not really that big of an issue.

So basically what they did was they got paid for a claim that shouldn't have gotten paid, and they had to refund the money. They're short-term things. Like, that stuff just sort of happens. I'm not sure what exactly it was for. They wouldn't tell me, but $3 million, but I mean, on $90 million, really, who cares? It's, what, 3% or 4% or something like that? That could be a short-term issue. If that starts popping up a lot, then maybe we have a little bit.

Maybe this technology isn't as good. I keep trying to get in touch with as many people as touch as technology as possible. And everyone just says it's really good. I mean, there are always issues, right? I mean, this could be a gigantic fraud. I mean, but I doubt it. I mean, I've talked to enough people that I think it's highly unlikely. I mean, that could be an issue, right?

But the debt could become an issue, maybe. But I don't think so. I mean, I mean, they're going to have $20 million in that debt by the end of the year, and the next year they should be doing at least it's going to be trading at one times EBIDA, or not EBITs, sorry, net tech to EBITA. No, I was just wondering on the rack contracts is I'm not aware of anyone who's gotten fine for a rack contract, but you know, the classic thing, and this is more on the DME side when you're selling equipment to Medicare, then obviously this is different, but

the classic thing is, hey, this company looks super cheap, it's trading at five times, EBITDA, it's growing super quickly, 80% of the revenue is, to CMS and then they come out and they say, hey, this company was defrauding CMS or, hey, CMS has reviewed your pricing structure. You were at 20% EBITDA margins. CMS doesn't like that. You're going down to 10% because they're giving you a 10% price reduction, retroactive six months, take it or leave it.

We're 80% of your revenue. So those are just kind of the, I was wondering if there was something there, but it doesn't seem like it. Yeah. It doesn't seem like it. I don't know. I don't think so. I don't think there's a huge risk.

they could yeah yeah so we we are right up again at the one hour mark I as you know I've got a hard stop in about 10 minutes so I want to make sure I think we've talked about a lot I think you did a great job of covering the overview of the company but there are there any points on the bull side the bear side anything that you you wish we had addressed that you want to make sure our listeners take away with them I just want to make sure that people understand how fantastic of businesses is that there's no political risk on terms of the in the CMS side because they're They're saving the government money. I can't remember how much they saved, but billions of dollars in money. I mean, there's no reason why they're going to get attacked for that. The fees are lower for the government than the commercial side. I believe they're lower than 15%. So I just don't really think that there's that much risk there. These contracts on the government side are very long, 8.5 years.

They have one come to do. Maybe they win another one. But, I mean, that's pretty stable revenue on the commercial side. This is, I think, just about as fantastic of a business. I've seen in terms of there's not really that much competition. The competition is really not that good. And they're just eating their lunch. They're immediately getting into the one or two pass.

And there are competitors who they're destroying are going to go public at 15,000 revenues growing at 10% where this is going to grow a lot faster. I just think it's silly to tell you truth. It's like, I don't know if you're short enough, but would you, nothing's investment advice, but if one of these competitors who's lunch there eating comes public at 15 times revenue. Would you be tempted to put a short on? Okay. So a SPAC deal just happened. This company called, yeah. I'm not short in this. I'm not short in this. I just because it's just too crazy and I just think something back could happen. But there's this company called

MSP recovery that looks like they're a, well, it doesn't look like. It's a law firm. And they basically sue insurance companies on behalf of the government. And they make money. That's on the MSP side, the business I brought up a little bit earlier, very, very small portion, but it's a fast-grim portion between, in performance. But in the long run, MSP doesn't matter. But this company went public at what? They bought 0.5% of the company at a $33 billion valuation with zero revenue. And then if you don't redeem your shares, you get a minimum of 35 warrants.

It's, you know, so anyone who's followed my, especially the blog, we don't talk a lot, about SPACS on your, my blog, my Twitter or whatever, knows. I follow SPACs very closely. I'm very interested. I think they create really interest in trading opportunities. You and I talked about this deal. I've posted some stuff on it. I never seen anything like this.

There is a lot of shenanigans going on at that deal. And I'm going to leave it there because I don't want to get in any trouble. But people can go find the tweet. It is one of the craziest SPAC deals I've ever seen. And I, you know, I'm looking at the tweet I put up right now. It's a $230 million SPAC. There's no pipe into it. Most SPACs like to come public with the pipe because it helps cover a lot of the fees with the SPAC.

And it shows people that serious institutional investors are buying into whatever they're pitching or maybe not even serious. At least some institutional investors are buying no pipe in this deal. 230 million in trust. 160 million of that cash goes to the balance sheet. 70 million of that cash goes to transaction costs. It is a wild deal for a company with zero revenue right now. I wild absolutely wild and on that note we should have perform it trade at that valuation there you go I look I said you were dreaming big earlier but now you're dreaming really

that's that's a proper valuation in my opinion uh where can be if people want to I I know you have been driving the PFMT bandwagon there's actually some other really good research out there but I think you're clearly kind of the thought leader on this where can people reach you if they want to swap thoughts on PFMT or anything yeah they can email me at Kroog at Shathamharborecap.com on Twitter at CHCAP 2016. And that's good. Perfect. I'll put his Twitter link in the show notes. Everybody can reach out on Twitter. I don't like to put emails in the show notes too much. But Chris, this has been fantastic. Super interesting idea. I'm still riding my head around it. I know you're driving home. I just want to gain more confidence

on this. How are they, you know, in seven years, how do they grow to beat people? Because the rest of the story. I've got the revenue visibility is great. The rest of the story is so good. But super interesting idea. I really appreciate you coming on and talking this, sharing this idea and looking forward to having you on for the next one. All right. Thanks. Appreciate it. Thanks for