Performant Financial Corporation

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1 Financial Performant Financial Corporation Ticker: PFMT Current Price: $8.73 Recommendation: Hold Price Target: $9.59 Investment Thesis Key Statistics 52 Week Price Range $7.11-$ Day Moving Average 8.75 Estimated Beta.98 Dividend Yield N/A Market Capitalization (millions) Year Revenue CAGR 16.14% Trading Statistics Diluted Shares Outstanding Maintains long relationship with all clients and able to renew all major contracts to grow their business Successfully expanding existing technology and expertise into new markets. The increasing total gross debt creates growing opportunity for Performant. The updates in ObamaCare can potentially impact Performant positively. Average Volume (3-Month) 278,72 Institutional Ownership 32.5% Insider Ownership 54.81% EV/EBITDA (LTM) 5.31x Margins and Ratios Gross Margin (LTM) 63.12% EBITDA Margin (LTM) 35.11% Net Margin (LTM) 15.45% $16. $14. $12. $1. $8. $6. One-Year Stock Chart 4,, 35,, 3,, 25,, 2,, 15,, Debt to Enterprise Value.28x $4. 1,, $2. 5,, $. Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Volume Adjusted Close 5-Day Avg 2-Day Avg Covering Analysts: Minghua Li 1 University of Oregon Investment Group

2 Business Overview 213 Revenue by Segments Figure 1: Revenue by Segments 9.43% 26.45% 64.12% Student lending Health Market Other Source: SEC Filling Student Lending Revenue Growth Figure 2: Student Lending Revenue Growth Student Lending Revenue Source: SEC Filling Figure Healthcare 3: Healthcare Revenue Revenue Growth Growth Healthcare Revenue Source: SEC Filling Performant Financial Corporation (Performant) is a leading provider of technology-enabled recovery services. Performant was founded in 1976 and is currently headquartered in Livermore, California. The company was originally named Diversified Collection Services Holdings, Inc. back to 1976, and changed its name to Performant Financial Corporation in 25. Although the company has 37 years of history, it only went public in August 212. By having 37 years history, Performant has well-established long term relationship with all clients ranging from 8 years to 23 years. Performant provides recovery service to various market including student lending, health care, tax recovery, federal agencies, and financial institution, and its primary focus is student lending and health care market in the U.S. The customer base of Performant consists both of government and private clients. In 213, its total revenue was million. Among those, approximately 122 million or 48% came from the U.S. federal government. Revenue stream purely consists of fees based on the percentage of recovered amount. Its revenue can be divided into three segments in five different markets: Student Lending The student lending market contributes $ million or 64.12% of its total revenue at the end of the fiscal 213 year, and the main drive for this market is the total outstanding educational debt and default rate. Performant entered this market back in 199. Today, Performant is able to successfully maintain long-term relationships with all clients, especially the three largest including Department of Education, Great Lakes Higher Education Guaranty Corporation (GLGC), and American Student Assistance Corporation (ASAC). The Department of Education consists $51.57 million or 2.2% of its total revenue, and has been a client of Performant for 23 years. GLGC and ASAC consist or 16.5% and 3.89 or 12.1% to its total revenue respectively, and both have been clients of Performant for 8 years. The remaining or 15.32% of is derived from other clients Healthcare The healthcare market contributed $ or 26.45% of its total revenue in the fiscal 213 year. The main driver of this market is the total Medicare and Medicaid spending. This market is relatively new to the company since Performant only entered this market in 25. Within this market, the main client is Centers for Medicare and Medicaid Services (CMS), which consists 99% of total healthcare revenue. CMS awards four recovery audit contractors (RAC) every three years. Performant is one of the only four RACs in the U.S. Each contractor is responsible for certain segment of the U.S, and Performant has been overlooking the Northeast region of U.S. since 29. UOIG 2

3 Figure Other 4: Other Revenue Revenue Growth Growth Other Revenue Source: SEC Filling Source: performantcorp.com Other Markets Other markets including state tax, federal agency, and financial institutions make up the remaining 9.43% of Performant s total revenue. Compare to student lending and healthcare market, other markets are growing relative slower. State Tax Market Performant entered state taxing market in Basically, in this market, Performant works with state tax clients to recovery delinquent taxes by using its technology platform. Performant also provides service to eliminate old issues and identify hidden issues that related to payment process. By partnering with the Department of Revenue, Performant has been able to double the anticipated recovery amount. Federal Agency Market Before the transformation, Performant was a primary contractor and key partner in this market for more than 2 years. Within this market, the primary responsibility is to recover and manage government debt subrogated from over fifty different federal agencies. By having a long-term relationship, and maintaining a high recovery rate, Performant has been awarded consecutive recompete contracts. Financial Institutions The Financial Institution market involves institutions with private load and mortgage portfolios. Performant works closely with financial institutions and advise them of potential default risks within their portfolios, and provides recovering services to delinquencies and defaulted loads including both student loads and mortgages. Strategic Positioning Performant Recovery, Inc. Performant Recovery is a subsidiary of Performant Financial Corporation, and it is primarily focused on audit and recovery services in healthcare market. The main business process is to assist clients to manage delinquent income taxes, medical receivables, and other receivables. In 29, Performant Recovery was awarded a three-year contract by Center of Medicare & Medicaid Services (CMS) to identify and recover improper payments, and became one of the only four Recovery Audit Contractors (RACs) in the United States. By winning this contract, Performant is responsible for 9% of recovery funds from 43$ billion improper payments. Performant Technologies Performant Technologies process, normalize, and analyze issues from large customers by using its end-to-end technology. Basically, the technology can divide complex recovery process into separate steps, which can simplify complex workflow and make the process more efficient. UOIG 3

4 Source: performantcorp.com The main data system used by Performant is called Insight Data System. As mentioned above, the insight Data System can identify fraudulent and erroneous claims prior to payment. With the wellestablished system, and experienced expertise, Performant is able to offer unique, powerful and highly configurable solutions to various market including healthcare, student lending, financial service, and government sectors. By combining both divisions, Performant is able to offer five different kind of solutions including Financial Asset Recovery, Risk Management, Audit & Recovery, Cost Containment, and Fraud, Waste & Abuse to all five markets. Business Growth Strategies The overall growth strategy for Performant is to maintain a relative high recovery rate, and expand its existing student lending technology to different market. The main factor contributing to Performant s success is the ability to maintain a high recovery rate. Part of Performant s clients including the Department of Education will allocate additional placements to those recovery vendors producing the highest or relative high recovery rates. By maintaining a relative high recovery rate, the total recovery amount that Performant was able to ask and receive has been increasing historically. This success is based on its wellestablished data system and experienced expertise Figure Total 5: Total US Gross US Gross Debt Debt Projection Projection Initially, the only revenue drive for Performant was the student lending market. In 25, they decided to modify their existing technology and enter the healthcare market. As of today, the revenue generated from healthcare market consists 26.4% of its total revenue, and 99% of them comes from public healthcare market. For future plans, the management intends to maintain their focus on growth, and possibly will expand its market share in private healthcare market and beyond. Industry Gross Public Debt Claim+Placement Source: usgovernmentspending.gov Overview Although Yahoo Finance classifies Performant as purely a business service company, I believe it belongs to debt collection industries because majority of its revenue (about 9%) comes from recovery defaulted payments. Debt Collection Industry The debt collection industry has a close relationship with the overall economy, and the total outstanding debt. To enter this industry, it does not require large working capital because human asset and data are the main entry barriers for this industry, which means the major cost for them is salaries and commissions. During the 28 recession, the debt collection industry was overwhelmed by the UOIG 4

5 increasing speed of default rate. Although there were more opportunities for them since the increased outstanding debt, the recovery rate was much lower than the default rate since defaulters were just not able to the obligations. This resulted in an underperformance for the whole industry. Figure 6: Total US Educational Spending Projection Total US Educational Spending Projection 9 14, 8 12, 7 1, 6 5 8, 4 6, 3 4, 2 1 2, Total US Education Spending Student Lending Placement Source: ed.gov Figure 7: Total US Healthcare Spending Projection Total US Healthcare SpendingProjection 18 1,4 16 1,2 14 1, Health Spending Health Recovery Claim Source: cms.gov Now, due to the declining unemployment, the recovering economy, and the ability to meet debt obligations made this industry became a blooming industry. Performant is one of the companies who were able to exploit this blooming opportunity. Among all the debt collection companies, Performant managed to grow annually at 2% for the past 5 years. Macro factors Student Lending Based on the 213 report published by the Department of Education, the originations of student loads supported by the government represents compounded 11% annual growth from 22 to 212, and the CAGR for U.S. Educational Spending will be 4.33% until 219 at a base point of $6,82 billion. From the available data on the Department of Education website, the student loan default rate has been increasing from 5% in 26 to 1% in 21. Healthcare Based on the projection made by the U.S. government, the government healthcare spending will grow at approximately 6% annual until 222 at a starting point of $ 2,7 billion, and the private spending will grow at 5% annually through 221 at a starting point of $1,5 billion. In addition, the updates of ObamaCare could potentially lead to higher default rate in both public and private healthcare market, which in turn can benefit Performant. Interest Rate The lower interest rate can positively affect this industry due to the ability to meet debt obligations. The potential of raising interest rate could result in higher debt cost and defaults, which could be a threat to the industry and Performant. Per Capita Disposable Income The increasing per capita disposable income can lead to more purchasing activities, which can positively affect the borrowing activities. Based on the report published by IBISWorld, per capita disposable income had an annual compound growth rate of 1.2% from , and will continue to grow at a 2.2% compound growth rate through 219. UOIG 5

6 Figure 8: Per Capita Disposable Income Projection Per Capita Disposable Income Projection Competition The main drive for the whole industry is determined by the total outstanding debt and default rate. The determination of success in this industry is solely based on the ability to maintain a high recovery rate since majority companies charge services fees proportional to the amount they are able to recover Source: IBISWorld The industry is decentralized because larger companies only account for approximately 17.7% of total industry revenues as end of 212. Based on the report published by IBISWorld, the number of companies will decline at an annual rate of.9% since larger companies are seeking ways to create more efficient working process through acquisitions. Management and Employee Relations Figure 9: Total Total Revenue Growth Source: SEC Filling Total Revenue Source: SEC Filling Lisa Im (Chief Executive Officer) Lisa Im joined Performant in 22, and has been the Chief Executive Officer since 24. Before 24, more than 9% of Performant s revenue came from a single contract with federal government. After Ms. Im became the CEO, she transformed Performant into more diversified corporation with three divisions including student lending, health, and other that handling more than 5 major federal and state government contracts. With more than 2 years of corporate growth and operational strategies experience, Ms. Im was able to guide Performant to expand its business to advisory, process management, and technology solutions for both public and private clients. Ms. Im earned her Master s degrees in Business Administration with concentration in Finance from California State University, and her Bachelor of Business Administration in Marketing from Loma Linda University. Dr. Jon Shaver (Chariman of Board of Directors) Dr. Jon Shaver has been the Chairman of the Board of Performant since June 27. Before he joined Performant, Dr. Shaver was the CEO of EdFund, and executive director of California Student Aid Commission. Dr. Shaver also served in various board and executive roles in Both Performant and its subsidiaries before 27. Dr. Shaver received his Doctor Degree in organization and administrative studies from the University of California, Los Angeles, his MBA in marketing from Pepperdine University, and his Master in higher education administration and BA in history from SUNY at Brockport. His diversified experience enabled him to look at Performant from a unique perspective. UOIG 6

7 Figure 1: Total Total US Enrollment US Enrollment Projection Projection Hal Leach (Chief Operating Officer) Hal Leach is the COO of Performant, and he is a recognized operations strategy leader within the debt collection industry. His idea about full circle process analysis and improvement in the call center for the past 2 years has made the company number one in the industry. Hakan L. Orvell (Chief Financial Officer) Hakan L, Orvell who has more than 2 years of experience in various industries became the CFO of Performant since November 26. Prior to his position in Performant, Mr. Orvell also served as CFO of Neopost, Inc. Mr. Orvell s receid his CPA accreditation in Illinois, and MBA from the University of Stockholm. Total Enrollment Student Lending Revenue Source: cms.gov Management Guidance For 214, management expects the revenue to grow negatively because the CMS recovery audit contract renewal process has been underway since Feb 213, and the federal government reduced the compensation to Performant. The management suggests the above changes may result in approximately $5 to $15 million negative impact on 214 s total revenue, and the total revenue expects to be somewhere between $2 and $24 million. During 214, nearly all the major contracts of Performant are facing a renewal process, and the management remains confident on all of them based on the historical performance and relationship. Portfolio Strategy Figure 11: Total Total US Enrollment US Enrollment Projection Projection Health Spending Health Revenue Source: ed.gov The UOIG purchased Performant on April 12, 213, and purchase at a price around $12.65 in Tall Firs portfolio. As of today, we have a net realized loss of 31.54% percent or $3.99 per share, and no unrealized gains or losses due to the fact that Performant does not pay dividends. Since the Performant is currently in its recovery stage, and I believe continuing to hold Performant in our Tall Firs will recover our loss in the near future. Recent News Morgan Stanley Sees Contract Renewal Delay As Potential Catalyst For Performant Financial Yahoo Finance May 9, 214 The CMS recovery audit contract renewal process has been delayed to June 214 from February 213 due to the revision of request-for-quote (RFQ) process. This delayed resulted significant drop in healthcare revenue for 214. In addition, multiple protests have been filed against the revised RFQ process, so the UOIG 7

8 Figure 12: Total US Gross Debt Projection Total US Gross Debt Projection 2, 18, 16, 14, 12, management sees this as a factor can cause future delay in contract renewal process. Morgan Stanley states: as these uncertainties clear, particularly the ward of the RAC contract, we see room for significant upside in the stock.we remain overweight with a $12 price target. After the release of the announcement, the stock price bounded up 7.4% the next day, and then came back down slowly , 8, 6, 4, 2, RAC award may be upcoming after GAO decision, says Wells Fargo Yahoo Finance April 24, Gross Public Debt Claim+Placement Source: usgovernmentspending.gov - Similar as previous news, this also talks about the delayed RAC contract. HMS Holdings is one of the companies who protests against the revised RFQ process. In April, 214, U.S. Government Accountability Office denied HMS Holding s protest about the revised RFQ process. Well Fargo believes this indicates the CMS may award contract re-competes in the near term. Although this news didn t have a huge impact on Performant, I believe whether Performant can successfully renew the RAC contract could significantly impact the stock price. Figure 13: Total US Educational Spending Projection Total US Educational Spending Projection Total US Education Spending Student Lending Revenue Source: ed.gov Performant Financial Up on Beat, Outlook Yahoo Finance March 4, 214 As of the fourth quarter of 213, Performant was able to deliver three consecutive quarters of positive surprises compare to Zacks Consensus Estimate. For the full year of 213, Performant was able to improve its revenue by 7.1% year over year which is 1 million ahead than Zacks Consensus Estimate. Zack Equity Research believes the 214 operational result of Performant should be weighted on by the new CMS RAC contract award. Catalysts Figure 14: Total US Gross Debt Projection Total US Gross Debt Projection Upside The increasing projected total enrollment and total educational spending can drive the total revenue from student lending market. The updates in ObamaCare can potentially result in higher default rate in healthcare market, which can positively affect Performant s revenue The ability to integrate and modify current existing technology will open new markets. Gross Public Debt Total Revenue Source: usgovernmentspending.gov The increasing interest rate may result in higher default rate. UOIG 8

9 Downside Performant is heavily contract based company, and four largest clients consist over 75% of its total revenue. Fail to renew any contract can have a negative impact on its revenue and growth. Highly rely on human asset and recovery rate. Fail to maintain either one can have a negative impact on its business. Multiple Implied Price Weight Market Cap/Net Income = P/E % P/S % P/B % Price Target $8.72 Current Price $8.73 Overvalued (.8%) Has a close relationship with overall economy, so the recovering speed of overall economy can determine the growth rate of Performant. Changing in political party may affect spending in healthcare, which in turn can affect Performant. Comparable Analysis Since debt collection service company is quite unique, comparable companies are screened primarily based on the service, size, risk, and growth expectations. When finding comparable companies, I primarily focused on healthcare and business service market because all 17 director competitors and 31 clients in student lending market are either privately held or government sectors. In regards to weighting the multiples, I assigned 5% to P/E, 35% to P/S and 15% to P/B. Source: prgx.com PRGX Global Inc. (PRGX) 35% PRGX Global, Inc., together with its subsidiaries, provides recovery audit services to businesses and government agencies having payment transactions in the United States, Canada, Latin America, Europe, Asia, and the Pacific region. The company operates in three segments: Recovery/Audit Services-Americas, Recovery Audit Services, Europe/Asia-Pacific, and New Services. Yahoo Finance PRGX Global is the subcontractor of Performant in Northeast region of the United States, so it works closely with Performant s business. The subcontractor only works when Performant is having difficulty to handle the large claim. Therefore, I believe PRGX shares the same risk and growth opportunities in the U.S health market, so I weighted 35% for PRGX Global. Source: magellanhealth.com Magellan Health Services, Inc. (MGLN) 2% Magellan Health Services, Inc. is engaged in the healthcare management business in the United States. The company, through its contracted network of third-party treatment providers, offers managed behavioral healthcare services, including outpatient programs, such as counseling or therapy; intermediate care programs comprising intensive outpatient programs and partial hospitalization services; and inpatient treatment and crisis intervention services. Yahoo Finance UOIG 9

10 The reason why weighted this company 2% is because Magellan Health Services, Inc signed a strategic contract with Performant. The contract states Magellan Health Services, Inc provides health service, and Performant provides the Audit and Recovery service for Magellan s clients. Therefore, I believe the overall performance of Magellan Health Services, Inc can affect Performant s revenue. Source: hms.com HMS Holdings Corp. (HMSY) 3% HMS powers the healthcare system with integrity by providing cost containment solutions for the federal and state governments, commercial insurers, and other organizations. Focused exclusively on the healthcare industry since our founding in 1974, HMS helps ensure healthcare claims are paid correctly and by the responsible party, and that those enrolled to receive benefits qualify. HMS Holdings Corp Website Although HMS Holdings Corp has a relative large market capitalization ($1,418 million compare to $418 million), it shares the same healthcare market, and has relative similar growth rate with Performant. In addition, HMS Holdings is also one of only four RACs in the United States. That means HMS Holding shares much similar risk and opportunity with Performant. Therefore, I assigned 3% to HMS Holdings. Source: portfoliorecovery.com Portfolio Recovery Associates, Inc. (PRAA) 5% Portfolio Recovery Associates, Inc., a financial and business service company, is engaged in the purchase, collection, and management of portfolios of defaulted consumer receivables in the United States and the United Kingdom. It detects, collects, and processes unpaid and normal-course accounts receivables owed primarily to credit grantors, governments, retailers, and others. The company also acquires receivables of Visa and MasterCard credit cards, private label and other credit cards, installment loans, lines of credit, bankrupt accounts, deficiency balances of various types, legal judgments, and trade payables from various debt owners, including banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance companies, medical groups, hospitals, auto finance companies, and other debt buyers. Yahoo Finance The reason I put Portfolio Recovery Associates, Inc. into my comparable analysis is because it is the most similar company that I could find within the same industry. However, due to its larger size and more internationally exposure, I only gave it 5% when as signing the weighting. Source: dfcglobalcorp.com DFC Global Corp. (DLLR) % DFC Global Corp., through its subsidiaries, provides retail financial services to unbanked and under-banked consumers, and small businesses. The company s primary products and services include unsecured short-term consumer loans, secured pawn loans, check cashing, gold buying, and Western Union money transfer and UOIG 1

11 money order, as well as foreign currency exchange, reloadable VISA prepaid debit cards, and electronic tax filing. Yahoo Finance Although DFC Global overlaps with Performant in both recovery and service area, DFC Global has a much different P/B, P/S, and especially P/E than Performant. Based on the large difference, I decided to not weight DFC Global Corp in my comparable analysis. Source: insperity.com Insperity, Inc. (NSP) 5% Insperity, Inc. provides an array of human resources (HR) and business solutions to enhance business performance for small and medium-sized businesses in the United States. The company offers its HR business offering through its Workforce Optimization solution, which encompasses a range of human resources functions, including payroll and employment administration, employee benefits, workers compensation, government compliance, performance management, and training and development services. Yahoo Finance With a much similar growth rate, P/E and P/B, I weighted Insperity, Inc 5% for my comparable analysis. The reason why I only assigned 5% to Insperity is because Performant is primarily in recovery market instead of business service. CBIZ, Inc. (CBZ) 5% CBIZ, Inc., through its subsidiaries, operates as a diversified services company in the United States and Canada. The company provides professional business services, products, and solutions to small and medium-sized businesses, individuals, governmental entities, and not-for-profit enterprises. It delivers its integrated services through three practice groups: Financial Services, Employee Services, and National Practices. Yahoo Finance Source: cbiz.com Similar with Insperity, CBIZ, Inc shares the same business market, and has a similar EPS growth rate with Performant. The reason behind 5% is to diversify my comparable analysis away from purely healthcare market. However, since the revenue drive for Performant is not business service, I only assigned 5% to CBIZ. Excess Equity Return Analysis To value Performant, I used the Excess Equity Return Model, and it is modified model based off the normal DCF model. By using this model, we can value a financial company by the sum of their capital currently invested and the present value of excess returns expected in the future. UOIG 11

12 Figure 15: Total Total US US Gross Gross Debt Debt Projection Projection Total Enrollment Student Lending Placement Source: ed.gov Total Revenue The total revenue is projected based off the total U.S. gross debt. I regressed my historical total revenue against the total U.S gross debt in the same period, and it gave me a.918 adjusted R 2. Then, I regressed my future total revenue based on the future total gross debt projection made by the U.S. government, and had a.987 adjusted R 2. Then, I broke down the total revenue into its three operating segments including student lending, healthcare and other. Student Lending The revenue from Student Lending market is projected based off the total U.S. educational spending and enrollment. I regressed the total placement volume against both total U.S. educational spending and enrollment. However, I didn t simply took the historical data, and do the regression. Since the management mentioned the majority revenue of Q4 212 was deferred to 213, I readjusted the revenue, and did the regression. Both of spending and enrollment gave me an adjusted R 2 higher than.9. Then, I projected my future placement based on both the future enrollment and total educational spending that projected by the U.S. government. One Year Daily Hamada Beta Company Beta Weighting D/E Tax Rate Unlevered Beta PRGX Global, Inc %.% 34.% 1.16 HMS Holdings Corp % 46.34% 39.2%.7 Magellan Health Services Inc % 2.29% 24.17%.71 Portfolio Recovery Associates, Inc % 51.96% 37.5%.93 Insperity, Inc %.% 37.5%.77 CBIZ, Inc % 46.85% 37.5%.61 DFC Global Corp % % 37.5%.53 Weight Average Unlevered Beta.87 Performant Financial Corp % 41.% Levered Performant Financial Corp. Beta 1.8 Other For other market, since the historical data shows revenue from this market is trending down and I have no concentrated outside markets to regress against, I assigned a certain percentage based on the total revenue, and followed the decreasing pattern. Healthcare Since Performant only entered this market in 29, my regression shows this is a weak relationship between total U.S. health spending and my healthcare revenue with only 3 available data sets. In addition, because I already have the total revenue, revenue from other market, and revenue from student lending market, I simply assigned the differences to this segment. After the projection of three segments, I further broke down the revenue into major clients based on historical data and management guidance. Beta SE Weighting OneYear Daily % One Year Weekly % One Year Daily Hamada (Comps) 1.8.% One Year Weekly Hamada (Comps) 2.5.% One Year Daily Vasicek ETF % One Year Daily Hamada ETF % Performant Financial Corp. Beta.97 Salaries & Benefits For financial firms, salaries & benefits are the main expense, which is equivalent to cost of goods sold for non-financial firms. The salaries & benefits for Performant consists both fixed salaries and commission, so I projected the salaries & benefits based on a percentage of total revenue. Since the historical data shows salaries & benefits were growing at a decreasing rate, I followed the pattern and assigned a reasonable decreasing rate based on the total revenue. UOIG 12

13 Weighted Average DCF Assumptions CAPM Level Implied Price Weighting 8.34% % 8.54% % 8.74% % Price Target 9.59 Current Price 8.91 Undervalued 7.59% Other Operating Expenses Other operating expense includes expenses related to its use of subcontractors, other production related expenses and administrative expenses. Historically, other operating expense has been increasing as a percentage of total revenue due to the expansion in healthcare market and use of subcontractors. The management suggests this expense increase as the business growing, but at a slower rate than its revenue. Therefore, I assigned a declining rate to this expense as a percentage of total revenue. Depreciation and Amortization Although the management has been focusing on growth, there is no historical evidence of frequent acquisitions based on available data. In addition, based on the historical 1-K, the majority of depreciation and amortization comes from computer, software, and customer contracts, so it is impossible to project depreciation and amortization based on those assets due to their short useful life period. Hence, I projected depreciation and amortization as a decreasing percentage of total revenue. Adjusted Beta Adjusted Beta Implied Price 1 2.% 2.5% 3.% 3.5% 4.% Undervalued/(Overvalued) 19.68% 2.% 2.5% 3.% 3.5% 4.% % 62.53% 76.56% 94.42% % % 35.3% 45.4% 57.9% 72.38% % 13.81% 2.73% 29.9% 39.39% 1.7 (7.78%) (3.51%) 1.48% 7.39% 14.53% 1.17 (2.87%) (17.72%) (14.8%) (9.83%) (4.8%) Interest Expense Based on the management guidance, the ability to repay its load and refinance is closely tight to the performance of the company, and both its outstanding Undervalued/(Overvalued) debt and interest expense have been decreasing as a percentage Terminal of Growth total revenue. Rate I followed the pattern to decrease the interest expense to 4% of total revenue, and maintained this percentage into the terminal year. Tax Rate Since there is no guidance given by the management, I took the average of historical tax rate. It gave me a 41% tax rate, and it is lined up with fact set projection. Therefore, I kept constant 41% as my tax rate into the terminal year. Cost of Equity I calculated my cost of equity by using CAPM. It takes into account the risk free rate, market risk premium, and my weighted average beta. The risk free rate was determined by the current 1 year treasury yield, and I used Damodaran s Market Risk Premium as my MRP which is 5.75%. For my Beta, since my company only went public in August 212, I only have one and half years worth of data. Therefore, I calculated a one year daily beta, one year daily Hamada beta, and one year daily Vasicek beta. However, since Performant has a significant high Debt to Equity ratio compare to its comparable companies, the Hamada beta is significant large than unlevered beta. Then, I selected three closest EFT including IYF, IYG and IYC to calculate Vasicek betas. Based on all betas, I factored in IYF Vasicek and Hamada and came up with a beta of.96. UOIG 13

14 Recommendation Method Final Implied Price Implied Price Weighting Forward Comparable Analysis % DCF Assumptions % Current Price 8.91 Implied Price 9.15 Undervalued 2.72% I recommend a hold for Tall Firs portfolio. Performant has managed to modify and expand prior existing technology to new market such as healthcare, and was able to maintain an annual growth rate of 16% right after its IPO. Despite the budget cuts by the Department of Education, and delayed RAC contract process negative impacted Performant since 213, I believe it will recover starting Q2 of 214. My target price is with the 52 weeks price range, so I am very optimistic about my final implied price. UOIG 14

15 Appendix 1 Relative Valuation Comparables Analysis PFMT PRGX HMSY MGLN PRAA NSP CBZ DLLR ($ in millions) Performant Financial Corp. PRGX Global, Inc. HMS Holdings Corp. Magellan Health Services Inc. Portfolio Recovery Associates, Inc. Insperity, Inc. CBIZ, Inc. DFC Global Corp. Stock Characteristics Max Min Median Weight Avg. 35.% 3.% 2.% 5.% 5.% 5.%.% Current Price Beta Size Short-Term Debt Long-Term Debt Cash and Cash Equivalent Non-Controlling Interest Preferred Stock Diluted Basic Shares Market Capitalization 2, , , , , Enterprise Value 3, , , , Growth Expectations % Revenue Growth 214E 16.8% (15.%) 4.7% (.56%) (15.%) (3.5%) (5.49%) 4.7% 16.8% 5.8% 4.8% (8.6%) % Revenue Growth 215E 21.6% 1.1% 13.8% 11.35% 14.% 1.1% 21.6% 15.4% 13.8% 1.5% 3.8% 3.2% % EPS Growth 214E 17.% (5.5%) (24.7%) (29.5%) (47.15%) 17.% (24.7%) (43.9%) 13.1% (22.3%) (5.5%) (91.48%) % EPS Growth 215E 8.95% 19.2% 35.3% 52.55% 52.% 8.95% 55.% 19.8% 19.2% 35.3% 2.6% 28.% Profitability Margins EPS Gross Margin 46.% 12.5% 28.54% 3.7% 28.54% 37.72% 29.71% 24.8% 46.% 16.9% 12.5% 68.% EBIT Margin 4.5% 2.% 7.8% 8.37% 17.6% 4.23% 12.28% 3.43% 4.5% 2.% 7.8% 21.6% EBITDA Margin 42.4% 3.% 14.72% 17.37% 23.9% 14.72% 27.35% 6.32% 42.4% 3.% 9.6% 15.9% Net Margin 23.85% 1.1% 3.8% 6.54% 7.7% 2.8% 12.56% 1.78% 23.85% 1.1% 3.8% (8.2%) Credit Metrics Interest Expense Debt/EV Leverage Ratio Interest Coverage Ratio Operating Results Revenue 3, , , , Gross Profit (Operating Income) EBIT EBITDA Net Income (84.) Capital Expenditures Multiples EV/Revenue 3.74x.19x.89x 1.6x 2.17x.89x 3.35x.25x 3.74x.19x.79x 1.49x EV/Gross Profit 11.33x 1.2x 3.61x 5.27x 3.61x 2.36x 11.33x 1.2x 9.38x 1.11x 6.29x 2.19x EV/EBIT 27.29x 7.19x 1.8x 18.47x 1.83x 21.6x 27.29x 7.19x 9.98x 9.51x 1.8x 5.19x EV/EBITDA 12.26x 3.9x 6.29x 7.61x 8.66x 6.5x 12.26x 3.9x 6.11x 6.29x 8.22x 6.99x EV/(EBITDA-Capex) 13.94x 4.88x 8.93x 9.32x 11.12x 8.35x 13.94x 4.88x 6.11x 9.71x 8.93x 9.48x Market Cap/Net Income = P/E 39.78x 13.1x 26.19x 3.3x 23.4x 39.78x 26.19x 27.1x 13.1x 28.51x 15.37x (4.3x) P/B 4.74x 1.2x 2.5x 2.3x 4.74x 1.9x 2.5x 1.3x 2.7x 3.11x 1.2x.78x P/S 3.3x.35x 1.1x 1.61x 2.4x 1.1x 3.1x.4x 3.3x.35x.6x.33x UOIG 15

16 Appendix 2 Excess Return Valuation Excess Equity Return Analysis ($ in millions) 21A 211A 212A Q1 Q2 Q3 Q4 213A Q1 Q2E Q3E Q4E 214E 215E 216E 217E 218E 219E 22E 221E 222E 223E Total Revenue % YoY Growth 12.5% 31.94% 28.9% 7.6% 26.15% 43.84% 7.15% 21.53% 18.76% (23.9%) (23.9%) (23.9%) (15.%) 14.% 13.% 12.% 11.% 1.% 9.% 8.% 7.% 6.% Salaries & Benefits % Revenue 47.5% 41.16% 39.51% 48.58% 34.56% 32.63% 39.72% 37.9% 42.28% 38.29% 36.15% 44.% 4.% 39.% 38.5% 38.% 37.5% 37.% 36.5% 36.% 36.% 36.% Gross Profit Gross Margin 52.95% 58.84% 6.49% 51.42% 65.44% 67.37% 6.28% 62.1% 57.72% 61.71% 63.85% 56.% 6.% 61.% 61.5% 62.% 62.5% 63.% 63.5% 64.% 64.% 64.% Other Operating Expenses % Revenue 21.41% 25.42% 29.42% 33.14% 29.29% 27.16% 29.23% 29.38% 29.56% 38.6% 35.3% 37.99% 35.% 32.% 31.6% 31.2% 3.8% 3.4% 3.% 3.% 3.% 3.% Depreciation and Amortization % Revenue 5.84% 4.77% 4.52% 5.8% 3.8% 3.52% 4.69% 4.17% 5.% 4.8% 4.45% 5.93% 5.% 4.5% 4.3% 4.1% 3.9% 3.85% 3.8% 3.75% 3.7% 3.65% EBIT EBIT Margin 25.7% 28.65% 26.55% 13.19% 32.35% 36.7% 26.36% 28.54% 23.15% 18.85% 24.11% 12.8% 2.% 24.5% 25.6% 26.7% 27.8% 28.75% 29.7% 3.25% 3.3% 3.35% Interest Expense % Revenue 12.33% 8.3% 5.91% 6.1% 4.23% 3.73% 4.69% 4.53% 4.61% 5.21% 4.59% 5.78% 5.% 4.5% 4.4% 4.3% 4.2% 4.1% 4.% 4.% 4.% 4.% Earnings Before Taxes % Revenue 13.47% 12.2% 18.92% 7.19% 28.12% 32.97% 21.67% 24.1% 18.54% 13.64% 19.52% 6.3% 15.% 2.% 21.2% 22.4% 23.6% 24.65% 25.7% 26.25% 26.3% 26.35% Less Taxes (Benefits) Tax Rate 4.2% 37.79% 42.24% 48.68% 42.44% 38.97% 39.39% 4.73% 41.62% 43.19% 32.49% 66.83% 41.% 41.% 41.% 41.% 41.% 41.% 41.% 41.% 41.% 41.% Net Income Net Margin 8.8% 7.59% 1.93% 3.69% 16.19% 2.12% 13.14% 14.23% 1.82% 7.75% 13.18% 2.9% 8.85% 11.8% 12.51% 13.22% 13.92% 14.54% 15.16% 15.49% 15.52% 15.55% %Growth 23.97% 85.51% 58.33% (47.15%) 52.% 19.78% 18.34% 16.95% 14.89% 13.64% 1.31% 7.2% 6.2% Equity Cost Excess Equity Return (.19) (.58) Present Value Beginning BV of Equity $ Cost of Equity 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.34% 8.54% 8.54% 8.54% 8.74% 8.74% 8.74% Equity Cost Ending BV of Equity Net Income Dividend Payout Ratio Dividends Paid Retained Earnings UOIG 16

17 Appendix 3 Revenue Model Revenue Model (in millions) 211A 212A 213A 214E 216E 217E 218E 219E 219E 22E 221E 222E 223E Student Lending Placement Volume 6, , , , ,4.94 7, , , , , , , , % Growt h 17.88% (7.57%) 14.54% (4.%) 11.% 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% Total Revenue from Student Lending % Growt h 17.92% 8.34% 23.6% (3.23%) 11.12% 1.88% 9.87% 8.85% 7.84% 6.82% 5.% 4.% 3.% % of Volume 1.96% 2.3% 2.48% 2.5% 2.5% 2.52% 2.54% 2.56% 2.58% 2.6% 2.6% 2.6% 2.6% % of Tot al Revenue 75.1% 63.5% 64.12% 73.% 71.15% 69.82% 68.49% 67.16% 65.84% 64.52% 62.73% 6.97% 59.25% Department of Education %Growt h N/A 61.71% 77.89% (36.88%) 36.8% 19.28% 14.95% 13.85% 15.5% 9.% 8.% 7.% 6.% % of Tot al Revenue 11.% 13.8% 2.2% 15.% 18.% 19.% 19.5% 2.% 21.% 21.% 21.% 21.% 21.% Great Lakes Higher Education Guaranty Corporation %Growt h N/A 33.91% 7.23% 8.18% 8.57% 7.35% 6.11% 4.83% 3.53% 2.19% 8.% 7.% 6.% % of Tot al Revenue 18.% 18.7% 16.5% 21.% 2.% 19.% 18.% 17.% 16.% 15.% 15.% 15.% 15.% American Student AssistanceCorporation %Growt h N/A (17.91%) 21.53% 26.45% 2.3% 1.66% 13.2% 12.21% 7.81% 6.83% (4.47%) (6.71%) (9.28%) % of Tot al Revenue 19.% 12.1% 12.1% 18.% 16.15% 15.82% 15.99% 16.16% 15.84% 15.52% 13.73% 11.97% 1.25% Other Student Lending %Growt h N/A (11.98%).95% 5.4% 2.% 6.35% 5.% 3.6% 2.14% 9.% 8.% 7.% 6.% % of Tot al Revenue 27.1% 18.45% 15.32% 19.% 17.% 16.% 15.% 14.% 13.% 13.% 13.% 13.% 13.% Healthcare Net Claim Recovery Volume , ,294. 1, % Growt h % % 24.3% (48.9%) 34.29% 24.% 21.91% 2.% 15.97% 14.59% 15.18% 13.54% 11.99% Revenue from Healthcare Claim % Growt h % 154.6% 23.35% (48.58%) 34.29% 24.% 21.91% 2.% 15.97% 14.59% 15.18% 13.54% 11.99% % of Volume 11.43% 11.35% 11.29% 11.36% 11.36% 11.36% 11.36% 11.36% 11.36% 11.36% 11.36% 11.36% 11.36% % of Tot al Revenue 13.22% 26.6% 26.45% 16.% 18.85% 2.68% 22.51% 24.34% 25.66% 26.98% 28.77% 3.53% 32.25% CMS %Growt h N/A 57.1% 23.41% (49.3%) 34.94% 24.15% 22.4% 2.11% 16.3% 14.64% 15.24% 13.6% 12.4% % of Tot al Revenue 13.% 25.8% 26.2% 15.71% 18.6% 2.43% 22.26% 24.9% 25.41% 26.73% 28.52% 3.28% 32.% Other Healthcare %Growt h N/A 144.3% 17.1% (2.21%) (1.46%) 13.% 12.% 11.% 1.% 9.% 8.% 7.% 6.% % of Tot al Revenue.22%.26%.25%.29%.25%.25%.25%.25%.25%.25%.25%.25%.25% Other % Growt h 6.36% 19.35% 5.17% (.8%) 3.64% 7.35% 6.11% 4.83% 1.% 9.% 8.% 7.% 6.% % of Tot al Revenue 11.76% 1.89% 9.43% 11.% 1.% 9.5% 9.% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% Total Revenue % Growt h 31.94% 28.9% 21.53% (15.%) 14.% 13.% 12.% 11.% 1.% 9.% 8.% 7.% 6.% UOIG 17

18 Appendix 4 Vasicek Beta One Year Daily Comp Beta Vasicek Beta Company Beta D/E Tax Rate Unlevered Beta Cash as % of FV Unlevered Beta - Cash Adjusted SE Variance Blended Comp % 34.1% % PFMT % 41.% % Industry PFMT Beta Variance Weight 99% 1% Unlevered Vasicek Beta 1.26 Levered Vasicek Beta 2.16 Hamada Beta 2.18 One Year Daily ETF Beta - IYG v.s PFMT Vasicek Beta Company Beta D/E Tax Rate Unlevered Beta Cash as % of FV Unlevered Beta - Cash Adjusted SE Variance IYG % 18.37% % PFMT % 41.% % Industry PFMT Beta Variance Weight 99% 1% Unlevered Vasicek Beta.58 Levered Vasicek Beta.99 Hamada Beta 1. One Year Daily ETF Beta - IYC v.s PFMT Vasicek Beta Company Beta D/E Tax Rate Unlevered Beta Cash as % of FV Unlevered Beta - Cash Adjusted SE Variance IYC % 13.41% % PFMT % 41.% % Industry PFMT Beta Variance Weight 1% % Unlevered Vasicek Beta.75 Levered Vasicek Beta 1.28 Hamada Beta 1.28 One Year Daily ETF Beta - Financial (non-banking) v.s PFMT Vasicek Beta Company Beta D/E Tax Rate Unlevered Beta Cash as % of FV Unlevered Beta - Cash Adjusted SE Variance Financial Service (non-banking) % 9.77% % PFMT % 41.% % Industry PFMT Beta Variance Weight 99% 1% Unlevered Vasicek Beta.29 Levered Vasicek Beta.41 Hamada Beta.4 UOIG 18

19 Appendix 5 Discounted Cash Flows Valuation Assumptions Discounted Free Cash Flow Assumptions Tax Rate 41.% 3.% Risk Free Rate 2.72% Terminal Value Beta.98 PV of Terminal Value 36.5 Market Risk Premium 5.75% Sum of PV Free Cash Flows % Equity 76.86% Excess Equity Value % Debt 23.14% Total Liabilities 183 CAPM 8.34% Market Capitalization Current Book value Fully Diluted Shares Implied Price 9.91 Current Price 8.91 Undervalued 11.19% Considerations Discounted Free Cash Flow Assumptions Tax Rate 41.% 3.% Risk Free Rate 2.92% Terminal Value Beta.98 PV of Terminal Value Market Risk Premium 5.75% Sum of PV Free Cash Flows % Equity 76.86% Excess Equity Value % Debt 23.14% Total Liabilities 183 CAPM 8.54% Market Capitalization Current Book value Fully Diluted Shares Implied Price 9.58 Current Price 8.91 Undervalued 7.5% Discounted Free Cash Flow Assumptions Tax Rate 41.% 3.% Risk Free Rate 3.12% Terminal Value Beta.98 PV of Terminal Value Market Risk Premium 5.75% Sum of PV Free Cash Flows % Equity 76.86% Excess Equity Value 46.7 % Debt 23.14% Total Liabilities 183 CAPM 8.74% Market Capitalization Current Book value Fully Diluted Shares Implied Price 9.27 Current Price 8.91 Undervalued 4.9% Weighted Average DCF Assumptions CAPM Level Implied Price Weighting 8.34% % 8.54% % 8.74% % Price Target 9.59 Current Price 8.91 Undervalued 7.59% UOIG 19

20 Appendix 6 Sensitivity Analysis Adjusted Beta Implied Price Undervalued/(Overvalued) 1 2.% 2.5% 3.% 3.5% 4.% 11.19% 2.% 2.5% 3.% 3.5% 4.% % 31.57% 42.69% 56.86% 75.54% % 17.19% 25.48% 35.74% 48.76% % 5.74% 12.1% 19.78% 29.26% (7.82%) (3.57%) 1.42% 7.32% 14.45% (14.72%) (11.28%) (7.3%) (2.66%) 2.84% Adjusted Beta CAPM Implied Price Undervalued/(Overvalued) 1 2.% 2.5% 3.% 3.5% 4.% 11.19% 2.3% 2.3% 3.% 3.8% 4.5% 6.33% % 52.36% 52.36% 77.67% 117.7% 19.54% 7.33% % 22.32% 22.32% 36.72% 57.16% 88.44% 8.33% % 2.42% 2.42% 11.43% 23.4% 4.6% 9.33% % (11.67%) (11.67%) (5.65%) 1.98% 11.98% 1.33% % (22.13%) (22.13%) (17.93%) (12.77%) (6.28%) CAPM Risk Free Rate Implied Price Undervalued/(Overvalued) 1 2.% 2.5% 3.% 3.5% 4.% 2.% 2.5% 3.% 3.5% 4.% 2.52% % 2.89% 8.6% 15.42% 23.7% 33.99% 2.72% % 1.27% 6.74% 13.26% 21.15% 3.9% 2.92% % (.3%) 4.95% 11.19% 18.71% 27.97% Risk Free Rate 3.12% % (1.82%) 3.23% 9.2% 16.37% 25.16% 3.32% % (3.29%) 1.56% 7.28% 14.13% 22.49% Market Premium Implied Price Undervalued/(Overvalued) 1 2.% 2.5% 3.% 3.5% 4.% 2.% 2.5% 3.% 3.5% 4.% Market Premium 5.55% % 2.82% 8.51% 15.32% 23.58% 33.84% 5.65% % 1.23% 6.7% 13.21% 21.1% 3.84% 5.75% % (.3%) 4.95% 11.19% 18.71% 27.97% 5.85% % (1.78%) 3.26% 9.24% 16.42% 25.23% 5.95% % (3.22%) 1.63% 7.36% 14.23% 22.61% Tax Rate Additional Sensitivity Tables Additional Senstivity Tables 1 2.% 2.5% 3.% 3.5% 4.% 2.% 2.5% 3.% 3.5% 4.% 39% % -.3% 4.95% 11.19% 18.71% 27.97% 4% % -.3% 4.95% 11.19% 18.71% 27.97% 41% % -.3% 4.95% 11.19% 18.71% 27.97% 42% % -.3% 4.95% 11.19% 18.71% 27.97% 43% % -.3% 4.95% 11.19% 18.71% 27.97% Tax Rate %Equity Additional Sensitivity Tables Additional Senstivity Tables 1 2.% 2.5% 3.% 3.5% 4.% 2.% 2.5% 3.% 3.5% 4.% 74% % -.3% 4.95% 11.19% 18.71% 27.97% 75% % -.3% 4.95% 11.19% 18.71% 27.97% 76% % -.3% 4.95% 11.19% 18.71% 27.97% 77% % -.3% 4.95% 11.19% 18.71% 27.97% 78% % -.3% 4.95% 11.19% 18.71% 27.97% %Equity UOIG 2