Our recent meeting with PRGX management provided us an opportunity to dig into some of the events from the first quarter a bit more. We came away from the meeting a bit more cautious about our revenue and EBITDA estimates for this year, given that it could take the company a little while to overcome some of the challenges present in the first quarter. Thus, we lowered our 2014 and 2015 adjusted EBITDA estimates by $1 million each, to $26 million and $33 million, respectively. This translates to a $0.02 reduction of our 2014 and 2015 EPS estimates, to $0.14 and $0.39. On the positive side, we now believe that the company is aggressively repurchasing shares. We would not be surprised if PRGX completed its entire $20 million sharerepurchase authority this year, which could equate to about 10% of the stock. This would more than offset the impact on EPS from our EBITDA estimate reductions.
Besides some timing-related delays in claim activity, there were three main hurdles in the first quarter that we believe could take some time to overcome, and this left us a bit more cautious regarding our estimates. First, as management spoke about on its first-quarter conference call, the company is moving from being a first-pass reviewer to second-pass reviewer at a significant client.
We believe this is the same client that PRGX experienced a delivery issue with in first quarter 2013, due to a technology failure that required the company to reprocess its data. We had worried about the reputation impact of the failure and the downgrade to second-pass reviewer appears to be the fruition of that. We believe that the switch to second-pass reviewer is occurring around mid-2014. The revenue for PRGX could still be relatively similar, but there might be a timing lag in the second half of the year, since PRGX will have to wait for the first-pass reviewer to work through claims before it gets a chance to work on claims for that customer. We thus will see the bulk of the impact from this switch in the second half of the year. Second, the company had a large project in its commercial recovery audit business in the second half of 2013, which creates a moredifficult comparison to go against this year. Third, on its first-quarter conference call the company cited pricing pressure as a headwind to the core recovery audit business a bit more than it has in the past.
We view management’s commentary on its last conference call as a sign that it recently agreed to a price reduction at a large client, which will be a drag on the business. We believe management’s guidance for 2014 (which assumed EBITDA would be roughly flat in the core recovery audit business) included the impact of these factors, but there is probably more downside than upside to that target. We thus believe a bit more-cautious approach to estimates is appropriate, so we now project a decrease of $1 million this year.
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