CorVel Corp (CRVL) 2003 Q1 法說會逐字稿

Thank you for standing by. Welcome to the CorVel Corporation's quarterly conference call. During the course of this conference call CorVel may make projections or other forward-looking statements regarding future events or the future financial performances of the company. CorVel wishes to caution you of that these statements are only predictions and that the actual events or results may differently materially. CorVel refers to you the documents the company filed from time to time with the Securities and Exchange Commission. Specifically, the company's last Form 10-K and 10-Q files for the most recent year-end quarter. These documents contain and identify important factors that could cause the actual results to differ materially, for these contained forward-looking statements . At this time all participants are in a listen-only mode. A question and answer session will be conducted later in the call with instructions being given at that time. As a reminder, this conference call is being recorded. I would like to turn the call conference over to your host, Mr. Gordon Clemons.

Thank you, Nicole. Welcome to our quarterly conference call. We had a quarter which we did 66 million in revenue up nicely from the prior quarter and up 14 percent from the prior year. Earnings per share were 36 cents, up 15 percent from the prior year. I had been planning to begin this call by providing our perspectives regarding the current congressional movement to reform corporate governance. As you can appreciate, I wanted to practice that portion of the talk before giving it to you, but I found no one was willing to listen to me. I found that by holding a dog biscuit, though, I could get my friend Beau to stick with me while I ran through my thoughts. However, she grabbed the biscuit, bit me at the same time, ran outside and pooped on my freshly mowed lawn. I have concluded therefore that it be best that I stick to shovelling the poop, bringing more bisquets and keeping my mouth shut about legislative matters. I'm, nonetheless, heartened to think that surely our national leaders will hold themselves to the same governance standards and accounting standards for the federal government that they are now so zealously promulgating for the private sector. We should see some very interesting new federal budgets. I would guess that prison terms will make legislating new social programs a bit more dicy, though. Just the thought of increasing government control in the private sector really puts my mind at ease. The congressional pontification on governance has put an impact on the equity markets as I'm sure you're all aware. After all the success of the central government control of economies enjoyed in east Germany in the old Soviet Union perhaps the stock market is not overreacting. Oops, I'm afraid I'm now drifting into that speech I promised Beau I wouldn't give without more biscuits. Specifically on some of these issues, though, I would like to say, and I'm sure we have other people in companies like CorVel that feel the same way that some of the comments about stock options I think are inappropriate. Even if we assume that all the criticisms are real, I think that it's difficult for companies to fully compensate people for the kind of effort it takes to build small companies. It is somewhat simplistic to suggest that as I'm afraid Warren Buffet does, that cash compensation is perfectly adequate. I know that he is although quite enthused about holding stock himself. So I think this is a point on which I'm probably a little brash to say, I think he's wrong and I'm sorry to see the use of a tool that's been abused by someone taken away from perhaps the rest of us. I would like at the same time, though, to comment about our institutional investors. We've had a number of institutional investors over the year who have been with CorVel for some time and who participate in extremely constructive ways in our company. Your questions, criticisms and advice have been extremely valuable. And I would like to plead with you to continue to be involved as you have been with us. We have especially over the past year had several people bring us information off of the companies that are not in our business but who are doing a better job in some aspects of the way they run their companies than we are. And that kind of help is extremely valuable. Also, a short comment on our stock movement. CorVel has been a Russell 2,000, Russell growth and a Russell value index funds. We had some PE expansion which dropped us out of the value fund and there was some selling pressure as though index funds got out of our stock, and that could continue. We really don't know how much they're either in or out. But that did have some impact recently. In summary, we had a I think a fairly strong quarter. The good managed care market conditions are pushing us along. Health care inflation, which is a big problem, I think, especially for large employers, is raising employer interest in managed care. The auto market has been gradually moving into using managed care more than it did in the past. Branding, that is, selling our company name and becoming better known with key customers is ever more valuable. And will play a part in how we manage our business going forward. Internally, we had a pretty solid quarter. New services and technology are continuing to help us gain share. We won several large accounts during the last three, four, five months. Did get outfoxed I would say on a big prospect that would have made the quarter even better. We have a good pipeline for pending deals. Our new med check project new PPO tools and the dashboard that we now run on the Internet are really attracting customers. The product development pipeline also remains extremely full with I'd say new ideas coming in regularly. So that we'll have our hands full over the next you year. Patient management operations are making some progress. Although that continues to be a bit of a journey. We didn't have as good a quarter in AR management as we have had. I'll talk more about that later. Going now to more specifics, the general market, I think, is pretty widely recognized as having turned in the insurance market perhaps turned too much. It's very tight. Insurance prices are causing employers to look for new solutions to be more involved in looking at our kinds of services. There's been consolidation in some parts of our industry, both in the PPO sector and then in general. And then that has brought the market into a little more stable situation. Probably four or five national vendors that compete pretty aggressively in both the PPO and broader managed care markets now. I think some of the smaller vendors are struggling. Although there are always new vendors and venture funding coming into the business. Prices have improved somewhat and continue I think to improve. We're continuing to transition away from some low-priced business. That hurts our growth in some segments of our business, but I think it's critical. Selling low priced business really drains a company. Most of the low-priced customers are also very demanding about service and it ends up I think draining a company of its ability to focus on quality and build better services. So I think we've been benefited by our gradual movement away from some customers. The ecommerce trends continue. I know they're not as popular as they once were. And I'm certain they lead to some equity problems for the market. But there are really substantial benefits coming along and they're becoming more production worthy I'd say each quarter. As I mentioned the auto market is definitely improving and we've had some nice success there. We spent a couple of years kind of quietly in the background working on some of our products for that market. And that's been really paying off in the last six months. On the business side we had the improved market conditions did certainly help in that quarter we did purchase a diagnostic imaging company headquartered and largely selling service in the state of Florida. This was part of our strategy to continue to expand into specialty PPO markets. We, as I mentioned, run several new accounts. A couple of the larger ones in the auto market. And then as I mentioned we did get kind of out hustled on an account that I think we were in a great position to properly serve. So the quarter was not all good news. On a case management side, we see some improvement in margins and certainly in pricing. We're coming along with some of the software we need to do a better job there. The ongoing implementation of our new med check product and its use in conjunction with CareMC is very exciting to our customers and I think that's been very instrumental in the new account wins lately. As I mentioned it's a good quarter for new prospects and we have quite a bit in the pipeline right now. Strategic opportunities are really our primary focus. We are continuing to increase the pressure in the marketplace with a weekend - that we can bring to our technology advantages. I think we have good momentum there and we have expectations to be pretty aggressive with new tools and capabilities over the next six to nine months. We are expanding, as I mentioned, into second generation PPO products and with the acquisition of the diagnostic imaging network and the ongoing expansion of our existing programs in that area we expect to continue that effort. We are broadening beyond worker's comp now, first of all, and more successfully into the auto market. But there will be other efforts following that. We are though, nonetheless, I'd say continuing a tight focus on building our franchise and making sure that our expansions are tightly synergistic with our existing business. There's just so much to do in product development that it's important that our expansions be fairly closely related to our base business. The technology as I said is beginning to pay off, continues to increase in that area. The dashboard is a sort of a high level reporting interface on the Internet for executives and is the first of its kind in our industry and has been received extremely well by customers. It will lead to further changes in the way our web site runs. Our investments in artificial intelligence are continuing to gain momentum are very much a part of our regular production at this point. The latest versions as I mentioned of med check are strong and taking market share. We do have some investments coming up in hardware and communications and those will take place in the latter half of the current calendar year. On the product development side, in more detail. Med check is really substantially improved by the expansions we've made in artificial intelligence and will start seeing benefits from that in both its productivity as well its performance for customers. The web aspects, web tools and web access to that product make it extremely popular in the marketplace. The E commerce and more specifically electronic interfaces are allowing us to expand the degree to which we are really tightly integrated with our customers. One of the investments we'll have related to this in the coming year will be the expansion into document management services. There's a fairly good interest in the marketplace for scanned and electronically read documents. And we're going to be making some expansions in that to support our already existing offering in that area. Our tools in this area can be leased now, which is not something we did in the past. That opens some segments of the market to us which we previously had not sold into the - we have some expanded PPO administration tools, which are also opening segments of the market that had been outside our region in the past. So we feel we have a large number of prospects that we really now need to be getting into that previously we didn't have the technology to approach as well. Our product is very, very competitive and coupled with our PPO we feel we're in strong shape there. TRMC is continuing to be a focus of our investment. This is our transaction processing web site. We have a number of ideas for the continued expansion of that product. More recently we put effort into a scheduling tool that allows customers and other providers to actually work on scheduling patient appointments over the Internet. This will be an area that will require quite a bit of ongoing expansion over the coming years, but is integral to a lot of our strategy in that area. CareMC is becoming a part of our standard programs. We really have it involved in all almost all of our accounts. It automatic mates transactions, very importantly accelerates claims resolution. It's more efficient than the paper processes and certainly shrinks the time involved, reduces errors which are a significant problem in the insurance industry. So it is increasingly important in our business as we had hoped it would be over the last couple of years. From a cash flow perspective, we had a pretty good quarter. Cash declined to eight and a half million, but that was a combination of YENLD bonuses paid in the quarter. The acquisition of the diagnostic imaging company and then a mix of other smaller events. But nonetheless the incoming cash flow was strong in the quarter. Stock repurchases, in spite of doing the acquisition out of cash flow, we had repurchases of 97 thousand shares in the quarter, with 3.3 million, bringing our total investments there to 72 million. Hard shares were down to 10.8 million. And fully diluted shares down to 11.193. So we continued to gently whittle away at the equity outstanding in order to improve returns to our shareholders. Those conclude my remarks, and I'd like now to turn this back over to the question and answer session period.

Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press 1 on your touch tone phone. You will hear a tone indicating that you have been placed in queue. All questions will be pulled in the order they're received. You may remove yourself from the queue at any time by pressing the pound key on your touch tone phone. If you're using a speaker phone please pick up your hand set before pressing the numbers. Our first question is from Chris (Arnt). Please go ahead. Are there any further questions?

Our first question is from Richard Glass, please go ahead.

I'm going to start off with the usual questions here. If we can break down the sales between the two components. If you can give us the margins there for both of them and what the factors were. And then if you could tell us about the marketing spending, in particular, sort of the order of magnitude if you don't want to give an exact number and how long you think that will continue for.

Maybe I'll start with that one and come back with the splits. The marketing expenditures were for the national convention that, rims, which is a big part of our business. And we did spend more this last year than we had. I don't think we expect that amount to continue. We had - and we also had a strong quarter. So we were able to do a few things that we probably wouldn't have done in a weaker quarter. So I think the order of magnitude was, took our overhead up from eight percent up into the eight and a half percent range. I guess it was 8.2 up to 8.8. We are continuing to have a general goal in keeping our corporate overhead around eight percent. There is some mixed change in our business. Some of our web products are running centrally and we used to run them in the field in distributed computing techniques. That's causing some expenses to come into the corporate office that would have been in the field. So commensurately in the quarter we had a stronger gross profit in the field. It was up from 18.3 percent to 18.6. So there's some expense shifting from the field to the corporate office. We don't like that. We'd rather push our costs out. But we also do not allocate expenses to the field from the corporate office. So as we do more things on web servers, we are bringing some cost into the corporate office. Going back to the splits between the two general product areas, I want to preface this by saying that we have a change this quarter caused by the acquisition of the diagnostic imaging company. And that's going to, let's see, require us to help any of you that are running models by restating some of our prior quarters. We've taken the diagnostic imaging and some of our other scheduled services. There's a growing market out there for expanding beyond the more simplistic definition of PPOs into expanding the role for the managed care company. And we've been working on that and expect to continue that. We are putting all of that in the provider programs area. And we did have some of it over in patient management. So I'll be - maybe I'll start by restating the March quarter. I don't have the old numbers with me. But the way we're showing it now, the March quarter we did 30 million in patient management with a margin of 9.6 percent. We did 30.756 in provider programs, with a margin of 26.8. The current quarter in June we show 32 million 185,000 in patient management, with a margin of 11 percent. And we're showing 34.1 million in provider programs with a margin of 25.7. Some of these new services are significantly lower margin than the older PPO products. There are offsetting advantages. So from a hard dollar perspective there's a benefit. But the margins are decreased somewhat. To be specific, the field profits in provider programs in the March quarter were 8.2 million and 8.25. In the June quarter they were 8.775. So moved up quite nicely even though the margins declined. So there will be some change in the mix within provider programs caused by this expansion. But we do expect to continue to see attractive growth in the hard dollar profits. What I'd like to say is for those who do run models, I think it might be easier to, I hate to do this, but to ask you to perhaps call us separately and we'll go through the detail. We have restated internally they say sectors going back a couple of years. And I think prior to that there wouldn't be much impact anyway. So we'll be able to update that for you. But I just wanted to give these two quarters at this time.

Okay. Can we get into the DSO issue. Can you give a little more detail on what's going on there?

We had gotten down to around 50 days, I think. In this quarter we were back up to 51.8, which was not a big problem. But disappointing. We really like to think we can continue to push that down. We did have some further expansion, because of the acquisition. But that's not something negative in that. I think our total DSO was around 54 days. But we picked up all of the accounts receivable for the acquisition and yet we only had, say, a month's revenue or a little over a month. So in the next quarter we'll have a full quarter's revenue and hopefully roughly the same DSO. So or same AR. So the DSO might decline slightly. But I think overall we just drifted back up a little bit in days sales outstanding. It's hard for our operations to focus on too many things at once. And we're pushing on, as we are on some of these new product things, sometimes in the middle of the year we don't stay on top of our AR as much as we would like. But in general I'd say the AR picture has been pretty strong. We've had a gentle decline in write offs which we do expense during the quarter. Some of our margin improvements have actually come from having cleaned up our AR business in the past.

Last question, I promise. In the case management, can you give us a little more insight into the pricing situation there. You said there's been some improvement.

Yes. Some of it was just really that the work we began a year ago in some accounts took us a full year to actually get some progress in place. So we have continued to have some of our price increases come in more slowly. We had contracts. So the full effect of our price increase of a year ago wasn't really reflected in our results. And won't be completely probably until the September quarter. So we just had a little bit of steady progress there throughout the last year. We've had also inflation in nursing compensation during the same period. So it's been a challenge to make a lot of head way. But I think we've done pretty well with the price changes. And we're also gradually just changing both our position in the marketplace and customers' perspective on us. There are probably customers who are going to be looking at prices pretty much to determine who they do business with. And little by little we'll have those customers doing business with our competitors, hopefully. I'd say that we do have some significant software investments we've been making to try to address some of the internal issues related to this, primarily proactivity. There's been quite a bit going on. Also the Internet has brought some changes in the case management industry in terms of reporting, and there's a lot that's been done there. But more coming. And I think that over the next couple of years we'll gradually bring that product line into a little better shape. But certainly over the last couple of years we've been carried more by our PPO results.

Okay. Actually I have to throw one more at you, if you don't mind. Looking at the SG and A for the last few quarters here it was 7.9 percent. And 8.2 and now we're at 8.8. Are we going to see this level off and decline from - I know you're growing your top line pretty good but it's eating up some of the leverage you would think you would have. At what point do we pull the TLOT fell back there.

I think our real goal is to get our growth rate up. And our challenge is just what rate can we invest in the technologies to support that. I think that in general the entire insurance marketplace, most of the vendors, everybody says they're unique. But all in all if you ask a customer who is unique, whether it's an employer talking about insurance companies or insurance company talking about managed care vendors, there's been more interchangeability of vendors than is appropriate or is characteristic of a market where there's value-added services being provided. And it's been our dream all along to separate ourselves from our competitors, using technology. So it's always a dating kind of thing where we're looking at our results on the top line and earnings per share and trying to balance that. If we were I guess - I do not find being public being difficult. I think it's fun and so not like a lot of companies that wish they were private. But I would say that were we private we would probably, I'd say, spend three million dollars more a quarter than we do today. I mean, that's not an exact number but it might be between a million and five million. There is really - there are some tremendous opportunities to change the way insurance is managed. I think they will come along. The question for us is can we create a time to market advantage or not. And it's very challenging. You work a loan on it and the other guys are bright too. So they're all plugging away at similar things. We're a relatively small company but the big difference for CorVel over the last several years having started 14 years ago with nothing, we have built ourselves up to where we are as big as the leaders. We were able to spend one of our smaller, now that we're getting bigger we'd like to really press on and it's part of it is just competitive juices I think we'd like to go after a few people and they the same with us. And it's getting a lot more fun now that we're bigger. So there are some substantial opportunities to change the way things are handled. Our additional intelligence area is a substantial opportunity. Document management. Automate active processing. The interface to carriers. I think there's a chance over the next few years some of the things that were talked about in the dot com bubble they eventually will come to pass. And it wouldn't have been credible for us to say that we had a horse in that race in the year 2000 when there were 500 companies out there with multi billion dollar cap values. But at least privately we felt we did have a horse in that race. And in our case our horse is still running and a lot of them are back for new shoes. So we're excited about it. But I think we'll be able to manage the overhead certainly within our earnings per share forecast. But the most important thing for our company I think is to get our growth rate moving north again.

Sounds good. And I guess you're slowly going private and weren't in fear of that. So thanks a lot.

We don't really want to be private. I expect that our equity values will increase. But we're definitely picking up shares now and then when other people are ready to leave.

Sounds good. Thanks

Are there any further questions? ? Mr. Clemons, there are no further questions. Do you have any further comments?

No other than I just wanted to remind people, sounded like Chris (Arnt) had a little trouble we had a problem with the system and didn't get that. We'll certainly be around today if any of you have questions or would like to pick up the prior quarter's adjustments on those restatements, we'd be glad to handle those on an individual basis. Thank you very much for your attendance today

This concludes our conference call for today. Thank you for your participation. Please disconnect at this time.