CorVel Corp (CRVL) 2003 Q2 法說會逐字稿

Welcome to the CorVel Corporation quarterly conference call. During the course of this conference call, CorVel Corporation may make projections or other forward-looking statement regarding future events or the future financial performances of the company. CorVel wishes to caution you that these statements are only predictions and that the actual events or results may differ materially.

CorVel refers you to the document the company files from time to time with the securities and exchange commission, specifically the company's last 10K and 10Q files for the most recent fiscal year and quarter. These documents contain and identify important factors that caused the actual results to differ materially interest those contained in our projections or forward-looking statement.

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. This conference call is being recorded. I would now like to turn the conference over to your host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, Nicole, and welcome, everyone, to our September quarter earnings conference call. Before beginning I'd like to apologize for not having taken a trip back to New York recently to speak at the Bear Stearns health care conference, although we found that investors did not miss me at all. My absence did create some unanswered questions regarding my dog Bo and I'd like to cover those. He's doing fine, he is beginning to leave the room if I talk about Sarbanes Oxley, and I guess what really sets him off is discussions about accrual accounting and its introduction into the federal budget process, so with that -- with that behind me, I guess I'd like to jump into the quarter.

The revenues for the quarter were up about 19%. One of our better increases in recent years. Earnings per share were up 16%. In summary, the insurance marketplace continues to look strong to us, tough on employers with the high prices. Health care inflation is also high which pushes employer interest in our services so the market background is strong. Our proprietary products I think also are helping us win accounts.

On an internal basis, our operations are extremely busy implementing new capabilities as we have a little more coming on line now than we normally would at any one point in time. We are seeing some productivity gains and we'll hope we can continue that, although it's really kind of unclear at this point. Patient management operations are showing improvement which has been a real relief to us. Before talking in a little more detail about the market and the business, I'd like to comment on some aspects of our quarter from a financial perspective that I think are important and put the quarter in some better relief for you guys.

Gross profits in the field or field profits for CorVel are actually up 27% year over year. Investments in technology were high in the quarter, and I'd say the pace of change in our business is picking up quite a bit. We welcome this, because we've been making investments in technology. We are transitioning fairly rapidly to not only our new medcheck product but new features in it. That is completely obsoleting older versions of that software which we've been running for let's say over 10 years now.

We also had large investments in the quarter in document management which is a popular product in the marketplace right now. As a result, we chose to write down some older software by $1.5 million in the quarter and that expense is actually included in the results that generated our earnings per share of 37 cents, so it was actually a stronger quarter than at first might be apparent. The quarter allowed us to accelerate therefore our investment pace in technology and to participate aggressively in this transition in our marketplace. These improving trends are encouraging and I think support our past investment strategies.

Now, moving back to the market in general, insurance pricing, as I mentioned, has continued to be strong in the marketplace. I think the PPO consolidation down to three major vendors in our industry is continuing to move business in our direction. Health care inflation rates add to the savings that we achieve, and as a result make our services more attractive. I'd say also prices in our own business appear to be continuing to improve. On the e-commerce front, the pace of implementation of new technology is accelerating. Our offerings appear to be very much on point and I'd say the challenging investments that we made beginning three or four years ago in our website are really starting to pay off.

The auto marketplace is also strong and we have a growing business in that sector. Our bill review product is very competitive in that market. The PPO, which we've been working on for a long time, has positioned us to win business against competitors, and also I'd say our large office network which is now more than double the size of our nearest competitor is a big advantage in this marketplace where a local service is important.

Our CareMC product offering is continuing to expand. It's very much on point as we had said in the past, I think that continues to be ever more true as we add functionality to it. We've put a lot of effort into building infrastructure into that product and I think that's going to be key as the volumes ramp up in that business. Our application backlog there though is high and there's a lot left to do. On the business side, as I mentioned, we had good market conditions, the acquisition from the Spring is coming along nicely with as always a fair amount of work to at the beginning but I think that's working out to have been a very nice choice for us.

We won several important accounts in the quarter, although we missed a significant opportunity that bothers us, I'd say we got a little bit outhustled by some people quoting things that were a little bit misleading to the customer and that happens to us occasionally. It's a tough market out there, so we had our ups and downs in the market on quarter, but on balance as you can see from the results, it was a very strong increase in business. Partly bolstered by the ongoing improvement in the auto market. Our case management operations are improving. We have a lot left to do but we have some margin gains there, some productivity gains, and I'd say in spite of our price increases some revenue gains as well. The PPO business is very active and continuing to evolve.

We're making ongoing implementations of our newest medcheck product in support of the PPO business, we have several features in that product that are quite attractive to customers right now. It was a good quarter as well for new prospects and I think our pipeline there is in pretty good shape. From a strategic standpoint, we are as you can tell from the choices we made on our accounting to press our advantage in technology, we will continue to invest aggressively there and we feel that that's having an increasing impact in the marketplace, making it, you know, I'd say ever more difficult for our competitors.

We want to keep a tight focus on our franchise and workers compensation and expand into the auto market as that market is opening up to us. As a lower priority and a little more on a long-term basis, we will continue to look to expand the markets that we participate in, but for the short-term we're very focused in our base business.

As you can see in the quarter, our technology is paying off. I would say I would not at this point extrapolate those results. We feel that it's going to be important to see this kind of trend continue before we feel confident that it's part of the business going forward. We do feel encouraged though that we're on the right track and I'd say the artificial intelligence investments that we've made have really been paying off. The medcheck technology is in a period of particularly rapid change, especially on the data capture side, that is services like scanning and OCR.

The hardware and communications market, certainly very tough for those companies, are on the other hand offering favorable pricing to us and that has been a background cost reduction area for us in our own business, so what's hard on them is certainly helping us. We expect the industry in which we participate to undergo substantial change over the next five years and the current pickup and the pace of that change seems to be consistent with that view. From a product development standpoint, a few brief comments. The medcheck business as I've mentioned is undergoing a lot of change. We're adding web tools, the ecommerce aspects of that product are linking up with CareMC and producing tools that are particularly exciting to our customers. We're now leasing access on an ASP basis to our capabilities.

We've added some PPO administration tools that are opening a couple of new markets that I think will be more visible in our results in the coming year. And I'd say medcheck at this point is an extremely competitive product in the marketplace with a lot in the pipeline as far as new features coming. Our product differentiation I think is making a difference. On the CareMC side, we had a new release in the quarter that was pretty important to us, it added a lot of infrastructure and just fundamental strength underneath the product. The usage has picked up quite a bit and we're adding quite a few new users all the time, so the activity in that is has picked up quite a bit. It's become really a standard part of our business and is really included pretty much in almost all of our new sales now.

On the cash flow side we had had a good quarter. The AR management continued and I think our results there are about flat. We're down maybe 2/10 of a day in day sales outstanding, so the little pickup we had last quarter did not continue, and I think we feel like while there's more to do there, we're in pretty good shape. Cash is down to 5.5 million as a result of investments in the quarter. Interest income was negligible. Stock repurchases continued at a fairly high rate, at least for us given our size, weighted shares dropped about 137,000 in the quarter, that would be the diluted shares.

We spent 4.4 million on share repurchases in the quarter bringing our total to date to 77 million. That has reduced total shares since the beginning of that program by approximately a third, so we've now repurchased a third of our outstanding shares. Basic shares in the quarter were 10,750,000, weighted shares were 11,056,000. That summarizes or completes my comments. I'd like to turn it back now to Nicole so we can go to question and answers.

Ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question, please press 1 on your touch-tone phone. You may also remove yourself from the queue at any time by pressing the pound key on your touch-tone phone. Our first question is from Don Christian, please go ahead. Please go ahead. Are there any further questions? Our next question is from Don Christian. Please go ahead.

How about Fred Greenberg?

Hi, Fred. This is Gordon.

Maybe they have transmuted me into Don Christian, I don't know.

You're looking good as either Don or Fred.

Great quarter.

Thank you.

Yeah, it was encouraging. I may have missed it. I stepped out for one sec. Acquisition effect on sales?

The acquisition effect on the revenue growth was meaningful I'd say in terms of percents. We would have grown roughly 13% without the acquisition. It was 18.7% with it, however we did accomplish the acquisition out of internal cash flow without reducing our share repurchase, so while it's not organic growth, it did not in any way affect shares outstanding.

Do you ever break out the medcheck corecare business? With that growth rate it's 31%. Be curious what kind of effect it would have maybe in the quarter and give us a sense of going forward if it's substantial?

Yes, I'd say the -- that growth rate was also affected by the fact that the acquisition we made was in the PPO business, so that rate is somewhat above the natural rate in that business. Also, there's a fairly rapid growth going on in our sale of those second generation PPO products, something we've talked about in the abstract over the last few quarters, but the underlying PPO growth rate is still good, but it's below that rate, and after a few other, if there are other questions I'll cover those, then usually we'll come back to the splits in our two businesses and I'll give the profits on those as well.

Thank you.

Our next question is from Chris Arndt. Please go ahead.

Actually without further ado, would you mind giving the revenue from the two businesses and the profits?

Yeah, I was just trying to hold out there. See if I could get you to ask a question.

Thanks.

Let's see. The patient management revenue in the quarter was 31.2 million with field margins of 12.9% so our best in quite a long time with the productivity gains there helping quite a bit. Some pricing, too, obviously. Then on the provider program side we had 38.2 million with margins of 24.4%. Those are down somewhat but that's more a mix change with the newer products that have higher revenue but lower margins affecting that, so overall the field profits were 19.2% of revenue. Then the admin expenses including the writeoff of software were 6.7 million putting the pretax profit margin at 9.5%.

That excludes the writeoff?

No, that includes.

So the writeoff, you put within GNA rather than within the provider program segment?

Yes, that's true. I think we felt like it was better to have it be visible. It would have blended in I guess with the provider programs and distorted the field margins somewhat.

Okay. Without the acquisition, would your margins have been a lot higher? Do you know approximately what your margins would have been in the provider programs without the acquisition?

Yes, that's true. The provider programs margins would have been higher. The acquisition has been running a little ahead of our expectations on profitability but it is a low margin business, so I'd say the PPO margins are down slightly just the pure PPO margins, but not meaningfully. There are a lot of changes going on. This is really the area where there's a lot of technology change going on in our business, and it's kind of hard to break out all the pieces but I would say that automation is changing the pricing in the business by component and there's, as I mentioned, we missed a big account where somebody kind of cleverly quoted their stuff a little differently than we do, so we're trying to respond, but our product itself is just extremely competitive so I think we're what we're trying to do is push the technology and the advantages we have there because we've made such a long-term investment in it and so the PPO margins have, I think, hung in there a little bit. That business has got such good margins that it's probably under some pressure almost all the time.

Okay. Now, if you excluded the software writeoff on the SG&A expense, the total expense would have been 5.2 million which would be down sequentially from the quarter.

Yes, that's true. The other quarter had some fairly big marketing expenses in it and a couple of other unusual items that were nonrecurring, so without the write-offs the SG&A would have been back in line pretty much with where it was trending before the June quarter.

Okay. I see. And what do you expect from this SG&A line going forward? Are you going to since you don't have that presumably that 1.5 million writeoff similarly coming in the third and fourth quarter, would you spend that on development or would we expect a lower SG&A number?

Our feeling is that if this is not just an unusual spike, and we really do have what we feel is organic growth that's taking us forward, it will show up in our revenue line and then earnings would move with that we would hope. We have felt all along in here that it is nice to be in a place where you can invest aggressively and this does free us up. What would have happened without this is just our balance sheet would have been a little higher on software assets and we are spending aggressively there but we'd like not to have that be something we just pay for in future years with depreciation, so we wanted to take advantage of the fact that we were obsoleting some older stuff to write had a down. I think it's unclear to us.

We don't like to give guidance on earnings I'd say as a company and that's turned out to be something that's now popular in the marketplace, but I'd say in general we would like oh see things continue obviously and it would end up in our results. I think what's really important to shareholders, I hope, is whether or not we can continue to grow in the future and I'd say this quarter shows that we're making the investments that would support future growth, but it isn't when things change somewhat rapidly and this is a little bit of an abrupt upswing, it is hard for us at least to know if it's real. We've had bumps in the past and in both directions frankly.

Can you -- the biggest change or one of the biggest changes was the improved margins in patient management. Is that -- do you see that as being stable?

Well, it -- I'd like to say yes. It's a business made up of a lot of small pieces so it usually doesn't move, you know, unexpectedly in one direction or another, but it has been a difficult market for a long time. I'd say the margin improvement there is nice, but it's not -- certainly is not at an attractive level yet but it has improved, and I think the marketplace environment has helped us a lot, just with the strong insurance results make that a little easier for our customers to treat us a little more fairly I'd say in that market. Those margins are still in our mind unacceptably low.

But they're up 400 basis points from their --

Pointing out our very poor performance of recent years.

It makes a big difference on the up side because there's a lot of revenue associated with that.

No, that's right. We have a substantial revenue base there, and, you know, we learned this quarter that sort of how -- it puts in perspective how poorly we were performing a couple of years ago. We had a lot of pricing that had gotten popular in the late 1990s and I think that some of the changes were put in place in early 2000 and we had to live with them and it took took us a long time to unwind them. So we really do have a fair amount left to go, not necessarily that the margins will pick up, but we're just installing the newest release of our advocacy software, a fairly substantial program that will take us all the way through 2003 getting better productivity management in place, so we've been working pretty hard and without a lot of joy in this particular segment for a long time and I think we're starting to see some improvements. I think that some of that gain is likely to continue, but one say a quarter like we're headed into where you have holidays and snow and where last year of course we had the tragedy in New York, those kinds of things can weaken that best because it's very dependent on labor productivity, but we think we're trending in the right direction, so while I wouldn't extrapolate the results, I'd say internally we're certainly hoping to continue to improve that business.

Okay, great. I'll let someone else ask a question if there's additional.

Are there any further questions? Our next question is from Don Christian, please go ahead.

They certainly have me as Don Christian. We've been buying stock back for a long time, and sort of complaining about liquidity at the same time, and what is the point of the exercise really?

Well, I think in our case we just had excess cash and during the slow markets we didn't have a good place to put it. We did switch a little bit last spring and made a small acquisition. I think that if this revenue gain continues, I would caution that cash flow will be impacted because it will go into AR and fixed assets and the stock repurchase will have to slow down. We're at a kind of a low point on cash. We really can't run the company without going into debt below five million in cash, so I think the stock repurchase would slow, but we're -- the only real way to improve liquidity in our stock is for the value of the company to grow and that would drive up the value of the float.

I think what we're really trying to do with the repurchase is just return cash to investors when we don't have an equally attractive opportunity in the business. Now, if things start to pick up in here, our use of cash on a for internal reasons would be -- would pick up and that's the highest return we get. We don't really get the same returns on capital when we buy back stock, so we do prefer to invest it in the business. I'd say the result of Sarbanes Oxley is that as everybody, well, I'm not sure everybody is really seeing it, but I can assure you that insurers providing us D&O insurance are putting extremely heavy pressure on companies to discontinue all forms of acquisitions. I like to joke about Sarbanes Oxley, I think it is the most destructive legislation that has ever been passed and it's going to show up in the marketplace in a lot of strange places. I know Merrill Lynch has just discontinued trading 4500 of the smaller over-the-counter stocks, those kinds of things are rippling through the economy and I would bet a year from now we'll have a whole lot more discussion about the impact, but certainly in our case the kind of people who will provide us insurance do not want to see us doing acquisitions and we feel we've been prudent and conservative about them, but the pressure's on to cut back, I'd say, from outside forces anyway.

So the insurer refuses or is backing off taking risk on D&O because of, quote, acquisitions that may be tainted or have some problem in the seller may have some particular problem that's not undiscovered?

Yes, I'd say that's the feeling. The people selling D&O insurance just want to reduce their exposure to events that could occur as a result of acquisitions so they like companies these days that aren't doing acquisitions. We look attractive in that regard in the sense that we don't buy public companies and we tend to do asset purchases, but I would just say that as an example of the kind of pressure that's out there that I think will weigh on other companies. Our growth has been largely organic, so it is less important to us, but picking up this company last spring was at a very important part of our strategy and helps us reach critical mass in what we think will be a next generation of services, so I think occasionally a carefully chosen acquisition can be a great thing.

It certainly won't encourage independent, outside directors coming to the board.

Well, that's true. That's another big problem for companies, and I think also companies going public. I can't imagine a company our size and smaller being able to go public successfully in this market. With that legislation in place, the cost of being public is much higher than being private, so if you're competing against private companies, then you have to carry the being public cost. It used to be an advantage to be public, but I think it's become a disadvantage. I noticed in yesterday's news a couple of the states are filing their own actions against Wall Street entities, and it's a very negative I think environment to see develop in our country.

Yeah, yeah. Well, I don't happen to disagree with that. I don't happen to agree with that idea of separating the analysts that way, I think it's very artificial, but it's politics.

Well, no, we don't have a lot of analysts as it is.

Well, you certainly have fewer in the future if they go through with it.

Yes, it's making it tough, that's true. It won't be easy making a living being an analyst I don't think.

No. So you're not giving any forward-looking guidance?

No, we have not in the last few years. I think our earnings growth has been pretty steady, in this case our revenues have finally picked up a little bit, although as people pointed out the acquisition had an impact on that, but the market has definitely improved.

Looks like your best number on the top line for a long time.

Yes, it is. I didn't look back to see how long it's been, but it's getting a little more into the range we had like to see it.

Good. That's my last question.

Thanks, Fred. Good to talk to you.

Same here.

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

Well, thanks, Nicole. I think that's all we have for today. We'll be around today if anyone has any further questions about items in our results. Thank you very much for joining us and we'll look forward to talking to you next quarter. This concludes our conference call for today. Thank you for your participation and please disconnect at this time.