CorVel Corp (CRVL) 2003 Q3 法說會逐字稿

Thank you for standing by. Welcome to the CorVel Corporation quarterly conference call. During the course of this conference call, CorVel Corporation may make projections or other forward-looking statements regarding future events or the future financial performances of the company. CorVel wishes to caution you that these statements are only predictions and that actual events or results may differ materially. CorVel refers you to the documents the company files from time to file with the Securities and Exchange Commission, specifically the company's last Form 10-K and 10-Q files for the most recent fiscal year and quarter. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or 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 now like to turn the conference over to your host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, Diana, and welcome to our December quarter conference call.

Before I begin, I wanted to take a moment just to thank our -- some of our institutional investors -- you can relax, I won't name you -- for their support this last quarter. I think we have a very unique situation with a number of our investors who really participate more as co-owners in the company than they do as passive investors. They've been very helpful to us in being aware of trends in health care. Often your knowledge precedes ours in some areas of the industry, and it's very helpful to pick up on some of the developing trends. We have benefited from that. I would certainly like you to feel appreciated for your more active than normal involvement in our company.

The quarter was a good quarter for us, I think. We had sequentially nice growth from the September quarter, which is unusual for us. We normally have a soft December quarter. The holidays are particularly tough on us. We had 73 million in revenue, up about 25% from the same quarter the last year, earnings per share were up 15%. Just -- I'll summarize first on some of the items that have impacted us, and then I'll come back in more detail.

The market environment remains attractive for a number of reasons. Our proprietary products, I think, continue to differentiate CorVel and are helping us with new business. Operationally we are very busy implementing new programs, I think perhaps a little more than one would like all in one year, but there's just a lot of good things going on, which makes for a hectic operating environment.

Service expansions have taken some added investment, and that's been a conscious decision on our part. Our patient management operations are showing some improvement. Financially, we had a good quarter, with earnings up 22% at the field level over the prior year, same quarter the prior year. Revenues up 19%. These are higher than we've been achieving in recent years. Investments in technology were relatively high in the quarter as well, though.

And now in more detail, and first on the market side, the marketplace is strong. High insurance premiums are certainly helping our insurer customers get well after six or seven tough years on pricing. It has, though, really aggravated, I think, the employer marketplace, and they are very actively looking for ways to address the cost problems. That brings them to managed care so it raises the demand for our services.

Health care inflation is also running at a high level, and certainly I expect will be a political issue over the next couple of years. It does add value to our service and so therefore further helps our demand in the marketplace. The marketplace remains competitive, though, and I think both new vendors and failing older vendors put pressure on prices at times. So a lot of the more mature companies are struggling, so as they flail about to try to hang in there, they can have a negative impact.

On the e-commerce front, that really is now a mainstream part of our business, I would say. The implementation pace of new technology is accelerating, if anything. Our technology is a key to customer buying decisions and has really paid off for us. New service models are beginning to emerge based on the technology, and that takes up a lot of our attention as we go forward here. We are pushing to expand our role in the e-commerce based solutions.

The auto market has been a good one for us over the last year. Our product is very competitive in that marketplace. We are a new vendor, though, and that forces us to kind of worm our way in a bit. We're not as well recognized. Our PPO is a competitive advantage for us in that market, as is our large office network. We need to have our offices become more conversant with the auto customers in their geographic areas, but we have tremendous presence in the marketplace because of our very large office network, the largest in our industry by quite a margin.

Our Web site, CareMC, is continuing to expand, and is very important in our sales these days. The product scope is being expanded fairly aggressively over the coming year. The IT support platform beneath it is also being added to as our volumes increase. The application ideas and opportunities are numerous, and now that we're in implementation with customers on a much broader scale, there's really a lot of feedback feeding into our development backlog.

On the business side, the market conditions in the quarter, as I said, were strong, particularly in bill review and PPO, where our technology and our PPO network are strong advantages for us in the marketplace. New accounts are continuing to come online at a good pace. And as I mentioned, the auto market is also contributing to our growth. On the case management side, revenues have not been as strong but our internal operations have been improving.

There's a lot left to do, but we've made some pretty good progress year over year, and I'll talk about that more quantitatively later. The PPO business is attractive. It's active, and it is evolving. We are moving toward directed care networks, which are really a very much a next generation product in our industry. The latest versions of our MedCheck product, which is our bill review product, a dashboard which is a reporting product in the Web site and the rest of the CareMC transaction processing application are all very effective with accounts and helping us win accounts. We have as a result I would say an ongoing active new prospect pipeline.

The -- I think the most important thing for us right in here is to maintain in a fairly active marketplace our strategic focus, and I wanted to comment on that because it is having an impacted and changing our business as we move into the directed care market. We see -- we think -- a couple of fairly meaningful opportunities for growth for the company. But within our current strategic focus. Strong current results in the last couple of quarters, particularly have allowed us to accelerate our investment. It was difficult, I think it is for most companies, I'm sure, to get started. Zero to 20 million is tough.

Then once you really do have a business and a revenue model, 20 to 100 million is probably fairly easy, it may not feel like it at the time, but looking back, I think it was. Between 100 and 500 million companies like CorVel are struggling to develop their brand and mature. I think we're working our way through that fairly difficult process. I think a lot of companies get acquired in that sense range. And really, as you get on beyond a half a billion and on towards 2 billion, you become well recognized in your industry, known to the leaders among the companies with whom you'd like to do business. And life changes a bit.

So we're, I think, making good progress through a period in our growth that we think will begin to accelerate as we move forward. We have a tech knowledge advantage and believe now is the time to be aggressive, both exploiting that as well as further developing it. As long as that advantage continues in the marketplace and it continues to generate superior growth, we believe we can afford to invest at a faster pace than our competitors. We are focusing investment in product development, not in overhead items, but really directly in the people and the talent base necessary to push our product forward more rapidly. The pace has changed in our industry we believe will increase in the coming years, and I think the public debate on health care inflation is going to create some interesting times over the next couple of years, as I mentioned.

Our early investments, though, going back 14 years, really, have formed a very solid foundation for our current expansions, but we think we're investing in a place where we have built a lot of solid infrastructure already. Being more specific in those product lines, in the MedCheck area, we've added development staff in the last couple of quarters. Our AI project continues to do well and is being expanded. The web tools are very popular for this product. And there's more development coming in that area.

Our e-commerce solutions are allowing more interfaces with major payers and employers, and there's a lot that's going to come in that area. We have quite a full backlog of coming new features. But at the same time, a lot of investments continue to make in order to achieve those gains. On the CareMC side, our first mover advantage has helped us, we're adding new services now and adding development staff, our usage is accelerating. I mentioned earlier that our investment in the infrastructure to support that product is something that we're investing in, and has added to our capital expenditures in the last year. We have much more to develop.

We have a number of features and capabilities that will be coming on stream. We know that our competitors are looking to copy what product we introduced about three years ago and so it's important for us to move meaningfully beyond that position in the marketplace. I'd say one area we have had a couple of questions, and I wanted to comment on it a little bit in this call and will probably modify these comments in future calls depending on feedback from those of you who are interested in cash flow, in the quarter, we had a cash flow -- we would estimate at 6.6 million, which is income and plus depreciation. That compares favorably with a little under 6 million the prior year, year to date, we're up maybe 15%.

Working capital helped us a lot last year. So if you add working capital changes to cash flow, last year we were at about 19 million, this year only at 16.5, because we've really reduced our AR and now as our revenue growth accelerates, we're not getting the same gains, hazard-dollar gains on working capital. And then capital additions this year have been strong as we've invested in some of the technologies to support our Web site. So net of both working capital and fixed asset additions, we would show cash flow net cash flow at only 4.9 million this year -- or this quarter, excuse me, and only 5.8 for the year. 5.9, the same quarter the prior year, and 11.3 million for the first nine months of the prior year.

So the comparisons become less attractive, so to speak, as you add in all the factors that impact cash flow. But I'd say the two big factors are increased revenue growth, which inevitably pulls our accounts receivable up. And then we've consciously accelerated the pace of our investment in technology. We have, at the present time, maybe 25 million in direct investments in technology and another maybe 12 million in our field operations. And so our ability to invest in technology has improved nicely as both our size has increased and the profitability of our more highly value-added services has begun to kick in.

In the quarter, accounts receivable was in good shape. We have tend to have a seasonally strong quarter in December because of some internal incentives, so we actually came out of the quarter with a little reduction in our day sales outstanding, brought our cash up to 8 million from 5.5 the prior quarter, so small change, but nothing significant. Interest income remains negligible, partly because we don't have a lot of cash. I say more importantly because the interest rates around real attractive these days.

On the stock repurchase side, we only had a drop of 37,000 shares in the weighted shares outstanding in the quarter. We did repurchase 3.3 million in shares in the quarter, but we had some option exercises that offset some of that. Basic shares were 10 million, 765,000 in the quarter, weighted shares were 110323. At this point as I reported last quarter, we have repurchased approximately a third of the shares that were outstanding at the time that we began our repurchase program. So it's a continuing program, based largely on our positive cash flow. I think the only thing that can reduce it at times is if our growth rate accelerates, which would be an attractive alternative investment for us in any event. So I think that we're continuing, though, to try to manage the capital in the business to produce attractive returns for our investors.

That concludes the prepared remarks I have. And would we'd like to open it up to questions at this time.

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 polled in the order they are 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 speakerphone, please pick up your handset before pressing the numbers.

Are there any questions?

Our first question is from Chris Arndt (ph). Please go ahead, sir.

Hi, Gordon. Nice quarter.

Thank you.

Let's see. Can you -- I was cut off at one point of the call, so I'm not sure if this is redundant, but what was the impact of your acquisition in the quarter? And you know if there's any way to talk about internal revenue growth rate, what would that have been?

I didn't talk about that, and we have not disclosed the compact amount or size of that business. That's the AnciCare MRI network business that we purchased in May of last year, and it definitely is increasing revenue growth, you know, for the first year that it's part of the company. We haven't talked about that specifically, but it would take -- our revenue growth which was 25% in the quarter would definitely be down under 20%. But it would still be an attractive quarter relative to the rates that we achieved without that. We were probably at the revenue line in the 12 to 15% range, and we definitely have moved up from those numbers a little bit.

Okay. And what -- as well could you talk about the internal growth rate of the provider side of your business? It was extremely high. I think most of that is because of AnciCare -- or some of that is because of AnciCare is in that segment?

Yes. I think some comments there -- and I'll break out the two segments. I have not done that yet. Patient management business in the quarter was 31.4 million, which is up 4.9% year over year. The bottom line in that business though, is at 12.8%, whereas in the December quarter a year ago, it is margins were 10.3%. So we've increased field profits by a little over 29% year over year in spite of only 5% revenue growth.

On the provider programs side, and this is the area where we have some mix change in the business and we're getting into some of these second-generation products, so our -- and I think in the last call I discussed that we would probably break a third segment out in our business. I would think it will be another few quarters so that we have a chance to see that the work that we're doing to try to launch something in that market will take root.

We've had things we've done in the past that didn't work out, and so there are no guarantees in this one. Butter (ph) -- there's a mix change going on there that does dilute the margins a bit. The revenues in that sector in the quarter were 41.7 million, up 45% from the same quarter the prior year. And even up -- let's see -- 9% sequentially from 38.2 million in the September quarter. So we have some strong growth in the network area. The margins were 21.6%, down from the prior year. And that's a largely due to mix change. The hard dollar profits were up about 18.5% year over year. So the investments in that business are a struggle for us. We're -- we have kind of an ambitious idea about that business, and yet we have a lot to learn in it. So it's -- it definitely, though is an exciting part of our current growth model.

Okay. So wait a minute. So if your patient management -- if we can call it, I guess, the gross profit for that -- was up, you said something like 31%? Is that right?

29 -- a little over 29% year over year.

Can you give a dollar term for that?

Yeah, it was just a little over 4 million in the quarter. I usually just quote the percentage rate. We have a 12.8% margin in that business in the quarter. We began to recover our margins -- we still feel that's unacceptable, but that's been a tough industry, and we suffered a lot in the 2000-2001 time frame on margins, but we began recovering our margins, I'd say, in the early part of 2002, and that's continued. The December quarter's a tough one because of the holidays, particularly.

Yes.

Especially when Christmas and New Year's are on Wednesday. We sort of end up taking two weeks off.

What was the G&A expense?

G&A was -- 6 million? Yes, 6,260,000.

Okay. On and obviously that's up a lot year over year. Because if you're growing your patient management 29%, your gross profit and your patient -- your provider almost 19%, then to get to something, oh, you know, a lower operating income growth is significant investment in G&A. Is there a reallocation from cogs to G&A, or is all the increase in the additional investments and spending on your part?

Yes. As I was saying, it's all additional spending, and I would say that we're trying hard to focus that additional spending in development and product development. So that we're -- I think we really feel that the advantage we started to build as we got bigger and continued to invest in technology has paid off, and we're in a period here where the business -- each individual piece is relatively simple, but I think health care fools people because it gets very complex in total, and the kinds of applications that we're developing for the coming year are intricate more in terms of the number of details involved than because we're trying to -- we're not -- we're obviously not trying to invent a cure for cancer or anything, but the combination of all the pieces gets very complex.

And I think I should compliment our team. We have a group of people who have been together for most of our history, and I think that makes a difference in technology. We've had wonderful results, and they've been hard-pressed the last couple of years. We've really been pushing to take our company forward and all the burden, a lot of times, falls on some of them on some of these involved projects. We've added some high-talent people, and I think we're at the size now where we're beginning to -- things that used to be one person are now turning into small (inaudible). So there's a lot going on in the technology area. But that overhead expansion is almost -- well, very largely in product development.

Okay. Thanks a lot.

Are there any further questions?

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

Not really. I'd like to thank everybody for joining us on the call, and as I said at the beginning, we especially appreciate the involvement from people like Chris and a number of others among our investors who have been active with us, and it's been great. I think it has definitely made a difference for us. We find new ideas in the marketplace that some of you are learn about before we do. So I just wanted to thank you for that. It was a strong quarter for us, and it's been a strong run this last year, so we're looking forward to the coming year.

Thank you.

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