CorVel Corp (CRVL) 2003 Q4 法說會逐字稿

Welcome to the CorVel Corporation fiscal year-end 2003 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 projections and that actual events or results may differ materially.

CorVel refers you to the documents the company files from time to time from the Securities and Exchange Commission. Specifically, the company's last form 10-K and 10-Q filed for the most recent fiscal year-end 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 our host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, Sherrat.

Well, a lots happened since the last time we talked. The economy has been, I think, hit by the Iraq war a little bit and we've suffered from that. We've certainly all gotten to know the SARS word and winter has been a little tougher on us than it was in the past. However, as you know, when business is good, we like to take credit for it if he management level and when business is a little tougher, we, of course, recognize the economy has a big impact, and this is one of those quarters where we'd like to credit the economy rather than management performance.

All in all though, we had a employ quarter and especially in product development. I'll talk more about that later.

And I think it was in the face of at least a very interesting backdrop. If not our quarterly success, certainly our long-term success is all about people. We have a couple of important changes to talk about today.

Peter Flynn, who had been on our Board since 1990, as a member of management at the venture firm that funded our development along with Jeff Michael, joined our executive team during the quarter to focus on national sales and business development. Increasingly CorVel is involved proposing on large business opportunities and Peter's skills and long term experience with the company will be a big boost to us in that area.

Peter is a determined competitor, as I can attest to in having golfed against him a few times. And, sort of, reflecting on that a little bit, he spent much of the last year working with us without compensation. Which I think is pretty strong testament to his committment to getting things done the way he wants to see them done.

Additionally, Allan Hoops joined our Board of Directors just recently. Allan was previously the President and CEO of PacificCare and is a well recognized national leader within the HMO industry. Allan has a long record of personal and business success, a member of the UCLA baseball hall of fame, he has always been a determined competitor as well. You may have seen him if you watch the AT & T Pebble Beach golf tournament, he's regularly is one of the 25 amateurs who play their way into the finals and play the entire tournament. I can't imagine accomplishing that myself. His personal tributes are all those we'd like to share.

His knowledge of group health, ant that is, the health benefits market is of particular importance to CorVel as we seek to expand breadth of the market in which we compete. So we're very excited about those two changes in our senior management team and wanted to cover that with you.

First I'd like to summarize briefly the quarter and then I'll come back to details in each of the segments. In the quarter, we had $74 million in revenue up about 22% from the same quarter the prior year. Annualized or annual revenue was $283 up about 20% from the prior year. Earnings per share was up 15% in the quarter, and 15% in the fiscal year.

The market, as I mentioned, in which we compete, remains, I think, very attractive if it is at least late laid against a more difficult backdrop. We continue to see new opportunities coming up, though, and look to expand into other segments of the market as we go forward in the coming years.

Internally, we had a very busy quarter. We're in the mid-of, we're kind of finishing up a number of implementations of new software and new services and I think our field organization is pretty heavily taxed to do all of that at once. It would be nice to have a little less going on, but I think that just comes with the turf these days.

Service expansions as well have been going on and do require investment. Our product development had a particularly strong quarter, we'll talk more about that later.

Now going back into a little more detail in each of the segments, the economy, I think, continues to be pretty tough and ultimately weighs on our market a little bit, although in the best quarters we don't pay much attention to it.

The weather was real mild early in the winter, then we lost some production days in this -- in the quarter just ended, particularly in Colorado, Texas, and some spots along the East Coast. Some of that's normal but it was a little heavy, I think, the level of influence of just all the negative factors caused customers to tend to stay with their current vendors. That certainly helped us in our own renewals in the quarter, but it made it a little tougher to move business from other vendors in the quarter. Although this was a very active period, I think there's as much business out for bid as certainly there ever has been.

The healthcare inflation rate remains high, that certainly helps our business along. The market remains competitive, which we'd like to see fade a little bit, but we have some very erstwhile competitors and they remain strong and active, I'd say. On the e-commerce side, business continues to move forward in that area and I think is doing every bit as much as those who really fought a lot of it three years ago, had forecast, it's now an integral part of all of our new business proposals and it's very very, very important to all of our successes.

Our technology is a differentiating factor in the marketplace. At this point, I think we have a demonstrable lead on most of our competitors. We're in a sprint though to add some new technology, one in an area where, I think, we, frankly, overlooked it a little bit. So there's still a pretty target-rich environment. More on that, I think, in the coming quarters as we get a little closer to bringing some additional things into our service.

The auto market remains attractive and was a part of our -- a strong part of our growth in the year. Our product is competitive there. We have a strong PPO and a competitive advantage for us created by that. Training our office network to sell in that market has been a challenge and we're continuing to work on that. We added some staff on that in the year just finished.

On the business results side, the patient management revenues increased about 11% from the prior year. I think relative to our competition, that looks pretty good but didn't contribute to the level of growth we'd like to have. That remains an area that is challenging.

The provider programs or PPO and network management area, was up 32% for the year, certainly a strong year for us. Patient management profits were up 20%, though, from a weak level a year ago. And the provider program profits were up 17% reflecting some of the mix change in that business as we enter some new segments that are -- do have lower margins.

The issues in the product lines, I'd say, on the patient management side, improvement was largely due to market share gains as the unit volumes per customer were probably down in the year, although we don't track that very effectively, I would say. Pricing has improved but remains too low and is certainly a problem for us in the business, I think is really a symptom that we haven't properly differentiated this product.

There is an opportunity, it would appear, to do a better job in this market segment but inevitably, some of the other opportunities are brighter and we have a tendency to focus on some of the areas where the margins are higher.

The latest versions of MedCheck, our Employer Dashboard and all the rest of the CareMC website product line, are doing well and certainly are contributing to winning accounts. As I mentioned earlier, they're an integral part of almost every sale these days. We have a very active new prospect pipeline, we finished a very successful industry trade association meeting in which we generated several hundred new leads. So it's -- the market is certainly out there.

From a strategic standpoint, we continue to see what we consider to be attractive and meaningful growth opportunities in our current strategic focus so we don't see dramatic change in our direction. We continue to emphasize technology investments, feel we have a lot to do there, and definitely feel we're seeing the benefit from that. The phase of development in which we're in right now is one of the more enjoyable times where things kind of come together a little faster than normal.

We certainly go through periods, and will again, where you're making more important infrastructure changes and you don't see as much come out, but we're in a little stretch here where we've got the website pretty well built and so bringing products to that will come along a little more rapidly than it has the last couple of years.

I think there will be another phase out in the future as we go to .Net and other new approaches to interactivity with customers that may require infrastructure development again.

We continue to have very efficient operation and development with low overhead so I think it's important to understand that, in our case, most of our investment goes directly into product development and not into overhead. The investments of the last decade, which have gone on kind of tirelessly over the years that we've been in business, have built a solid foundation and a lot of what we're getting done today is built on the efforts that people have made over quite a long time. And I think those investments are paying off as a result.

I'd say nonetheless, our position is challenging, our market share is still relatively small. We're maybe 6 or 7% of the market, as are a couple of other larger companies. So it is still a very competitive arena out there.

On the product development side, we're running along at the rate of about one new release in our MedCheck bill review product line a month with some minor changes even in between. So that's a very active area at this time. With quite a bit left to do that we see that will be new in the marketplace. So that will be just a fairly high pace of change there.

The AI project continues to do very well and if anything, to continually open new areas that -- where we'd like to work. The web tools are very popular and - for this product so bringing it into the Internet is exciting and we're doing more of that all the time. We definitely have, in our latest generation of this application, a foundation for future developments. So it's kind of in a nice phase.

I think similarly, with CareMC, our broad product line website, we are adding new service there all along and had a fairly substantial change in both its appearance and functionality for the trade show that was just completed. The site is reaching what I'd call critical mass at this point, so it's becoming much more functional than it was a year or two ago.

Our usage is growing rapidly. We have had a doubling in volume in that website in each of the last two quarters. So the pace of increase in usage is pretty substantial and certainly requires us to be adding to the infrastructure at a -- quite a rapid rate, as you can appreciate. When you're doubling on a quarterly basis, things kind of pile up on you pretty fast.

We see opportunity, though, to improve more in the reporting area, to add new transaction processing capabilities. The AI effort is expanding as opposed to just doing more in the same areas we've been in, we're actually adding that functionality to additional products in the website and we're working on QA reporting capabilities, quality control reporting capabilities, in the site. So a lot going on there.

We've talked in the past a little bit about cash flow and I'll just run through some of those numbers briefly for you. In the year, EBITDA was a little over $37 million, up from $32 the prior year. Cash flow, defined as net income plus depression, was up from 27 - up to $27, rather, from $23.

We had a good year in managing our working capital, so a lot of that flowed through into cash for the business. Although in the most recent quarter, accounts receivable outstanding deteriorated a little bit and we'll be working on that to keep it down at a, it's still at a good level, but it was a little, it moved up a little more than we'd like. We've had a lot of, as I mentioned, a lot of new things going on in our field operation and that is taxing for them.

Cash was around $6 million at the end of the quarter. Interest income, which we used to talk about a little bit, as you can appreciate, is negligible these days. We don't have much cash and nobody pays us much to have it.

Stock repurchases in the quarter were around $4 million. We dropped shares outstanding about 81,000. Hard shares were 10,000,625 and weighted shares were 10,000,951. So we've dropped that below the 11 million mark, which was one of our milestones we were kind of pointing to. We're up to about 5.2 million shares that we've repurchased since we began that program in 1997.

Although we do see some opportunities in the market to pursue acquisitions and, as we have said all along, we prefer that to buying back shares, so I wouldn't -- I don't know that because we're fairly conservative in how we approach acquisitions, that a lot will take place there, but there certainly are some little niches in the marketplace where we'd like to pursue opportunities to strengthen the company. So our stock purchase program is still in our plans, but it could slow down if we find some opportunities in the marketplace.

At that point I'd like to conclude my prepared remarks and open this up to questions from people on the call.

Sherrat, if you'll take over at this point.

Ladies and gentlemen, we will now begin the question-and-answer session.

If you would like to ask a question, please press "star 1" on your touch-tone phone. You will hear a tone indicating that you have 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 "star 2" on your touch-tone phone.

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Your first question comes from Richard Glass of Morgan Stanley. Please go ahead sir.

Hi, Gordon, nice quarter.

Do you want to give us the breakdown in terms of the margins between the divisions and what's going on there in terms of the changes as well?

Yes, the -- let's see.

The revenues in the patient management segment were about $33.4 million in the quarter, which was a little above our expectations. It was up 4 1/2% sequentially year-over-year up 11.3%. The margins there were 10.4%, which was down slightly from the prior quarter and down from a little higher level a year ago.

I think the economy's affected that area. But nonetheless it continues to improve a little bit for us and year-over-year certainly is contributing more to profit than it was.

Provider programs we did $40.6 million, which was actually down 1% from the prior quarter, which was exceptionally strong. We had some year-end work that we did for a couple of people. But nonetheless was up 32% from the prior year and the profits were up 17.4% from the prior year.

It ran around 24%, field profit margin in the quarter, which is, has been blended down by some new services from new services from the numbers that were closer to 30% maybe three years ago. But nonetheless, I'd say the individual components of that are still running similar margins and in that area remains kind of the core of our business. So those are, I think, the two segments that we break out.

Okay.

Can you just for clarification, you bought back 81,000 shares for $4 million?

No, no. That doesn't sound like very good purchasing, does it?

I think we reduced the weighted shares by 81,000 and --

Oh, I see.

Here I can actually give you specific numbers.

The net number is what you're saying?

Yeah, the net -- yeah, we repurchased 122,000 shares in the quarter at an average price of 33.40 for $4,000,067.

So, yeah, and that netted down -- we have some options exercising every quarter so there's always some netting down. And then of course the weighting changes based on the price. Although the price in the marketplace has been pretty flat.

Okay.

And what was the SG&A, what did that look like?

The SG&A was pretty much dead flat with the prior quarter at 6,000,275, which is 8 1/2% of revenue.

We have historically have wanted to keep that near 8%. We and a little higher this last year as we had some strong operations and we continued to be investing in software at a little higher pace than we had been.

So anyway, it continues to run a little higher, but we try to keep it balanced with how the margins are going in the field. We're certainly in a place where we could be a little less aggressive there if the market got a little tougher on us.

Okay. So the goal there is 8% loan return?

Generally, that's -- yes, that's where we've been.

I think if the company -- if we worked our way into better value-added market positions, and, therefore, in other words, had higher margins, we might like to see our investment rate higher but we've been trying to manage the pace of our investment in software and technology in such a way that we can keep that down.

We do run around 60% of our corporate overhead is R&D or systems support. And so we're -- we run pretty tight on other stuff. So we're trying to keep a lot of that focussed on the technology.

Okay.

Can you give us a little more color on these direct care networks you said are included? Have they not been included at all or are you just kind of highlighting them now? Is that lower margin business or is that better business? Can you give us some insight there?

Yeah, the directed care networks run lower margins and are new to CorVel. We've been in some small segments of that over the years, but they are growing in popularity in our marketplace. That is business where we actually are involved placing patients with appointments.

I mean, this is not encouraging people or providing some kind of channelling efforts to get people into PPOs, this is actually, literally, calling the provider's office to schedule an appointment where you have the patient and you're really their representative.

So we're actually scheduling the appointments, we are specifying the care or coordinating and -- well and/or coordinating the reporting and service delivery from the provider, and we are also coordinating and essentially guaranteeing the reimbursement to the provider.

So we, in a sense, look a little bit like a practice management company in that segment of the business in that we take care of all the administrative duties for the provider and we're also, in a sense, the marketing arm or, in other words, we are bringing the patients literally to the provider on a patient-by-patient basis.

Sorry, Gordon.

How do the margins compare then?

Oh, the margins in that business are, it can be much lower because the actual cost of the care is included in our product. So that we're invoicing as the provider and we do not ever, at any time own providers or, you know, or in any way function in that business. We don't think as a managed care vendor we should be doing that. But we are increasingly involved in the activities related to the provision of the service. Or actually it's mostly the information processing and reimbursement.

And this is something you feel like you have to be involved with as opposed to really want to be?

Oh, no, I -- I'm quite excited about it. I think it's a substantial opportunity. It's a service that has an income statement that might look a little more like an HMO's, it's not a risk bearing entity as an HMO would be, but it is a service that includes the provision of care as part of the income statement. I think it has a substantial future opportunity.

I suppose I would say that, you know -- and today we're not doing anything in the more -- we're not doing anything in heart surgery obviously, or eye surgery. I like to think of this as years where you don't mind someone scheduling your appointment. That might be for an x-ray or for a physical therapy encounter, it could be for a second opinion or in comp they're called an IME.

This is -- it's taking place more easily in areas where the patients don't mind being helped. But I think in the long run, and this is -- goes well beyond where I think investors ought to be discounting, so I would not include in of this in our fortunes but if the long term it would be nice to think someone would actually help somebody with care choices when they have serious decisions to make, rather than relying on a next-door neighbor who says he likes Dr. Jones. But that would be a very different future.

I mean, I think the company, if CorVel reaches that kind of a stage, would have to have a tremendous reputation with consumers. And so we're a long ways from that. But it's a much more complete involvement in healthcare and we're pursuing it because we think it's an exciting evolution in networks and PPOs.

Okay.

And can you tell us what the numbers were on the DSOs?

The -- well, the DSO was around 55 days, I think, maybe a little over that, and was up from the mid-53s at the end of the year. So it's - we like it in the low 50's, we don't like it in the mid-50s, so I'd say we're definitely going to take a look at that, and see if we can push it back down.

It used to run though, as high as the 70 and we were always happy around 60, but our long-term goal is to keep pushing that down so we're disappointed to see it bounce up a little bit.

I think we're happier with the low 50s.

Yeah, well, in service businesses that's where problems show up, if you end up with stuff you can't collect it's an indication.

Actually, the overdue segment of that was in pretty good shape in the quarter. We have a couple of accounts where it moved up a little bit, but we don't have what we think are problems.

What's going on there a little bit is that we're moving into some of these new secretaries and the invoicing and collection processing are more complicated initially for our offices to learn how to handle, they're more automated once we get them going. So I think we'll recover from that.

But in the quarter, they got a little distracted, I would guess, into kind of some of these other implementations.

All right.

My last question, then I'll get off, can you give us an example of how CareMC is benefitting one end of the core business? It seems like we're spending a lot of money here, it's nice that it's growing, but it's unclear how it's helping the bottom line.

Yes. I would say -- that's a good question because I think the revenues are not directly coming in, as we do not charge for usage of CareMC.

We do have one competitor trying to work in that direction with a website idea. I wouldn't suggest that we'll never charge, but it has been just a feature of our regular service. So the way it contributes to the bottom line and to revenues is that it's a differentiator in the marketplace. It does help us win accounts. I would say it's moving even past that. I think -- and we're not alone in recognizing these opportunities.

I do think that the market in which we compete is largely made up of the provision of information services. We don't actually care for patients and we don't sell hard products. So we deliver services, not products.

And not only that, but within services, we don't deliver what I would call tangible services, like I'll drive you to the airport or I'll shine your shoes, we talk to you, phone you, fax you, EDI you, web you, whatever, we send information. So it's really an integral part of the evolution in our marketplace. But more importantly, I think the interactions between ourselves and payers, and ourselves and providers are becoming ever more automated.

Some of that is moving more slowly than, I think, those who dreamed about electronic interfaces would have liked, but nonetheless it is moving forward. And at the same time, the cost of providing that kind of service is dropping continuously.

Even if those vendors are having an awfully tough time these days, their technology is, I think, moving along at a very exciting pace. So it's -- I don't think today a major account could be won without some of these automation features.

And, in fact, there are new twists on that that come along, you know, each year I'd say, not literally every quarter, but we're constantly on the lookout for people that are getting an advantage by doing something clever in a particular aspect of that. And I'd say in the last six months we found one that we had overlooked that I think other people had done a better job than we had with. So - but I think the cost is manageable.

We're actually outspending as a percentage of revenue some of our competitors or probably all of them, but we do compete against a couple of companies that are at least double, if not triple our size and so their ability to spend is at least as a percentage of revenue, gets a little cheaper. So it is an issue.

In the year, though, we were actually able to not increase our capitalized software and so it fell slightly as a percentage of revenue. Hardware costs have actually fallen fairly significantly over the last three or four years as a percentage of revenue. Although at this time, we are, because of the volume increases, we're involved in a fairly substantial and I'd say almost ongoing expansion of our infrastructure. But there are some efficiencies that have come here.

We went through a tough time in the middle '90s with laptops and distributed processing in terms of its cost, anyway. It contributed nicely to the business, but as that has kind of converted over to low-cost PC's and web interfaces, our hardware costs have actually been dropping fairly meaningfully as a percentage of revenue. So I think this is the direction for the company because I think it's important for us to steadily move into higher value-added positions.

Thanks, Gordon.

Uhm-hmm.

If you would like to ask a question, please press "star 1" on your touch-tone phone.

There are no further questions.

Mr. Clemons, do you have any further comments?

Yes, I'd just like to thank everyone for their involvement. We continue to have, I think, a lot of support from some of our investors who have actually been helpful to us as we work through some of these technology investments. And particularly, I'd say with our just prospecting for new ideas.

There's really a lot going on in healthcare. I think some of the people who are committed to some of the technology changes are making some progress out there. It is tough.

Most of the companies have gotten overcapitalized and have really far too many shares outstanding to really have the benefits work through their investors. We think we're in a good place on that and continue to try to manage our capital outstanding as we make these investments.

We see some interesting opportunities that I think will be at a place where we can talk about them a little better by, I would suggest, maybe next fall. So we'd like to thank you for your continued support and we'll talk to you again next quarter. Thank you.

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