CorVel Corp (CRVL) 2005 Q2 法說會逐字稿

Welcome to the CorVel Corporation Quarterly Earnings Release 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 results or events may differ materially. CorVel refers you to the documents the Company files 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 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. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to your host Mr. Gordon Clemons. Please go ahead, sir.

Welcome to CorVel's September quarterly conference call. In summary in the quarter we continue to work our way through this challenging market. We had a strong quarter in product development and sales prospecting, rebalancing our expenses continues in the software market. 4 profit improvement projects continue to be our priorities. Sales prospecting as I mentioned I think is particularly active -- was in the quarter end and continues. In summary, we had revenues of just a little over $72 million, which reflects the seasonally soft September quarter. Earnings per share of 29 cents were flat with the March quarter and down 3 cents from the June quarter. As we discussed last quarter four important factors are driving our results. First, the Company's market has been set back by the cyclically soft claims market. Comp claims remain down perhaps 10 to 15 percent year over year. Second, we are responding to the market conditions. We have continued to rebalance our expenses to revenues and we believe our newest products and sales initiatives are directed at our best opportunities for growth. Third, legislative changes particularly in Colorado and California hurt us this year, but we are now building towards the new California law that will be effective early next year. And fourth, the Managed care market and workers' comp and auto continues to offer attractive opportunities and we continue a rapid base of product development, which I'll discuss later. During the quarter we made progress in each of our 4 key operating projects, which I'll also cover later.

Now I'd like to go over these areas in more detail. The marketplace, which we've discussed in the past, continues to be soft particularly in claims volumes. Obviously the economy is much stronger and we think that will bleed over into the claims market. Right now claims are down about 10 to 15 percent year-over-year and most recently, in California claims are reported in the -- the fourth quarter of 2003, is the most recent reporting that is public in California, with claims up 20 percent in that quarter over the same quarter the prior year. High prices for insured programs have revived interest though in self-insurance. CorVel is offering an expanded product line with good application in the self-insurance sector. We've begun to sell document management and workflow automation tools to payers and large employers in combination with our traditional managed care services the new products address more and more of the total claims processing needs of our largest prospects.

However, I think if you pull back from these quarterly changes in technology and the marketplace I think we see an insurance industry that is entering a phase of sweeping automation, not unlike that changed the $75 round-lock trade in the equities market, some 20 years ago to today's $10 retail trade laid off to island.com for 4 cents. The government's investigation into the insurance brokerage and underwriting practices could help to accelerate the pace of change in the insurance industry, but it is really just a symptom of the underlying changes underway. Automation can now replace many of the layers of middlemen both service and brokerage layers in the insurance industry, and we believe that's kind of the overall backdrop to this market.

On the operation side in Patient Management we had revenues down about 7 percent to a little over that annually and 3 percent sequentially, which dropped profits annually by 36 percent and 11 percent sequentially. Volume continues soft with claims at lower levels than we've experienced earlier in the year, we are backing away from some of the low price segments of this market and continue to rebalance expenses by reducing field management expenses and closing some unproductive offices. Pricing rationality is the fiscal necessity and we are improving pricing. Also, we have begun marketing a next generation case-management product. This effort will include artificial intelligence and require another year to really gain momentum.

On the Network Solution side of the business revenues were down 5 percent annually and 7 percent sequentially. Profits were off 2.9 percent annually, and 8.9 percent sequentially. The length of the soft claims market is also impacting medical bill review volumes. About 55 percent on medical bill review is from prior years claims. So there is quite a lag in that which is now coming into that business. In this product line we are expanding the breadth of our medical review services, both those conducted by our first review artificial intelligence system and those that involve manual reviews. Artificial intelligence is also assisting us to manage internal workflow. In the quarter, we began implementing the new MedCheck QL product. QL is a high speed-processing engine, that also includes a number of operations and proven concepts. Its implementation is expected to improve operating efficiencies and is scheduled to continue for much of the year. QL incorporates a number of new document management processes, it expands our offerings for customers, implementing office automation projects. We remain enthusiastic in addition about our directed Care Networks and expect to continue our expansion there, although the soft market has impacted this product line in the current year, prospects appear to be improving for next year's business volume.

Reducing expenses is obviously something we've had focus on in this market. That takes really 2 broad areas for us both direct labor and overhead. On the direct labor side, MedCheck QL is our best opportunity for gains in the coming year. The newest version of this store review software is expected to reduce out direct labor buy, as much as 50 percent in that product, as well as to expand the integration of document management processes involved in claims management.

In the quarter, we began implementation of the key components of this program. Significant workflow changes are involved though, and as I mentioned this implementation will extend well into the coming year. Secondary, it involves our improvement that we seek in field overhead, as well as case management margins, and both of those projects, are a little more on the day-to-day operating side and they are well underway.

In product development, we have 4 major initiatives. The first is network solutions expansion; this is an ongoing expansion of our line in our medical review services and their sale in both comp and the group health markets. Expansions include increases in our artificial intelligence to maximize savings, expanding the definition of qualified build, thus expanding the size of the market we can service, increasing the use of fee negotiation and establishing this product in the group health market. Current product development efforts are focused on artificial intelligence initiatives to better manage workflow and cost assessing speeds. Second is MedCheck QL, which I talked about previously. MedCheck QL is the latest version of MedCheck, which is CorVel's proprietary medical review software. QL uses some new web service technologies to substantially improve processing speeds. In addition to increasing speed, QL establishes a foundation for further improvements in the effectiveness of medical bill review.

We have added document management capabilities that improve efficiency in our medical review processes. These have been integrated with MedCheck QL. Combining document management with artificial intelligence promises to improve the total savings we achieve for customers both in the application of fees schedules and U&C tables as well as in PPO administration. Third major area is a product we call Enterprise Comp, which is now being introduced in extensive breadth of our services to create a more complete worker's compensation management solution. Enterprise Comp extends our services to include automate clients processing tools for payers and has been shown to reduce loss time claims. As its name implies, our new bundle of services positions us to deliver a more complete configuration of services at the enterprise level for major payers. Enterprise comp's short-term priorities include expanding the artificial intelligence engine included in the service, connecting that engine to other customer claims management software applications, establishing CorVel in the marketing channels for such services. This latter effort up will probably take -- certainly most of the coming year.

Our fourth product expansionary, is our document management under the brand name Scan One. This is a rapidly expanding service; CorVel's technology allows customers to implement scanning solutions without disrupting existing workflow, easing the conversion to pay up those processes. The number of sites providing scanning services expanded in the quarter. Our data capture architecture is unique and allows us to provide remote capture capabilities that can then bring the scanned documents into a central database. It's currently in a phase of fairly rapidly development; we had 2 fairly meaningful software releases in the quarter that included features for the service.

In the quarter, cash flows were $7.6 million at the EBITDA level and net of fixed assets and working capital is still $3.2 million positive, cash was about $13 million at the end of the quarter with accounts receivable days sales outstanding at about 55 days. During the quarter, we repurchased 3.6 million in stock to bring the total there to almost a 102 million inception to date. shares were $10.455 million and diluted EPS shares were $10.597million both reductions from the prior quarter.

That concludes the prepared comments I have and I would like to turn the call over now to questions. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS).

Arnold Ursaner, CJS Securities.

Good Morning. A quick question I ask you, can you be a little more specific on headcount reduction and the number of offices you closed?

Yes. Our office closings are really coming along. Naturally a kind of a measured takes because you have to wait for leases to expire. But the total number of offices is now 155 and it probably 20 higher than that roughly. So some of those are on the smaller side. I think the change in offices is partly a change in the technology for operations. We're certainly able these days to deliver service up from more concentrated locations than we were in the past. Headcounts are above 3150, I'd say right now. But there is some expansion of part time labor in that number. Not dramatic but may be a hundred so that full-time headcount continues to drift down slightly. But the document management operations are set up with technology that allows us to use part-time workers from home.

Going back to the analogy you used on the call to the extent that revenue opportunities are dramatically shrinking, you used the brokerage analogy. Does MedCheck QL basically enhance as that trend occurs in the insurance business, how are you positioned for that move? The overall pie that you are going after shrink materially?

No. I don't think so. I mean, I do think that claims are softer right in here in the short run. I think in fairness in our best years we were able to grow despite softness in the market and we just haven't been as effective lately. The MedCheck QL expansion, I believe, positions us ideally in the marketplace with the leading technology in the market. As best we can tell right now from those customers who compare our savings to those of our competitors were producing the highest overall savings in the industry for our customers and we think that this latest round of technology will enhance our savings somewhat as we go forward. So I think the challenge for us is to continue to penetrate more of the insurance industry. I do think that long-term transaction processing in insurance industry is going to be a competitive market where only the most technologically advanced companies are going to thrive and thus our continued high pace of investment in that product.

Mention again on MedCheck QL requires a fair amount of workflow effort to implement it. Is that a fact that you think is inhibiting the adoption of this new program?

Well actually, there I may be a little confusing in my comments. I'd say that internally it requires us to make some changes in how we operate. For customers, it's much easier to implement than our prior products. It's just a fairly meaningful change in their workflow within our own organization, and I think in fairness for operating folks that's a lot to observe when you're trying to run a business in a tough market. So it is going to require some work to gradually install in our field. We're converting to a hundred percent paperless processing. We're expecting it to complete that by the end of December. And so that's a pretty big effort to make in this kind of a market but it's a very exciting, I think, change in our technology.

A follow-up question obviously -- industry volumes have been as poor as they have been. We are now starting to grope against much, much easier comps. As a key player in the industry, what are you looking for the signs of the change in the overall industry trends?

I think that the first thing we actually look to is one of our competitors that has a clinic business and they report, I think, some firmness in their clinic volumes. That is encouraging us and so first of all the care volumes will have to move up. And then we'll expect affirming in the resulting claims. We're still hoping for a firmer business in the March quarter. I don't know that I see a lot of improvement in the December quarter. But I still believe, behind all of that, our fortunes are largely on our own hands and it's up to us to execute better than we had in the last year and half.

Mitra Ramgopal, Sidoti

Gordon, I missed when you were talking of patient management revenues. How much profits were down?

The profits were down 36 percent annual and 11 percent sequentially in case management.

Okay. And you did allude to the hurricane impact and if you could quantify the little, may be, you know, how much revenue you think you might have losses in result of that?

Yes. I think that's a -- I don't want to say that is, we know exactly. First of all, our Florida operations did an outstanding job throughout the quarter and didn't allow that to be as big an excuse, as we might have liked. They really did a tremendous job and also our technology allows us to move work processing around during that kind of a disruption, I think, it will cost us $1 million overall and some of that -- most of that was in the quarter, some of that may be medical bill volume that trickles into the current quarter certainly when businesses, as disrupted as it was in Florida it has a longer term effects for a while, but I guess I like to highlight the effort our folks put in. They were working straight through all the weekends and we had locked things down four different times, so, it was a very disrupted quarter and no doubt down there.

Roughly how many shares you bought back in the quarter?

One second, yes, I have anticipated -- we bought back 136,000 shares in the quarter but there were also stock option exercises during the quarter so that shares didn't go down by that amount.

I know you talked about regulations in Colorado and California, could you give us a sense of how much of your business could be impacted by anything unfavorable out there?

Colorado was hurt quite a bit but I think that's pretty much behind us. That was in the auto market and I don't have an exact number on that. California is an important state, both in workers compensation and actually as well as the prevalent and we have been hurt more than we expected to be in California. There was also in addition to the change in the law, we had one insurance company go into liquidation during the quarter and another that we were servicing was absorbed into a larger company that doesn't use us, so we had a couple of losses of business, where we are in that market in California right now is kind of in the never, never land between the cutbacks last year and the new law which we think will be favorable to us but does not begin until January. The regulations for the new law are supposed to be finalized November first, if they are on schedule that would be nice they may well lag a little bit. It's a quite a big change in worker's compensation regulation. So, it's -- I am wanting to be cautious about how quickly it becomes clear, how that's going to work out. It does involve quite a bit of nature activity and we are optimistic about it. We also think that our web-based tools are particularly well suited to address the regulations that are anticipated in that change. So, but it is always tough to go from one law to another. There, usually, is a soft period where customers have a tendency to hold back until they kind of see which way the wind is blowing.

At this time there are no further questions. Please proceed sir.

Actually, Gordon, I know you mentioned that you don't expect December to be a lot of better than what we saw in September and may be some pick up in March and those of your overall sense where you are alluding to pretty much the revenue, EPS we saw in this quarter?

Well, we don't -- in lieu to the guidance I would just say that in general the December quarter runs into the holidays and so it usually isn't a robust quarter as March or June. I think this year we get a break; we love it when Christmas is on a Saturday or Sunday. We hear out the Christmas gringe here certainly and so I think the holidays are a little more favorably scheduled this year than they are sometimes. But the overall period there beginning may be two weeks before New Year's Day has turned into a softer labor market, I think, throughout our country. So it's just a quarter in which it's hard to make a lot of headway. Also we -- looking at out business prospects, we see business that we think will come on board more in the March quarter than in the next three months.

We do have a follow-up question from Arnold Ursaner with CJS Securities.

Gordon, I know in the past we had a problem once with the contractor that was expiring and -- we didn't ask you about it, so could you just remind us if you have any key contracts that do expire over the next two quarters that we should be alerted to?

Well, I think not sure exactly which one you are referring to but --

Slight of change coming?

Most of our -- I would say almost all of our contracts have 90-day outs in them. So, the challenge in our business is that, customers kind of obligate us to service but they are not generally obligated to long-term commitment, so almost any of our business can change vendors in fairly short notice. I am not aware of any particular renewals in the next three months. There is more business out there that is for bids and there has been -- and I don't have a good explanation for that. It just appears that people are looking around in the marketplace a little more than they were quite a bit more than they were a year ago. But that still remains we've seen how much of that we win. But there is enough lot of business kind of looking around at the vendors.

And to win that business are you having change of pricing structured off?

I would say pricing is always a factor in our industry, and it has been tough for the last 2 or 3 years. But I don't feel that's the driver right in here. I think the lot of that is new innovations in the product line people are -- I think a little more interested in service than they were a year ago. I think there has been an improvement there -- I think there is an ongoing change in the business, it's very competitive no doubt. But the 3 national companies that have BPOs and solid processing are still the leaders out there. Although first half in the quarter as I'm sure once we aware was acquired at least concluded negotiations to be acquired by Coventry, which create some change in our business not clear exactly how much but Coventry is a group health BPO, and I would think will be focused primarily on their existing foundation in the group health market.

(OPERATOR INSTRUCTIONS). There are no further questions. Mr. Clemons, do you have any further comments?

No not at this time. I'd like to thank everyone for joining us on the call. And we look forward to talking to you in 3 months. Thank you.

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