CorVel Corp (CRVL) 2005 Q3 法說會逐字稿

Thank you for standing by. Welcome to the CorVel Corporation’s 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 performance 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-time with the SEC -- specifically the Company’s last Form 10K and 10Q filings 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, Marvin -- and welcome to CorVel’s December quarter conference call. I’d like to reinforce the cautionary statements just expressed. In this kind of market, I feel we need to give you what we can in terms of our expectations. But I want to caution you that our forecasts reflect only our opinions, and that could change as the year progresses.

Also, I’d like to discuss the details regarding our plans, and give a little more depth than normal. But unfortunately, this call is a popular watering hole for our competitors. As operating managers, you would expect us to be enthused about what we are doing, and we are. We believe we’ve reached the bottom of this market cycle, and will see improvements in the coming quarters.

In a sort of perfect storm, this last year saw falling claims volumes, unfavorable state legislation and new federal regulation. Our for-profit improvement projects discussed in the past -- I’ll cover them again this time -- remain our top priority. We have a busy development calendar.

The December quarter, with revenue of around $70 million was seasonally soft, as December always is. And reflecting on the soft claims market. The convergence of several important factors created a very unusual 2004 calendar year, and a particularly soft December quarter.

First, as we had previously discussed, the soft claims market has continued to reduce business volume. We believe our market is now at its cyclically low level. Second, although typically regulatory changes have been neutral or positive in our business, last year we had two very negative changes in Colorado and California. These two states comprised as much as 20 percent of the comp market.

Third, new administrative regulations in the form of HIPAA, previously ADA -- now Sarbanes-Oxley -- related 404 audits and all of this has combined to create short-term priorities that did not contribute to business success. But it did call for our attention.

Fourth, during the last year, we have been involved in substantial changes to our internal workflow process. During the quarter, we had investments in the new processes, but were still maintaining the old. We’ll talk more about that later. Since this, in any difficult market, this one has forced us to make adjustments to our business model -- and those are ongoing.

Now I’d like to cover each piece in more detail. The soft labor market has reduced claims volumes. We have some maintenance reduction to be in the 10-15 percent range for 2004 versus 2003. Friday, for example, we learned that Ohio claims for 2004 had fallen -- down 30 percent to the levels prior to this cycle.

Workers compensation care activity appears to be picking up. We expect this to be reflected as we move to the claims coming up. As we have discussed in previous calls, we continue to look for an improving climate in this March quarter we’re now entering.

During the year, we lost a good account to [Accared’s] Choice, to internalize that physician’s provision of managed care service. The large carriers at times like this look to internalize some services, reflecting the soft demand for their claims processing services.

Margin pressures created by the move to self-insurance have also motivated carriers in that direction. High prices for insured programs have revived interest in self-insurance. Some of this interest materializes in high deductible programs. Either high deductible programs or self-insurance -- raising the profile or managed care -- and have, in some cases, caused large underwriters to backward-integrate.

ASP solutions are appropriate for such customers. ASP services a lot of customers who implement internal programs easily through internet access to CorVel solutions. CorVel is well-positioned to provide such service, but has not historically had a market reputation in this sector. We are now actively selling such.

In addition, we’ve begun to sell document management and workflow automation tools to payers of large employers, in combination with our traditional managed care solutions. The new products address more and more of the total claims processed by these large prospects.

However, if we pull back from these technical changes in the market, we see the insurance industry just entering the phase of significant change, driven by improving automation technology. The government’s investigation into insurance brokerage and underwriting practices could help to accelerate the pace of change in the industry, as well. But it’s really just a symptom of the underlying change that’s already underway.

Automation can now replace many of the layers of middlemen -- both service and brokerage layers in the insurance industry. We expect the change that’s now underway to continue over the coming decade. Perhaps accelerated, at times, by unusual events such as these.

These changes, though, will require insurers and employers to implement important -- and at times, complex -- new technologies. Technologies developed and supported by CorVel.

Moving to operations, we had a number of key issues that impacted the quarter. I’ll discuss some of the variances to the same quarter the prior year. We estimate our claims activity to be down about 10 percent on a per-customer basis, year-over-year. This reduced revenues in the quarter versus the prior year by approximately $7.5 million.

The law changes in California and Colorado have had a significant effect, also. These reduced revenue in the quarter versus the prior year by approximately another $2.7 million. The New Year’s Holiday fell in the December quarter, since it occurred on a Saturday, reducing revenue days in the December quarter. Conversely, though, this will add a day to the March quarter -- making it 2 days longer than the December quarter.

New accounts net of loss added about $5.8 million in the December quarter, compared to prior year. But net of the other factors discussed above -- the year-over-year revenue -- fell by almost $6 million. Profits followed these same issues, proportionately -- creating a $4.1 million variance to the same quarter the prior year on a pre-tax basis.

Moving now to segments. Patient management revenues were down 7.6 percent annually. But profits are off a little over 50 percent, year-over-year. Volumes continue to reflect the soft claims market. Despite the soft claims market, we must increase prices. Market prices have not kept pace with labor cost increases in nursing. National account pricing slows that change, but there’s really no alternative, at this point.

We will continue to rebalance expenses, by reducing field management expenses, and by closing our productive offices.

Given the conditions in this sector, we are moving our discretionary resource investments to other market segments. Longer-term, we expect to improve the technology in the service area, but we view pricing as the only exclusion, in the short-term.

Moving to network solutions. Revenues again there were off 7.8 percent annually, with profits off a little over 20 percent on a pre-tax basis in the field. Network services -- given the length of the soft claims market -- is also impacting them. 65 percent of the bill volume of any given year is for prior years’ claims. So there’s a built-in lag of how this segment of the market or service, rather, responds to changes in the underlying claims volume. We have added customers and had a good quarter, in that regard. But bill volume per account is down.

Next -- product line. We’re expanding the breadth of our medical review services. This expansion has required improvements to our systems. These have been a major focus of our development and operations efforts over the last two quarters. And we expect to begin making progress in the coming quarters. Artificial intelligence is now involved, helping us to manage internal workflow, and will facilitate this expansion of service.

In the quarter, we continued the implementation of workflow changes enabled by our scanning expansion. During the quarter, we incurred incremental expenses as we rolled out scanning, but were not yet able to offset these costs with increases in processing speeds. Achieving processing efficiencies remains a high priority for the coming quarters.

We remain enthusiastic, in addition, about our direct care networks. Soft comp market has impacted this product line, significantly. However, new customers are being added, which favorably impact trends for the coming year.

On the expense-reduction side, we have two -- I think two -- major areas where we’re looking for improvement. First, the largest is in the deployment of new med-check technology. I have referred to that a little bit, already.

The newest version of our medical bill review software is expected to reduce our direct labor costs, as well as to expand the integration of document-management processes involving claims management.

Significant workflow changes are involved, and in the quarter we had increased expenses associated with the implementation of changes to our workflow. We expect to begin realizing efficiencies throughout the coming year, but in the quarter, it jumps into new processes -- preventing our operations from achieving such efficiencies. Ultimately, we expect to achieve approximately a $10 million annual improvement in productivity. That’s a pre-tax number. The second area, of course, is our case-management business. We are working on overhead reductions and rebalancing the field. But as I said, the big part of that is going to have to come through a price increase.

Now, moving to product development, and beginning first with network solutions, which is the broad category of our bill review, PPO and other medical review services. This is the ongoing expansion of our line of medical review services, and their sale of both workers comp and group markets. Current product development efforts are focused on artificial intelligence initiatives -- better managed workflow and processing speeds.

During the quarter, we began implementing the restructured workflow. In our new systems, medical review will be moved to specialty units for an expanded provision of new services. In late December and again in January, we added important production management improvements to support these specialty reviews. With this improved workflow, we plan to expand our medical review service breadth over the coming quarters. Hopefully and specifically in MedCheck -- our latest version of MedCheck, which is our proprietary medical review software. It uses changes in workflow to substantially improve processing speeds. In addition to increasing speed, it sets the foundation for further improvements in the effectiveness of our medical reviews I just discussed.

The development teams had a strong quarter, with many important improvements to our software added each month. These reflect the major release of this software -- at least once a month -- where both customer support and software development capabilities are operating at a high level, I believe. Releases of new software have been on-schedule, and rich in content, although absorbing the pace of these changes has been difficult for our field operations. But the bottom line is that it’s a savings form our systems to our knowledge leads the industry. We expect to make further improvements on that as we go through the year.

The enterprise comp product now being introduced expands the breadth of our services to create a more-complete workers compensation claims management solution. We will be introducing this tool to national accounts during the coming year. At this time, we have more thoughts from which introductory level this service is being delivered.

Lastly, our Scan One document management services is certainly a growing area. Document management is quite synergistic with Medical Review. CorVel’s solution allows for the local capture of documents to our system, eliminating the need for the scanning [inaudible] required with prior-generations of this technology. Our ability to produce local medical review was a key to our expansion into the medical review service, 15 years ago. Again, we believe CorVel’s ability to distribute technology to where the work is really done in worker’s compensation is the key to meeting the needs of this part of the market, and will again be a differentiator in our entry into the document management marketplace.

During the quarter, the cash flow numbers reflected the softer business. We had EBITDA of around $4.9 million and positive cash flow in the business. Accounts receivable remained about 55 days. Cash balances were approximately $10.5 million. That’s up a couple of million from the same quarter the prior year.

We had $5 million in stock repurchases in the quarter, for $107 million inception-to-date. That reduced hard shares to 10.3 million, and was a little bit back-end loaded in the quarter. So it didn’t affect the diluted shares as much as it will in the coming quarter. Diluted shares for the quarter were $10.510 million.

That concludes my general comments. I’d like to now turn the call over to questions from participants. Thank you.

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 touchtone phone. Your questions will be polled in the order they are received. 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 touchtone phone. Your questions will be polled in the order they are received. You may remove yourself the queue at any time by pressing *2 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the numbers.

We’ll pause for a moment to allow these callers with questions to enter the queue. Our first question comes from Arnold Ursaner with CJS Securities. Please go ahead with your question.

Good morning, Gordon. This is actually [Joe Giomichael] in place of Arnie.

Okay.

Just a couple quick questions for you. Could you just discuss with me what the changes in the overall headcount year-over-year…? Has that…? I know you had 3,100 employees, I believe, at the end of this quarter?

We had 31 -- yes -- I’d say that’s been fairly flat the last 3-4 months. We did drop down for a while. We had a struggle -- not a struggle -- but we’ve certainly had increased processing work associated with this workflow change and bill review. But case management headcount and the overhead numbers have come down, in the number of outstanding or open offices has dropped below 140. So we are making progress on the case-management side. Although the market volumes are soft.

On the bill review side, we really expect to have that reduction in front of us, and in rough numbers, we would expect to come down to 150 bill review analysts over the coming year -- assuming volumes that we currently have.

Got it. Is there any proposed legislation that you know of that could positively or negatively affect us?

I think the only one that we’re focused on right now and is absorbing some resources, is the change in California. The change that impacted us this last year really wasn’t well-publicized. It was actually put in place at the end of 2003. The changes that Arnold Schwarzenegger is more well-known for having initiated are coming this current year, in 2005. We believe they will help our business, but there’s no doubt that this kind of level of change -- the big change from last year and another one this year -- certainly forces us to do a lot of retooling.

So we’re just wanting to be cautious, in terms of how that affected the business. But it does raise the importance of managed care, of controlled networks, and is an attempt to try to restrict employees’ access to just moving around in the marketplace among providers. So it has the potential to be helpful. We’ll just have to wait and see.

Got it. Just a couple technical questions. You said EBITDA for the quarter was 4.9, and G & A was around 2.9? Somewhere around there?

EBITDA was 4.9. Net income plus depreciation was 4.1. Take out of the 4.1 working capital changes -- it was 3.1. After fixed assets, it was about breakeven. So we were cash flow neutral, if you add in both working capital and fixed asset changes.

Okay.

We spent about $5 million in the quarter on stock repurchases.

Got it. Then also, you’ve given us the rates of change for the PPO and PMS positions. Could you just give us the real numbers for revenue and gross profits?

Sure. The field numbers for patient management were revenue of $31.1 million. Field profit margins were 4.7. On the network solutions side, we had field revenues of $38.7 million -- down from 40 even in September. Although with this order of work in the quarter…

Sure.

Field profit there was $7.45 million, or 19.3 percent.

Thank you very much. I’ll jump back in queue.

Next question comes from [inaudible]. Please go ahead with your question.

Good morning, Gordon.

Hi.

I want to clarify a couple of those numbers you were discussing in the cash flow for the quarter.

The $3.1 million -- would that be, could we say, the cash flow from operations?

Yes. If you take out fixed assets. That would be net income plus depreciation, loss and changes in working capital. If there’s an increase.

Okay. Thanks.

Yes.

And then I’m wondering on the expenses, during the quarter. Is there a number in aggregate that we could point to as non-recurring, or temporary in nature?

Well, let’s see. I hope they’re non-recurring. We had about -- it’s a little awkward. Because what we have is added expense for scanning. And that process will reduce the number of bill review analysts that we have in place. So in the short-term, the incremental expenses are about a half a million a quarter for scanning. And we haven’t got efficiencies out of the bill review analysts.

What we expect in the longer-term is to have that scanning cost grow, actually. To increase from maybe half a million in the quarter to perhaps three quarters of a million in the quarter. And then have the bill review analyst population drop by about 2.5 million in the quarter.

So the short-term negative impact is maybe half a million a quarter from a year ago. And we haven’t yet accomplished enough of the implementation to where we’re reducing the labor costs.

Okay. So the $10 million in savings that you talked about in your opening remarks…

Yes.

That’s what you just also referred to as the $2.5 million per quarter?

Yes. That’s right.

And when does that -- when should that kick in?

We’re at this point -- especially with the releases of software in just the last 30 days -- both the release in late December and another one in late January -- we hope to begin reducing the bill-review analyst count during the current quarter. I think that certainly in the June quarter, we would expect to have good momentum on that.

The challenge has been that this is a fairly substantial change in the way our bill review systems work. And we have certainly found that that’s an awful lot to absorb for our field operations. There is artificial intelligence involved, which affects the automation of the workflow. There certainly is the difference between working on paper and working from scans.

We have some customers that are so wed to the past that they really have a hard time with some of this automation. So we’ve had to put some processes in place that allow us to take automated work and then literally, unfortunately, convert it back to paper for people that prefer paper.

So there’s a fair amount of work going on. But I think it’ll gain momentum as we get toward the backend of the current quarter. There are other benefits, in addition, that I didn’t refer to. I think once again, we’re forecasting, here. I want to be cautioning people about that. But there are ongoing improvements in both our savings coming from this kind of work.

And that has happened. I’d say we definitely have seen improvements in what we produce for customers. And as we get into this next phase of the implementation, it will also increase some of our own revenues in both the PPO area and in some of the related medical review services.

So there are other benefits that are more important than these cost-savings. But in the short-run, what’s been impacting us has been not yet getting the revenue gains or the savings.

Okay. Then finally, you mentioned the price increases that you’re going to have to put into place. I think you said that was on the patient management side.

Yes. That would be case management prices. They’re easier to put in place locally than they are nationally. We have a fair number of national accounts that are under some kind of contracts. So that always stretches that out a bit. I think the industry in general is moving toward some better pricing, there. But it has been at a pace that has not exceeded the increase in labor costs for nurses.

So the margins have stayed under pressure. I think the biggest impact on margins, though, in the last couple of quarters has really come from the very soft referral market.

Okay. Thanks. I’ll get back in the queue.

Yes.

Our next question comes from [inaudible]. Please go ahead with your questions.

Good morning. A couple of questions. I think you mentioned you’re reaching the bottom of the cycle, here. In terms of if we look out to what you’re seeing in March and Fiscal ’06, could you give us a sense as to the kind of top line growth we should be expecting? And also, in terms of the margin pricing? You’re [inaudible] preventing where we should go for in terms of a bounce back in your profitability.

Some, on that. But I’d say CorVel generally has not provided future guidance, and it’s just as well. I think most of you do a better job of forecasting than we do. So I would just say that the cautious approach would be appropriate, and your own expectations are probably as good as ours.

Having said that, the March quarter is going to be artificially better, in the sense that it has two more production days than the December quarter. I don’t know that that does much more than buy us a little time, but it will make the appearance of the quarter look better.

I would say that we feel like we’re now 15-16 months past the time when the economy began to pick up. So we expect an improving tone to our market. The companies I’m tracking that have a little more of a leading kind of aspect to their business would show that -- say a year from now -- the market might be quite strong. It appears that some of the leading indicator businesses are doing exceptionally well right at the present time. That is beginning to reflect itself in inflationary pressures.

But it’s a very mixed environment. Certainly the recovery off the bottom 15-20 months ago was pretty shallow and not real strong. So we’re going to be cautious as we move through the next 6-9 months, where we do expect certainly to have gotten past, hopefully, this declining volume in the claims business.

There are other affects in our business that are not as cyclical in nature, and certainly those two negative changes in California and Colorado fall in that category. Hopefully, there’ll be some improvement in the California market. But the two law changes were permanent rather than cyclical. So we expect to recover, but I think you want to be cautious over the next 6 months.

Okay. And I think you mentioned you bought back some shares in the quarter. Could you give us just what the average repurchase price was?

I think it was around $29 a share. We repurchased 174,000 shares in the quarter and spent $5 million.

I assume [inaudible] where the stock’s trading at. You will continue to react to the market?

Yes. We have been. We’ve not been -- our volumes have been fairly steady over the last 6 or 7 years. Alternatively, if we found an interesting acquisition that helped us with a couple of our initiatives or one of them, we have done that at times in the last 2 years or 3 years. So that’s always an alternative.

We prefer to be expanding the business. But if we don’t feel that are alternatives -- reducing the shares outstanding has been attractive for us. And I think it helps us produce a good return on equity over the long term.

Okay. Thank you.

Our next question is a follow-up question from [Ed Rowe]. Please go ahead with your question.

Thanks. Hi, Gordon, again.

Sure.

Those leading indicators that you refer to -- you may have already said this. If you did, I apologize. You’re talking about providers now? I mean actual…

Well, that would be a better indicator. And we do follow the clinic business a little bit. I think Concentra had some improvements in the clinic business, starting I think in the September quarter. Maybe even June. I don’t know. But they began showing a little bit of improvement in their clinic business -- and that was encouraging to us. It’s kind of odd for you to be rooting for your competitors, but we do.

So that’s a part of it. But no, I participate in some industry groups that cut across industries. One that I always liked is the [inaudible] manufacturing business. They lead the economy. And I don’t know that I fully understand that, but their volumes lead the economy by as much as a year. And they’re extremely hot, right now. They’re at the point where they’re very much sold out in trying to raise price. Of course, they’re under the pressure from the steelmakers’ price increases, as well.

So I track it all the way to manufacturing and down to us. I would say that’s not as helpful, in fairness, to this market cycle. And comp really kind of peaked on a claims side in maybe ’97 or ’98, and started getting softer after that.

It appears to have begun to bottom out in the last year on the claims side. This is confusing to a lot of people. Because on the underwriting side, the premiums have sky-rocketed. Clearly, workers comp costs expressed as percents of labor -- or in more traditional terms, they’re always floated on the premium numbers -- are up dramatically. But the underlying claims volume has [inaudible] on the soft side.

So we look for leading indicators -- first in manufacturing and then ultimately that’s affected a little bit by state legislation. I just guess we’re feeling like it’s a combination of factors. And there are times it feels like we’re close to the bottom.

Okay. Great. Thanks for that. Then finally, is there any…? Maybe it’s taking a little longer this time for that claims volume to pick back up, because of the… As a mix or a portion of total jobs, manufacturing jobs are less than they used to be?

I think that’s fair. I think there’s a long-term improvement in frequency in workers comp that goes all the way back, maybe 15 years. So there’s a general background issue. There’s just less serious injuries in the United States than there were 15 years ago. I think we have to expect that to continue. The cyclical nature would really relate to the economy.

Then I think the two law changes -- especially California -- hurt us more than we expected. I don’t know that we fully appreciated the different ways in which the California market was benefiting us. I think in fairness, normally as the market adjusts to those changes, things come back in different areas. What happens first is that medical providers don’t like the new pricing schedules that have been implemented. It does push them into either different forms of outpatient surgery. Certainly, you’d be aware of that from all your work.

I think the reimbursement processes push care either out of in-patient settings, or into various forms of modified outpatient care. Ultimately, that flows into the reimbursement process. Because they change the way they invoice to try to work their way around the new regulations.

But that creates a bunch of variables that are kind of hard to forecast. The net of all of it is that maybe a year or a year and a half after a big law change like this, we do see things pick back up. We expect that in California, but we haven’t… We want to be cautious. The drop is real, and was very specific to certain businesses.

Q-Metrics, which was an independent medical bill review company, just sold to First Charlton. First Charlton sold to Coventry. So there have been some real changes created by this California law change.

Okay. Thanks very much, Gordon.

Yes.

Our next question is a follow-up question from Arnold Ursaner. Go ahead with your question.

The structural question I’d like you to maybe focus on a little bit -- one of the pieces on your slot is that you’ve invested massive sums so that people would prefer to go outsource and get better efficiency for doing it in-house, than spending the money. Yet virtually everything you’re talking about seems to shift back toward in-house -- away from you. Is there some structural change that has occurred that’s causing this to occur that may have a much bigger impact on your business [inaudible]

Well, I wouldn’t want to characterize my comments as saying that everything is focused on insourcing. I did suggest that we lost an important division of a big insurance company to insourcing. I do think that it’s an appropriate area to be cautious about when thinking about CorVel, in that if we don’t advance our technology, certain services that we provide can be insourced.

I think that what has happened in the insurance industry is that the high premiums have frustrated employers. They have pushed for self-insurance. They don’t like getting approved to be self-insured, so they’ve gone to high-deductible programs as a way of self-insuring quickly without being approved state-by-state for self-insurance.

That has taken some of the major carriers and placed their large-account business in a different status than it normally is. There’s less underwriting in that block of their business. That makes the profit margins in those businesses pressured. As a result, they look for new places to make money. They can look at managed care as a source for that.

They may have gotten involved in some practices there that they shouldn’t have, and thus the investigation that New York started and now other states are following.

I think that the real trick for any company in CorVel’s position is to continue to advance your technology so that when people look for new solutions, they do buy outside rather than insource. But there’s always a mix of that in the marketplace.

There’s a very substantial part of the market where insourcing doesn’t make any sense. All the medium carriers -- the medium-sized carriers -- and most of the TPAs would certainly not benefit from attempts to insource -- where we have substantially greater volume than any of even the largest carriers.

There are times, though, where political pressures cause them to want to insource. A middle manager who wants to kind of build his own empire, regardless of the logic involved. Usually those kinds of attempts go on for 2 or 3 years, and then eventually there’s a management change and things turn around. It can be a long time. Don’t hold your breath.

I’d say the general trend in the business has been a little stronger to insourcing than it used to be. But remember -- we have a 6 or 7 percent market share. So our segment for the business that will want to insource, logically the largest. Perhaps that’s Zurich, Travelers, Liberty and those kinds of companies that tend to want to insource. But they buy meaningful blocks of business on the outside. In fact, two of those are our larger customers.

So, insourcing doesn’t necessarily have to hurt us. It’s usually done by the companies that are so large that any piece of their business is meaningful to work on.

You mentioned in your formal remarks that you lean toward this ASP model that highlights your unique position to give the solution to your clients. Could you give us a sense of the revenues you have in the ASP model today? And the potential impact it could have on your financials over the next two years?

We have one customer that I wouldn’t want to go size [inaudible]. But we just have one large customer that’s a pure AST model. What’s happened in our business is that we converted from a proprietary platform -- which was an old digital equipment system -- to an open system. So we had many years where we really couldn’t participate in either the software leasing business or the ASP market -- because our solution was not something that could be easily replicated by payors.

Over the last 6 or 7 years, we’ve migrated to not only an open system, but to a web-based system. At this time, we’re in a very strong position in regard to ASP, in the sense that our total bill review process could be broken up into 6 or 7 modules.

We are capable of outsourcing to the payor any of or any combination of those steps in their work. So really, it gets a little difficult to say how much is going to be ASP. Because we have moved… Already maybe 25 percent of our business has a portion of the service in an ASP form of delivery. And yet, we’re still doing most of the work. We think that the ASP model is properly implemented. We think we’re in a very good place, there. It allows a company like CorVel to move any combination of its services to the payor that they really want to pick up.

That’s a pretty complex sale. I’d say that where we’ve struggled a little bit is that I didn’t really have enough senior salespeople on that kind of sales process. So one of the business model adjustments we’re making at this time is to strengthen our national account sales effort, and have the kind of people who can discuss these changes with customers.

It takes a fairly sophisticated presentation. And at the same time, you have to be careful not to scare off people that are struggling at their end of the world just to manage claims and get by in the day.

I think there’s a lot of change going on. We’re finding, though, that the bigger payors enjoy this kind of stuff. They enjoy the conversations. They are very excited about the combination of ASP services that we can offer them.

Question for either you or Richard. Your gross margin has deteriorated pretty rapidly. Under 14 percent. Can you give us a sense of where you think this can go to over 10-18 months? And [inaudible] your gross margin back? You’re actually -- now you can control better your gross margin.

Well, that -- yes. Normally, we like to say that to our field operation. But I think the reality is that we struggle more to control SG&A than we do the gross margin. I think that this will recover as the business strengthens. Our problem has been falling volumes in a business where we haven’t, historically -- and I think currently are not -- as anxious to cut our production capabilities as perhaps we should be.

We tend to be a growth-oriented company, and so it’s hard to re-trench. I think that’s part of our personality. I think the gross profits in the field, essentially in our minds, can go back to where they once were. I don’t want to give guidance as to exactly how that will happen. But we see many more opportunities in high-margin products. We feel we have not responded as well as we could have in some of the network solutions areas. We see good opportunity, there.

We’ve had quite a bit. We have a distributive service model. So some of these changes have required us to put some unique software in place in order to maintain our service model, and yet move into some of the more-sophisticated services. We have brought some new, high-talent people into the company to help us with that effort. So we’re optimistic about that side of it.

I think we’ve made tremendous progress in the last 6 months in our software. I feel especially good about that. I’m proud of the people who’ve been involved. We’ve had a very hectic and hard-working period in here. But it has not been one where we’re struggling to have our software work properly. It’s really been one of just rapid progress in nature and the content of our service.

We really have, I think, an outstanding platform to offer payors. We just haven’t had as many senior salespeople as is required. So that’s been the major change, there. I think that as the volume in the industry stabilizes that we’ll start to see the kind of growth that will bring those margins back.

Thank you.

Yes.

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

I’d just like to thank everybody for participating, today. I know these kinds of quarters are as frustrating for us -- I assure you -- as they are to investors. But as Warren Buffett says, “Usually most people don’t want to buy stocks when they’re on sale.” I’d say at this time, we’re very active in our business development and our technology development.

I think we have really great people in those activities. They know what they’re about and we’re making good progress. So we’re looking forward to the coming year. Thanks for joining us. We’ll talk to you again, next quarter.

Our conference call for today. Thank you for your participation. You may disconnect at this time.