CorVel Corp (CRVL) 2006 Q4 法說會逐字稿

Welcome to the CorVel Corporation Quarterly and Fiscal Year Earnings Release Conference Call. During the course of the 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 results or events could 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 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.

[OPERATOR INSTRUCTIONS] 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 March quarter conference call. Before I begin, I want to remind you that the results today that we are reporting are unaudited at this time. Final audited results could vary from the results Management is reporting. Estimates of accruals are subject to different views and, these days, evolving accounting treatments. Although CorVel's income statement and balance sheets are relatively simple, they do include accruals for accounts receivable reserves, payables and capitalized software. Any adjustments to the balance sheet have a more meaningful impact on the P&L. We expect to complete the audit by the end of June. The financial report for the quarter and the fiscal year could change if our auditors conclude there are adjustments needed to be added to those that we'll include in the results today.

The extended period between results reported for the December quarter and those reported at the end of the fiscal year audit have caused us to want to provide our shareholders at this time with Management's assessment of our business. We believe CorVel's business results have been changing, increasing the importance of an update at this time. While results appear to be improving, it is also important when we are making such observations for all investors and prospective investors to be aware of the risks in our business. As we have seen in the last couple years, workers' comp claims are soft, insurers and TPA's are vertically integrating into our business changing our forward-looking strategies, and regulatory changes at the State level have in some instances meaningfully impacted our results and future changes are likely. The federal regulatory environment, particularly the Sarbanes-Oxley legislation continues to substantially raise the cost of doing business as a U.S. company. Some of our most direct competitors are much larger than CorVel and therefore have superior resources. A more complete list of the risks in our businesses is included in the current 10-K.

With that as background, revenues for the quarter were just short of $67 million, reflecting the stronger seasonal quarter offset by ongoing softness in claims volumes. Network solutions margins continued to improve. Case management volumes and margins remained under pressure. As our financial and Sox audit is not complete for fiscal 2006 the results I can report to you today, as I stated earlier, are unaudited. EPS was $0.33 for the March quarter, which is up 38% from the same quarter the prior year. During the quarter, market conditions remained soft. As I stated, our network solutions product line expansions and operations improvements continued to strengthen results in this important segment of our business, and we continue to make progress on cost controls.

Subsequent to the end of the quarter, we added Cy King, the former president of a competing medical review organization, to our corporate staff. And just this week we announced that Dan Starck, a seasoned healthcare management executive, is joining CorVel as our COO and President. We welcome Cy and Dan. These additions are part of our plan to much more aggressively pursue this year's key objectives. Now I'd like to turn to more detail and first talk about the marketplace. As I've previously mentioned, the major forces are soft claims volumes, evolving customer needs, regulatory reformation and a labor market buffeted by a number of different forces. First the soft claims environment. This is kind of hard to pinpoint exactly, but we feel the open borders have certainly expanded the labor force with a lot of unreported workers. There are offshoring trends, productivity gains, automation and then seasonally we have the hurricanes and other events that deflate the mood of the labor market. These have the net impact of subduing the mood of the labor markets, which in turn reduces reported work-related risks.

Ongoing technology advances are also changing customer needs. Insurers and third-party administers are seeing less need to outsource some of their work, and are turning to us mostly for high value-added services like PPO's, medical review, specialty services and specialty software. Those are the services of greatest value to payors today. On the regulatory side, changes are taking place or have taken place in several states. At this time, Texas, Tennessee, and Illinois have or are now modifying their workers' comp regulations. Such changes create unique demands by State, favoring companies that can work locally in many different markets. So while they can hurt CorVel, they also are the kind of thing that we're particularly suited to addressing.

In the quarter, we were able to correct our prior response to changes in the California market from a couple of years ago, and are experiencing much improved financial relations -- or results, excuse me, in that State. We hope this experience better prepares us for the ongoing changes in Texas, Tennessee and Illinois. On the labor market side, there is some strengthening, it looks like in that area. It remains to be seen if that translates into higher claims. It has not yet. The March quarter enjoyed a seasonal respite from hurricanes, but the next season is just around the corner. The unfriendly U.S. regulatory environment for business continues to push employers offshore. Oil, it looks like, could appear to be beginning to produce some inflation and, all in all, we believe it is prudent when forecasting to expect continued pressure on the U.S. labor market.

Now turning to operations. I'd like to go through our results by segment. On the patient management side, we had revenues of $27.9 million, which was down 15% annually, up 4% sequentially. Gross profits at the field level were down 23% annually, but approximately double the sequential prior quarter. Volumes continue to reflect the soft claims market. We continue to seek price increases to reduce field management expenses, and to close unproductive offices. We have not made as much progress in this product area as we need to, and we'll continue to focus on improving margins in the coming year. Adding improved technological solutions is a key component of our plan, and is going to continue throughout the year. Returning injured workers to productive employment remains the bottom line in workers' compensation. So this product line is important to us and will continue to be a key part of our total service offering.

On the network solutions side, we had a stronger quarter with revenues of $38.7 million which was down 3% annually, but up 6% sequentially. Profits were up 24% annually and 14% sequentially. The soft claims market is also impacting medical bill review. Since two-thirds of any year's processing is for bills from prior years claims, there is a substantial lag in this service's underlying market volumes. We are now finally in that portion of the major project to implement new document management and smart routing where the benefits are more than offsetting the expenses. As was discussed last year, in spite of soft market conditions we persisted in making major technology changes throughout the period beginning in calendar 2003 and continuing in 2004, '05 and '06. In each of those years, we implemented the next major phase of a total platform change in our next work solutions business. At this point, after a long and complex conversion, we're at the point in the overall project where each new phase adds to the benefits we're able to enjoy. We've stayed the course, are beginning to see the payoff, and have a large backlog of additional new features to add to this service as we go forward.

The new technology and expansions yet to be completed supported additions to the breadth of our medical review services. In the quarter, network solutions margins expanded as a result of additional revenues in high value-added specialty review services. This mix change in our product line impacted margins in the March quarter. I will speak later to the impact that we are seeing more recently. The purpose of the restructuring of our network solutions technology has been and remains to facilitate improved results for our customers, improving margins and the delivery of new and expanded services. The most important result so far has been to substantially improve the savings we achieve for our customers. However, at this time our savings results lead the industry and are meaningfully better than some of our large competitors. We are working to more clearly present these results to prospective customers.

As we've discussed in prior calls, we have 4 key projects. They have evolved a little bit as we enter the next fiscal year. The first is the ongoing extension of our product line and network solutions. Although the last two or three years we have added a lot to that product offering, we plan further service expansions later this year. The scope of the underlying software and network solutions is being expanded to include a broader range of services, as well as extensions to the portions of an episode of care in which we were involved. This project, as I explained earlier, is in the phase where the results of our work are more visible in our margins. The business development focus this year is two expansions to the scope of service provided to customers.

The second major project is a carry-over from last year, focusing on improving margins in patient management. This involves price increases and the additions of specialty products and some automation for that service area. The third project, again, is a carry-over from last year and is the expansion of our enterprise comp service line for claims payors and employers. This effort leverages our success with artificial intelligence, taking it into work flow management. We expect to increase resources for this initiative in the current year. And the last product is the expansion of our CareIQ line of directed care networks. The first phase of this project is a software addition to our network solutions platform, which is under way at this time. The first version of this software will be implemented later this year.

Normally at this point I'd talk a little bit about our financial management projects. This quarter the focus of this discussion is to help you understand the current results a little better and to -- So briefly I'll go through the financial projects, and then come back to the status. On the expense reduction side. We've continued to work on that, although we're at the phase in the cycle where it's not quite as important as it was last year. We continue to work on case management margins.

On the cash flow side, receivables were reduced 17% year-over-year. Fixed assets net of depreciation were down 1% sequentially and 8% annually. Book cash was $14 million at March 31, and has risen since that time. On the SOX compliance side. We expect to complete the integrated 404 and financial audit in June. As a result of SOX, audit costs have increased approximately 10-fold to over $2 million a year, meaningfully reducing discretionary resources. These costs have raised corporate expenses as a percent of revenue from 8% of revenues, which was our traditional level, to about 11%. The added expense consumes most of our discretionary resources.

Now I'd like to speak to the results in the March quarter, and provide some information on more current operating conditions. I want to caution you that our annual audit is ongoing, as I stated earlier. The extensive audit regulations now required extended reporting timeliness. However, timely reporting is important to keeping shareholders and investors informed on business trends. CorVel has been going through a soft claims market. At this time, we believe our results appear to reflect improvements in some of our key projects.

Today's discussion is intended to provide you with an update regarding the current status of our business. I'm sure you can appreciate that, without the completion of our audit, our discussions reflect estimates from Management regarding our financial results. Final audited results could vary following the completion of the audit. Operating results did improve in the March quarter, particularly toward the end of the quarter. This continued trends which began in the December quarter. These trends reflect increasing traction for the key network solutions projects of the last few years. Results were at the highest levels we have experienced as we exited the March quarter.

At the conclusion of the quarter, network solutions margins which had been in the mid-20% range in prior quarters had moved to the roughly the 30% range. Patient management margins, though up a bit, continue to be an area of under performance. Corporate overhead, as I stated earlier, has increased as a result of regulatory compliance expenses to about 11%. These changes have combined, though, to produce increased Company margins. Again, I wanted to caution you that the most recent trends are estimates and reflect only a limited amount of information. Just as the California law changes depressed results more than we had anticipated, regulatory changes in other states could again change our trends.

Now I'd like to talk briefly about our product development projects. Most of these are software oriented and we've talked about them in prior quarters. The first is the network solutions project area, which includes all of the ongoing extensions to our medical review services and their sale in both workers' comp and group health markets. We have a large backlog of projects there, although manageable, and I think we have some exciting new additions coming in the next quarter or so. Software version releases in the quarter and expected through the June and September quarters include features which support our profit improvement initiatives.

The second area is MedCheck, which is specifically our bill review product. We implemented a 64-bit processing environment for that product line in the quarter. This is a key step in our ongoing scaling of this important software. 64-bit processing opens an entirely new wave of development, which promises higher speeds and much more powerful applications. A change of this magnitude will likely expose other weaknesses in our total application. However although this is an event -- although this is an event that occurred in the background, it was an extremely important step forward for us in the quarter.

On the CareMC side. We have ongoing development there. That product continues to be an ever-increasingly important part of our total offering to employers. And the last project is enterprise comp, where we're introducing an extended line of our services to create a more complete solution for employers and large insurers for workers' compensation. As I stated earlier, it extends our artificial intelligence experience and good results into an entirely new area of claims management.

In the quarter, DSO was near the end of the range. We've been able to get it to, in the past, at around 52 days. We didn't have any stock repurchases, so cash increased to $14 million from $8 or $9 million at the end of the prior quarter. And that concludes my remarks at this time. So I'd like to turn it open to questions. Thank you.

Ladies and Gentlemen, we will now begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Jay Hill. Please go ahead, sir.

Hi, Gordon. How are you?

Fine, thanks.

I wanted to ask you two questions. My first question is can a illegal immigrants currently file workers' comp claims? And my second question is kind of a follow up to that. Would you expect to see an increase in workers' comp claims if legislation is passed which results in legalizing these 11 million hispanics that are currently illegal?

You know, you're getting into areas that are -- probably reflect more of my personal opinion than an official Company position. But as I understand it, illegal immigrants can file for comp now. I would say they tend not to. I mean, for obvious reasons.

Right.

And they do -- In fairness to them, I think they have a strong work ethic and they are here to work. If there were a change, I don't know. I think that the only change that would raise comp claims as regards to illegal immigrants would be some changes that might make it a little a little tougher to fill the markets as they currently do. I think what -- The impact is that they reduce the tendency for U.S. workers to want to do anything to disrupt their work status.

What's the primary reason why current illegal immigrants don't file claims even though they're allowed to?

Well clearly they do file and in fact in southern California we have to have Spanish speaking units to deal with the fact that they don't speak English. So it is a part of the workers' comp experience. It's just that I don't think that they file them with as much comfort as legal workers.

Great. Thanks, Gordon.

And I think also that -- The other thing is that it just adds a lot of unemployment essentially, and it's unreported unemployment, to the labor force. So whenever unemployment rates are high, which counting the illegals they're quite high now, the labor market is soft and that's the effect that really reduces claims.

Okay.

Our next question comes from the line of Mitra Ramgopal.

Yes. Hi. Good morning, Gordon. Just a couple questions. If you could just repeat again the gross margin in the quarter for network solutions and patient management?

Yes. The gross margins were -- let's see. Actually, they were 26.3% in network solutions and 8.2% in patient management for total field margins of 18.7%, which is the highest level in the last three years.

Okay. And again you eluded to a seasonality in this quarter that will change actually going forward. Again if someone is looking at the business, which tend to be your stronger quarters from a seasonal standpoint ?

Yes, that's an excellent question and I'm glad to have the opportunity to comment on that. The March quarter is a pretty good quarter for us seasonally. Part of the seasonality that really is important in our business is the number of workdays in each quarter. Workdays in the quarter can be as high as 64, I'd say, and as low as -- I'm not sure, maybe 62. And for us, we do a little over $1 million a day, so -- And there really aren't very many variable expenses. So for us the extra two days goes to the bottom line, or a lot of it does. And so it's important to know the number of work days -- or for us to comment on them. This last quarter, I think, was a longer quarter. The current June quarter is a longer quarter. September is a shorter quarter, and the toughest quarter is always the December quarter with the holidays.

So results are seasonally high in March and June. They're a little softer in the September quarter and they're, of course, very tough for us in the December quarter. The other thing that has raised the seasonality, I would say, is the hurricane season and it -- I'm not sure that I know exactly what it extends from and to, but certainly it impacts both the September and December quarters. So it can further depress those two quarters, which are softer in any event. So we certainly look to make hay in the current June quarter.

Okay. And finally -- sorry -- If you could just comment again. I think on the last call you talked about seeking price increases, etc, And in terms of just reducing field management expenses and closing productive offices or some offices. If you could just give us an update, if most of that has been completed.

Yes. I'd say the reductions in overall headcount for the Company have declined or slowed. And we're still trickling down maybe 10 people a month, but it's not an organized Company program. This is very much a delegated responsibility to our operating management, and I think the adjustments reflect the soft claims market but there's not a big focus on that at this time.

I'd say the big impact going on right now is just the turning the corner on this big project that we've had going on in network solutions for the last three years. And we had upwards of $3 million of incremental expenses for document management in 2004, and then we began to see some benefits in 2005 calendar year. But this last, I'd say, three to six months and ongoing right now we have the thing kind of coming together. And that's where the big change has been.

Okay, thanks.

Okay.

[OPERATOR INSTRUCTIONS] We have a follow up question from Mitra Ramgopal.

Yes, hi. Again, I notice as you start to bill cash, and I think you had mentioned acquisitions would be something you'd be looking at as a use -- I don't know if you could comment in terms of an acquisition pipeline you're looking at or any progress on that front?

Yes. And we're a little bit less sophisticated in this than some -- many public companies. We have had an acquisition here and there, but we don't have a large ongoing effort. We are prospecting at this time, and we have been hoping to pick something up along in here. We don't have anything pending or close to conclusion, but that is why want to let the cash build up. It's a little awkward with -- we had always bought stock back and we do like that. So I would say if there were major institutional shareholders with a block that they were in interested talking to us about, we do have cash, so -- We would have to have Board approval. At this time, we have used all of the Board approved stock repurchases and -- but we would certainly consider something like that.

Although our main goal is to look for expansions to the business and with -- That's the one reason I touch on the changing customer needs. We do feel that the market for our services has evolved somewhat in the last four or five years, and it's important for us to kind of reposition ourselves a bit. So that's the strategic reason for looking at acquisitions. We've had pretty good success at incorporating new entities. We are decentralized. We operate acquired companies as individual profit centers, and I'd say more recently both of the directed care network area and the scanning company that we purchased a while back have made meaningful contributions to the Company. So I think we feel we've been a little less assertive on acquisitions than perhaps we should have been, and we're trying to correct that.

Okay, thanks again.

Okay.

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

Well I'll just close by thanking everyone for their patience and contributions during what was a tough period for us. There have been several of our investors who have been, I think, made especially important contributions to the Company. And we're certainly working hard and anxious to reward you for your patience with us. We did exit the quarter, as I said earlier, at a little healthier run rate than we have had and we're looking forward to the coming year. So thank you for joining us. We'll talk to you again next quarter.

This concludes our conference call for today. Thank you for your participation. [OPERATOR INSTRUCTIONS]