CorVel Corp (CRVL) 2007 Q1 法說會逐字稿

Thank you for standing by. 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 the actual events or results 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 filed for the most recent fiscal year and quarter. These documents contain and identify important factors that could cost the actual results to differ materially from those contained in our projections or other 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 is being recorded.

I would now like to turn the conference over to your host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, Amy, and thank you all for joining us today. I'm sorry that it took some of you awhile to log on. We were told there was a flood of calls coming and I think, for those of you familiar with CorVel and its trading, you can be assured that wasn't a flood of people logging into this particular call.

In any event, the revenue for the quarter was about 70 million, reflecting the stronger seasonal quarter that we have each year, offset by ongoing softness in industry claims volumes. These are conditions largely unchanged from the last time we spoke.

The Network Solutions margins continued to improve as did the revenues. Case management volumes and margins remain under pressure. As we reported, we expect to report about $0.49 for the quarter. As you all know, all earnings are estimates up to seven to ten years afterwards, since everybody likes to now restate forever, so this is our current estimate of earnings -- up a little over 70% from the same quarter the prior year. During the quarter, claims volumes, as I said, remained soft. Our Network Solutions product line expansions and operations improvements continued to strengthen results in this important segment of our business. That's a trend that has been ongoing for a few quarters now.

We continued to work on strategic transitions in our product line that will take longer to have an effect. Our Board, as you know, has approved a 1 million share expansion in the common share buyback program. We continue to explore acquisition opportunities and remain optimistic about that but wanted the flexibility to employ excess cash in resumption of our buyback if we see opportunities in the market that we feel are preemptive.

Now, I'd like to talk more about some of the segments of the business. From a market perspective, industry claims volumes, as I said, continue at historically low levels. I don't know that we see any change in that. They seem to have stabilized somewhat in severity; that is the cost of individual claims is up. That drives demand for our service. However, claims volumes and units continue to be down, and I would say down substantially, at least 50% or more from three or four years ago.

The cost of healthcare is an issue, and that is driving the severity up. Again, it is a driver for some of the more sophisticated services that we provide.

Evolving customer needs are an issue. Large payers, insurers and TPAs now conduct more of their managed care in-house. However, they are showing good interest in specialty review functions directed at controlling healthcare costs, and they do purchase technology. ASP applications such as our CareMC or MedCheck software meet the needs of this in-sourcing trend.

I'd say interestingly also for CorVel, which has focused largely on workers' comp, group health payers or more open than they have been in the past to adding sophisticated medical review to their processes. The group market has been resistant to change in the past and moves very, very slowly compared to workers' comp in the implementation of new technology, but there are signs that this market is beginning to feel the pressure to innovate, driven again by the large increases in healthcare costs.

Case management is a commoditized service where large payers tend to provide the service for themselves and price at low levels, and that continues.

Regulatory reformation is an issue. Individual states are fairly active compared to where they were a couple of years ago or three or four years ago from a regulatory standpoint. The reforms begun in California a couple years ago have spurred change in other states. This trend requires investment by companies like CorVel and can be expensive, but it is a feature of niche markets and can be at the same time a plus for companies focusing uniquely on a particular market segment, as CorVel does.

The labor market is also heavily impacted by a number of forces, certainly things that we have talked about before. The open borders and large amounts of illegal immigrants are putting a lot of pressure on the labor market. It does soften the mood in the labor market and that certainly has an impact on our business.

Now, I'd like to move to a discussion of the operations. As you know, since we won't be reporting our 10-Q for a couple of days, I can't talk about this in as much detail as I would like. Revenues in patient management were down both sequentially and annually, and profits were down a little more sequentially and annually. Volumes continue to reflect the soft claims market but appear more stable than a year ago. This product line remains an integral part of our total managed care solutions, though in workers' compensation. We intend to continue repositioning it to customers that value this service and to add operations technology necessary to achieve satisfactory margins. We believe that's possible, although it's been a pretty stubborn project for us. Much as we converted our Network Solutions product line to new technology over the last three years, we are now beginning a similar project in patient management.

We have seen, in Network Solutions, growing benefits from consolidated databases and the expanded use of artificial intelligence and seek to bring those benefits to our patient management business. This project, as I said, is expected to require perhaps as much as 18 months before it begins to produce results, though.

Moving to Network Solutions, where we are seeing the kind of improvement that is driving our results at the bottom line, revenues were up annually and even more strongly sequentially. Profits were up meaningfully. I guess this about all I can say right now. In the quarter, they have been up strongly over the last three or four quarters but as you can tell, they were particularly strong in the current quarter. The soft claims market will have a lagged effect on unit volume in even medical bill review, so we expect to see a continuing sluggishness in just volume of bills, but as I mentioned, a growing interest in specialty review and other forms of services where CorVel has unique technology is definitely improving our results. As a result, in the June quarter, as we demonstrated, Network Solutions results for customers improved. Savings moved up as they have been throughout the last couple of years. Specialty review service volumes increased and these have better margins and certainly are areas where we are more distinguished for our competitors. So there's also a mix change going on as a result in our total product line, both within Network Solutions and within our total CorVel revenues. This favorably affects margins.

The new Activ software release, we did a press release on that maybe a month or more ago. We, at that time, couldn't provide guidance with regard to implementation, but it was successfully implemented just this last Friday night, providing additions to the breadth of our services. I will talk more about that later.

The purpose of the restructuring of our Network Solutions technology has been and remains to facilitate improved results for our customers. We think we have meaningful advantages there versus our competitors, and we're going to be working in a national sales effort to bring that better to light in front of the kind prospects that we pursue in the marketplace.

In operations, we focus on four key projects that I've discussed in prior calls. The first is the ongoing extension of our product line in Network Solutions. This project area is a priority almost every year and has been a centerpiece for business. However, as we entered the current fiscal year, I thought this would be a more quite time in Network Solutions development. Instead, as we got into the new fiscal year, we have continued to observe areas where we can make further improvements to this business. Regulatory change has negatively or can negatively impact this product line at any time and create either competitive forces were just the cost of accommodation. As a result, it is difficult to provide guidance regarding these results. They can be both good and bad, depending upon how regulations change in any given state.

Implementing a steady procession of new software, though, is also challenging for our field operations, and we went through a period for a couple of years where we had a tremendous amount effort in the field to accommodate a lot of the improvements in this technology.

While software is a very visible part of the project, a great deal of effort must be expended in the field to implement change and to do this on the fly -- in other words, fly the plane while you are also making changes in how you fly the plane. But as you can see, the benefits are beginning to come through.

The second project that is a high priority for us is to seek improved margins in patient management. As you can tell, we've not made much or any progress in that over the last couple of years, but it remains a high priority. The field, I would say though, has done a wonderful job of continuing to adjust our organization structure and to accommodate the changes in technology. As I said, we're going to have more coming in the case management area. This does impact the way we are organized, the number of branches we operate, the manner in which we interface to customers. So there's an awful lot of change going on, on the fly, but we are beginning to see the benefits of that at the bottom line.

The third project involves providing new claims management technologies to insure some TPAs often referred to as enterprise comp -- in our case, it's kind of an internal brand name. This effort leverages our success with artificial intelligence, particularly in workflow management. The changing needs of major payors make this an important long-term initiative. Since the improving results are given, the improving results we are now seen in Network Solutions, we expect to be able to increase the allocation of resources to this initiative.

The last area is a product line we call CareIQ, which is the development of direct-care networks. We've completed the initial versions of our Activ software I referred to earlier and just this last few days implemented that. However, this expansion is still in the very early stages of development.

Now, I'd like to briefly discuss cash flow as at least an indicator of some of the underlying economics in the business. Although Days Sales Outstanding and receivables is currently at our best levels ever, we continue to believe that we can make long-term improvements. I wouldn't suggest a lot in the near term, but clearly that's an area of inefficiency in our industry.

While we continue to invest in our technologies and in our branch networks, fixed asset additions net of depreciation have also been an area of improvement and have not been consuming much cash. Although aggressive investment in technology is a focus of our strategy and has been for well over a decade, the advances in computing technology allow our dollars to go further each year than they did in the past. This has a favorable impact on the cost of these investments. Our consolidated cash balance as a result moved from 8 million at December to 14 million in March and over 21 million at the end of the June quarter. These trends continue and position us to be more aggressive in our strategic efforts.

On the product development side, we have organized our discussion in the same four key areas. In the Network Solutions area, we have a large backlog of projects and are excited about the ongoing progress in this business area. The Activ release of MedCheck discussed in a press release the other day was successfully implemented just this last week. This is the largest release of MedCheck ever implemented. It touched over 200 programs, each of which had to be changed. It includes important new features in utilization management, directed care networks and other operations efficiencies in our existing business.

The second area, MedCheck -- and I've discussed this a little bit in the last couple of calls I think, but it continues to be an area of string for us. We have implemented 64-bit processing in this product line. This -- I'm just reemphasizing this but I think it's very important to understand that this was a key step in the ongoing scaling out and scaling up of this important software, positioning us to pursue much larger prospects.

As we discussed in today's press release, MedCheck is entering into a period where its role in medical review will be expanded in at least two important directions. MedCheck will become more involved directly with providers and also be more integrated with patient management activities, particularly those impacting the duration of care, which is an area where savings are really coming through in states that have provided accommodating regulations. These new directions will fill our backlog for the foreseeable future and take Network Solutions services into segments or into new segments of the market.

Another area for us that is very important is CorVel's CareMC healthcare portal. This continues to be a trendsetter in our industry and include many more features than those on our competitors' sites. We have important expansions underway and are increasingly integrating Network Solutions and patient management activities within this portal. We are particularly proud of all the people involved in CorVel's technology investments. Throughout our history, we've steadfastly invested in technology, and as I said earlier, it's a key to our strategy. The processing of medical claims, particularly those in workers compensation, include a great many variables. The transactions are typically small and our revenue from them is very small, creating an extremely high volume of detail. Imaging has now geometrically also expanded the storage requirements and yet there is still much more that can be done in this area. We are fortunate to have a highly talented group of professionals involved in this effort. Our operations groups as well work very hard to accommodate the steady stream of new capabilities and yet, as I said, fly the plane at the same time.

This long-depressed market is kind of grinding down some of our competitors' ability to sustain high levels of technology investment. Inevitably, in any given year or two, we have new competitors that boast of particularly different approaches to the market, but over any five-year period, the difficulties in the market usually result in their either departure or assimilation into other companies. At CorVel, we've maintained our investment throughout the trough in this claims market. The pace of the introduction of new capabilities has not only waned, it has actually increased, as I mentioned just in the most recent release, which was the largest ever.

The backlog of future enhancements is very full and extends well into the future. In any quarter, we cannot distance ourselves meaningfully from any given competitor, but over time, our persistent pace of investment has created meaningful market advantages.

The last is enterprise comp, which I talked about earlier. That is the providing of new technology to the claims community. This is an important area of investment in the near future. As our investments in Network Solutions are now beginning to pay off, we will be able to increase our investment in this area. The claims community is an underserved market and we believe we see opportunities to add new solutions to sectors of this market which have been relatively stagnant over the last decade or so.

On the financial side, on the cash flow, again, we will file the detail in our 10-Q here shortly. The cash flow in the quarter was obviously strong. EBITDA was at a new all-time high. Then because we are not seeing increases in either working capital or fixed assets, a lot of that cash flow comes through to our cash balances and therefore our ability to pursue other initiatives.

I guess lastly, we didn't have any stock purchases in the quarter. Interestingly, because of the combination of events and related to SOX, our insiders have also been locked up since March 15. That's five months now in which they've not been able to transact in the stock, neither has the Company been able to do that. This is not an acceptable position to be in and it's something that we have not addressed but we're going to and we're going to fix this and get past this.

I think that pretty well summarizes the comments I wanted to make. I'd like to open it up now to questions from anyone on the call. Thank you.

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

Good morning, guys. Just a few questions -- I guess, if I had to look back, say, over the past six years, I've never quite seen the jump in margin improvement we had this past quarter. I don't know if there's anything specific you can point to that might explain that, especially on the Network Solutions side.

Yes, I think so, and I would say your reference to the last six years helps a little bit. I think that if people look back over our earnings results, they were steady for awhile and then we went through a difficult period. Although this seems like a big jump, we are actually still just working our way back toward our long-term trend line. I wouldn't want to say -- you know, I can't give you guidance that we're going to be able to always do that but as a personal goal, that certainly is something that I feel is possible and remains within our objectives.

So, I think that while the results seem to be picking up a little more sharply than one might expect, they are really just kind of headed back toward the levels of the past. We are carrying extremely high levels of overhead at the present time. This was not a part of our past. Regulatory changes have created some of that, and some of it is, hopefully, not going to be long-term.

So I think there are opportunities to do still better. There are, of course, at the same time, risks and threats in our business, but think the pick-up is really just kind of going back out of a difficult period.

Again, if I had to look back, say, at fiscal '01, I mean, if we look at the gross margin this quarter of 23%-plus, I think this was the first time you even broke 20%.

Yes, that's true. I think while we -- I think we may do ourselves a disservice by pointing only to the difficulties in case management as to the effect of the market there, but the other side of that is that we are seeing a mix change in our business. While we have not done well in case management, we have been able to reduce it as a percentage of our total volume, and so that also helps our overall margins.

There are some costs that have moved from the field to the corporate office over the last five years. We've moved to central computer processing, so a lot of our distributor processing in the past has now come together in Web-based services in our Portland data center. So there are expenses that come to the corporate office been used to be in the field.

But as you suggest, it's certainly true that margins in Network Solutions have improved. We have begun to do a better job bringing some of our specialty services to the market. We've had nice increases in the savings results for our customers, and I don't know. The trough in our results extended certainly a lot longer than we had hoped so maybe -- we are anxious to get back to where we belong. So I would say a lot of hard work under the surface went into getting the earnings back up.

Okay. I noticed G&A did increase a bit. Is there anything in particular that was driving that or --?

Well, my least favorite subject is -- drives that mostly, that is the regulatory requirements to comply with SOX, so that's probably not a subject I should spend a lot of time on. I've been in anger management since that was passed! (LAUGHTER)

Okay. Finally, I guess just going back in terms of the revenue, it was, as you said, it's stabilizing here, given the backlog you're seeing, etc., and probably facing some easier comps last year. I guess we should see a return in terms of comps being positive for the rest of year, or is it too early?

Well, I think we have not had a (indiscernible) made it our practice to provide guidance, but I would say that we haven't seen favorable trends in claims volume, so the background in the industry is still not positive.

We do feel we've underperformed, I think, in sales management and we are addressing that. Dan Starck who is new and as President of the Company is going to put emphasis on that. We have, with this improvement in our margins, we have the resources to be more aggressive in sales. I think we feel that there is an opportunity there but perhaps a comment I made little bit too brief in my regular remarks with regard to strategic change in our business. There have been changes in the industry that we did not respond as well to initially as we might have. I don't see an immediate change, let's say, in sales but I think that we do feel there is an underperformance issue there and one that we can address. So, as it took us awhile to address our Network Solutions opportunities, it may take us a little while to address the sales opportunities, but we have, I think, built a tremendous foundation in terms of technological capability and our products' viability and efficacy is very strong, so we are now going to be more aggressive in sales. But I don't want to suggest any immediate pick-ups there. I think that's always a little longer-tailed project.

Okay, thanks.

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

I'd like thank everyone for joining us today. Again, sorry it took us a little while to get started. We will look forward to talking to you again next quarter. Thank you.

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