CorVel Corp (CRVL) 2007 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 of financial performances 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 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 cause the actual results to differ materially from those contained in our projections or forward-looking statements. At this time, all participants are in a listen only mode. A question and answer session will be conducted later in the call with instructions being given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Mr. Gordon Clemons. Please go ahead, sir.

Thank you, and thank you all for joining us today to discuss CorVel's September quarter. As you're probably already aware, revenues for the quarter were 67 million. This continued the firming trends of recent quarters. Case Management margins showed some improvement. Network Solutions continued to reflect the strong results we have had more recently. Earnings per share for the quarter were $0.51 up from $0.22 in the same quarter the prior year. During the September quarter, claims volumes remained soft as far as we could tell. The pace of change in state regulations though is high and healthcare inflation which is a factor in our business continues.

Our Network Solutions product line expansions and operations improvements continued to strengthen results in this important segment of our business and as I mentioned, patient management results also improved. We continued to work on strategic transitions in our product line and during the quarter, we or well, actually since the last time we talked in August, we repurchased 200,000 shares. I'll talk more about that later. We continued to explore acquisition opportunities. After I go through an overview of the kind of the market situation for the Company and some other general comments, Dan Starck, who is our President will cover operations today so this will be his first time to actually help you guys understand our business.

The marketplace, though evolving, remains largely unchanged from the last time we spoke. Important factors include industry claims volumes which continue at historically low levels, severity though, that is the cost of individual claims is up, unreported claims for workers, perhaps illegal immigrants, appear to be a factor reducing reported claims and costs. They become a more important factor in the labor market. Evolving customer needs are an issue and large payers, insurers and TPA's now like to insource some of the labor content for managed care but they do continue to outsource specialty functions and purchased technology, all of which are CorVel specialties.

ASP applications such as our CareMC platform or MedCheck software meet the needs of this insourcing trend. The A&H market is also more open to adding sophisticated medical review than it has been in the past. Telephonic case management is a service large payers have insourced at least on the labor side and on the other hand specialty services in that area and field case management remain important services of CorVel, as do telephonic services for those carriers that choose to continue to work with a service bureau approach.

Regulatory reformation is an issue. Individual states, as I reported last time, continue to be pretty active with regulatory change in workers comp. The reforms begun in California a couple of years ago or now maybe three years ago have spurred change in other states and that's typical. That trend may well spread across the country. Most of those changes have been favorable to our business.

This trend requires though, investment in product development by CorVel as well as by our competitors. We are expanding our product development resources for calendar 2007 and believe our technical capabilities provide a competitive edge in the marketplace. I think another factor driving our recent results is the ongoing inflation rate in healthcare. Open borders and the resulting large numbers of illegal workers have increased unreimbursed healthcare while this dampens workers comp claims volumes as these people do not typically report claims, it does drive healthcare costs and particularly costs shifting to the private sector.

Our customers have no choice but to seek services from a Company like CorVel who can provide assistance, providers have no choice but to try to find ways of being reimbursed, but a disproportionate shifting to the private sector is something a service like CorVel provides, helps to offset. The sophistication required to properly reimburse providers has never been higher. CorVel strategy remains to invest aggressively to produce industry leading results and we see additional opportunities for further innovation in the coming year. These trends have increased the importance of specialty review products and the newest forms of smart processing we invested in over the last three years. CorVel's success in these areas is clearly evident in our recent savings results for customers and therefore in our financial results. Now I'd like to turn the call over to Dan to discuss operations.

Thank you, Gordon. Good morning, everyone. I was just going to cover some very specific things about Patient Management and Network Solutions and then talk a little bit about our 2007 projects. Patient Management revenues for the September quarter were $26.3 million. This represents an 8.2% decrease from the September quarter of '05 and a 3.9% decrease from the June quarter of '06; however, profits in the Patient Management sector have increased 44.5% from the September quarter of last year and 20.3% from the June quarter of this year. We continue to back away from inappropriately priced business and soft industry claim volumes continue to depress demand.

During the quarter, we did add Product Management support and we've initiated efforts at software development resources. The transfer of our operations from our client server based applications to our CareMC portal has continued. In the use of scanned documents, smart writer by Cape, which is our name for our processing engine will be a focus of technology development in the coming year. The move to CareMC is expected to require about another 15 months before it produces the entire intended results.

In the network solutions line of business, revenues were $41 million for the quarter. That represents an 8.8% increase over the September quarter of '05 but a 3.2% reduction from the June quarter of '06. Profits were up 53.1% as compared to the September quarter of last year, but down 1.8% from the June quarter of this year. We do expect the soft claims market to have a lagged effect on medical review services so volumes could remain sluggish in this sector for perhaps about another year. Specialty review service volumes have increased though and this mix change generally continues to improve our margins. The new Activ version of MedCheck software will support our future additions to the breadth of our medical review services. The industry is increasingly competing on the basis of total savings for customers and that's a trend which favors CorVel 's industry leading results.

Now I'd like to spend a minute overviewing the projects that we'll really been focused on in 2007. The first is the ongoing extension of our product line in Network Solutions. This project area is a priority almost every year. It's been a centerpiece of our business, and we've continued to see opportunities to further expand medical review services for our customers. Regulatory change though can negatively impact this product line and competitive forces can also change the results. As a result, it's difficult to provide guidance regarding these results; however as I stated a little bit earlier, at this time we do see significant opportunity in this area, so we are expanding the pace of our development efforts in Network Solutions.

The second project that we're working on is to seek improved margins in the Patient Management service line. We've begun to make some progress in this area and expect this gradual improvement to extend into the next year.

The third project is the expansion of our sales efforts. We will be segmenting our sales efforts and expanding sales support to achieve more effective results in specific market segments in the coming year. The fourth project involves providing new Claims Management technologies to insurers and TPA's. This effort leverages our success with artificial intelligence, particularly in Work Flow Management. The changing needs of major payers make this an important long term initiative for CorVel. Given the improving results in Network Solutions, we do expect we'll be able to increase the allocation of resources to this initiative over the coming months and years.

The last project is the expansion of our CareIQ product line, what we refer to as directed care networks. We've begun this with pilot sites and we plan a national expansion over the course of the next 6 to 12 months. Now I'd like to turn this back to Gordon to cover current cash flow trends and our product development status.

Thanks, Dan. Cash flow and asset management are contributing to our results and help us manage our balance sheet and number of shares outstanding. Although reductions in days sales outstanding and receivables assisted cash flow this last year, we believe that over the long run, we can can continue to improve the management of our AR, and this has been a long term goal of CorVel. While we continue to invest in information processing and in our branch network, accounting changes during the last two years have caused us to expense more of our investments in technology. A review of our balance sheet would reveal that net fixed assets have declined by almost 20% in the last year alone.

Our consolidated cash balance was 8 million at December 31, and has increased to 22 million by the end of the September quarter in spite of some stock repurchases. Strong cash flow positions us to become more aggressive un our strategic initiatives and capital structure planning. Now I'd like to briefly go through some of our key product development efforts and they line up with the projects Dan discussed earlier.

Network Solutions development continues apace and we expect to expand our investment pace in the coming year. The medical review platform we have built over the last 15 years positions us well to continue leveraging this advantage. MedCheck specifically, which is our medical bill review product, the software development there is being increased as well, expanding ASP functionality for major payers, improving operations management, and expanding reporting and analysis are among the projects in progress.

CorVel's CareMC, healthcare portal continues to be a trendsetter in our industry and we continue to want to expand that as well. CareMC was designed from the outset to be a portal in which a customer can interface their own systems through those of a combination of managed care vendors, not just CorVel. As communications technology continues to improve, interfacing multiple vendors also expands. We are continuing to add claims management functionality as well to this platform.

And lastly Enterprise Comp, that is the providing of new technology to the claims community is also an important area of investment for the foreseeable future. Now that our business momentum has improved, we are increasing our investment in Enterprise Comp. The claims community is an underserved market we believe we see opportunities to add new solutions in sectors of this market which have in the past been relatively stagnant. From a cash flow perspective, we had a quarter which reflected the changes in earnings. EBITDA was again just over 10 million and we can discuss cash flow more if there are questions later. DSO in the quarter was 54 days up just slightly from the last quarter and cash was at 22 million.

I referenced having repurchased 200,000 shares. 145,000 of those were purchased in the September quarter and the remainder during the opening month of this quarter. We've spent about 138 million inception to date and have repurchased 7.3 million shares at the end of the quarter, hard shares were 9.328 million, and diluted EPS shares were 9.486 million. That covers the prepared comments that we had at this time and I'd like to now turn it back for questions. Thank you very much.

[OPERATOR INSTRUCTIONS] Our first question is from Ed Kroll with Cowen & Co.

Hi, Gordon.

Hi.

First question is on the cash flow, if you could tell us what the operating cash flow number was for the quarter.

Well, let's see. I've got it broken out into several categories. EBITDA was 10.2 million of, let's see, EBITDA less working capital was 9.2 and less working capital and capital expenditures was 7.4. I think maybe operating is net of the two changes and working capital and net fixed assets would be 7.4.

Okay, thanks for that. And then on the new product side and I don't know if you or Dan or both could comment on this, the CareIQ, I mean, that sounds like a very interesting dynamic new direction for you to go in. I'm just wondering how does -- or is it possible in doing that that you alienate some of the providers in your -- in your network?

Well, I think -- we don't expect that. I would say though you're right. It is a different kind of service. The PPO networks have been broad based. I think competitors and customers in the marketplace like to think that we should have 60% of the providers in the State, let's say, in the network.

I mean, usually bigger is thought of as better?

Yes. They tend to think of that because it's been viewed as a discounting capability and I think the movement to CareIQ is a very big change and that is it's a much more tightly focused network, as you referenced. It does include the ability on CorVel's part to work directly with patients to actually schedule them into care and so we do tend to pick providers that are convenient to employees and who respond to -- what we really find is if you're directing care, you really get a very different price mechanism than the PPO market gets. I think a lot of providers have become pretty cynical about PPO's but it's an early stage product.

It's certainly got a long way to go to reach the stage where it would be a factor in the marketplace in terms of alienating providers. I do think that the cost shifting forces in the provider community are serious and have reached a stage where it's tough on providers and I do think there are going to be some changes there. You see some of the large corporate healthcare providers having to make changes to accommodate the marketplace, try to back away from government controlled sectors where the reimbursement is inappropriate. It's going to be -- I think the next ten years are going to be very interesting in those areas.

Okay, thanks for that color. And then finally, I know it's not as much of a direct effect on you as some of the real health plan players, but just wondering your thoughts on the election results and what that might mean over the short-term and the long term for workers comp regulations around the country.

I don't know that we see -- at least I'm not smart enough to have too much of an interpretation on that. We, in California, the election was pretty conservative strangely, of all things, and the big tax increases were all voted down and Arnold was returned to power, so strangely, there are -- and some of the Democrats elected nationally are the more conservative Democrats. I think Bush has been a more liberal President than at least I anticipated, but our business is State regulated. I think the states have been more active. I think that if there's a trend electing Democrats usually returns focus to labor and a little bit away from shareholders, I guess.

But we tend to serve the labor markets so I wouldn't want to forecast anything positive out of this necessarily, or particularly negative. I think it's -- I'm not sure it's much change for us, but any given state can impact us pretty serious seriously. We've had changes in California, Texas, and Illinois in the last two years and those were pretty dramatic. As we referenced on the call, I think working on our software and being positioned to deliver a technically sophisticated product in response to regulatory changes is a CorVel strength, so perhaps in some ways, the more difficult the comp market gets, perhaps the better it is for us. We're kind of like Brer Rabbit in the Briar Patch.

Okay thanks I'll get back in the queue.

[OPERATOR INSTRUCTIONS] Are there any further questions? You have a follow-up from Ed Kroll with Cowen & Co.

You mentioned stepping up the investment in your IT oriented capabilities. I presume like MedCheck and CareMC.

Yes.

Can you quantify that for us, what that might mean on say a CapEx basis for '07? I think you said in calendar '07.

Yes. I was kind of, yes. Looking out into the coming calendar year even though we report fiscally. I don't know that we would be too specific. I think that we feel like we did maintain our investment during the softer times we had economically and I think that was wise and now we feel like we want to press our advantage a little bit. There is a lot of opportunity and yet a fair amount of work to do. CareMC is a, I think web-based healthcare transaction processing is going to become ever more important, so we're short of what we would love to have in terms of resources but so we're expanding that. It's nothing like doubling it or something like that but we're trying to pick up a bit there.

We, as I mentioned, our capital additions have declined partly due to accounting changes for software, but also just that I think as we've moved to centralized processing, we've had some economies. Our processing has become more communications based and a little bit less dependent on local processing, so we have some efficiencies. I would just say that we're looking to that area to leverage our strengths and I think continue to look for the higher margin kind of opportunities in the marketplace and so I think some of the changes in our P&L that we've accomplished over the last couple of years are directionally where we would like to go.

Okay, thank you, Gordon.

Yes.

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

I'd just like to thank everybody for joining us today and I appreciate that we have a number of major investors who have stuck with us through tougher times. We feel better about taking care of them in the last year and I hope their patience was rewarded. We're working hard and we'll look forward to talking to you guys next quarter. Thank you very much.

Thank you.

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