CorVel Corp (CRVL) 2007 Q3 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 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 financial 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, Latisha, and thank you all for joining us today to discuss the results of CorVel's December quarter. I will cover our markets and the related product development issues, and Dan Starck will address operations for the quarter.

In summary, revenue for the quarter was around 67 million. This continued the firming trends of recent quarters. Case management margins showed some improvement. Network solutions continues to reflect our improving outcomes for customers and has been strong.

As you know, during the quarter we split our stock three for two, so during my discussions today the results and comparisons will all include the effects of that split and therefore would not perhaps sync up with some of the numbers you might have become familiar with in prior quarters.

Earnings per share for the quarter was $0.27, which is up from $0.10 reported for the same quarter the prior year if both periods are adjusted for stock-compensation costs. The GAAP earnings for the prior year's quarter -- or same quarter the prior year, were actually reported at $0.12 and would compare to something around $0.29 or so were we not to include stock option and compensation expenses in the current quarter.

But the official numbers are $0.27, but compared to comparable numbers a year ago it would be up about 170%. During the quarter claims volumes remain soft but appear to be flattening, from what we can tell. The pace of change in state regulations remains high. Healthcare inflation continues to be a driving force in the business.

Our network solutions product line expansions and operations improvements continue to strengthen results in this important segment of our operations, and patient management results also improved, and Dan will discuss those as well.

We continue to work on a strategic transitions in our product line and are making progress there. During the quarter we repurchased 327,000 shares as a part of our long-term stock-repurchase plan. And we continued to explore our acquisition opportunities and, as you probably know, completed one during -- well just recently here subsequent to the end of the quarter.

Now going back to a little more detail on some of those points. In the marketplace, as I said, claims volumes appear to be flattening out a bit. Severity is up and that drives up the cost of Workers' Comp. The -- from what we can tell, some of the claims drop, particularly in California, may well have been due to the tort reform that was put in place and took apparently some of the profit out of the plaintiff's attorneys involvement in Workers' Comp. in California, and we are hearing from customers that that has also had a big impact on the volume of claims coming in.

Customer needs are evolving, led by enabling technology and market price. Our customers are quite rapidly changing the nature of the services that they buy from us. CorVel is unique in its ability to offer proprietary technology, national provider PPO networks and the most extensive local branch organizations, so we feel we are ideally position to do provide solutions to those customers.

As we will discuss later, CorVel continues to expand its product line as well as the definition of the markets we choose to serve.

ASP applications such as our CareMC and MedCheck software provide the platform through which we will deliver a broadening line of expanded products and also expansions in the markets we serve. Our large customers now require us to integrate our processes with both their internal processes as well as their particular approaches to their business, and so our software platforms are particularly important, and especially our ability to integrate them with their technology.

Much as technology transformed the securities trading industry over the last 20 years, we believe, so too, it is beginning to redefine transaction processing in the insurance markets and is really the driving force behind a lot of what appear to be other forms of symptoms in the market, but the technology changes are having a dramatic impact on the way healthcare is delivered in Workers' Comp.

The regulatory reform continues to be important in the business and while we had a quiet period for a few years, recently there's been quite a bit of activity in Workers' Compensation at the state level. Reforms begun in California a couple of years ago have spurred changes in other large states.

Issues like prompt pay, new fee schedules, fines for those who don't pay promptly or who have problems in their processing are a big factor, new utilization review regulations were very effective in California and are likely to be copied in other states. And more recently in playing on the same theme of technology, there are now clearing house initiatives that are gaining some attention in a number of key states, and particularly, are aligned with CorVel's capability to interface technology to the marketplace.

This trend requires investment in product development and by CorVel, as certainly as well as our competitors, and CorVel is structured financially to continue its record of fairly heavy investment in that area. That's been a part of our past and will continue in the future.

Healthcare inflation continues and is a force behind a lot of these state initiatives. A number of market forces have combined to make uninsured healthcare a challenge for providers. In addition, government programs such as Medicaid and Medicare provide inadequate reimbursement for people. As a result providers have no choice but to cost shift to employers in the private sector, and are constantly changing their billing techniques in this effort.

CorVel's customers expect to us protect them from bearing an unfair burden and that really is what has been driving the increase in our results for employers. The sophistication required to properly reimburse providers has been increasing steadily. CorVel's strategy remains to invest aggressively to produce industry-leading results.

We see additional opportunities for further innovation in the coming year, and have a very full slate of product development I'll discuss later. These trends increase the importance of specialty review products and out-of-network processing and the newest forms of smart processing and smart routing of work. CorVel's success in these areas over the last couple of years has been a key part of our resurgence and has led to our industry-leading savings for employers.

Now, I'd like to turn the discussion over to Dan Starck, who will cover our operations during the quarter.

Thank you, Gordon, and good morning everyone.

I'd like to take just a few minutes to cover some specific product line results as well as our main initiatives for the year.

In the patient management product line, revenues for the quarter were $25.8 million. This represents a 3.4% decrease compared to the December quarter of 2005 and a 1.9% decrease from the September quarter of 2006.

Profits for the patient management product line rose 40% from the December quarter of 2005. However, it did decrease 39% from the September 2006 quarter. As we've done over the course of the past several quarters, we continue to back away from inappropriately priced business and soft industry claims volumes continue to press demand for this service.

Internally, we are in the process of transferring our operations from a client server application to the CareMC portal. The use of our scan documents and smart routing by our claims processing rules engines will be a focus of technology development for the coming year, as Gordon alluded to earlier in our investments. The move of our internal operations to CareMC is expected to require most of the remaining 2007 before it produces all of the intended results.

In the network solutions product line, revenues for the quarter were $40.8 million. This represents a 12.1% increase over the December quarter of 2005 and a 0.6% decrease from the September of 2006 quarter. Profits are up 56.4% compared to last December, and up 0.2% from September of 2006. We do expect the soft claims market to continue to have a lagged effect upon medical review services. So volumes for this could remain sluggish in this sector for perhaps another year.

Specialty review service volumes have increased and this mix continues to -- this mix change continues to help improve our margins.

New versions of our MedCheck software continue to expand breadth and complexity of our offerings and the pace of innovation in this segment of our industry continues. Our investment in MedCheck are intended to support future additions to the breadth of our medical services. For example, we continue to add to our product line of directed care networks.

We are also in the process of expanding our involvement in the ASP market for medical review software. The industry is increasingly competing on the basis of total savings for customers, and this is definitely a trend which favors CorVel's industry-leading results.

In operations for 2007, we will really be focused on five key initiatives. The first initiative is the ongoing extension of our product line and network solutions. This project area is a priority almost every year, and it's certainly been a centerpiece to our business.

We continue to see, as was just discussed, opportunities to further expand our medical review services. While regulatory change can negatively affect this product line at any time and competitive forces can also change the results, it's difficult to provide guidance regarding these results. However, based on where we are today, we are planning on expanding the pace of our development efforts in this area.

The second initiative is focused on improving margins in our patient management service line. Although there was some decline in the sequential quarter from September of 2005, the year-over-year results show that we have begun to make real progress in this area. We expect gradual improvement to extend into the next year.

We have met a couple of focuses in this. One is, we have discussed a little bit earlier, is backing away from inappropriately priced business, but also a continued focus on productivity at the field level.

The third initiative is the expansion of our sales effort. Over the course of the year, we will be segmenting our sales force and expanding our sales support to achieve more effective results in specific market segments. In the quarter we did hire a new Vice President of Sales who joined the Company, and we are looking at how we can more effectively deliver results.

The fourth initiative, enterprise comp, involves providing new sales management technologies to employers, insurers and TPAs. Enterprise comp delivers a new approach to the management of Workers' Comp claims that we believe improves claims management out comes.

The last initiative is the expansion of our CareIQ line of directed care networks. We've begun this with pilot sites in early 2006, and we are on they're way to a national expansion. We have new software scheduled for the June quarter to be released and that software is focused on improving processing efficiencies in this service line.

Now, I would like to turn this back over to Gordon to cover current cash flow trends and our product development status.

Thank you, Dan.

Because our capital structure and our ability to finance our strategic initiatives is very important, we like to briefly cover the status of our Asset Management and cash flow trends in each of these calls.

Although our days receivable or days sales outstanding in receivables has been relatively flat this last year, we do believe that over the future years we will be able to achieve further improvement in this area. However, at the present time, it's no longer contributing to cash flow and that's good news, because it's probably largely because our business has begun to grow again.

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 detail will show that net fixed assets have actually declined by approximately 13% in the last year. This creates some drag on earnings but generates cash flow.

Our consolidated cash balance as of December 31st a year ago, in 2005 that is, was 8 million. By the end of the September quarter, we had increased cash to 22 million. And again, by the end of 2006 calendar year, we were up to 24 million cash on hand to finance acquisitions or other investments.

These cash flow trends reflect our financial discipline and our commitment to maintaining cash flow to support our strategic initiatives. Operating cash flow positions will be used to fund additional expansions as we move forward.

On the product development side, I would like to cover those projects that support the key projects Dan discussed. Network solutions development continues the pace, and we expect to expand our investment pace in the coming year. Medical review -- the medical review platform we have built largely MedCheck although it's increasingly being delivered through CareMC, is positioned for further expansions. We see quite a large amount of development coming in that area.

As I mentioned earlier, Sophisticated Medical Review differentiates CorVel in the marketplace. On the MedCheck side, which is just our bill review portion of that, the MedCheck development software spend rate has been increased as our results have improved, expanding ASP functionality for major payers, improving operations management, and expanding reporting and analysis are among the projects that are in progress at this time.

We expect the innovation in future years, insurance based financial transaction processing to require an ongoing rapid evolution in our technical capabilities. As I mentioned earlier, there's a parallel here between what went on in the securities trading industry and the trends we think will now sweep into healthcare.

CorVel's CareMC healthcare portal continues to be a trendsetter in our industry. CareMC was designed from the outset to be a portal in which a customer could interface their systems to those of a combination of managed care vendors, that is, not just to CorVel.

As communications technology continues to improve, the need to interface multiple vendors and multiple constituents in the healthcare process becomes increasingly feasible and very friendly and attractive. We are continuing to add claims management to this functionality and to scale out the system's capacity. There will be some investments over the coming year to require that, but as you are probably all aware, the technology is moving so fast that investments in hardware are no longer a driving force and most companies commitment to technology, really software development, drives the business.

Enterprise comp, that is the providing of new technology to the claims community, is also an important area of expanded investment for CorVel. Now that our business momentum is improved, we are increasing our investment in our enterprise comp initiative. The claims community is an under-served market and it is quite receptive to new ideas and new approaches to delivering improved outcomes for employers -- return to work outcomes, that is.

We usually talk about cash flow a little bit here and it's probably primarily of interest only to the analysts involved. Our EBITDA was 8.7 million in the quarter, up from 5.3 a year ago. Net income plus depreciation, then subtracting our changes in working capital and fixed assets, was 4.4 million in the quarter, whereas it was 7.5 million a year ago.

That, I think, highlights the fact that the business momentum has changed to the positive now and we are having -- we are no longer having the big drops in working capital and we are also seeing some improvements or some needs to invest in fixed assets. So, cash flow will not be as strong net of investments in the business perhaps as it was during the softest parts of the market.

DSO did improve to 53 days, but as I said earlier, changes in working capital for accounts receivable is not really, at the present time, the factor in our cash flow that it was during the couple of tough years we had. As I mentioned earlier, cash was at 24 million at the quarter's end. We did complete an expansion through an acquisition in enterprise comp of a business that helps to improve our ability to serve TPA's carriers and employers in that marketplace.

So cash will decline in the current quarter, perhaps to something like half of what it is now, though I really don't have a good view of where we will be at the end of the March quarter. Stock repurchases, as I mentioned earlier, were 327,000 shares in the quarter. That brings our investments in our own stock to 149 million inception to date.

We have repurchased 11.2 million shares over that period and, as you can tell, we currently have a little over 14 million outstanding. So our -- we have had a fairly dramatic impact on the amount of equity or capital that is required in our business. The diluted shares at the end of the quarter were 14.368 million.

This concludes our comments at this time. Dan and I will now be available to take questions from you about the quarter.

And we've had some change in our investors over the quarter. It was a fairly interesting quarter for us from a shareholder perspective, so we -- if there -- if some of the investors are not on today, I am prepared to talk a little bit about some of our segment data if that comes up.

So -- and if you are a new investor and have additional questions or information you'd like that we have not reported, please feel free to bring those issues up on this call. In the past, we have over the years structured our call to meet the needs of some of our investors that have been with us over a long period of time, and with some change in that population, some of you may have some new thoughts.

So at this time I would like to turn the call over to Latisha, and we will take any questions you might have. Thank you.

OPERATOR INSTRUCTIONS]

There are no questions in queue at this time. Mr. Clemons, do you have any further comments?

Yes, I will make a couple of comments to close, and then we will turn these guys lose.

This morning one of our competitors announced the acquisition of some assets from another of our competitors in the industry. At this time, I think, most of the discussion about that transaction should come from them and certainly will. We would suggest that the key assets in our industry are proprietary software and medical review capabilities, large PPO networks, a large field branch organization and the ability to handle out-of-network processing.

CorVel is the only company in the industry that owns proprietary assets of substantial size in all four of those key segments. The transaction that was announced this morning moved some of the lower margin portions of the business from one competitor to another but did not change the makeup of the key assets, the one vendor is a leading PPO provider, and the other is a leading provider of out-network-processing and those two key assets, and where each of those were strong in those areas did not change hands, understandably, and so the lower margin service components of the business were moved from one vendor to another.

There has been consolidations in our industry, one of our other competitors owned by a long-term disability insurer was sold to private equity during the quarter. This transaction moves another major block of business between vendors. But, I guess, our position would be that financial engineering will not dominate the landscape. Ultimately employers are buying a complete outcomes solution in Workers' Compensation, and as was already the case, CorVel is the only vendor with strong proprietary assets in all the key components of those services.

Other than that in the quarter, the only other comment I would make is that we did have continued large investments in G&A. I don't know if all those would be considered investments. But our G&A expenses were up. Some of that is changes in accrual versus cash accounting for audit expenses. So, in other words, creating some double accounting in the quarter of some expenses that will, in subsequent quarters be reduced because of those timing changes.

So I think G&A expenses might be a little higher in the quarter than we would expect them to be going forward. But we felt that it was a change we needed to make to properly reflect our -- the cost of accounting as a cost of regular expense that spread throughout the year.

Other than that I have no further comments. We appreciate your attendance today, and it's been an exciting quarter in the industry, and we think it will lead to a very eventful 2007. So we look forward to talking to you again in another quarter.

Thank you very much.

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