CorVel Corp (CRVL) 2008 Q1 法說會逐字稿

Welcome to the CorVel Corporation 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 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, Celeste. And thank you all for joining us today to discuss the results of the March quarter.

Revenue in the quarter was $71 million. Case Management margin showed some improvement, while Network Solutions continued the strong performance of the recent quarters. EPS was $0.37, a record, up 70% from the $0.21 the same quarter the prior year. Both of those numbers are adjusted to put them on an equal footing with regard to stock-option costs.

During the quarter, our Network Solutions product line savings results expanded. This is -- our results for customers are what drive our bottom line as well. Patient management results improved. CorVel acquired a claims administration organization in California and, just this last week, added another along the East Coast.

Like to pause for just a second, before we get into the detail, to take a moment thank Judd Jessup on our Board for his very hard work over the last couple of years, to help us through what was a tough transition. And I'd also like to thank all the hard-working CorVel people who've done a great job getting started on the next wave of our growth.

Now we'd like to discuss each of our business segments in a little more detail.

On the market -- industry claims volumes appear steady; they don't seem to be going down like they had been, which is a help. Severity -- that is the cost of individual claims -- is up, which sort of favors our kind of business as well. Insurance premiums, though, are soft now, responding to the very low claims of the last few years. ASP applications, such as our CareMC and MedCheck software, also are important now, because the carriers are seeing lower premiums and looking for ways to reduce costs and improve efficiency. On the regulatory reform side, individual states are fairly active, from a regulatory standpoint. That is, they're passing changes in workers' comp -- things such as provider reimbursement, prompt-pay processes, and fines for people who don't reimburse providers promptly; expanded use of utilization review, and an ongoing interest in the licensure of PPOs which, in workers' comp, are called MCOs or other acronyms.

Healthcare inflation continues at a high rate, with the un-reimbursed healthcare becoming an ever-greater problem for providers. There's no way out for them but to push for higher costs in the private sector. And these trends make it ever more important for employers and private-sector participants to purchase review services, such as CorVel.

The cash flow characteristics of claims management services enable leveraging of the companies in the Business, which in turn has drawn the attention of private equity investors. Such financial investors have been acquisitive, and that has led to industry consolidation. Companies like Sedgwick First Health, Genix, and the managed-care arm at Concentra have all been acquired over the last couple of years.

Interestingly, most of the key participants in the industry have somewhat different market positions and different strategies. Perhaps this is common in a fragmented marketplace such as workers' comp, where the total market opportunities are quite large relative to any of the participating companies.

In conclusion, we see market opportunities consistent with our strategy and are encouraged that the acquisitions we are seeking will move CorVel quickly forward.

Now I'd like to turn the call over to Dan Starck, who will discuss operations.

Thank you, Gordon. And good morning, everyone.

I just want to take a couple of minutes to review the product line-specific results, as well as some of our key initiatives for the year.

So we'll start with our patient management product line. Revenues for the quarter were $28 million. This represents a 0.3% increase over the March quarter of 2006 and an 8.4% increase over the December 2006 quarter. Profits for the product line increased 11.7% from the March 2006 quarter and 64.6% from the December 2006 quarter.

As Gordon mentioned, during the quarter, we completed the first acquisition in our Enterprise Comp strategic plan. For the sake of today's call, these operations are included in our patient management product line reporting. And I think as anybody who's on the call has probably seen, we've also completed another acquisition this week.

We continue to reposition our patient management business and to back away from inappropriately priced business. The addition of the two acquisitions we've recently completed opens CorVel to both new markets and to new services. Each of these organizations brings both new services and technology to CorVel.

Early results in California have been on plan and are very encouraging. Adding our managed care to the service offerings of Hazelrigg gives them a powerful product offering. CorVel's financial strength, our public status, technology and sales support have helped the acquired company focus their efforts specifically on customer service.

From an internals perspective -- the transfer of our internal operations from client server applications to the CareMC portal continued this quarter. We expect to be 100% complete with our transition by the end of this calendar year. Once completed, we'll be able to employ the use of our document scanning and our smart routing technology that exists in our claims processing rules engine within the patient management product line as well. These are tools we have successfully employed in Network Solutions. Those efforts will be a focus of our development in the coming year in patient management.

Turning to the Network Solutions product line -- revenues for the quarter were $43 million. This represents an 11.5% increase over the March 2006 quarter and a 5.3% increase over the December 2006 quarter. Profits in Network Solutions increased 46.8% over the March 2006 quarter and 7.5% over the December quarter. Results in Network Solutions reflect the ongoing improvements we are making to both our software and to our specialty review services, and we continue to see opportunities to further improve savings for our customers.

At this point, we're working to improve the implementation of new techniques introduced in calendar year 2005. As a result of other industry consolidations, CorVel is now one of only two National Workers' Compensation PPOs. Our commitment to having a complete national offering of the unique workers' compensation MCOs licensed by individual states makes our national PPO uniquely tailored to the niche requirements of our industry.

Our PPO results have been strong in the past few quarters, and further expansion is a high priority for us. Our continued emphasis on our specialty review service products has also helped us achieve some mix change, and this mix change has continued to help improve margins. New versions of our MedCheck Software continue to expand the breadth and complexity of our offerings. It also continues to add to the quality of our results by driving better savings for our customers. We expect to sustain our pace of change and innovation in our software in the future.

Now I'd like to cover the five key projects that we have going this year. The first is the ongoing extension of our product line in Network Solutions. Network Solutions is a high priority for us every year and has been a centerpiece to our business. And we continue to see many opportunities to further expand our medical review services.

We believe that the way to do this is to continue to invest in our software in order to continue to improve our industry-best total savings results. The industry is increasingly competing on a basis of total savings. Therefore, as we deliver better savings for our customers, their return improves, which in turn drives CorVel's results. Our expectation is that we'll continue to build on our recent success in the Network Solutions product line that we've enjoyed in the past few quarters.

The second project is focused on improving our margins in the Case Management service line. We continue to have a number of initiatives in order to accomplish that goal -- first, in really evaluating all of our price points to ensure we are receiving proper value for the services that we deliver; and number two, delivering our Case Management product through more efficient means. We've started to make some progress in the area, and we expect to make better strides as we finish our system conversion to CareMC and we're able to implement improved workflow processes.

The third project is the expansion of our sales efforts. We've now segmented our sales team in order to employ a multi-tiered selling process that is intended to create focus at the national, mid-market and local level. Improving our representation at the highest levels within the industry is a key priority for us. And our newly established national sales team is getting started on this important task.

I would be remiss if I did not comment here a little bit on last year's sales results. While the annual growth rate for fiscal year 2007 is 3% in the aggregate, we're very excited about the areas in which we are experiencing growth. We've actively moved away from inappropriately priced business in the Case Management product line and have seen that product line reduced by 5.8% over fiscal year 2007.

However, our focus has really been on the higher-margin Network Solutions business line. And we've been able to grow that product line by 9.6% over the course of the past year. We want to grow the business overall, but at this point we're focused on growing the right business, and we've seen good results in those areas.

The fourth project, Enterprise Comp, involves providing new claims management technologies to employers, insurers and TPA's. Enterprise Comp delivers a new approach to the management of workers' comp claims that we believe improves claims management outcomes. Expanding this program to achieve a national presence will be a central theme for CorVel this year.

The completion of the two acquisitions provides us with the platform to deliver this service on a national basis. To speak specifically regarding our first acquisition, we're pleased with the early results from our California acquisition, from both a sales perspective and operating perspective.

Our sales pace and market presence have gained momentum not only in California, but on the entire West Coast since the transaction. The integration of the two organizations has gone well over the past few months. Both CorVel and Hazelrigg employ the philosophies of delivering top-quality service to its customer. So there was immediate common ground from which to work.

We've started system integration. And in fact, we've utilized integrated data in our new dashboard that will become available in the next couple of weeks. As I said, overall, we're pleased with our progress in this area.

The last project is the expansion of our CareIQ product line of directed care networks. Over the course of fiscal year 2007, we made significant strides in rounding out our provider network and developing the infrastructure needed to support the CareIQ product line. New software that is scheduled for release in the September quarter will be focused on improving processing efficiencies in this service.

Now I'd like to turn it back to Gordon to cover current cash flow trends and our product-development status. Gordon?

Thanks, Dan.

Our cash flow is a reflection of our profit growth, obviously, together with the capital management, though, that we have used to create a relatively small balance sheet over the years.

First of all, our AR has remained in control, at about 53 days sales, which supports our cash flow trends. Our net fixed assets have declined by approximately 66% in the last year. That is not capital additions, but just the net fixed assets on the balance sheet.

Our consolidated cash balance at the end of calendar 2005 was $8 million. By the end of 2006, it had risen to $24 million. Although we completed an acquisition in the March quarter and repurchased $22 million of our stock in the last 12 months, cash at the end of March was again at $15 million. Cash flows were increased, in fairness, by $13 million during this same year from stock-option exercise and related tax benefits. We normally manage our repurchases of stock to at least offset option exercises and, over the last 10 years, to reduce the total shares outstanding.

As we announced this week, and as Dan has explained, our primary use of cash at this time is in the expansion of our Enterprise Comp programs. We attempt to use our cash to take advantage of unique opportunities. Sometimes we've had to be patient to find what we want, but we are well positioned to respond when we do see unique situations.

On the product-development side, I'd like to talk about the projects that support the initiatives Dan just discussed on the operations side. We have had an expansion over the last year in our total investment pace in product development. The Network Solutions project development continues with emphasis on specialty review services -- the CareIQ process that Dan just described -- and also on PPO support programs.

In the MedCheck area -- which is our bill-review system and is a flagship product for CorVel in the industry -- our spend rate has actually increased, even though we were in a slower period. Our focus is upon expanding ASP functionality where we see opportunities with major carriers, improving operations, management and expanding reporting and analysis. We are also continuing investments in the supporting infrastructure -- that is the hardware and co-location type activities.

CorVel's CareMC healthcare portal is increasingly integral to our operations. Subsequent to the end of the quarter, we introduced expanded dashboard capabilities and showed those in the recent National Trade Show. This tool extends our ability to consolidate multiple data streams for customer reporting. During the current year, we are completing the transfer of our Case Management services to this platform as well.

On the Enterprise Comp side -- and this is our branding for a line of claims management services and technology -- we plan to use CareMC as a switch through which we can interface multiple claims systems to create a national claims data warehouse. CorVel's combined technology resources have been built from the beginning 20 years ago to support individual offices and small businesses. As a result, we can add capabilities almost immediately to any new acquisition. And in turn, these new companies each possess technology assets of incremental value to CorVel.

One key in our acquisitions is to find companies whose strengths do not overlap with CorVel's. To the extent that an acquisition lacks tools of importance, they become a more attractive partner for CorVel, before we can quickly bring our systems technologies to them.

In the quarter on cash flow, we had EBITDA of about $11.4 million; that's up from $8.7 million in the preceding quarter. Net income plus depreciation was $8 million, up from $6.3 million in the December quarter. Both these numbers are records for the Company.

As I reported earlier, our AR was at 53 days, and we finished the quarter with $15 million in cash to support our ongoing expansion efforts.

On the stock-repurchase side, though, we have continued to repurchase stock when we see opportunities. Total to-date expenditures on that are $154 million. We have repurchased 11,359,000 shares. We had 147,000 shares repurchased in the quarter, in spite of our efforts to complete acquisitions.

That concludes my comments at this time. And I'd like to turn the call over to Celeste for any questions we have.

Thank you.

(OPERATOR INSTRUCTIONS) Jennifer Taylor with Royce Funds.

Hi, good morning.

I was just wondering if you could give a little more color around the acquisition, just in terms of just specifically, what you paid for it; what kind of revenues they had, and just generally a little bit more information about how -- if you could quantify the contributions that you might expect over the next year or two, little bit further.

Sure, Jennifer. This is Dan.

It's a little tough to project what the contribution will be going forward but --

Yes, thanks.

The purchase price -- and I'd have to remember the 8-K -- the purchase price was approximately $12 million, with -- we believe the revenue contribution is about a $16 million-per-year run rate. We recognized two months of revenue in the quarter.

Okay.

Okay?

Great.

(OPERATOR INSTRUCTIONS)

Celeste, can I just chime in here a minute?

Sure.

All right.

Just to help Jennifer out a little bit, and provide a little more thought around the acquisition -- or now there are two -- we service a line of TPAs across the country. That market remains a strong one for us, and we added a customer in the quarter. We provide a range of services, depending on the size of the TPA. And then, as we've described, our Enterprise Comp services are designed to take our technologies, that we feel we've done a lot to perfect in the bill-review side, and bring a lot of the rules engine technology over into claims processing.

We work with TPAs on a range of types of combinations of service. And now we see the opportunity to provide claims management services where they're appropriate. There are certain markets that we can't reach unless we can deliver claims management services. And in other markets, we work a lot with our current customer base in the TPA market.

So our total program in the Enterprise Comp sector is fairly complex. And I think, as Dan said, we don't like to provide guidance. But I would say we are excited about this. The acquisition was accretive in the quarter and is going very well. It's obviously a little early to say a lot; things can change as you go forward. But so far, it's been exceeding our expectations.

Are there any further questions?

We have a follow-up question from Jennifer Taylor.

Hi, thanks.

I guess we're having a quasi-private conference call here. But --

That's fine.

I had missed a couple of your comments on the -- and by the way, thank you very much for the detail and follow-up. That's very helpful.

I did want to kind of circle back to some of the comments around the private equity; I had missed it. And just in terms of -- I don't know if that's -- you're seeing that in tandem, or as competition as part of the acquisitions you're looking at, or sort of what role that -- or impact that's having.

Well, we haven't seen new competition coming from that effort. I would say that the cash flow characteristics of our industry are quite positive. And it's possible to run businesses with small balance sheets. So I think it makes it attractive to financial buyers.

That's right.

We had assumed that they would be competitive looking for deals. But I think that they've gotten so big, they're looking at the bigger deals. And we find the market attractive for smaller companies that are looking to partner up with us. But they have changed the face of our industry somewhat.

And they're not all private equity players. Some of them are HMOs looking to do a little bit in workers' comp and other major companies. I think the acquirer of Sedgwick was not somebody who had been really heavily involved in workers' comp, so --

Okay.

-- there's a range of people looking. And it's -- I think some of the companies in our industry that had struggled a little bit kind of ran out of patience, or energy or something, and coupled up with bigger companies. And that makes a lot of sense. It hasn't changed the industry a lot, though.

Okay.

So from a -- not only from a competitive acquisition standpoint, also just from rationalization, though, of all these services, it's fairly healthy at this stage, I guess.

Yes, I think so. There are some very different niches within workers' comp. And I think we've been unrepresented in some of the market segments in the past. And that was our own fault. We weren't quite as aggressive, I think -- or I wasn't -- as we should have been. And we've got some fresh blood in the Company. And they're off slaying dragons that used to scare me away.

So I think that's been a very nice transition for us over the last year, although it's wearing me out. But I think they're all off running.

And yes, I think there's a rationalization of some of the services. I do think that there are some intelligent and interesting strategies from our competitors. I mean, some of them are doing, I think, very good work, and just having different approaches to the market. And they sort of pursue different niches. And some of them have been very successful in their own choice of particular strategies.

Okay, that's great. Thank you.

Yes.

Are there any further questions?

There are no further questions. Mr. Clemons, do you have any further comment?

Oh, I always have more to say -- no.

I would like to thank everybody for joining us on the call today. We have a few prodigal sons back on the call, which is fun for us to see. We've had an interesting time. And I think we see some real opportunity in the marketplace. We look forward to the coming year with a lot of enthusiasm. And we're excited to be off on some new development efforts. And we'll look forward to talking to you guys again next quarter.

Thank you.

This concludes our Conference Call for today. Thank you for your participation. Please disconnect at this time.