CorVel Corp (CRVL) 2008 Q3 法說會逐字稿

Thank you for standing by. 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-K filed for the most recent fiscal year and quarter. These documents contain and identify important factors that 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 your hosts, Mr. Dan Starck and Mr. Gordon Clemons. Gentlemen, please go ahead.

Thank you, Molly. First I'd like to thank everyone for joining us today to review and discuss CorVel's December 2007 quarter results. I'm joined here by our Chairman, Gordon Clemons, and as we have for the past couple of calls, I' will be covering the quarter's results and future initiatives and Gordon will be covering product development. After our overview,, as we always do we'll open the call to questions.

Now on to the December quarter results. Revenue for the quarter was $76.7 million, which is a 15.2% increase from the December 2006 quarter. Earnings per share were $0.43 for the quarter, up 61% from the $0.27 reported in the December 2006 quarter. During the December quarter, in our traditional business lines Network Solution savings continued to expand and we recorded a second consecutive quarter of improvements in our Case Management product line. We continued to advance our Enterprise Comp expansion, our strategic initiative of bringing a new approach to Claims Management, and we also made substantial investments in our current technology foundation, as well as ensuring that we are prepared for growth by relocating our data center to a co-lo facility.

From a marketplace perspective, claims volumes continue at historic lows and premiums have been soft; however, it appears that things may be stabilizing. California always seems to lead the way for the rest of the country, and while there have been a number of years of double-digit premium rate reductions there appears to be a bottoming and even reports of a potential slight increase in rates for 2008. While claim volumes continued to be low, the severity -- that is the cost of claims -- continues to rise.

From a political perspective, states continue to develop legislation, mostly geared toward automating the healthcare transaction process. Several states have fairly significant legislation that took effect either in 2008 or will take effect in 2009; Texas, California and Minnesota to name a few. Industry consolidation has been significant this past year, especially in the PPO area. While this is has disadvantaged some companies that least access the technology or PPO networks, we believe this change has favored CorVel because of our long-term investments over the course of the history of the Company, and we own our own proprietary assets in our PPO and our systems. Overall, with current market environment and the positive trends in CorVel's results we are confident in our strategic direction.

Now I'd like to spend a few minutes to discuss the product line performance specific results and our key initiatives for 2008. In Patient Management, revenue for the quarter was $33.3 million. This is a 29.3% increase over the December quarter of 2006 and a 5.7% increase over the September quarter of 2007. Profit improved 174% over the December 2006 quarter and 26.1% over the September 2007 quarter. As most of you are familiar with, in the first half of 2007 CorVel acquired two claims administration companies. The results of those acquisitions are included in our Patient Management results. We've continued to reposition our entire Patient Management business.

In our Case Management product line we've shown improved performance over the past couple of quarters with both revenue growth and margin improvement. Over the past couple of years, we've made a conscious decision to move away from low-priced business, as well as improve internal efficiencies. While on the surface, it's easy to talk about, internally these strategies are difficult to execute at the field level. As a result of this move, our Case Management revenues declined in ten of 11 quarters. Expenses trailed down, just not as quickly as we would have liked. Now, though, it does appear that we may have found the bottom and we're starting to see an upturn in this product. In the past two quarters -- the September quarter and the December quarter -- we've seen a strengthening in our Case Management revenues while our corresponding expense reductions have reached more appropriate levels. This has produced two consecutive quarters of meaningful margin improvement in the Case Management business and had a positive effect on the Company overall.

With the addition of our claims administration capabilities this past year, CorVel's now moving into new markets and new services. The expansion of our service offering has been well received from both our current customers and prospective customers. As we continue to integrate our service delivery this next year, we'll be able to deliver our integrated product to customers across our national footprint. The transfer of our internal operations from our client server applications to our CareMC platform continued, as well. This will allow us to continue to evolve the work flow processes in the Case Management business.

In Network Solutions, revenues for the quarter were $43.3 million. This represents a 6.2% increase over the December 2006 quarter and a 3.3% increase over the September 2007 quarter. Profit increased 15.6% over December 2006 and 5.7% over the September 2007 quarter. CorVel has now recorded 12 consecutive quarters of margin improvement in our Network Solutions products. These results are made possible by our continued efforts in a number of areas; growth, savings improvement and internal efficiencies.

First from a growth perspective, in spite of a very difficult environment with work comp claims declining by upwards of 35% or more over the past few years, we continue to see revenue growth in this product line. Second, on savings improvement, we continue to make meaningful strides in our savings performance, producing a significant benefit for our customers. The combination of our MedCheck®®® software, national PPO, and specialty review service produces results that we believe outperforms the rest of the industry. As I mentioned earlier, there's been significant consolidation in the workers' comp PPO industry. In order to ensure that CorVel can compete head to head, we continue to invest in the development of CorCare, our national PPO. In September we announced that we had added integrated health plan, IHP, as an affiliate to our PPO. Third, from an internal efficiency standpoint, with the implementation of scanning, workflow tools and smart routing, CorVel's been able to utilize technology to leveraged the growth in the Network Solutions product line by moving work to the most appropriate resources.

Now I'd like to switch focus a little bit and talk about our focus for our key initiatives for 2008. The first initiative is improving our overall sales performance. We continue to expand and emphasize our sales efforts locally regionally, and nationally. While this is not a short-term return, we believe that we are starting to see some positive momentum in this area. Our sales opportunities continue to improve and we will continue to add additional sales resources where appropriate. The second initiative is the continued expansion of our Enterprise Comp initiative. Enterprise Comp involves providing new Claims Management technologies to all of our customers; employers, insurers and TPAs. In 2007, our Enterprise Comp team successfully expanded our service delivery capabilities to include claims administration, and they continue today to build both our presence and our capabilities across the country.

From an acquisition perspective, both the financial and business objectives have been met by the acquired companies and we expect to build on those successes in 2008. During the December quarter, the integration process continued on all fronts. Culturally,, both organizations have aligned well with CorVel. From a systems perspective, during 2008 we expect to achieve a fully-integrated data platform for all of our lines of service. That data platform will be the underlying foundation from which we'll continue to refine this delivery of our fully-integrated suite of services. All of this information will be accessible externally to our customers' via our CareMC portal. Overall we're very pleased with the progress of this initiative.

The third initiative is the continued development and expansion of our Network Solutions product line. The performance of the Network Solutions line continues to be a major contributor of our overall performance and we'll continue to invest in its future. Over the course of the past we've really focused on a number of areas and we'll continue with those in 2008. First of all software. Our MedCheck®®® software is the bedrock of our Network Solutions business. We have and will continue to invest in its development. As we move forward, we will expand its depth and complexity in order to deliver a top-quality product to our customers. From a PPO perspective, strengthening our PPO network via better contracting and affiliate relationships will continue in 2008.

And lastly, a specialty review. Over the course of 2007, ensuring that this product was seamlessly integrated into our medical review process was a high priority. We believe that there's significant opportunity with this product in the future. Additional resources have begun to pave the way for growth in this product in 2008, in both in the workers' comp market and potentially in the A&H market. We also continue to make our MedCheck®®® software available on an ASP basis. This offering continues to generate significant interest.

Our fourth and final initiative is the transformation of our Case Management business. I spoke earlier about our most recent successes in the Case Management product line. While we've had some very nice gains over the past couple of quarters our goal continues to be to reshape the delivery of this product in order to capitalize on our technological capability. CorVel went through a similar transformation process in our Network Solutions business. With the implementation of a paperless work environment, workflow tools, rules engine implementation, and smart routing technologies we believe that we can make meaningful and sustainable progress on the delivery of Case Management, which will in turn continue to improve the financial outcome.

Now I'd like to turn the call over to Gordon to discuss product development.

Thanks, Dan. Our development teams have never been busier. I'll summarize some of that for you. I'll consolidate the various projects under the operating priorities Dan discussed. It is important, though, to remember that healthcare information processing becomes more and more sophisticated -- or as it does and workflow tools become involved, everything is really integrated and all of our separate projects really deliver information and customer value through our CareMC portal. We have been steadily adding more and more customer value to CareMC over the years. This is an initiative that began in 1999. On the sales side, of course our first goal is always to try to build a better mouse trap and then all of the projects Dan discussed work in that direction to support our sales people with the best possible products. In addition, on the administrative side we have efforts underway to improve our systems in support of our sales efforts. For example CRM Systems are an important investment. We are improving systems in this area, primarily through leased software, as those kinds of tools are readily available. We are also now working with business intelligence vendors to improve our knowledge of the marketplace.

On the Enterprise Comp side our vision is to bring employers and TPAs throughout the country to a new and more effective approach to Claims Management. The key to this new service is a combination of rules engine and workflow management processes developed over the last five years in other areas of our total systems environment. Dan spoke to both the effort and that results in the Network Solutions area. We're now looking to bring that into the claims side. We install our medical review systems in the companies joining Enterprise Comp, or joining that family of services. In addition we will be integrating Claims Management software gained in our acquisitions into CareMC.

First we wanted to have a seamless continuum from the management of incoming claims submission through to Claims Management and medical management. Secondly, though, we want to bring ow new concepts for the management of workers ' compensation claims into the operations we have acquired. These are each meaningful efforts that will stretch out in phases throughout the coming year and certainly in the years beyond that. The combination of the various aspects of this total development effort will combine to create a new approach to Claims Management. We have seen what this did in our Network Solutions service and expect to take what we learn there into the Enterprise Comp business.

On the Network Solutions side, during the quarter we added a major in0patient network to our national CorCare network. This has already begun to add to our results. In the coming quarters we expect to continue to bring our MedCheck®®®® Select, or our specialty review systems, into improving interfaces with both our MedCheck®®®® bill-review product and to our CareMC portal. We will also be improving the electronic connections between our customers and both the specialty medical review portions of this product and our PPO. We are adding features to facilitate the integration of additional PPO affiliates, as well. Improving total savings is a key business priority, as Dan discussed, and new forms of smart routing are an ongoing initiative that improves results for our customers.

Recent legislation in some states is pushing for more electronic submissions of medical billings. Our phase one product was introduced January 1st of this year. Clearing house services extend our processing for providers and payors from the receipt of bills from providers for transmission to medical review and on to payors and all the way through the entire system to the posting of payments back to providers. We would like to participate in this entire continuum. Smart routing of supporting documentation will also be included. This work is related to the electronic medical records and member card initiatives you read about that are already underway in the other segments of the healthcare industry.

Expanding our Case Management services in CareMC that's been a key development project. During the quarter we begin the use of workflow management tools and the routing of work through the claims intake process and on through triaging and into Case Management. These features have been installed with one customer. We are learning from that implementation and will be adding refinements as we go through the year. In addition, we've made the investments necessary to bring scanning and document storage to both our Case Management and our expanding Claims Management processing. The combination of rules engine, workflow management and document imaging form the foundation for the smart routing we plan to continue developing in these services. In addition, for both our Enterprise Comp customers as well as for those customers buying just a subset of our service, we are continuing the development of dashboards. These tools will be configurable to each customer individually and we hope will improve the user experience within CareMC.

CarelQ systems, which are our directed care networks, have been the most complex of our efforts. Our CareIQ services involve us in the healthcare community in ways not included in other managed care activities. Building the many complexities involved in healthcare into a managed workflow environment is a complex task. Several modules, though, were completed in the quarter. During the quarter we moved our primary data center to a co-location facility to improve redundancy features and to prepare for future expansion, as Dan discussed. Much-expanded storage systems was installed as well, as we continue to scan an ever-larger volume of documents. This was a planned part of our long-term system strategy. At this point we have over 200 people now involved in the development, testing, implementation and support of our systems. Over the years the efforts of our development and operations management teams have been keys to our success and to our strong position within the workers compensation marketplace. We have had consistent in our strategic direction and our R&D leadership group has proven over and over that people are more important than the machines involved.

That concludes my comments on our product development area and I'll turn it back over to Dan.

Thank you, Gordon. I'd just like to add a few more items prior to opening the call to questions. Cash flow for the quarter was positive $2 million, with quarter ending cash balance at $11.3 million. Our DSO maintained at 48 days. We repurchased 171,473 shares in the quarter, spending $4 million. We've spend $162 million inception to date and have repurchased 11.7 million shares. Hard shares for the quarter were 13.731 million. Diluted EPS shares were 13.964 million. Although we had not planned to buy back stock last quarter, market conditions changed and at that point we felt it was appropriate to restart our share buyback.

In summary, we're pleased with the progress that we're making in a number of areas. We have achieved record earnings and made significant investments in the future of the business. We are starting to show growth in each of the main business lines, while at the same time improving our internal efficiencies. Last, we've been able to make substantial progress in our strategic initiative, Enterprise Comp. Our ability to execute in all of these areas is only made possible by the outstanding work of the entire CorVel field organization.

This concludes my comments and I'd like to open the call to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from John Sabo with Flintridge Capital.

Good morning, and thanks for another good quarter. I guess my first question is what was the impact on the operating expenses from the move of the data center?

John, the -- I -- the exact number is -- I'll get my hands around that here in a second, but --

Just ballpark, I guess, if you have it?

What's that.

Just ballpark would be fine if you have it?

The expense in the quarter was approximately $400,000.

Okay. And then should we assume that that would not be an ongoing expense from here or will there be additional expenses related to that change going forward?

There's -- it happened part way through the quarter, so there could be some additional expenses, but our goal here obviously would be to start leveraging that business, although I guess my thought here would be if we're going to have opportunities to continue to make substantial investments in that facility, which will leverage the growth of the Company we'll continue to do that. But I think from our perspective, we've come a long way in where our systems are maintained and how they're maintained. We feel like we have a class-A facility now that any company would be proud to have and we'll look to leverage that going forward.

Okay.

John, this is Gordon. I'll just add to that a little bit. There will be some ongoing expense to lease the co-lo -- lease access to a co-lo facility, and that's not trivial. We were involved in a data center that was in our -- in a high-rise building jointly with our development team and we're probably going to continue to occupy all of that space. So I think for the next year or so there will be a little more expanse than there was in the past.

So if I look at that -- the admin expense, the G&A, that $10.584 million, it took quite a jump from the prior quarter, so as I think about how that's going to go for the next several quarters, then I should probably assume that that $10.5 million is a decent run rate or maybe it falls back slightly?

Yes, it could vary a little bit but I think our efforts are focused on the top line. We've struggled a little bit with that expense and internally we've had some serious discussions about it, but I think investing in our future and the platform there has been our overriding interest.

Okay. And then I'm curious about your comments about the potential bottoming in the volumes. And, Dan, I think you said that you saw an upturn in Case Management volume and I was just curious, was that beyond the volume you may have gotten out of the two acquisitions? So in other words, was it more than just that?

Yes, it was, John. We've seen a strengthening on the Case Management revenues in the past couple of quarters, and so whether that's a leading indicator for claims volumes, we're not sure. But there's just been some reports that we've come across here in the last little bit that indicate that there may be some slight premium rate increases coming in '08.

Okay. If I could just ask one other question about the -- you mentioned the accident and health market. Could you maybe just help us size the size of that market and what the potential would be and did that contribute to any of the revenue growth in the quarter or is that something that's just sort of a multi-year effort before it becomes a material driver of your top-line growth?

It's a small part of our Network Solutions business today. We have shown some growth in it over the course of the past year, and the A&H market is significantly bigger than comp, upwards of eight to ten times larger than the comp market. But I think, John, it really is a multi-year effort for us here as we go forward. The specialty review product and our specialty review product specifically does very well in that market and we've hired some resources to try to sell into that market specifically.

Maybe you can just help me out, when you say specialty review product, what exactly does that entail?

It's really out out-of-network bill review process.

Okay, so [anything that would be] out of your network or out of someone else's network? I mean are you agnostic about that?

John, for a -- we're agnostic about it I think, but this would be the carrier or TPAs volumes and they would take their PPO discounts where they can and then they have some percentage of their volume that falls outside of the network. We have a product that is based on some specific database processes and is not just a simple fee negotiation product, so it's fairly conservative in its approach and is attractive to people in the A&H marketplace for that reason, and we've seen some improvement in the interest in that product.

Okay, great. I got it. All right, thanks very much.

(OPERATOR INSTRUCTIONS) Your next question comes from Brandon Fazio with Brant Point Capital.

Thank you. I was just looking at the numbers. Usually December quarter's been a seasonally weak quarter, with revs and margins typically lower. This quarter it seemed like you had lower gross margins but certainly the operating margin's flat and the revenues certainly went up. Can you just talk about some of the components there that may drive that or what gets the better than normal December results -- fourth quarter results? Thank you.

A couple of things I think contributed to that. One, on a sequential basis we had 4.3% revenue growth, which we traditionally haven't seen in the fourth quarter. There was actually the same number of days in the December quarter versus the September quarter this year, so we had some very nice pickup again on the revenue piece and just really have had some, we feel, momentum on the sales side, which I think really carried us through the quarter.

Okay. So this is really all sales driven is pretty much a little better-than-expected business wins or is it just some of your new products taking off?

There were some new wins. We've seen some growth in -- we really saw growth actually -- or not gigantic growth, but small growth in all business lines.

And I think we -- it's a a little early for us to know, but it would appear that the underlying claims volume on a same-customer basis improved a little bit. And it's hard for Dan to say, but I would note there's a remarkable correlation of his time with the Company and two successively improving quarters so -- and not to cast aspersions on the prior CEO, but I think Dan's done a hell of job.

Less impact from the holidays or whatever else?

No, he takes shorter vacations than I did, if that's what you mean. No..

That's tough to say because the way the calendar fell it actually didn't work very well because Christmas and New Year's were both on a Tuesday, which meant the Monday's were normally fairly soft as far as the level of work getting done or the amount of people at work. So it really feels like we've a little bit of sales momentum here. It's one -- one quarter does not a trend make, but certainly we're very pleased with where revenues came in for the quarter.

Okay. Great. Thank you, guys.

There are no further questions at this time.

Okay. Well, we certainly appreciate everybody joining the call and look forward to talking to everybody again soon. Gordon, anything else?

No. Thank you very much.

This concludes today's conference call. You may now disconnect.