CorVel Corp (CRVL) 2008 Q4 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 performance 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 Securities and Exchange Commission, typically 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 your host, Dan Starck. Sir, please go ahead.

Thank you, Ashley. I'd like to thank everyone for joining us today to review and discuss CorVel's fiscal 2008 results and March 2008 quarter results. I'm joined today by our Chairman, Gordon Clemons.

Since the March quarter is the last quarter of our fiscal year, during the financial discussion I'll cover both the quarter information as well as fiscal year results. And as we have for the past several calls, I will be covering the financial results and future initiatives, and Gordon will be covering product development. After our overview, we'll open the call to questions.

Now to the financial results. Revenue for the March quarter was 77.4 million, which is a 9.1% increase from the March 2007 quarter. Earnings per share were $0.44 for the quarter, up 20% from the $0.37 reported in the March 2007 quarter. For the fiscal year, revenue was $302 million, up 10% over fiscal 2007, and earnings were $1.67, up 28% from fiscal 2007.

During the March quarter, in our traditional business lines, our network solution savings continued to expand and our case management business line appears to be stabilizing. We continued our strategic initiative of our enterprise comp expansion, which is our initiative of bringing a new approach to claims management, and repositioning CorVel as a full service provider to the Workers' Compensation market. And as we have in the past, we continue to make substantial investments in our current technology platform, a key building block in our strategic development and evolution.

From a marketplace perspective, claim volumes continue to decline to historic lows, based on a recently -- based on some recently released data, claim frequency declined approximately 2.5% in 2007. For the prior two years, claim frequencies had dropped at nearly 7%. The 2.5% decline in 2007 is much closer to the long-term trend for frequency decline of 3% to 4%.

Medical costs continue to become an ever growing part of the average Workers' Compensation claim. Medical benefits now make up nearly 60% of total losses. The average medical cost per claim continued to climb in 2007, rising by about 6%. Now this is the lowest increase in the average medical claim costs since 1995.

From a political perspective, states continue to develop legislation geared towards automating the healthcare transaction process. And industry consolidation has had a significant impact this past year, especially in the PPO area. While this has disadvantaged some companies at least access to technology or to PPO networks, CorVel has fared well in this situation because of our strategy of owning our own proprietary assets, such as our PPO. Overall, with the current market environment and the positive trends in our results, we're confident in our strategic direction.

Now I would like to discuss our product line performance, the specific results and our key initiatives for 2008. In our patient management line of business, revenue for the quarter was $33 million. That's a 17.9% increase over the March quarter of last year, and a negative 1.2% from the sequential quarter of December. Profit is up 69.8% over the March quarter of 2007, and up 2% over the December quarter of 2007.

From a fiscal year perspective, revenue in the patient management segment was 128 million. That's a 19.3% increase over fiscal 2007, and profit was up 67.4% over fiscal 2007. As most of you are familiar with, in the first half of 2007, CorVel acquired two claims administration companies, and the results of those acquisitions are included in our patient management results. We've continued to reposition our entire patient management business throughout the year.

Our case management business stabilized this past quarter, after showing very solid improvement for the prior two quarters. While we've been actively moving away from low-priced business over the past couple of years, revenues now appear to be firming and margins are stabilizing.

With the addition of our claims administration capabilities, CorVel is now able to serve all types of customers in the Workers' Compensation market. Whether that's insurance carriers, TPAs, as well as self insured employers, those that are looking for either a fully integrated solution or those that still prefer to unbundle their TPA services and managed care services. The expansion of our service offering has been received very positively from both current customers and prospective customers. And as we move forward we will be able to deliver our integrated product to customers throughout our national footprint.

The transfer of our internal operations from client server applications to our CareMC platform continues to move towards completion. And this will allow us to evolve the work flow processes in our case management business.

In the network solutions product line, revenue for the quarter was 44.4 million. This is a 3.4% increase over the March 2007 quarter, and a 2.5% increase over the December 2007 quarter. Profit increased 10.6% over the March 2007 quarter, and 2.9% over the December 2007 quarter.

From a fiscal year perspective, revenues in the network solutions business line was 174 million. This is a 3.9% increase over fiscal 2007, and profit increased 11.3% over fiscal 2007.

CorVel has now recorded 13 consecutive quarters of margin improvement in our network solutions product. These results are made possible by our continued efforts in a number of areas, most notably growth and savings improvement.

First from a growth perspective, in spite of a continued decline in the industry's total volume and significant levels of competition, we continue to see revenue growth in this product line. We're seeing better increases in our unit volume. And while we would like to enjoy a higher growth rate, we're also realistic about the environment.

From a savings improvement standpoint, we continue to improve, producing a significant benefit to our customers. As I mentioned earlier in the call, even though Workers' Compensation claims frequency declined by approximately 2.5% in 2007, medical costs increased by about 6%. Now, when comparing those results against CorVel's book of results and book of business, our network solutions results compare quite favorably.

While we experienced a very similar 6% increase in medical charges in 2007, versus 2006, our recommended payments were relatively flat, thus saving our customers nearly all of the increase.

Moving forward in 2008 we'll be focused on four key initiatives. The first initiative is improving our overall sales performance. We continue to expand and emphasize our sales efforts locally, regionally, and nationally.

We've made significant investments in our sales team in three areas, headcount, training, and CRM systems. We'll continue to add additional sales resources where appropriate.

The second initiative is the continued expansion of our enterprise comp initiative. Enterprise comp is a unique approach to managing Workers' Compensation claims, and one that we believe will improve claims management outcomes. Our enterprise comp team has been extremely busy over the course of the past quarter and year. And when stepping back and looking at the progress that has been made with this initiative over the course of the past fiscal year, it is significant.

CorVel acquired two separate claims administration companies, integrated those companies into CorVel and started to develop the platform of the future. We have taken our strategy from the white board to implementation, and we now possess a national service capability. While all integration activities have bumps, the integration of these businesses have gone well, and the financial results have met our expectations.

The March quarter was focused on the systems integration and the ongoing organizational development necessary to expand the company's ability to present itself to the employer market. Those efforts are on track and prepare the company now to continue building out the EC Vision.

The third initiative is the continued development, expansion of our network solutions product line. The performance of the network solutions line continues to be a major contributor to our overall performance. With every year, medical inflation rises, and medical reimbursement continues to become more complex. We believe these reasons emphasize the need for continued investment in this product line, and we'll continue development in four subsets.

First with our software, our MedCheck software is the underlying foundation of the 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 top-quality product to our customers. From a PPO perspective, we'll continue to strengthen our PPO network via better contracting and affiliate relationships.

CareIQ, which is our directed care network, delivers significant savings opportunities to our customers via not only unit cost savings but also utilization management.

And finally, from a specialty review perspective, we believe 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.

Our fourth and final initiative is the transformation of our case management business. While we've had improvement in the margin of this product, our real goal continues to be to reshape the delivery of this product. In the March quarter we started to implement a paperless work environment in a number of our case management operations. This is the first step of the transformation process. The implementation of a paperless work environment will allow us to add work flow tools, rules engine, and smart routing technology so that we can make meaningful and sustainable progress on the delivery of case management.

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

Thanks, Dan. As Dan mentioned, the March quarter was a particularly busy time for our development teams, as well as for the rest of the people involved in the launch of enterprise comp. The ongoing expansion of the enterprise comp service line offers both excellent short term and long-term opportunities, and will therefore continue to occupy an important portion of our product development priorities.

As we had hoped, our existing and longstanding base in managed care systems has provided a platform onto which to add full-service claims management solutions. Our sales efforts thus far in the employer market for full-service solutions and Workers' Compensation have indicated that prospective customers have a high interest in vendors that can credibly offer a service solution that integrates all related information in a smoothly functioning total claims management environment. We believe that market conditions are well suited, therefore, to the goal of our enterprise comp strategy.

Now specifically on enterprise comp, the development effort was focused on the integration of the acquired claims system, which we picked up last year, within the CareMC web portal which we have been developing over the last eight years. In addition, we're beginning to move some of the technology which has been productive for us in medical review to the claims environment. These projects will extend through the planning horizon with interim milestones.

In addition, during the quarter we had a busy schedule of projects in support of new customers beginning enterprise comp service in the current June quarter.

Secondly, on the CareMC portal, the CareMC portal including our medical review strategy, continues to be the centerpiece of CorVel's technological advantage in the marketplace. We committed to this project back when the dot-com boom was kind of the hot subject, and we have built upon that initial beginning ever since. Over the last year we have been working on case management improvements to CareMC.

At this time our efforts are focused upon bringing the acquired claims systems' functionality into CareMC, as well as to continue building out the work flow management tools we believe will produce superior claims management results.

Our third major area is medical review systems. Our brand name is MedCheck. This product is the technological leader in the marketplace. Political and regulatory changes, as Dan mentioned, promise to continue to make medical review a complex area in which CorVel's capabilities produce differentiating results for our customers. We are working on improved customer dashboards and expanding operation and management capabilities in this important aspect of our business.

And lastly, work flow management, which is the tool that we're bringing to the claims management expansion we're making in enterprise comp, CorVel's Scan One business has been an important component of our work flow management initiatives in both medical review and in the CareMC portal.

Scan One's data conversion tools allow businesses launching e-commerce applications to create less difficult work flow migrations from paper to digital interfaces. Often such difficulties have caused the migration to new platforms to go much more slowly than most vendors had previously thought.

Scan One provides a suite of data conversion tools developed to support CorVel's medical review businesses, and now additionally sold into accounting applications in the business services marketplace. Although this is a small part of CorVel's business, I believe one can see from these efforts that in our enterprise comp expansion and also in these work flow management applications, the company is able to leverage its solid technological foundations in logically contiguous new opportunities.

This concludes my discussion of our product development, and I'll turn the call back over to Dan.

Thanks, Gordon. I'd like to add just a few more items prior to opening the call to questions. Cash flow for the quarter was positive 6.6 million, with quarter ending cash balance at 17.9 million.

Our DSO decreased to 46 days. Stock repurchases were very small in the quarter, 3,800 shares were repurchased for $86,000. We've spent 162.3 million inception to date, and have repurchased 11.7 million shares inception to date. Diluted EPS shares for the quarter were 13,958,000.

In summary, we're pleased with the progress that we're making in a number of areas. We have been able to make substantial progress on our strategic initiative enterprise comp, improve operating margins and make long-term IT investments, all while achieving record earnings per share. Our ability to execute in all of these areas is only made possible by the outstanding work of the entire CorVel organization.

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

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). We'll pause for a moment to allow those callers with questions to enter the queue. Our first question is from John Szabo with Flintridge Capital. Please go ahead, sir. Mr. John, your line is open.

Thank you. Sorry. Thanks for taking the question. I guess the first thing was, on acquisitions, anything sort of new on any potential acquisitions similar to Schaffer or Hazelrigg?

John, I'd say that we continue to look for the right opportunities. We don't particularly have anything that's real hot right now, but we are really focused on trying to get the organic side of the growth going, and if the right acquisition comes up with the -- not necessarily the right price, but what I would say would be the right strategic opportunity, we'd execute on that. I think that we are in a situation where we've had a nice cash buildup, and we would like to do a very strategic acquisition that would really bring something new to the organization.

Okay. Would that be -- (inaudible).

John, I'm only catching part of your question here.

Oh, sorry.

That's all right.

What would be sort of an example of something that would be strategic? Would it be an adjacent market or a new product or service?

It would really be on our current strategy of repositioning the organization into this full-service vendor, and probably, and most likely in the third-party administrator market.

I think the issue for us right now is, we have a lot of integration activity going on, and we're really not necessarily in the market of just layering on more work to do. So we would really want to focus on, does this -- does an acquisition bring us a strategic either market, from a TPA perspective, or specific customers.

Okay. When you say market, you mean geographic?

Exactly.

Okay. And is it fair to say that Schaffer is completely integrated and that we've seen most of the benefit of that, or is there still a little bit more to go there?

I think that's safe to say. Most of the benefit has been realized from both acquisitions.

Okay. I guess just sort of a bigger picture question. If you look over the last three years, you've done a great job of improving the margins with a relatively small increase in the top line. In fact, your EBITDA margins have almost doubled.

If you look out over the next couple of years, how do you see the progression? Do you see further margin improvement, or do you see maybe an acceleration in the top line from new products and services, or just, how do you think about the next couple of years from here relative to what you've done in the past?

John, I'll take a first shot at it, and then I'll turn it over to Gordon as well. From my perspective, I think there's a couple of things going. In our patient management and case management product lines, we've seen some nice improvement in margin, as well in network solutions, and I think from a network solutions perspective it's going to be very difficult. We've seen 13 straight quarters of margin improvement. I don't know how many more we can sustain as that continues to get better.

The network -- or, I'm sorry, the patient management business is a fairly low margin business. And I shouldn't say too low. It's better than our case management business, but it's one that, what we really need to do is drive growth through the system.

So, we are heavily dependent on volume, and so for us to really expand our EPS and growth in the next couple of years, we want to return the company to a higher growth rate. Some of that may be acquisition. We'd like to see the organic growth rate at a higher rate, and be able to leverage the current investments we have on the product lines.

So the next couple of years really to me is about, how can we grow the organization and not necessarily how do we squeeze more out of it from a margin perspective. Gordon, did you want to add your thoughts?

Sure. I guess I feel that our nearest term opportunity is to move from a very tiny market share position in the TPA business to a much more representative share, and that does, I think, open quite a bit of opportunity to the company.

Beyond that, I think there will be some contiguous market opportunities that will be a little more clear perhaps a couple years from now, so I see the company with opportunities to continue this kind of expansion into contiguous opportunities. And I think the thing that really fuels it is that we have a high return on equity so ultimately, we are going to develop the capital resource to either acquire our way into additional opportunities or to build proprietary tools.

Okay. And I seem to recall from prior quarters, you talked about some of the sales opportunities from the acquisitions in the TPA market. And I think it was along the lines of sort of multistate opportunities. Is that playing out about as you thought, or what's the potential for further leveraging the top line from the existing TPA business that you have?

John, let me see if I can answer that in the area I think you're asking. We've realized most of the synergies between the two organizations, or bringing our managed care product to those, and so those did play out as we thought.

From a new growth opportunity perspective, I think that's probably been a little slower than we expected. And part of that has been, I think, just getting the organizations integrated to a standpoint where we have a common language, and that we're moving forward and selling this product.

If I was to look at the past year and really think about the investment we made in that business and the integration activity, I'd say we were very successful from the standpoint that we were able to buy the businesses, integrate them and basically secure 99% of the current customers. So from the first year investment, I feel that's very successful. I think now we need to be able to understand how we accelerate the growth rate there over the next couple of years.

Okay. I guess if you look out over the next year, maybe coming back a little bit to this sort of question of where do you go from here, if you just sort of annualize the fourth quarter run rate, that would get you to about a 6 or 7% EPS growth going into 2009.

Would it be unreasonable to think that you couldn't get another four to five to get to you a double-digit EPS increase from some of these initiatives that you've discussed today, or is it going to take additional acquisitions to kind of push the ball or push -- advance the ball a little bit more than just a current run rate?

I would say that that's not unreasonable. Our goals are certainly at a double-digit expectation, but there's a lot of things going on in the market right now, and from a repositioning standpoint, there's some things that we have to get through from a sales perspective and get the growth rate. We have to get some growth to be able to get to that double-digit rate, though.

Okay. Fair enough. Thanks for another good quarter. Appreciate it.

Sure, John.

And are there any further questions? (OPERATOR INSTRUCTIONS). We do have a follow-up question from Mr. John Szabo with Flintridge Capital.

Sorry, I thought I'd give someone else a chance. Just a couple of detail financial questions here. Do you know about what you're going to spend on CapEX for '09, roughly?

Our capex is probably going to be somewhere between the $12 and 13 million mark this year.

Okay.

We were at 16.5 last year, but that was off of 8.5 in fiscal 2007, and a 7.8 in fiscal 2006.

Okay. And is that -- what would that be for, primarily?

Mostly IT investment.

In the network solutions or sort of across the board?

In both supporting network solutions and the growth into the enterprise comp business, our claims administration software and integration into CareMC.

Okay. And -- thanks for the cash flow number, by the way. Did you happen to have the D&A number, or should I wait for the Q or the K to come out?

Better wait for the K to come out, John.

Okay, all right. And just, I guess, on share repurchases, are you -- you kind of went back and forth a little bit about that. Are we still basically trying to build cash for that big strategic acquisition that's coming at some point, or do you think there may be some balance of that in fiscal '09, or sort of where are your thoughts on that today?

Boy, John, you kind of took my comments and turned them into that we're actually going to buy something here. I mean, that was a pretty -- pretty aggressive there.

I would love to see you buy something.

And believe me, if we thought the opportunity was right, I think one of the things that's interesting, John, just as a side note, we've actually passed on four deals, we did two deals in the past 15 months. We passed on four others, just because we didn't feel they were the right fit for the organization at the time. And several of those were quite large.

So we certainly are looking all the time. We will continue to build our cash position, and if the stock is at a point where we think it's appropriate to buy, then we will. Gordon's areas of really liking to do share repurchases are here. Gordon, do you want to tackle that one a little bit?

Well, I would just add that I think it's possible that we would -- we don't like to see our shares move up, so we do try to keep track of dilution.

Back on the growth question, though, I would like to add that the cash at the end of the March quarter this year was, I think, a couple million higher than it was a year ago, even though one of the acquisitions was consummated after the end of the March quarter last year. So, I think that our form of growth comes partially, as I said earlier, through our high return on equity, which causes us to be so cash flow positive. So I think it's not quite the same as other companies who might be relatively cash flow neutral or even some that have to borrow to grow. If we're growing out of our own cash flow, I think that's a little -- it's not true organic growth, but it's not the same as a growth through increased leverage in the business, and I expect to see the company continue to be able to fund growth at higher rates than are implied by our last two or three years performance.

On the share repurchase, I think we're looking to build cash for a nice acquisition, but partly because we think that's the best use of our funds. We will continue, though, to be, I think prudent about the dilution in our stock, and if we get an opportunity to buy some stock back, that wouldn't be outside our plans.

Okay. Well, you know, I guess the way I look at it is, the company generates a tremendous amount of cash, and as you said you've got very high return on invested capital. And if you can replicate those returns in an acquisition, obviously that's the best use of your capital, and I would look forward to seeing more acquisitions, but as you said, I mean, obviously it's got to be the right one. So, in the meantime I guess we'll just assume that maybe the share count stays relatively flat for '09.

Yes, I think that's a reasonable forecast. One of the other strategic ideas that we do follow is to try to keep the amount of equity we have at work in a relatively small marketplace under control. And I think there have been times when companies with excellent strategies have had trouble generating EPS in our industry just because they have too much equity to apply in what's a relatively small space.

Right. Okay. Thanks again.

Thanks, John.

And are there any further questions at this time? There are no further questions. Mr. Starck do you have any further comments?

I would just like to acknowledge the folks who joined the call and thank them, and certainly look forward to talking to everyone again soon. Thank you.

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