CorVel Corp (CRVL) 2009 Q1 法說會逐字稿

Thank you for standing by and 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 the actual events or results may differ materially. CorVel refers to you the documents that the company files from time to time with the SEC commission, specifically the company's last Form 10-K and 10-Q filed for the most recent fiscal year and quarter. These documents contain identify important factors that could cause 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, and Mr. Gordon Clemons. Gentlemen, please go ahead.

Thank you, Tina. This is Dan Starck. I'd like to thank everyone for joining us today to review and discuss CorVel's June 2008 quarter results. I'm joined by Gordon Clemons, our Chairman, and as we have for the past several calls, I'll 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 June 2008 quarter results. Revenue for the quarter was $78.2 million, which is a 5% increase from the June 2007 quarter. Earnings per share were $0.40 for the quarter, up 3% from the $0.39 reported in the June 2007 quarter. When comparing the June 2008 quarter to the June 2007 quarter, in our traditional business lines, network solutions results continued to improve from our expansion in our customer savings and growth in unit volumes. The case management business line also showed improved margins and revenues as well. We continued with our enterprise comp expansion, our strategic initiative of bringing a new approach to claims management and becoming a full service provider for the workers' compensation market.

With our traditional business growth, our enterprise comp expansion, and the infrastructure required to support our transition, over the course of the past year, we've experienced growth in our general administrative expenses. As we've discussed before, CorVel is in the process of becoming a full service provider to workers' compensation industry and in the past 18 months we've acquired two claims administration companies in support of this initiative. Following the completion of the acquisitions came a period of analysis and setting forth of development plans. At this point, we are now investing to implement our plans for enterprise comp.

Our investments have been in three main areas. First, information technology. Our objective is to bring a unique solution to the workers' comp claims handling process and the foundation of that plan is systems driven. As with many projects, up front investment is required to ensure long-term growth and stability, and we believe this situation is no different. While the investment has been significant, we expect that it will begin to pay dividends into the future and will be the foundation upon which we will build. The second area we've added is in people and resources. We've added senior level managers to CorVel in order to manage and integrate our acquired companies as well as support the continued development process of the entire enterprise comp product line. From a training and integration standpoint, the third area, we've added additional services and capabilities and we've invested in training our account executives and all of our managers on our new products and services. The result of this is a total expense run rate that is a little higher than we would prefer and we've already implemented some cost containment measures to try to reduce that.

Now, from a marketplace perspective, the workers' compensation market continues to be soft. Claims volume have continued at historic low levels and medical costs continue to climb. The average medical cost per claim continued to climb in 2007, rising by about 6%, while medical benefits now make up nearly 60% of total losses. For comparative purposes, only three or four years ago, the medical costs only were approximately 40% of losses. While industry consolidation was busy this past year, it's been relatively quiet thus far this year. However, last year's activity is still generating considerable activity in the marketplace. Overall, with the current market environment, and opportunity that we see ahead, we're confident in our strategic direction.

Now I'd like to discuss our product line performance specific results and our key initiatives for 2008. In patient management, revenue for the quarter was $33.3 million. On an annual basis, that's a 10.2% growth rate and on a sequential basis it's a 1.3% growth rate. Profit on an annual basis is up 32.3% versus the June 2007 quarter, sequentially, it's down 14.7%. Our initiative to reposition our entire patient management business continues. In case management we've been actively moving away from low priced business over the past couple of years, as well as working to improve our efficiencies. While our strategy is basic, it is translating into better results as our revenues have firmed, even slightly improved and margins have improved.

With our patient management business, we continue to develop our claims administration capabilities. Bringing this product to the market allows CorVel to service all types of buyers in the workers' comp market. As I've already remarked, we have made significant investments in this area over the course of the past year in all phases, systems, management and training. From a network solutions perspective, and product line, revenue was $44.8 million for the quarter. This is a 1.7% increase compared to the June 2007 quarter, and a 1% increase over the March 2008 quarter. Profit is up 5.7% over the June 2007 quarter, and down 1.7% from the March 2008 quarter. Despite a soft market and a continuing decline in the industry's total volume of Workers' Compensation claims, we continue to see growth in our network solutions product line. Our MedCheck software and smart routing technologies have helped our savings performance continue to deliver significant benefits to our customers. While medical charge inflation has grown at a rate of 7% to 11% over the course of the past few years, our savings improvements have outpaced the increases. Across our national book of business, our recommended payments for our customers are trending lower. Changes via consolidation in the PPO market continue to create opportunities for us this year.

Moving forward in 2008, we'll continue to focus on four key initiatives. The first initiative is improving our overall sales performance. We've made significant investments in our sales team in a number of areas. Headcount, training, and CRM systems. As I mentioned earlier in the call, this is also a piece of our overall growth in expenses and part of a long-term investment. Some of this will dissipate in future quarters, but the process of education and training is one that we will be invested in as we continue to execute our strategic change. The second initiative is the continued expansion of our enterprise comp product. Enterprise comp is a unique approach to managing workers' comp claims, one that we believe will improve total claims outcomes. Earlier, I spoke about the investments we have made to help ensure our future success with this initiative. The June quarter was focused on customer implementations, systems integration and the ongoing organizational development necessary to expand CorVel's ability to present itself to the employer marketplace.

The third initiative is the continued development and expansion of our network solutions product line. While we've had strong performance in this area, we continue to invest to ensure its future success. Development of our MedCheck software is always a top priority. Two of the other pieces of our network solutions product line that we're continuing to develop are, number one, our PPO. Via better contracting and affiliate relationships and CareIQ, our directed care network. Our directed care network delivers savings opportunities for customers in both unit cost and utilization management, and we continue to develop it and it's generating significant interest in the marketplace. While there's only a small portion of our revenue today, we expect that directed care will play an increasing role in the future.

Our fourth and final initiative is the transformation of our case management business. As I've said earlier, we've seen better performance in this area over the past few quarters. In the June quarter, we continue to expand our implementation of 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 and smart routing technologies, so we can make meaningful and sustainable progress on the delivery of case management.

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

Thanks, Dan. The June quarter was a particularly busy period for the development teams. Historically, companies valuing information management technology have been focused primarily upon the capture of data and upon its use in the traditional processes within a company. In, fact many of the systems primarily for financial reporting. In CorVel's business, systems often manufacture our product, if you will. Further, the focus of our development now includes more than just the collecting and storing of information. Also now part of development is the analysis and capturing of CorVel's business intelligence in our rules engines, and CorVel's domain expertise in our work flow management tools. Such efforts bring with them a requirement for new types of business development efforts, more involved than just capturing and storing the data processed within the business. These initiatives are also an important part of our vision for enterprise comp.

Enterprise comp in the quarter included the adding of two new large enterprise comp customers and completing the work necessary to meet their unique needs. Efforts will continue throughout the coming year as well, to migrate claims applications from our acquisitions to the work flow and rules engine based systems that we're building in all of our service areas. In the CareMC area, CareMC is central to all of our services as well as to how we intend to produce unique results in the workers' compensation claims management marketplace. During the quarter, we added vocational management tools to CareMC, incorporating our preferred work flow management tool sets. We are now implementing the resulting application. As we add new features or transfer features from legacy platforms, we are converting the new implementations to the rules driven work flow processes that increasingly are the foundation for our new approach to claims management. Software we pick up in acquisitions must be both integrated to CareMC and rewritten to incorporate work flow techniques or that's work flow management software. This can be a complicated total task and these efforts as Dan discussed, have added to our expenses.

In the medical review area, this is our MedCheck and related PPO processing technologies, we had some changes in the marketplace that we've discussed in prior calls, which have improved the opportunities for leased PPO access, we call this the EPPO market, that is electronically connected to our PPO, and those changes in the marketplace have added opportunities for the company. During the quarter, we added improved processing for EPPO customers and completed a systems work related to adding a couple of new customers in that service. Reviewing and QA and customers claims downloads is also a CorVel strength, related to our PPO processing and bill review. Cleaning data in this manner improves our ability to create superior results for our customers and improves their own use of the same data. In the quarter, we had improvements to this particular subset of our total service program. Although yet to be completed we also continued work on a new operations dashboard we expect will improve the management of our internal processes in medical review.

On the work flow management software side, a new version of software for our CareIQ directed care network, as Dan discussed was completed for diagnostic imaging. The new software incorporates the company's work flow management tools. This is an important milestone as the directed care marketplace requires complex service delivery and yet must also meet the timeliness expectations of claims professionals, patients and healthcare providers. As we have said before in these discussions, we expect directed care to increasingly be an integral component in both our patient management and provider management service areas. On the IT infrastructure side, we had a busy quarter as well, in anticipation of the computing needs of the future, the company has made some large investments to build out an increasingly strong hardware and communications platform. Further, we are investing in systems virtualization, a technology that facilitates server consolidation and the provision of hardware redundancy. Developing both new software and new hardware technologies simultaneously is financially and resource intensive. But we believe is critical to CorVel's goal of providing total disability management solutions to major national employers. This concludes our discussion of product development.

I'll turn the call back to Dan.

Thank you, Gordon. I would just like to add a few more items prior to opening the call for questions. Cash flow was a positive $3.8 million, with quarter ending cash balance at $21.8 million. Our DSO maintained at 46 days. We repurchased 100,000 shares in the quarter and spent $3.7 million on the repurchases. We spent $166 million inception to date and we've repurchased 11.787 million shares. Hard shares for the quarter were 13.758 million, diluted EPS shares were 14.045 million.

In summary, we're making progress in the execution of our strategic initiatives. We believe that we're making the investments necessary in order for us to become successful long-term. We're seeing positive organic sales growth in a difficult claims environment and our cash flow continues to be strong. These results are only made possible by the contribution of the entire CorVel organization. I would like to now open the call to questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). We'll pause for just a moment to allow those callers with questions to enter the queue. We have no questions at this time, gentlemen.

Okay.

I'm sorry, sir. We do have a question now from [Dick Herber] with FBH.

Hello, guys. Can you hear me.

Yes.

Very good. Just a question on the up front spending initiative and the I guess the disconnect for revenue generation within, if you could speak to how long those initiatives have to be put in place before we'll see positive impact.

Dick, it's a little hard to say just because of the strategic transition I think we're in right now. We've certainly made the two acquisitions, we've seen benefit from the acquisition activity on the revenue side as well as some synergies from that. And now as we do the integration of the software, and really develop the underlying foundation, that should be a lead -- that lead time is a little difficult to project, simply because we're really embarking on an area where we're going to put work flow management into something that really hasn't been done before. If I could liken it to a couple of things maybe the company's been through before, it took the company a couple of years to move from basically a two to three year process of moving from a completely paper-based system on its bill review business to moving to scanning and implementing work flow technologies. We'd like to think that, or I'd like to think that we've learned a lot in that process, and it won't be a two to three year process, but certainly we are moving into a new product line.

We're competing against some formidable competitors but ones that we believe we can take on and do well against by bringing a different solution and not bringing just the same what I would say traditional solution to claims management. So we would like to see more traction on the sales side. However, we also understand what we're up against, and we are selling a combined service today that we believe is very good and we believe we'll continue to evolve that process here in the next six months to 18 months as we get the software integrated, and are able to really convince that market that we have a different and differentiated product.

The two new large customers on the enterprise comp, I guess if you could speak to that a little bit related to how you won those and then also the upfront work that needed to be completed this quarter. It sounded like maybe that's in front of truly having revenue recognition with those two new wins.

I think that is and there's two -- let me -- I won't name them individually, but there's certainly two different customers. One of the customers was a traditional managed care customer of ours and they are now an enterprise comp customer and added claims administration. We did a fair amount of programming to bring them up. They are a national customer and we have now representation in all 50 states and are able to handle claims in all 50 states based on their needs. Another of the customers was specific to California, but did require a significant amount of upfront programming and hiring, if you will, just to make sure that we were able to facilitate their business, and how they wanted to be able to report and look at their business. The piece that I think was very strong in both of those new customer sales was their ability for -- or our ability to relate where we're going with claims management to them, and they believe in where we're going and we saw that as a very positive sign.

And when you look at your historical ROE based on business and the new model, if you will, could you speak to the -- I know it's way early to truly know how that shakes out, but your expectations on a trend line, whether it be in line, a little bit less than or greater than what the historical ROE trend line has been on your new business adds.

Well, this is Gordon and I'll -- I kind of enjoy those things so I'll grab that one. I would say that the margins in the enterprise comp area are a little better, or at least our sense is that they will be a little better, and they have been so far than in our historical business position in just managed care. I don't think we see the capital intensity in the enterprise comp area as being meaningfully different than it is in managed care. In many ways, the two are tightly linked. So as the managed care vendor we were the subcontractor to TPAs and the insurance companies as we remain, and so the services are fairly similar, the margins are a little better. I would think the return on equity trends would be similar. We are spending more on systems, but I feel that can be -- in the short term there's a little bit of investment in some of this. As Dan mentioned, we took customers that wanted us to service them nationally, and in one year CorVel moved from hardly being in the business to handling a national customer needs. So there were upfront costs there but as we trend out over the future, we would like to think that this -- the balance of the economics will be similar in the enterprise comp market, if not a little better, than what we experienced in managed care.

Last question, related to the mention of cost containment measures, just curious if there's any additional commentary that could be shaped around that?

Well, we're looking at all the opportunities. I think the thing that -- what I want to make sure that I think we come away from the call with is we're significantly invested and we are going to move forward with all of the projects and the items related to our strategic initiatives and the execution. I think we don't have a large scale, what I would call cost reduction plan. We're going to focus on driving the initiatives. We're looking at items unrelated to the strategic initiatives as to where we can contain costs. But John -- or Dick, for us, what we want to make sure we do is drive through the initiatives in the investment period.

Sure.

(OPERATOR INSTRUCTIONS). And we have no questions.

Okay. Well, I'd just like to thank everybody for joining the call and certainly appreciate everybody sticking with us here and we will close the call.

Thanks, everybody.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.