CorVel Corp (CRVL) 2009 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 the actual events or results may differ materially. CorVel refers you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically, the Company's last Form 10-K and 10-Q filed for the most recent 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 our hosts, Dan Starck and Gordon Clemons. Gentlemen, please go ahead.

Thank you, Cara. Good morning, everyone. This is Dan Starck, and I would like to thank everyone for joining us today to review and discuss CorVel's December 2008 quarter results.

I'm joined by our Chairman, Gordon Clemons. Today, in our usual format, I will cover the financial results and future initiatives and Gordon will be covering product development. Shortly after our review, we will open the call to questions.

Now let's discuss the December 2008 quarter results. Revenue for the quarter was $77 million, which is a slight increase from the December of 2007 quarter. Earnings per share were $0.34 for the quarter, down from the $0.43 reported in December 2007 quarter.

In our traditional business lines, our network solutions results reflect continued expansion in customer savings as well as some mix shift in our revenue stream. Our patient management results are reflective of investments made in the product line and some seasonal slowing normally associated with the December quarter.

We also continued with our Enterprise Comp expansion, our strategic initiative of bringing in a new approach to claims management, and our overall transition to becoming a full service provider to the workers compensation market.

Beginning with the December 2007 quarter, CorVel had experienced a step-up in our G&A expenses in order to support our growth in systems development associated with our strategic transition. Toward the end of the September quarter, several measures were put in place in order to provide a better balance of our spending with our overall revenue growth and strategic process transformation. The results of some of these measures have started to appear in the December quarter, as we have seen reduction in our G&A expenses on both an annual quarter comparison and a sequential quarter comparison.

Our approach has been to reduce spending on projects that are on the periphery of our strategy and gain a stronger focus. We continued to invest in systems development, management, and training for initiatives that are core to our strategy; and we expect to execute on those.

From a marketplace perspective, claims volumes have continued to decline to historically low levels (technical difficulty) initial indications so that claims volumes dropped 11% in the first nine months of 2008 versus the first nine months of 2007. The 2007 drop was 2.5% when compared to 2006.

Frequency -- that is, the number of claims -- continues to decline. However, severity -- the medical cost per claim -- continues to increase and the indications are it will increase again this year.

From a political perspective, there is legislation at both the state level and now the federal level that will have some effect on the industry this year. States continue to develop legislation geared towards automating the healthcare transaction process.

In Minnesota, for example, legislation scheduled to take effect in July will require payers to be able to accept bills electronically from providers. In December, payments back to the providers from the payers will need to be able to be transmitted electronically as well.

At the federal level, new reporting requirements will take effect later this year that will require the submission of claim data to the federal government that has not been required in the past. The submission of this claim information is geared toward ensuring that the Medicare program is not paying inappropriately for expenses that were the result of an occupational injury. Legislation in the form of Medicare Set-Asides has existed since 1992; however, the enforcement of this has been minimal. However, the new legislation provides a foundation for that enforcement.

While these individual pieces of legislation are important in their own right, we believe that this is part of a broader movement that will continue moving the healthcare transaction and the healthcare industry in general towards automation. CorVel is prepared to meet these challenges, and Gordon will discuss this further in the product development portion of the call.

In summary, we believe that market conditions, coupled with the continued movement towards electronic transaction, supports our longer-term strategic approach of becoming a full service provider to the workers compensation market and continued systems investment.

Now I would like to discuss our product line performance, specific results, and our key initiatives for 2009.

In patient management, revenue for the quarter was $33.3 million. This is essentially flat to the December 2007 quarter and down 3.3% from the September quarter. Profit, down 24% on an annual basis and down 10% from the September quarter.

Our initiative to reposition our entire patient management business continues. While the December quarter's results are not as strong as we would like to see, there has been good progress made in this business line over the past few years.

The addition of our claims administration product expands our service offering in this area and continues to open new opportunities. We will continue to emphasize progress within the patient management portion of our business, as it is key to our strategic execution and future service delivery.

In the near future, we will look towards a seamless integration of our service delivery between our claims professionals and medical management professionals. By introducing workflow management and our rules engine technology, our approach to the claims process will deliver the appropriate level of medical care to an injured worker at the appropriate time, as well as ensuring the level of oversight by the claim professionals in our system.

From a network solutions perspective, revenue for the quarter was $43.7 million. This is a 1% increase over the December 2007 quarter and a 0.5% increase over the September 2008 quarter. Profit was down 10.7% from the December 2007 quarter and down 5.4% from the September quarter.

The network solutions results continues to be a major driver of our overall results. Reflected in this quarter's results is a slight mix shift in our network solutions revenue. The mix shift is reflective of lower medical bill review volume in the quarter and continued increases in our directed care business, mainly our pharmacy and physical therapy products. This mix shift caused a lesser amount of gross margin associated with the revenues than we have normally seen.

The complexities of healthcare reimbursement and the ever-increasing cost of medical care emphasizes the continued need for investment in our MedCheck product and our network solutions product line.

Moving forward in 2009, we will continue to focus on our four key initiatives and their role in transitioning the organization to a full service provider.

The first initiative is the continued expansion of Enterprise Comp. Despite the continued decline in the overall volume of claims, we believe that this initiative is on point. In fact, in this market environment, we believe that this initiative continues to grow in importance.

Traditionally, through our managed care services, CorVel has only had access to a small number of employer customer opportunities, the employers that purchase their TPA services and managed care services separately. This group of employers is the minority in the workers comp market.

Enterprise Comp provides the ability for CorVel to meet the needs of the larger segment of the employer market, the employers that buy their services in a bundled format. By owning all of the major components of the workers compensation continuum -- claims administration, managed care, and the software applications needed to integrate and execute the different business lines -- we feel we are in a strong position to bring a truly differentiated product to the market.

Over the course of the past few quarters our field operations have been busy with all of the integration activities that must take place after acquisitions have been completed. At the same time, our IT team has been busy developing our claims management software application into one that begins to realize the vision of Enterprise Comp in the future. Much of the December quarter involved laying the foundation of the software into our production systems and the beginnings of field implementation.

Although I discuss the Enterprise Comp initiative at times as if it is just getting started, our claims administrations today as a Company are strong. We currently administer workers compensation claims in 45 states and have the ability to deliver service in all 50 today. We expect to see improving growth in this product line as our software and systems integration process continues and our sales force gains momentum.

The second initiative is improving our overall sales performance. As an organization, we are continuing to invest in our sales process. Over the course of the past year, we have invested in our sales leadership, training programs, and upgrading our CRM system. In this next year, we will be focused on sharpening our sales focus on our different product lines, as well as leveraging more roles in the organization towards growth.

The third initiative is the continued development and expansion of our network solutions product line. While we have had strong performance in this area, we continue to invest in ensuring its future success. The rising cost of medical care and the need to contain costs requires that development of our MedCheck software remains a top priority.

Two other components of our network solutions product line that we are continuing to develop are, first, our PPO network. The PPO opportunity continues to be substantial. While there has been consolidation in the industry over the past couple of years, this appears to have left many purchasers looking for potential options. We are actively working on strengthening our PPO via better contracting and affiliate relationships.

The second area I would like to point out is our CareIQ or our directed care network. Our directed care network delivers savings opportunities for customers via unit cost savings and unit utilization management. In particular, our pharmacy and physical therapy products are generating considerable interest.

I would like to speak for a moment just about physical therapy. For most of our customer base, physical therapy accounts for somewhere between 10% and 30% of their entire medical spend for workers compensation. Our approach to managing this area has consistently demonstrated significant savings as soon as a program is implemented.

We are starting to realize some of the growth opportunities in this product line due to the results that we have produced. We have made investments in call centers and software in order to deliver a high quality product to our customers, and growth in this area will allow us to take advantage of the economies of scale.

Our fourth and final initiative is the transformation of our case management business. In the December quarter, we continued 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 for us moving to a rules-based workflow routing.

The implementation of the paperless work environment will allow us to implement the technologies that we have successfully utilized before in the medical bill review as well as integrate it with the claims management process.

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

Thanks, Dan. The project areas I will cover today include our next-generation claims-handling technologies, which Dan referred to; various projects in response to ongoing eCommerce legislation affecting workers compensation; the directed care workflow software; and our reporting tools. These projects include the claims technologies which should impact nearer-term results; and yet I will also speak to the newer eCommerce initiatives that we hope will pay off in the long run.

Before discussing these, I would like to observe that although all of us would wish for better times, this is the kind of market for which a company with proprietary assets, no debt, and a strategic focus on information technologies is built. Don't get me wrong; this economy is very tough on us, as it is for everyone else. But the point is that CorVel's strengths are rooted in long-term investments and provider networks, software, and people.

During the December quarter, we continued to progress on the key projects involved in our Enterprise Comp total workers compensation solution. We are steadily moving selected features from our legacy claims handling software into the CorVel CareMC Web portal. That is, we are building claims-handling functionality into the healthcare portal we call CareMC, a facility first launched back at the beginning of this decade.

The real key to this transition is the incorporation of our rules engine and workflow tools in the management of claims. This is a large project when viewed in its entirety; but we are implementing portions of it as we go along.

Although the process involved in the deployments we have made, both in the past in medical bill review and in this effort in claims management, involve the automation of previously manual tasks, this effort has not been focused on production cost reduction. As we achieve the medical bill review in claims management, we expect to see improvements in the outcomes we achieve for customers.

For example, we find that while ultimately paperless operations will improve efficiency, in the near term such implementations allow us to improve workflow and production management. In turn, these improvements have created better outcomes for our customers. So quality and effectiveness are the actual outcomes from the automation of management of workflow.

The first components of this project are ready for field testing now, and additional steps in this process are planned throughout calendar '09.

An interesting area in our development, to which Dan referred earlier, is the manner in which we have been able to capitalize upon our long-term investment in information processing to extend the reach of our services in response to new regulations. This includes our work in reporting to state governments, our entry into clearinghouse services, and the more recently announced introduction of Medicare agency services.

These are relatively early-stage projects, although each must meet governmental timelines. A number of states have regulations designed to support the electronic submission of invoicing by healthcare providers. In response, CorVel has begun providing clearinghouse service.

Further, our medical review software has for some time been capable of receiving such e-bill submissions.

The clearinghouse brings medical bills into medical review; and on the other side, on the output side of medical review, we must also increasingly transmit bill review results to those states that require completed reviews to be submitted to governmental databases. Our past investments in e-bill processing have positioned us to expand into these nascent electronic commerce markets.

A separate and more recent effort discussed briefly in the last call is the Company's decision to become what is called a Medicare agency for the transmission of claims data from private workers compensation, auto, and even general liability carriers to CMS, the federal Medicare claims processing center. The Company had previously been selling Medicare Set-Aside services in the claims marketplace in workers comp.

Adding the new agency service is a response to Medicare's move to enforce compliance with long-standing regulations. Private insurers are required to coordinate their claims settlement for individuals eligible for current and/or future Medicare benefits with the claims payment processing handled by CMS. CorVel's services will assist insurers in gathering and submitting their claims data to CMS.

The passing of records to and from other parties is an ever-increasing aspect of electronic commerce in healthcare. It seems likely the new administration in Washington will continue to support such initiatives, if not in fact accelerate them.

While our efforts in this regard have limited immediate revenue or profit implications, they are a logical component of CorVel's long-term strategic investment in information processing. From a strategic standpoint, this move has taken what was taken, because ultimately these eCommerce initiatives will, we believe, be among the differentiators in our workers compensation services. These services are being offered to meet the regulatory deadlines this summer and again some more in the coming fall.

The next area is directed care networks, which are PPO networks that include services to assist patients with the scheduling of their care. Dan discussed the initiatives in the PT market, for instance.

Such networks deliver known patients to providers and can achieve favored pricing for our customers. These networks require considerable administrative support, and we have continued to improve the supporting software.

Now that the Company is selling a complete workers compensation solution, these services are more integral to our claims processing. As we have become increasingly involved in claims management activities, we have developed new ideas regarding how our tools should be better configured.

Development in these networks has been going on for a number of years, and I expect we will continue to invest in this area over the planning horizon.

The Company's workflow management software, originally developed for medical bill review, was also employed in the new software for these directed care networks. Our development plan is to capitalize upon these platforms, to allow such services to provide value to the claims administration function not typically achieved by either paper-based or legacy systems-based network services currently competitive in the marketplace.

Medical reimbursement and healthcare administration in general is, I believe, going to be actively discussed by both state and federal governments in the coming years. CorVel's investment in more advanced forms of network management will be important to our ability to respond to the changing view the public has of healthcare administration.

Lastly, as we have commented previously, we continue to work on both internal and external reporting tools for our users. Current efforts have focused on supporting the expansion of our claims management services. CorVel's data warehouse is steadily providing increased support to our reporting and analytic offering.

Now I would like to turn the call back over to Dan for his closing remarks.

Thank you, Gordon. I would just like to add a few more items prior to opening the call to questions.

Cash flow for the quarter net of stock repurchases was positive $5.5 million. We did spend $17 million in the quarter on stock repurchases, and we purchased 767,000 shares.

Quarter-ending cash was $12.1 million. Our DSO decreased two days to a record 45 days.

On stock repurchases, we spent $185 million, inception to date; and we have repurchased 12.6 million shares. Hard shares at the end of the quarter were 12,972,000; diluted EPS shares were 13,439,000.

In summary, we are making progress on the execution of our strategic initiatives, and the investments we're making are in our support of our long-term strategy. Historically, as Gordon commented, the Company has operated from a fiscally conservative approach. This approach has proven to be quite beneficial in this difficult economic environment.

We are very proud of the fact that the Company has proprietary assets, carries no debt, and has strong cash flow. We believe that this puts us in a strong position moving forward.

I would like to now open the call to questions. Cara?

(Operator Instructions) Mark Dickherber, Segall Bryant & Hamill.

Just a question related to the mix shift on both business lines. Trying to understand, I guess is that a product of the current environment, or some other anomaly that is easily explained?

I think it's a little bit of both. We have had very nice growth in our pharmacy MPT products; and we have just experienced a little bit of a bill volume decrease in the normal medical bill review.

Right now, it is very close to the quarter end, and we are looking at -- certainly being very diligent about looking at and understanding whether the medical bill review volume decrease is economically related, as in the broader environment, or whether it is a customer-specific issue.

But I think it is really more, at this point, more of a broader economic issue.

Would that be -- I mean, do you [have intel] to know if that would be competitive related? Are they going to a competitor for bill review? Or if they are just not (multiple speakers)

No, I think we've seen the normal ebb and flow of some customers in and out over the course of the past year. But really we have seen bill volume just basically flat to maybe slightly down with our existing normal base of business.

Okay. Then the margins from pharma and PT, if you could talk about, I guess, margin front and from a return on investment front.

They run a much, much lower margin than we have historically run in just our medical bill review business. They certainly provide -- they are a very nice product that complements the medical bill review business. It is just something that has traditionally run in, I would say, lower teens or -- and even upper teens at times in that business from a margin standpoint.

That's basically where they would stay?

Yes.

Okay. If you could speak on the new business initiatives, inclusive of the Medicare opportunity, just as it relates to perhaps the near-term spend, upfront spend that requires; and then also the longer-term ROI picture that would be expected from them.

Sure. I will take a little bit of a piece of it and then I will turn it over to Gordon to talk about specifically the MSA issue.

From a spend perspective, I think one of the things we have done really over the last three or four months is, as I alluded to in the call, put some measures in place to make sure that we've got a nice balance of investment versus growth. So we are being very particular at this point what we are investing in from a systems standpoint. So I wouldn't anticipate significant spend growth on the G&A side for entering this business.

I think from our perspective, there's really a couple areas. Enterprise Comp and growing the claims business is certainly a focus of ours. We are moving towards some specialization and segmentation in our sales force in order to capitalize and gain focus in that area.

We still have a significant opportunity in the managed care marketplace. As times get difficult or are difficult, I believe that you will see more employers -- or we'll see more employers that will take the time to unbundle their programs. So our managed care opportunities can grow from that perspective. And certainly our sales team, that is right in their sweet spot.

So then when we really turn over to the managed -- or excuse me, the Medicare portion, I think in the short term, it may not be a real profitable venture. But it certainly, I think, gives us the opportunity to expand our services or bring new services to our clients and potential clients that have their services spread out amongst multiple vendors. So I wanted to turn it over to Gordon for his thoughts on that as well.

Well, I guess I would just reinforce I think the really big opportunity for us is to succeed in the Enterprise Comp marketplace with delivering total solutions. The investments on Medicare Set-Asides are, I think as Dan sort of suggested, a differentiator for us in our current business. And then longer term, it is sort of unclear where that might all lead.

But strategically, our short-term interest in it relates to our existing business and workers compensation and our investment in the electronic transmission opportunities. But longer term, I think it's an interesting development in the marketplace. It is going to synch up lot of private insurer databases with the forms and processes that are required of Medicare; and where that leads is not exactly clear.

From an ROI perspective, more specifically on Enterprise Comp, how long do you think it will be before we start seeing that achieve more Company historical return levels?

I think we are really just kind of going through the transition period, where we've had some -- the cost of assimilating some acquisitions and making some adjustments.

The returns on that business are attractive. They are not quite as high as the best returns in network solutions, but they are better than the returns we get in our normal case management business.

So I think the margins in the overall there are slightly higher than in the mix of our normal business. More importantly, it positions us to sell our products at retail prices to employers, as opposed to wholesaling them to other payers.

So it is a -- I think long-term it should have a very good return. But we are going through the normal processes involved in launching something that is a meaningful expansion for our Company.

You think that it will be two to three years before we see a return of the near-term spending?

I don't think so. No, I think we are out very competitively in the marketplace right now, and we do have some things we are planning to do in the current calendar year that I think we probably shouldn't speak to exactly.

But our goal is to differentiate ourselves from our competitors, and we believe we are closing in on some technology investments that will do that. But in the current marketplace, we are very competitive on business right today.

Okay.

Are there any further questions? There are no further questions. Mr. Starck and Mr. Clemens, do you have any further comments?

First of all, Cara, thank you. I would just like to thank everybody for joining the call today, and certainly look forward to talking to everybody here in the next couple of quarters as we continue on our journey here of Enterprise Comp and transitioning CorVel.

So, appreciate everybody's listening today; and as always, Gordon and I are available at any time. Thanks, everybody.

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