CorVel Corp (CRVL) 2009 Q4 法說會逐字稿

Welcome to the CorVel Corporation earnings release conference call. During the course of this conference call, CorVel corporation may make projections or other forward-looking statements regarding future events or the future financial performances of the company. CorVel wishes to caution you that these statements are only predictions and that actual events or results may differ materially. CorVel refers you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's last Form 10(K) and 10(Q) files for the most recent fiscal year end quarter. These documents contained 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 turned conference over to your host, Mr. Dan Starck. Please go ahead, sir.

Thank you, Richard. I'd like to thank everyone for joining us today to review and discuss CorVel's March 2009, quarter results and our fiscal 2009 results. During the call today, I will be covering the financial results, current initiatives as well as product development. Initially, just to satisfy curiosity's sake, Gordon is not going to be on the call today, but he is doing fine, in fact, doing very well. Since the transition process of August 2007 when Gordon moved exclusively to the Chairman's role and I moved to the CEO role, Gordon has spent much of his time in both product development and the business development area for the company. With most of that time being focused on our enterprise comp product, he's unable to join the call today because he's at an implementation meeting with a new enterprise comp customer that he's been working on for the past 18 months. So in our normal format we will cover the call and then after our overview, we will open the call to questions.

Now to the March 2009, quarter and fiscal year results. For the quarter, revenue was $77 million compared to the -- comparable to the $77 million in the March 2008 quarter. Revenue for the fiscal year ending March 31, 2009, was $310 million, a 2.7% increase over fiscal 2008 revenue of $302 million. Earnings per share were $0.33 for the quarter, down from the $0.44 reported in the March 2008 quarter. EPS for fiscal 2009 was $1.42 versus $1.67 in fiscal 2008. With the extended time period that we have this quarter because of our fiscal year end and the filing of the 10(K), I would like to add a few comments to this current trend that we're experiencing. Just as the overall economic environment has improved over the past couple of months. our results appear to have a strong correlation to the broader market. We demonstrated improved results in revenue and earnings throughout the March quarter, finishing the quarter with record revenues in March. The early results of the June quarter show that positive trend to be continuing.

Now back to specifics in the March quarter. In our traditional business line, our network solutions result continued to reflect strong customer savings and improving volumes throughout the quarter. Case management results are reflective of lower volumes. We also continued with our enterprise comp expansion, CorVel's unique approach to managing Workers' Compensation claims. In the quarter we acquired a third party administrator in New York, our third acquisition in our expansion effort. From a broader perspective during the fiscal 2009, CorVel has continued to invest in the strategic repositioning of the company. The financial results over the course of the past year are reflective of continued investment in CorVel's transition process and really, the execution of our broader strategy. Short term reduction in headcount and spending could improve short term results. However, those reductions would also slow our development efforts and postpone our desired longer term progress.

We've continued to promote the advancement of our strategy by investing in acquisitions, systems development, management personnel and management development. From a marketplace perspective, claims volumes have continued to drop to historically low levels. Recently released information indicates that claim volumes declined by a projected 4% in 2008, slightly higher than the decline of 2.6% in 2007. While frequency continues to decline, though, severity, the average medical cost per claim, continues to increase. Average medical cost per claim increased by a projected 6% in 2008. For comparative purposes, the average medical cost per claim has increased at an average of 6.7% for the years 2002 through 2007. From a political perspective, legislation continues to impact the industry as well as shape CorVel's strategy. Throughout the company's history, CorVel has worked to provide electronic solutions to help ensure that our clients are able meet the regulatory compliance obligations.

At the state level, CorVel has been a leader in providing electronic reporting to meet state requirements. Now, as the different states move towards mandating the automation of the healthcare transaction Workers' Compensation, CorVel is ready to meet the needs of the market by providing clearinghouse services. Regulatory reporting compliance will soon be required with the federal government as well. New reporting requirements will take effect in 2010 that will require the submission of claim data to CMS. The submission of this claim information is geared towards enforcing Medicare as a secondary payer, and I will speak more to that in a product development category of the call. We believe that these pieces of legislation are part of a broader movement that we will continue moving the healthcare transaction and the healthcare industry in general towards automation. While we are not certain where it will lead exactly, CorVel will continue to be a participant. In summary, we believe that the continued rise in Workers' Compensation claims costs and the continued movement towards electronic transactions supports our longer term strategic approach of becoming a full service provider to the Workers' Compensation market and our continued systems investment.

Now I'd like to discuss our product line specific results and our key initiatives for 2009. In-patient management, revenue for the quarter was $32.9 million. On an annual basis, that's essentially flat and on a sequential basis, that's down 1.1%. Profit in patient management is down 55% on an annual basis and down 41% sequentially. For the past three years, repositioning our entire patient management business has been a major initiative of the company's. Included in the patient management results is our traditional case management product and our new enterprise comp product. The results of the quarter are affected by volume reductions in case management replaced by growth in enterprise comp. Cost reductions in the case management business followed the reduction in volumes, but trailed out through the quarter. The enterprise comp product has experienced enough growth to offset the case management revenue reduction. However, the enterprise comp product also bears the cost of transitioning those businesses from smaller regional businesses to one that provides the basis of a national platform.

The addition of our claims administration product continues to expand our service offering and open CorVel to new markets. Traditionally, as a subcontractor of managed care services, CorVel has had access only a limited number of buyers in the Workers' Compensation market. The aggregators, or employers that decide to do unbundle their Workers' Compensation buying decision and make a TPA selection and managed care vendor selection. We estimate that to be approximately 30% of the buyers in the market. Enterprise comp provides CorVel with access to the other 70% of the buyers in the work comp industry. We will continue to have emphasize the development efforts within the patient management portion of our business as it's critical to our strategy. In network solutions, revenue for the quarter was $44.1 million. On an annual basis, that's down 0.6% and on a sequential basis, that's up 1%. Profit is down 7.4% on an annual comparison basis, however, it is up 6.7% over the December quarter.

The March quarter results appear to be reflective of the broader economic climate in network solutions. On the annual quarter comparison, revenue and profit in March 2009 is down from the 2008 quarter. However, much like the economy on a sequential comparison, we've seen increased revenues in profits throughout the March quarter and through -- compared to the December quarter. The complexities of healthcare reimbursement and the continuing increase of cost of medical care emphasize the continued need for our investment in our MedCheck software and our network solutions product line. As I mentioned earlier, over the course of the past eight years, the average medical cost per claim has grown at more than a 6% pace per year. With our continued investment in rules engine technology, smart routing and work flow management tools, we are committed to continuing to deliver strong results for our customers in this area.

Moving forward in 2009, we'll continue to keep our focus on four initiatives. The first initiative is the continued expansion of our enterprise comp initiative, CorVel's unique approach to Workers' Compensation claims management. While I can appreciate the extended time that it seems we are requiring on this product launch, it's not like the evolution that the company has worked through before. Over the course of the past two years, we've experienced what I would say is a fairly normal process. In 2007, we acquired two companies in a five month period and experienced the financial synergies of adding our managed care products to the claims administration product. In 2008, we went through the integration and assimilation period as well as developing our approach to claims. Now in 2009, we are headed to market.

The vision we had of the acquired companies and the purpose has not changed. We took a measured approach of entering the TPA business in order to establish ourselves in the market and provide a growth platform. We never intended to keep the acquired companies as is. While that may be helpful in the short term, it's not conducive to building consistent national product. Over the course of the past two years, we've resisted the temptation to leverage the company up and do a big deal in favor of buying smaller companies, leading our culture become dominant and organically growing our way into the business. As a result, we are moving slower. However, we still continue to have no debt, remain cash flow positive and retain tremendous flexibility with the product line.

As we enter June, we feel that we are truly rounding the corner and we have a very solid enterprise comp product, one that can be truly differentiated in the market. As our product comes together, we are starting to see some gathering sales momentum. We've won more deals already in 2009 in enterprise comp than we did in all of 2008. Most are small in nature. However, we now have three clients that provide us with either national scope or significant geographical presence, including one which will implement on July 1. While this is a difficult economic environment to launch any new product, we do see significant opportunity within enterprise comp.

The second initiative is improving our overall sales performance. As an organization, we continue to expand our product line in order to become a full service provider for the industry. In the past two years, we have made significant additions to that product offering, enterprise comp, the advancement of our Medicare set-aside businesses, Medicare services and clearinghouse services. To support the growth of our additional products, we have invested in our sales leadership, our training programs and continue to upgrade our systems. We believe that we continue to make the investments necessary to grow.

The third initiative is the continued development and expansion of our network solutions product line. Current issues in the overall economy seem to be accentuating our customers' desire for savings. Our MedCheck product commands much of our development effort. However, there are a few other components of our network product solutions product line that we are continuing to find interest in and continue to develop. In our out-of-network hospital bill review program, we have made some exciting state specific advancements with this product, and we are seeing more and more interest in this product line. On the PPO network, the PPO opportunity continues to be substantial. Consolidation in the industry over the past couple of years has left many purchasers looking for potential options. We are actively working on strengthening our PPO via better contracting as well as taking it to market. Lastly is our Care IQ product, our directed care network which delivers savings opportunities for customers via unit cost savings and utilization management. In particular, our pharmacy and physical therapy products are generating considerable interest. We've made investments into call centers and software in order to deliver a high quality product to our end customer.

Our fourth and final initiative is the transformation of our case management business. In the March 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 of moving to a rules based work flow routing process. This product case management will play a very key role in the future of our enterprise comp product.

Now I'd like to spend just a few minutes on product development. There's two areas I would really like to highlight. The first area is our product development that's dedicated to our Medicare agent services role. In 2010, insurance carriers in self insured entities will need to report claim data to CMS under the Medicare S Chip extension act of 2007. This legislation is designed to protect the Medicare system from medical expenses considered to be the obligation of private sector plans, including insured and self insured Workers' Compensation, liability and no-fault plans. Implementation of this reporting has been delayed by CMS for six months at this point. Originally slated for the fourth quarter of 2009, reporting has now been postponed until April 1 of 2010. Our development efforts are on track for this product and we are ready -- we are going to be ready for the October timeframe.

With the comprehensive nature of our solution, we feel that we will be unique in the product offering in this marketplace. We feel it is a strategic move in this area from a product development standpoint because it accomplishes a couple of goals for CorVel. One, it provides another very important regulatory compliance solution for our customers, consistent with our historic performance. It also connects CorVel electronically to CMS for the first time. While none of us no exactly where would healthcare reform will go, we will have established electronic connection to CMS and again, we will plan on participating. The second area is our continued development in enterprise comp. We talked about it earlier and in this quarter, we've had the most visible progress to date. Much of calendar 2008 went into transitioning the systems from our acquisitions and beginning the process of learning how we would move what CorVel knows about work flow and artificial intelligence into the claims work that we've added to our services. By the end of 2008, we began the process of implementing Care MC, the work flow tools needed in enterprise comp. As we go through the current year, we are now at the point where each new monthly release includes important next steps in the implementation of our long-term plans. By utilizing the work flow tools and rules engine technology that we have successfully deployed before within CorVel, we truly have a unique process for managing claims. The use of our new process in our pilot location has produced very promising results and as I stated earlier, we have at this point a differentiated product and our work with customers demonstrates that they see the demonstrable advantages of the new CorVel process.

I'd like to add a few more items prior to opening the call to questions. Quarter ending cash balance was $14.7 million our DSO was 49 days. In the quarter, we repurchased 72,000 shares and spent $1.2 million. We spent $186 million (inaudible) to date and we've repurchased 12.7 million shares. Hard shares at the end of the quarter were 12,917,000, and diluted EPS shares were 13,036,000. In closing, the past year has been a particularly difficult environment for any company. Operating CorVel, though, with positive cash flows and without debt, has allowed to us make strong progress in the execution of our strategic initiatives and our long-term strategy. There is genuine excitement around our enterprise comp product and as it becomes more established in the market, we believe it provides us with significant growth opportunities. We are looking forward to this next fiscal year. Richard, I'd now like to open the call to questions.

(Operator Instructions) Your first question comes from Jim Larkins.

Good morning. I wonder if you could give a little bit more color on this third TPA that you bought, maybe the size of that TPA and any additional skills that they bring to the table or industries.

Sure, Jim. It's a TPA that was in -- it's in New York, Syracuse, a company by the name of Eagle Claims Services. They are a relatively new player in the business, started just a few year ago and their annual revenues were slightly below $2 million for the year. A couple of things went into the acquisition, most notably their growth rate over the past couple of years as well as the New York market and some of the laws there that -- it's difficult to get started in New York State so a couple of thing went into that acquisition. We are very pleased with the results of it so far, and we expect to see it continue to grow.

Great. You said that you have seen some better traction in the sales pipeline and also the businesses continue to get better, it sounds like, throughout the year month by month. Could you give a little bit more color on what that is? How much of it is -- does it feel like the economic environment is freeing up decision making versus you getting in front of the customers with your new services and that's really is what's kind of driving that sales process?

Jim, I would say that it's a combination of both. There's definitely -- it feels that there's a thaw, if you will, as far as decision make something concerned, and I believe that is due to the overall economic environment. The other part of that is we have been very active in the sales process. And we have opportunity in both the managed care side of the business as well as in the enterprise comp side of the business. So we are very excited about the opportunities.

When I look at the reported -- you gave some color on the profitability of patient management. How much of that is -- I'm trying to wrestle with the decline of profitability. How much of that is really cost driven that you are really laying on front end loaded cost due to the continued development of the systems and the people versus generic under performance of that division due to the falling claims prices? Just trying to wrap my head around why that business is struggling so much from a profitability perspective.

One of the issues is specific in patient management is really a fairly significant loss that we had in the company and in the case management business where we had a client that was fairly good sized, not extremely profitable, but fairly good sized, that we were performing services through December 31, and that really ramped down in the first quarter and and we had to continue to support the transition. So the cost went away much slower than the revenues specific to case management. In our third party administrative business or enterprise comp, really a lot of that is the ramp up, if you will in the transition from going, again from regional companies to the national platform. There are some issues surrounding pricing in the industry, but I don't believe that that truly affected the performance in the quarter. To me, it was a more based on us getting into that business and ramping up both our selling efforts and our management team to participate and be a player in that business as we go forward.

Okay. On the claims management -- or on the enterprise comp, can you give some color on where it seems like you are getting the best traction in the sales right now? Is it with -- you mentioned you have, I think you said you had three large national accounts. Is that where you are seeing the traction, or is it more kind of granular in basis?

We have just -- I will try to clarify my comments a little bit earlier. We do have a three fairly good sized accounts. One being one that gives us literally -- I think we administer claims in 46 states for them, and then the other two are really regional accounts, one in the west and one in the east. We are seeing a lot of our traction at the, what I would call the mid-tier level. Our product is very appealing to the government entities, whether those are municipalities or state governments. As well as obviously the self insured clients, but I would say in the mid-tier companies.

Great. I think that is about it. Thanks a lot.

Thanks, Jim.

(Operator Instructions) There are no further questions. Mr. Starck, do you have any further comments?

I would just like to thank everybody for joining the call, and I realize it's been quite awhile since we've had a discussion and certainly, partly because of our year end, and I look forward to talking to everybody on a shortened cycle next couple of months. Thank you everybody.

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