CorVel Corp (CRVL) 2010 Q1 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 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 and are projections or forward-looking statements.

(OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your host, Mr. Dan Starck and Mr. Gordon Clemons. Gentlemen, please go ahead.

Thank you, Regina. This is Dan Starck, and I'd like to thank everyone for joining us today to review and discuss CorVel's June 2009 quarter results. And as Regina said, I'm joined by our Chairman, Gordon Clemons.

In our usual format, I'll be covering the financial results and the current initiatives, and Gordon will be covering product development. And after our overview we'll open the call to questions.

Now, to the June 2009 quarter results.

Revenue for the quarter was $81.3 million, an increase of 4% over the June 2008 quarter. And earnings per share were $0.49 for the quarter, an increase of 24% from the $0.40 reported in the June 2008 quarter.

During the March quarter-- excuse me, in the June quarter in our traditional business lines, our network solution results reflect improved savings outcomes for clients and overall product line growth. Case management results are reflective of stabilizing volumes and subsequent cost controls.

We continued with our Enterprise Comp expansion, CorVel's unique approach to managing Workers' Compensation claims, by advancing our sales efforts and continuing with our internal development.

From a bought-- broader perspective, in the face of a difficult economic environment we've stayed the course with our plan, and we've continued to invest in the strategic repositioning of the Company. The results of the quarter show strong improvement from both an annual quarter comparison and a sequential quarter comparison. While some of our results have been below where we would like to have been for the past few quarters, internally we've seen positive signs of getting through some of the difficulties of our transition in the form of acquisition integration, system integration and ultimately growth.

We've resisted the allure of making short-term moves to boost profitability by making either significant headcount reductions or reducing on spending that were on projects that were core to our strategy. And, again, we stayed with our long-term plan.

Our transformation is not yet complete; however, we remain committed to our strategy and have committed to continue to promote the advancement of our strategy by investing in acquisitions, systems development, personnel and people development.

From a marketplace perspective for a number of months in the fall of 2008 and early 2009, the economic turmoil seemed to freeze the decision-making process in the industry. It appears as though that freeze is thawing, and people are now dealing with the situations with which they've been dealt. We're seeing a return to a more normal business cycle, not what I would term as normal prior to the fall of 2008 but much closer. And there's a renewed interest in products that better manage costs.

Claims volumes have continued to drop to historic lows, yet severity continues to climb placing further emphasis on cost-containment strategies.

From a political perspective, the movement towards e-commerce continues. While there are different efforts at both the state and federal level, it continues to be our belief that the current legislation is part of a broader movement that will continuing moving both just the healthcare transaction and the healthcare industry in general towards automation. Gordon will be covering some of the broader implications of this strategy in our product development section.

In summary, we believe that the continued rise in Workers' Compensation costs and the continued movement toward electronic transaction supports our longer-term strategy of becoming a full-service provider to the comp industry and our continued systems investment.

Now, I'd like to discuss our product line performance.

In the patient management product line revenue was $34.2 million for the quarter. That's a 2.6% increase on an annual basis and a 4.1% increase on a sequential basis. Profit was down 7.6% on an annual basis; however, it was up 75% on a sequential basis.

For the past three years, repositioning our entire patient management business has been a major initiative. Included in the patient management results are our traditional case management product and our new third-party administration product, Enterprise Comp. The annual quarter comparison results are affected by volume reductions in case management, replaced by growth in Enterprise Comp.

On a sequential basis case management volumes have stabilized, and the associated cost reductions have now normalized. The Enterprise Comp product has experienced enough growth to overcome the case management [revenue] reduction. And we started to realize some return on our upfront investments, investments that were made in order to transition our acquisition businesses from smaller regional businesses to ones that provide the basis of a national platform.

The addition of our claims administration product continues to open the employer market to CorVel, a market which significantly expands our opportunities. Traditionally, as a managed care services provider, CorVel only had an access-- only had access to a limited number of buyers in the Workers' Compensation market-- the aggregators, the insurance companies and the third-party administrators and a relatively small number of large employers that unbundled their Workers' Compensation services.

Enterprise Comp now provides CorVel with a vehicle that reaches the employer market, and we're also able to continue to meet and exceed the needs of our traditional customer base.

On to network solutions.

Revenue for the quarter was $47.1 million, which is a 5% increase over the June 2008 quarter, and a 6.6% increase over the March 2009 quarter. Profit increased 9.1% over the June 2008 quarter and 15.8% over the March 2009 quarter.

Network solutions continues to be a major driver of our overall results. In addition to improved savings outcomes for clients, the results of the quarter reflect volume growth in medical bill review and growth in our specialty review business, both due to our sales efforts. The improved growth rates in these products, coupled with their historically strong margins, created a strong increase in our gross profit in the quarter.

One of the contributing factors to our recent growth has been our commitment to offering a comprehensive solution to our potential network solutions clients, one that includes our clearinghouse services. CorVel has been committed to providing clearinghouse services since the early phases of the development of the legislation, and we've had a successful launch in Minnesota in July. We view the clearinghouse service as a product that truly rounds out our service offering and continues our longstanding approach of enabling our customers to meet their regulatory compliance obligations.

Our ability to include our clearinghouse services as part of our total network solutions product offering has been the deciding factor in several accounts that have chosen CorVel as their service provider. The complexities of healthcare reimbursement and the continued increasing costs of medical care emphasize the continued need for investment in our MedCheck software and our network solutions product line.

Savings and cost containment are always at a premium; however, the current economic environment has caused many buyers to reexamine their solution. Moving forward in 2009, we'll continue our 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. As we enter August we feel that we are truly rounding the corner and have a solid product, one that can truly be differentiated in the market. As the product comes together we're starting to see some gathering sales momentum. While most of the new accounts are small in nature, three of the-- of our current customers provide us either with national scope or significant geographic presence. While this is a difficult environment to launch any new product, we see significant interest in our Enterprise Comp product.

As we continue with the further development, we have two goals. The first is to gain scale within the claims administration business. We've taken a measured approach of entering the TPA business in order to establish ourselves in the market and provide a growth platform. So far we've resisted the temptation to leverage up and do a big deal in the favor of buying smaller companies, letting our culture become dominant and really bootstrapping our way into the business. As a result, we've moved at a slower pace. Today though CorVel has no debt, remains cash flow positive and has tremendous flexibility to act if the right opportunity were to present itself.

The overlay of the claims administration business onto our managed care infrastructure provides us with a unique situation. We have 130 office locations across the United States, and we have the ability to absorb business growth in most areas by adding the required headcount and leveraging the existing infrastructure. Thus, we can move as fast as our sales efforts and systems work will allow.

The second goal is truly establishing the CorVel Enterprise Comp brand in the claims administration business. This comes through a coordinated effort, time and results. The economic results that Enterprise Comp has produced for customers has been positive, and we expect to make the necessary investments to continue to build a better mousetrap.

The second initiative is improving our overalls sales performance. We've been laying the groundwork for this for the past few years as we've invested in sales leadership, training and a new CRS/CRM system. As a result, our pipeline continues to grow, and it appears that the growth we demonstrated in the current quarter is the beginning of the return on our investment.

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 in ensuring future success.

As I've stated already, current issues in the overall economy accentuate our customers' desire for savings. While our MedCheck product commands much of our current development effort, the continued development of our directed care network, CareIQ, will occupy an increasing amount of our time.

Over the course of the past few years our focus has been on improving the overall delivery of the CareIQ product line and making it a cornerstone for future growth. As technology continues to increase the speed in which tasks are accomplished, we believe that we have the opportunity to more proactively manage the episode of care for injured workers by tightly integrating CareIQ into our claims management process. The outcome of this integration will allow for the injured worker to access services on a more timely basis, as well as allow the employer to achieve maximum savings coupled with utilization management.

By taking advantage of technology that CorVel has successfully deployed before-- rules engine technology, smart routing and workflow management-- we believe that CareIQ presents the next generation PPO opportunity.

Our fourth and final initiative is the transformation of our case management business. In the June quarter we continued to expand our implementation of a paperless work environment as well as further the integration of the manage-- of case management into our Enterprise Comp product. We expect to continue that as it plays an important role in our claims management.

For product development now I'd like to turn the call over to Gordon. Gordon?

Thanks, Dan. The projects I'll cover today include our next generation total solution for Workers' Compensation, that is Enterprise Comp, about which Dan spoke; the e-commerce projects in response to the Workers' Comp legislation, both nationally and on the state level; and workflow software for directed care, to which Dan also referred. These projects include the claims technologies, which should impact nearer-term results-- I think we're starting to see some traction there; and the newer e-commerce initiatives that are more of a long-term nature.

In addition, I'd like to first frame these discussions within the strategic considerations that have led to the product development directions CorVel continues to take.

CorVel sells its services, as Dan mentioned, to major insurers, to third-party administrators, to both local and national government agencies and municipalities, as well as directly to private sector employers. During the '90s we expanded the scope of our managed care offerings, and in this decade we've added the total program of claims management. We continue to sell into all segments of the market; however, the most rapid growth is with employers in both the public and private sectors.

Establishing CorVel's brand in the market for total solutions has been a key to Enterprise Comp. We've developed a new approach to claims management, which gives us meaningful points of differentiation in the sale of these services. The technologies we have success with in medical review, that is workflow management and artificial intelligence, primarily rules engine work, are now being developed in our claims management software. This has required and will require a meaningful multiyear investment. We've been expanding our domain knowledge and establishing our reputation in these new markets. I believe these efforts will steadily gain traction over the next couple of years.

During calendar 2008, most of our claims effort in the software area was focused on consolidating the software we had acquired to run our Enterprise Comp services. That effort continued into this year. At this point though our effort is transitioning to the build-out of the new processes and software. We are building our new approach to claims management into the healthcare portal we call CareMC, a facility first launched earlier in this decade.

As I stated a moment ago, the real key to this transition is the incorporation of our rules engine and workflow tools in the management of claims. This is a complex process and will take us several years to build-out. However, as we have gotten into this work many individual components of the overall program are becoming identified. This is a large project when viewed in its entirely, but we are implementing portions of it in phases.

In the June and September quarters, for example, we are focused on the implementation of some of our overall plan in several key accounts. For the next couple of years efforts are focused on building out the business intelligence to drive the most effective workflow for each of the many individual components of the total claims management process. We have experts from within the industry who have joined CorVel and are working on that with a particular focus on developing the rules to drive workflow.

Our development teams are quite fully loaded now, and I'm afraid to say they will be for the foreseeable future. This is a very active time.

As the decades' old paper-based processes, currently well accepted in the traditional parts of the industry, are converted by CorVel to protocol-driven electronic workflows, many of our implied and expressed assumptions about the business and about claims management come into question. The development of this phase of a major product is both very exciting and yet can be bumpy. We find new solutions and sometimes unexpected opportunities.

In our medical review project, for example, we began looking in the automation of workflow for new efficiencies. And yet found, as we progressed in the project, the highest value was shown improved results for our customers. This has been our experience with workflow products-- projects in general. They produce the best possible results and improved outcomes for our customers.

A longer-term project in our development is-- then to-- and to which Dan referred is the e-commerce service line where we're expanding in response to new regulations. This includes our work in reporting to state government, our entry into clearinghouse services and the more recently announced introduction of Medicare agency services. These are relatively early stage projects.

A number of states have regulations designed to support the electronic submission of invoicing by healthcare providers. And of course the federal government points to automation as part of the proposed reform efforts. CorVel has begun providing clearinghouse services. Fortunately, our medical review systems have, for some time, been capable of receiving such e-bill transmissions and are thus well suited to the directions in which healthcare appears to be headed.

New changes to state regulations inevitably add wrinkles to our overall development plans; however, there is a general common theme in the various e-commerce initiatives. Thus, these state-by-state incremental changes tend to leverage more and more of our total platform. Also, the variety of ideas flowing from the state level legislation can produce more creativity than one consolidated national effort. Workers' Comp has always been a state-by-state program, and a lot of the new ideas come out of the various state regulatory changes.

Again, in this area the business result has been somewhat different than we originally expected as we embarked on these efforts earlier in the decade. We haven't developed a lot of clearinghouse revenue, but our clearinghouse capabilities has helped us land more of our traditional services, as Dan mentioned.

Another component of our e-commerce line of services is the Medicare agency program for the transmission of claims data from private Workers' Compensation, auto and general liability carriers and employers to CMS, the federal Medicare claims processing center. CorVel's services will assist insurers in gathering and submitting their claims data to CMS. This project is, we feel, synergistic with both our clearinghouse services and the e-commerce capabilities in the rest of our product line. Although the federal deadlines have been moved back 90 days, we continue to see good interest in this area and believe that this enhancement to our overall program will, again, improve the sale of all CorVel services.

A good example of our area of build-out in CareMC, impacted quite a bit by our expansion into Enterprise Comp, is the directed care network area. These next-generation PPOs integrate nicely with our new workflow management. The complexities in this area have required a substantial development effort, and we continue to see more opportunities to improve operations and, therefore, outcomes.

During the quarter we continued to make progress in the various segments of this business. Along the way we've come to learn some of the things we didn't know we didn't know though.

People often ask us, especially investors, when we'll have our software development completed, and I try to remind them that it will never end. Our plate has never been more full and nor have there ever been more opportunities than we face today. Technology is going to enable tremendous change in healthcare administration and financing, and at CorVel we expect to be involved.

I'd like to turn the call back over to Dan now for his concluding remarks.

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

Quarter ending cash balance was $20 million. Our DSO was 48 days. We repurchased 29,676 in the quarter and spent $647,000. We spent $186 million inception to date and have repurchased 12.7 million shares.

Hard shares at the end of the quarter were 12,921,000. Diluted EPS shares were 13,056,000.

In closing, we continue to execute on our strategic plan of transitioning CorVel into a full service provider to the Workers' Compensation industry. Operating CorVel with positive cash flow and without debt allows us to make strong progress in the execution of our strategic initiatives and our long-term strategy.

There's a genuine excitement around our Enterprise Comp product, and we're excited about the growth opportunities that it presents. We're looking forward to expanding our presence in the future.

None of this would be possible without the dedication and hard work of all the members of the CorVel team, and I'd like to thank them all for that.

I'd like now to open the call to questions.

(OPERATOR INSTRUCTIONS) And there are currently no questions in the queue at this time.

Okay. Well, Regina, I'll just wrap up the call. I want to thank everyone again for joining us, for those that did. We're certainly excited about what we have in front of us as well as some of the results that appear to be on the horizon. So thank you, again, for joining us and we'll talk to you soon. Thanks, everyone.

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