CorVel Corp (CRVL) 2010 Q2 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 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 hosts, Mr. Dan Starck, and Mr. Gordon Clemons. Gentlemen, please go ahead.

Thank you, Casey. This is Dan, and I'd like to thank everyone for joining us today to review and discuss CorVel's 2009 September 2009 quarter results. As you noticed, I'm joined by Gordon, our Chairman, and in our normal format I'll be covering the financial results and the current initiatives and Gordon will be covering our product development. After the overview, we'll open the call to questions.

In the September 2009 quarter, revenue was $82.4 million, an increase of 6% over September 2008 quarter and earnings per share were $0.50 for the quarter, an increase of 39% over the $0.36 reported in the September 2008 quarter. During the quarter, in our traditional business lines, our network solutions results reflect improved savings outcomes for our customers and our case management results are reflective of stabilizing volumes and subsequent cost controls. We continued with our Enterprise Comp expansion, our unique approach to managing workers compensation claims, with new customer implementations, advancing our sales efforts, and moving to increase our internal systems development.

From a broader perspective, the results of the quarter show strong improvement from the September 2008 quarter and demonstrate a solid follow-up to our June 2009 quarter results. Improved growth in our Enterprise Comp product and a small mix shift in the network solutions product line contributed to the results. From a strategic basis, we continue to execute on our strategy of repositioning CorVel as a full service provider to the workers compensation industry. Our transformation is not yet complete. However we remain committed to our plan and we continue to invest in the items that we believe will pave the way for future success, both personnel and systems development.

From a marketplace perspective, within the business environment we're seeing a return to more normal business cycle. Buyers of workers compensation services are showing a renewed interest in both unit cost savings as well as products that better manage costs overall. 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, government influence continues. While there are different efforts at both the state and federal level, it continues to be our belief that current legislation is part of a broader movement that will continue moving the healthcare transaction and the healthcare industry in general towards automation. Gordon will be covering some of the broader implications of this strategy in the product development section.

In summary, we believe that the continued rise in workers compensation claims cost and the continued movement towards electronic transactions supports our longer term strategic approach of becoming a full service provider and our continued systems investment in order to connect all constituencies.

Now I'd like to discuss our product line performance and some key initiatives. In patient management, revenue for the quarter was $37.3 million. That's an annual increase of 8.6% and sequentially, an 8.8% increase. Profit is up 15.1% over the September 2008 quarter and up 24.9% over the June 2009 quarter. Repositioning our entire patient management business has been a major initiative for us. Included in the patient management results are our traditional case management product and our third party administration product, Enterprise Comp. We continue to transition our acquisitions in the TPA space from smaller regional businesses to one that provides the basis of a national platform. We are beginning to see some positive financial effects of the repositioning. Our Enterprise Comp product showed strong growth in the quarter and its development has proven to be synergistic with our case management business.

Time and experience in the claims administration market continues to bring to light new opportunities for CorVel. Participating in the employer market significantly expands our opportunities for products and services, all the while connecting CorVel to the end-user of our products and services. We'll continue to emphasize the development effort within patient management as it's important to our strategic execution and service delivery.

On the network solutions product line, revenue was $45.2 million for the quarter, a 3.8% increase over the September 2008 quarter, a 4% decrease from the June 2009 quarter. Profit increased 8.6% from the September 2008 quarter and down 6.5% from the June 2009 quarter. The results of the record reflect a continued improvement in savings outcomes for clients. As I mentioned earlier, while claims volumes have continued to decrease, severity or the total cost of workers compensation claims continues to increase. Medical expenses now make up nearly 60% of the cost of a workers compensation claim. We see this shift reflected directly in our network solutions business.

While medical bill transaction volumes have remained relatively flat, medical charges relative to bill counts continued to increase at rates between high single digits and low double digits on an annual basis. High quality processing and bill review allows CorVel to participate in the increased savings that we delivered for our customers.

Over its history CorVel has helped its customers meet the regulatory reporting requirements. In 2007 we announced our intentions of providing clearinghouse services. In 2008 we announced we will be providing Medicare agent services. And now in 2009 we'll also be expanding our offering again and providing NCCI reporting for our customers. By expanding our capabilities into these separate but related services, our customers receive not only industry best savings results but also the comfort of knowing that all of their requirements for meeting regulatory compliance will be met. The complexities of healthcare reimbursements that exist today and the continued increase in cost of medical care and the need to meet the regulatory reporting requirements emphasizes our continued need for investment in our network solutions product line.

Moving forward in 2009, we'll continue to focus on four key initiatives, just as we have for the past year and a half. The first initiative is the continued expansion of our Enterprise Comp initiative, our unique approach to managing workers comp claims. As we've expanded this business over the course of the past year, we find more and more opportunities for expanding the delivery of our services to the employer market. Much of this past year has been spent further integrating our acquisitions, developing on our price comp product for the employer market and further developing our software. We've seen improved growth in this area and as we move towards the end of the year we're beginning to see some gathering sales momentum.

As we continue with Enterprise Comp this next year we have three goals. The first is the further development of our Enterprise Comp systems. Bringing the differentiated product to the market has been our goal since the outset. The foundation of the differentiation will be our systems and work flow. And while we've done a tremendous amount of work in this area and we've made good progress, we'll be expanding our spending in this area in the coming quarters in an effort to deliver faster development and create further differentiation from our competition.

Our second goal is to gain scale within the claims administration business. With every new account we're making progress in this area. However in order to consistently be considered as one of the top tier claims administration companies, we need to continue to improve our growth rate. Our national footprint provides us with the capability to absorb significant growth so we can move as fast as our sales efforts will allow. The third goal is the establishment of the CorVel Enterprise Comp brand in the claims administration business. This comes through a coordinated effort, time, and results. The economic results that we've delivered for our customers have been very positive and we expect to continue to make the necessary investments to build a better mouse trap.

The second initiative is improving our overall sales performance. Our growth rate has moved from flat to mid single digits over the past few quarters. We believe we can do better. We've been laying the ground work for this for the past few years as we've invested in sales leadership and training. We continue to work on effectively transitioning our sales resources to a more balanced approach between our traditional managed care business and Enterprise Comp. Our ability to compete with strong products in both markets has improved both our pipeline and our opportunities for the future.

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 future success. Two of the areas that we're focused on are, number one, our PPO. Industry consolidation that has taken place over the last couple of years has left CorVel as one of two national workers compensation PPOs. We've demonstrated that we are a viable option to the buyers that are seeking alternatives and we're excited about our opportunities in that area.

Another product that we're very excited about in this area is pharmacy. Pharmacy expenses continue to grow as a part of the overall cost of workers compensation claims. We've done a tremendous amount of work in the last year to invest in making our PBM offering one of the most competitive within the marketplace.

Our fourth and final initiative is the continued transformation of our case management business. We're excited about our opportunities in this area, as well. There are a number of synergies that we're able to realize with our case management business both as a standalone product, as well as a complementary product to our claims administration business. We've continued with the movement of this business to a paperless work environment and this will allow us to make systematic progress in many areas.

Now I'd like to turn the call over to Gordon to discuss Product Development. Gordon?

Thank you, Dan. The project areas I'll cover today include hardware virtualization, the ongoing progress on our next generation total solution for workers compensation, that is the Enterprise Comp product, claims intake developments within that product, the eCommerce and clearinghouse projects Dan referred to in response to regulatory changes, and the ongoing development of our directed care networks.

Virtualization is a term typically used in IT hardware circles for the allowing of multiple applications to run on subsets of a larger server which is equipped to allow each separate application to appear to be running on its own dedicated set of servers. As we continue to expand our use of virtualization, this change permits us to more easily add new applications in our data center to deploy larger servers and to prepare for future scaling of our data center in responses to changes in our marketplace.

The second category I'm going to discuss is the Enterprise Comp area. In the quarter, Enterprise Comp business volumes continued to expand, as Dan mentioned, supported by our ongoing development of claims management software. Although the early goals of the software transition have been met, as our experience in this market has expanded so too has our appreciation for nuances we believe will be important to future success. As a result, although we've made progress, we continue to almost continuously expand the scope of our expectations for this software. Just as our work flow and rules engine work in medical review resulted primarily in improved outcomes for customers, so too are the current effort in claims directed largely towards improving the savings we achieve for our claims management customers. Early EC customer results have demonstrated our belief that we can meaningfully reduce the total workers compensation claims costs achieved by traditional technologies.

Thirdly, an example of how the buildout of the new processes and software for Enterprise Comp has been adjusted to reflect our launch experience is the work begun during the quarter to improve our claims intake capabilities. These are referred in the industry as first notice report in capabilities, although we've expanded the scope of that definition, I would say, in the way we're doing our work flow. As we have endeavored to implement new work flow, we've added new resources to expand the claims intake capabilities of our CareMC software. The incorporation of our rules engine and workflow tools are expected to facilitate work on new claims. A particular challenge in this effort is the identification of traditional processes whose design was established decades ago and which was built around the logical work flow in a paper based environment. The work flow enabled alternatively by current technology allows for meaningfully different claims management, and often completely changes the existing processes. In many ways we're deconstructing old processes and reconfiguring them to take advantage of new technology.

We've now begun to increase volumes of data that we have available from the Enterprise Comp services we deliver. We have expanded our analytic resources to help us review results and to identify the most productive areas in which to focus our work flow rules. A simplified description of this period might be that we are moving away from the anecdotal descriptions of claims management common in our industry to an analytic and quantitative review of results, and more importantly the opportunities for future changes.

As we identify opportunities we add to our backlog of software projects though. We've also had to increase our training expenditures in support of implementation. These are meaningful changes in work flow and always a challenge to incorporate in an ongoing operation.

As we discussed in prior quarters we have continued the development of eCommerce and clearinghouse technologies. Medicare agency services and state level clearinghouse projects are the primary focus of this effort, but connectivity in general is the larger umbrella under which these projects reside. Although more progress was made during the quarter, activity in the Medicare agency arena is going to expand next year when the regulations reach the first phases of compliance. At this time, we are working with CMS, the Medicare administration office, to confirm our two way electronic connection with them.

Lastly, the ongoing support to our directed care networks remains an important part of our PPO development effort. Adding efficiency to the patient assistance, which is an integral part of this product, is an important focus of this effort. In addition, expanding integrated direct care with claims management and also with the medical reimbursement processes where CorVel is so strong, as Dan mentioned in his network solutions comments, are the other important aspects of the ultimate buildout of the software.

I'd now like to turn the call back over to Dan.

Thanks, Gordon. I'd just like to add a few more items prior to opening the call to questions. Quarter ending cash balance was $12 million and our DSO was 47 days. We repurchased 581,000 shares during the quarter and we spent $16,798,000. We spent $203 million, inception to date, and we've repurchased 13.3 million shares inception to date. Hard shares at the end of the quarter were 12,405,000, diluted EPS shares were 12,920,000.

In closing, we continue to execute on our strategic plan of transitioning CorVel to a full service provider to the workers compensation industry. We're excited about the growth opportunities that are presenting themselves in both the new market and our traditional market. Operating CorVel with positive cash flows and without debt has allowed us tremendous flexibility in making strong progress in the execution of our strategy and we're excited about the long term. We're very proud of the diligent work that the CorVel team has done in steering through a very difficult business environment that existed over the course of the past year and we are looking forward to the future.

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

(Operator Instructions). I am showing no audio questions at this time. Mr. Starck and Mr. clemons, would you like to give it an additional moment?

Casey, I don't think so. I think that we seem to have a trend of not a lot of questions at the end, but that's okay. We have a number of calls that take place afterwards. Gordon and I would just like to thank everybody for attending whether it's in the call itself or on the Webcast. We're certainly excited about the progress we've made in the business from both a day-to-day operations and a strategy level and we couldn't be more excited about the future. Thanks everybody for joining.

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