CorVel Corp (CRVL) 2010 Q4 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 you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's last 10-K and 10-Q files for the most recent fiscal year end 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 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 for joining us this morning to review and discuss the results of CorVel's March 2010 quarter and the results of the fiscal year 2010. I'm joined by our Chairman, Gordon Clemons. Since the March quarter concludes our fiscal year, there will be a fairly balanced discussion today between the March quarter results as well as the fiscal year results. And after the overview, we'll open the call to questions.

Now, to the quarter results and the fiscal year results. Revenue for the March quarter was $87.6 million an increase of 14% from the March 2009 quarter. And earnings per share were $0.54 for the quarter, an increase of 63% from the $0.33 reported in the March 2009 quarter. For the fiscal year, revenue grew to $338 million, a 9% increase over the prior fiscal year and earnings per share increased to $2.06, a 46% increase over fiscal 2009. The March quarter results reflect the continued strengthening of our traditional managed care business in both network solutions and case management. They also reflect a continued expansion of our enterprise comp business, our integrated approach to managing Workers Compensation claims.

The fiscal year results provide a broader view of CorVel's strategic transition and reflect the coming to fruition, if you will, of a number of projects and strategies that have been at work for the past four or five years. CorVel posted strong results back in fiscal 2007 and fiscal 2008 as we made gains in our traditional business and began our strategic repositioning process through a series of acquisitions and internal investments. In fiscal 2009, we experienced an earnings decline as our growth slowed during some of the heavy investment periods of our strategic transition. However, in the face of the worst economic environment since the Great Depression we remain undeterred and continue to build for the long term. When we put some of the transition issues behind us and our growth rate returned early last year, we had the infrastructure to support the growth and thus we were able to gain margin leverage and nice EPS leverage on the new growth. This isn't to say that we're finished as it will always be a work in progress but we do believe that some of the more difficult parts of our transition are behind us.

Now from a marketplace perspective, lost time claim volumes continued their annual decline moving down by approximately 4% in 2009. As the labor market remains soft with unemployment hovering around 10%, any short-term or even medium term increase in claim counts seems quite unlikely. The average total cost per claim rose by approximately 4.5% last year with both components that make up the total cost, indemnity costs and medical costs, increasing at nearly the same rate of 4.5% to 5%. The competitive environment of the business continues to become more aggressive. Prospective customers are requiring compelling reasons to move their business, thus spawning both innovation and service delivery and pricing approaches within the industry. The declining claim volume has had an effect on the entire Workers Compensation industry. In addition to that, the poor economy has provided difficulty for nearly every business in the country. While these have been obstacles for CorVel, they've only underscored the importance of executing our strategic transition and becoming a full service provider.

Now, I'd like to turn our discussion over to the product line performance and the specific results. Inpatient management revenue for the quarter was $41.3 million. This is an annual increase of 30% over last March. And profit grew by 292% over last March. From a fiscal year perspective, revenue was $151 million, a 13.8% growth over the prior fiscal year, and profit grew by 58%. This past year, we expanded our enterprise comp customer base in both new industries and new geographies, thus strengthening our position in the TPA marketplace. We also continued to invest in advancing our systems foundation and our work towards integration. The enterprise comp product has provided CorVel with the vehicle to move from a traditional subcontractor position to the retail position in the Workers Compensation industry. In the retail position, as a third party administrator, we're able to deploy our full product line for the end customers' benefit through our integrated approach.

Our case management product results saw improvement in the second half of the fiscal year through both efficiency and product gains. In network solutions, revenue for the quarter was $46.4 million. This is a 2.3% increase over March of 2009. And profit grew by 2%. From a fiscal year perspective revenue was $187 million, a 5.4% increase over last year, and profit grew by 8%. The year's results are reflective of improvement in many of the different components of our network solutions business, professional review, directed care networks, and our out-of-network product that reviews out-of-network hospital bills. Our medical billing is becoming increasingly complex and our ability to break down billing to its basics and reimburse providers at the appropriate level for the care provided is a rewarding benefit for our customers.

Now moving forward in 2010 we'll continue to focus on our four key initiatives. The first initiative is the continued expansion of our enterprise comp product, within which we have three goals. The first is to establish the CorVel brand by increasing our national scope and reach. Just as we did in the past year, we'll be working to expand our Enterprise Comp product and our TPA presence to customers in new industries and new geographies. The second goal is our software and work flow. We've made progress with our systems but we're increasing our resources dedicated to these projects in order to drive systems development and accelerate delivery. Ultimately, we believe that systems will provide CorVel the ability to bring together all of the different constituencies involved in Workers Compensation claims in ways that have not been done before. And the last goal is the differentiation of our product. We're committed to providing a different and we feel better experience in the life of the Workers Compensation claim for both the employer and the employee.

Our second initiative is improving our sales performance. It's been a stated initiative for two years with the ultimate goal of returning CorVel to double digit growth rates. We achieved that goal in the last two quarters of fiscal 2010 and we were able to push the fiscal year towards that goal, finishing the year at 9%. Our goal now is to sustain that type of growth.

The third initiative is the continued development and expansion of our network solutions product line. Strong performance in network solutions provides us with the opportunity to provide services and savings across all of our customers, both enterprise comp and managed care. In order to drive our network solutions performance, we're working on three main initiatives within there. The first is the strengthening of our PPO. Improving the breadth and depth of our PPO has enabled us to take advantage of competitive changes in the industry and we expect that moving forward. Our second is pharmacy. Pharmacy costs continue to grow and the improvements we have made in our pharmacy product in the past year have made this a very strong product, very competitive within the industry. And our third is directed care networks. There remains significant opportunity in implementing utilization management techniques to physical therapy and other ancillary services in the Workers Compensation industry. Our fourth and final Company initiative is the continued transformation of our case management business. We've seen better performance in this business the past quarter and we continue to move towards a paperless work environment and improved productivity. The advances in mobile computing and the ability to integrate our systems have reinvigorated the opportunity within this product.

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

Thank you, Dan. I'd like to discuss the Company's technology investments from three perspectives today. First, as they relate to the Company's business strategy, as Dan discussed. Second in the context of the financial results just reported. And lastly, some detail by major initiatives. Our strategy, even in these difficult markets, has been to expand and to continue to invest strongly in our business. Technology has been a fundamental component of our business throughout the years. As our business has become more complex, so too has the complexity of the development technology become also more complex.

During recent years the Company has broadened its role in the insurance industry, as Dan just discussed. Information processing has continued to be a key strength in this expansion. Both the IT hardware and the business software applications have had to be strengthened and expanded to support the expanded services now being sold. From a technology strategy standpoint we continue to believe in the constant improvement of our use of available technology. Although new cycles in technological advancement can be over-hyped, it does appear that the industry is in the midst of a robust new phase of advancement. CorVel's strategic use of technology has benefited by the advances being made in hardware, storage, communications and even mobile computing.

I'd like to compliment the management team for their ability to maintain strong financial results while simultaneously increasing the pace of investment in technology and in addition working through the difficult integration of our technology into the new businesses in which we're now involved. As always, while technology is key, it is the people who make this stuff work. The key to our success leveraging technology has been our ability to invest at a meaningful pace and to do so continuously. CorVel manages its balance sheet and cash flow to protect our ability to execute on long term strategic initiatives while at the same time producing current returns for shareholders. Organizations in every industry, certainly also in the insurance industry in which we compete, must have their finances restructured to allow for major upgrades to their technology platforms. Migrations have occurred from mainframe computing in the '60s and '70s to minicomputers in the '70s and '80s and on to PCs and now even to cloud computing and perhaps mobile computing.

Software has moved from legacy proprietary programming languages to open systems and software and is now moving from self-contained environments to cloud computing. Every aspect of the computing environment goes through these evolutions and it can be financially tempting for companies to consider investments in technology to periodically be complete, or defined that way, and to report earnings that do not reflect the constant obsolescing of existing platforms, that is to not make what can be awkward investments at times to move constantly to new technologies. In turn this can cause organizations and we've certainly seen this in our industry, which lasts perhaps through two generations of computing technology but who which later become less viable as independent companies because their platforms have aged.

At CorVel we've moved in our past from many computer platforms to centrally hosted resources, from proprietary software tools to more open environments, and from internally maintained data centers to co-location facilities. Currently we are continuing to incorporate additional new technologies. These include cloud computing, hardware virtualization, dot net and web services and even on to mobile computing. We have structured our balance sheet and reinvestment process and pace to support continuous migration to these new technologies and our operating management has been successful enough to be able to both afford these expansions and to continue to perform for our shareholders. We endeavor to maintain our investment pace in systems and at times we're expanding into new services and markets to increase the pace of investment.

CorVel's investments in fixed assets are roughly balanced with the cash flow from depreciation. Thus the Company's after-tax earnings are pre to fund either increases in working capital, acquisitions or alternative forms of distribution such as dividends or stock repurchase. Over the last decade the Company has made a number of acquisitions to support its entry into new markets and has repurchased meaningful portions of its outstanding stock. At this time we have accelerated the investment in technology and yet have continued stock repurchases. Three years ago, we were more active acquiring firms, as Dan discussed, as a way of moving quickly into new markets and at that time we repurchased less stock. Investments in acquisitions have tended to produce fairly quick returns whereas our investments in technology typically have required more time to pay off. I believe, though, that it has been this continuous investment process that has allowed the Company to remain healthy through difficult times, whether those times have come through legislation, regulation, industry evolution, or the kind of economic upheaval our national economy has experienced over the last two years. At this time, Dan's team has expanded the number of projects and the pace of work on those projects in support of our plan to offer unique solutions to new markets.

Now specifically on individual projects, I'd like to discuss cloud computing, hardware virtualization, ongoing progress in our next generation total solutions for Workers Compensation, and ongoing development of directed care networks. During the quarter we began another phase in what I'll refer to as the enablement aspect of our services. From the outset our strategy has been to provide outsourced services to insurers and major employers. 20 years ago these were on site installations of minicomputers which collected and processed field information from within the branch operations of our clients and then transmitted such work to the legacy systems of those same customers. A decade ago we began projecting our services using CareMC, a data processing portal which allowed the customer to enter information to CorVel's systems and to report out of such systems using the Internet. Now, newer technologies promise to once again advance our ability to enable adding unique features to our customer services using variations of cloud computing and mobile computing.

The computing industry is in the midst of a rich expansion of new platforms and improved versions of cloud computing. Such advances promise to expand CorVel's ability to add features to the product offerings of our customers. CareMC functions as a sort of private cloud, allowing client information to enter CorVel systems in different ways and to in turn be passed on to either client systems or to other constituents in the insurance arena.

The use of hardware virtualization continues to make our investments in computing more efficient. This technology 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 as the Company continues to grow. This technology increases the efficiency of our technology and speeds our responsiveness, both of which make us ever more competitive. During the quarter, CorVel's claims management systems were a focus of much of our development resources. To press our market advantage, this year we have greatly expanded the pace of investment in such systems. As mentioned earlier, the Company has expanded the resources focused on these services and we have a very full set of projects ongoing at this time. We expect to have an expanding feature set implemented in phases throughout the coming year or two.

A complex aspect of our software development involves integrating the various components of claims intake. Early triaging and the coordinating of care during the most important early stages of each claim. Although these processes involve a complicated combination of services and systems, this area also includes some of the most productive advancements we can make. Being involved more deeply in claims management has also helped us see opportunities to improve our directed care activity. Adding efficiency to the patient assistance aspects of directed care improves the injured worker's experience. Integrating directed care with claims management and medical reimbursement is another complex but important aspect of this work. The degree to which all activities are interdependent makes this a complex total project, and yet also allows each improvement to add value to the surrounding activities.

In summary this remains for both internal and external reasons a period where our technology staffs are both especially busy and particularly important to our ongoing success.

I'd like to now turn the call back over to Dan for his closing comments.

Thank you, Gordon. I'd just like to add a few more comments prior to opening the call to questions. We've continued to repurchase our stock this quarter and we've done this for a couple of reasons. First, we believe it has been a good value. Second, as we look for strategic acquisitions, we size them for strategic fit and geographic fit. We've been unable to find any that fit that criteria in the past quarter and thus buying stock has been a good use of our cash. Moving to some of the balance sheet items, quarter ending cash balance was $11.9 million and our DSO was 46 days. We did repurchase 168,000 shares in the quarter and spent $5.6 million. We spent $218 million inception to date and have repurchased 13.8 million shares. Hard shares at the end of the quarter were 12,027,000, and diluted EPS shares were 12,285,000.

In closing, the March quarter is the fourth consecutive quarter of improved performance and the close to a successful fiscal year, from both an operating and financial perspective. Our revenue growth and operating performance have significantly improved over the course of the past year despite a difficult overall economy. We're very proud of the diligent work that the CorVel team has done and I'd now like to open the call for questions.

(Operator Instructions). Our first question will come from the line of Daniel Oberon.

Hi, good morning it's Dan Baldini. You and your team have done a really wonderful job. Congratulations. I just have one question. I notice that Sedgwick CMS recently was sold and I'm curious to know whether you think that will have any sort of impact on the competitive environment?

I think it's a little too early to tell, Dan. They've been sold a couple of times I guess in the last couple of years in moving back to a state taken by United Healthcare and Fidelity National Title about three or four years ago and now being moved over, I think it's to the Trident Funds. They've been a very strong competitor of ours over the past few years in the TPA space, and quite frankly, we believe that they will continue with where they've been headed as far as some of the things they've done. But from an overall landscape it's a little difficult to assess this early in the process. Gordon, if you wanted to add some perspective on that as well. Dan, appreciate the comments and the compliments.

I would just second what Dan said. I think they are an exceptional organization and have been a strong competitor. I don't see that changing. Consolidating a little bit but I don't think this changes that.

Okay, thanks very much.

You're welcome, thank you.

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

Operator, I'd just like to close the call by thanking the folks who are joining the call. We're very proud of our investor base and we look forward to talking to everybody over the next few months and years as we move forward here. Thank you.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for your participation and you may disconnect.