CorVel Corp (CRVL) 2011 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 in our projections or forward-looking statements. (Operator instructions)

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, operator. I would like to thank everyone for joining us today to review and discuss the results of CorVel's June 2010 quarter. I'm joined by our Chairman, Gordon Clemons. And in our normal fashion, I'll be reviewing the financial results and key initiatives, and Gordon will be reviewing product development. After the overview, we will open the call to questions.

Now, to the quarter results -- revenue for the June quarter was $91.5 million, an increase of 12.5% from the June 2009 quarter. Earnings per share were $0.64 for the quarter, an increase of 30% from the $0.49 reported in the June 2009 quarter.

During the June quarter, we continued the expansion of our enterprise Comp product, CorVel's fully integrated workers' compensation claims solution. And our network solutions results reflect growth in our pharmacy and directed care product lines, while case management growth is reflective of increasing volumes.

From a marketplace perspective -- the labor market remains soft. And with national unemployment near 10%, there are no signs of a firming of the labor market in the near future. Workers' compensation claim volumes continue to decline. Yet the average total cost per claim continues to increase.

The increase in total claims costs is being driven by the growth in total medical costs, thus emphasizing the need for cost containment. Industry participants are looking for ways to bring expanded service offerings to clients in order to fuel growth to overcome the declining claims volume. The expansion of service offerings by our competitors is coming in the form of both acquisition consolidation as well as strategic partnerships.

In this difficult economic period, the employer's decision to move their workers' compensation program is very difficult. Change and the associated frictional costs are becoming reason enough for companies to remain with their current workers' compensation service provider. This has prompted new and creative approaches to pricing, as well as performance-related metrics in our industry.

Now, while some of these items may be perceived as obstacles for CorVel, these dynamics only underscore the importance of executing our strategic transition to being a full-service provider. As a full-service provider, CorVel is able to offer solutions to meet the needs of the wholesale buyer of the industry -- both insurance carriers and third-party administrators -- through our traditional managed care products; as well as the retail buyer, the self-insured employer, through our enterprise Comp product.

Now I would like to discuss our product line performance-specific results and our key initiatives for 2010. In patient management -- revenue for the June quarter was $43.3 million. This is a 31% increase over the June 2009 quarter, and profit increased 126% over the June 2009 quarter. Revenue increased 5% from the March 2010 quarter, and profits increased 14%.

Included in the patient management results are our third-party administration product, enterprise Comp; and our traditional case management product. CorVel's position in the third-party administrator business, through our enterprise Comp product, is gaining stronger footing. Once thought of as a newcomer to the business, we continued to advance our presence and gain momentum in the market through our unique approach to claims management and improved customer outcomes.

CorVel's unique approach has provided strong early results for our new customers, and our dedication to local customer service has translated well [through] the TPA business. Not unlike manufacturers in other industries that have moved to consumer-direct marketing and sales, the transition to providing a product directly to the end user has opened a considerable number of market opportunities for CorVel. And as we gain traction in the third-party administrator business, CorVel's presence in the employer market grows.

In our case management product, we're benefiting from things we've learned in the TPA business. The view from that perspective has provided us with a fresh, new look at the importance of case management in the total claims process. And we are actively working to incorporate our learnings in order to deliver a more impactful product.

In network solutions -- revenue for the June quarter was $48.2 million -- that's flat to last year's June quarter -- and profit is down 6%. Sequentially, compared to the March 2010 quarter, revenues increased 4%, and profits increased 7.5%.

Network solutions continues to be one of the main drivers of our overall results. And investments in MedCheck, our medical bill review software, continues, as does the strengthening of our PPO network.

Two areas of network solutions that are beginning to realize their growth potential are our pharmacy product and our directed care network. We've made long-term investments in both people and systems that are beginning to pay dividends. Medical expenses continue to increase on a per-claim basis, both in terms of hard dollar impact as well as a percentage of total claims costs. And pharmacy costs and physical therapy costs now consume approximately 35% to 40% of the entire medical spend in workers' compensation.

CorVel is able to bring savings to our customers not only through unit price reduction in both pharmacy and physical therapy, but also through our utilization management programs. By leveraging our integrated bill review platform, the ability to access and leverage data, and our dedicated resources, we're able to bring together the entire continuum of care.

In pharmacy, the key to improving savings is the ability to drive network penetration. And our visibility into the data has allowed CorVel to have market-leading penetration rates. With physical therapy, managing utilization to the appropriate numbers of visits to maximize the efficacy of treatment is our top priority. Our clinical oversight and involvement allows CorVel to collaborate with the injured worker's treating clinicians in order to meet that goal.

Now, on to the key initiatives -- the first initiative is the continued expansion of our enterprise Comp product, within which we have two main objectives. The first is to establish the CorVel brand by increasing our national scope and reach. And as with any geographically dispersed company, some geographic areas outpace others.

In the June quarter -- and really, through the first six months of 2010 -- we've gained ground in a number of geographies, most notably the Southeast and the Midwest. By leveraging our branch network, we've been able to capitalize on our existing presence and existing infrastructure. We also continue to look for strategic acquisitions that would give us added strength in specific geographies.

The second objective is to deliver a differentiated product through our software and workflow capabilities. In order to accelerate our pace of deliveries of specific enterprise Comp software, we've increased our resourcing in the IT function. Bringing together the different facets of claims administration is a large and complex job. But we're incrementally delivering software that will lead us to improving both quality and timely delivery of care. Our systems integration provides us with the ability to bring together all of the different constituencies involved in workers' compensation claims in ways that have not been done before.

Our second key initiative is to keep improving our overall sales performance. Our stated goal for the past two years has been to return CorVel to double-digit growth rates. We've achieved that goal for three consecutive quarters now, and our goal is to maintain that type of growth. We believe that our overall sales performance are made up of the combination of the pure sales effort, but they're very much aided by having products that not only meet but exceed a buyer's expectation.

The third initiative is the continued development and expansion of our network solutions product line. While we've had solid performance in this product, we've made some organizational investments and operating changes in order to improve our performance.

Earlier in the overview, I mentioned the work that we're doing in the pharmacy product and directed care network. Two of the other areas that we continue to focus our efforts are -- PPO, strengthening the breadth and depth of our PPO through our better contracting; as well as adding strong affiliate networks in specific geographies in order to improve total discounting. The second area in network solutions that we continue to work on is our enhanced bill review product. This product generates incredible savings for our customers on their most expensive bills -- out-of-network hospital bills. Our proprietary database continues to set the bar for the industry and differentiate CorVel from our competitors.

Our fourth and final initiative is the continued transformation of our case management business. The mobile computing age is upon us, and the technology advances that are available today have some exciting implications in our case management business. We expect to leverage them in the near future.

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

Thank you, Dan.

The June quarter included our largest increase in fixed assets in one quarter in the Company's history. While we clearly want to control expenses and to be prudent, investing in our future has been a key to our success. With a long-term investment pace over the years, we've been able to gradually move our market position forward. As Dan discussed, the current success in claims administration is one such example.

As much as it may seem that increasing spending must be carefully controlled, in fact, it is not easy for a relatively small company such as CorVel to meaningfully expand its investment pace in technology. Processes have to be changed.

Over the last year, the development team has been working to address larger projects and to carefully evolve their processes to accommodate larger goals. As the Company has grown, the approach to development has had to become more defined. Processes we used 10 years ago might have been okay for a smaller company. But at some point, CorVel had to make investments in its development processes in order to become a much larger enterprise. Dan and his team have been doing that.

In the early phases of such a transition, these investments can cost more than they produce and can lead to lumpy results. As you can appreciate, the impact of Sarbanes-Oxley is naturally to discourage investment moves that can create bumps in earnings. However, successful investment is necessary to long-term growth. And therefore, evolving our processes is necessary to our journey to being a more meaningful player in the insurance industry.

Although, understandably, Dan and his team don't want me to overstate their successes, I would like to complement them on having had the determination and have made the hard work -- taken the hard work necessary to make these evolutionary changes and investments.

This is also a time of change in the outside world of technology. The pace of development in the IT and software industry continues to impress us and to encourage our own initiatives. Although over a long period of time the pace of technological advance seems relatively steady, up close we see good periods than [yet] other times when less is happening. At this time, new generations of software tools, hardware virtualization and ever more advanced communication technologies promise to continue changing the landscape in the insurance industry. This pace of change makes training and implementation planning ever more important in CorVel.

I'd like to discuss our projects for the quarter, organized in areas that Dan's also covered. That would be systems integration, workflow and process improvement, and thirdly, information delivery. Systems integration projects have been focused on moving our claims processing software to the CareMC Web portal. This is the long-term project area that will encompass a number of years. Each month's software releases, though, typically include individual projects which move us along that path.

We're also increasing the use of our Scan One organization as the data-capture center for the Company. Scan One provides services designed to help organizations expand the scope and effectiveness of their workflow implementations and specializes in data intake and in the converting of information from image to data. We want to capitalize upon the fact that CorVel offers a wider range of the many service components involved in casualty claims than do other administrators, to build unique integrations of these services.

The second area is workflow management. While typically productivity gains are the logical result of investments in technology, we've found at CorVel that instead, we are able to achieve improved service for our clients and customers around the country.

During the quarter, we added additional functionality to our check-writing and reimbursement-management systems. Codified content of value in our early intervention tools and services was also added to our claims processing software.

We are also working on our 24/7 product which provides telephonic help on healthcare issues to the employees of our clients. We want here to have this service more well-integrated with our claims management processes.

The third area is information delivery. Information delivery is another focus of our current development. The data warehouse upon which we've worked for a number of years has become increasingly valuable, and our analytic group has capitalized upon it to produce new reports and analyses for our customers. We're expanding features which capitalize upon the data in our systems to address the needs of employers that are tangential to workers' compensation claims management but outside the normal role of claims management companies.

Stewardship reporting at levels below the consolidated corporate level has also been launched. And we continued to expand our reporting of workers' compensation data to the Center for Medicare Services. In a very busy year, we are, as this quarter's results demonstrate, enjoying some of the advantages of prior years' investments, and yet capitalizing upon those gains to increase the pace of the further development of our enterprise.

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

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

Quarter-ending cash balance was $13.7 million, and our DSO was 45 days. Under our current share repurchase program, 153,287 shares were repurchased in the quarter. We spent $5.5 million in the quarter. We have spent $224 million inception-to-date, and we've repurchased 14 million shares inception-to-date. This represents a 54% repurchase of our entire outstanding shares. Hard shares at the end of the quarter were 11,907,000, and diluted EPS shares were 12,187,000.

In closing, the June quarter is our fifth consecutive quarter of increased growth. The results are a product of all the work that has been done over a number of years that tends to be lost in a moment like this. We're very proud of the work that the CorVel team has done and continues to do on a daily basis to lay the groundwork for future growth.

I would now like to open the call for questions.

(Operator instructions)

Okay, maybe if I could offer one item while we're waiting for questions, if there are any. I did want to --

[Please go ahead].

I did want to clarify, for the group on the phone, a little issue around our tax rate. And I want to make sure we clearly communicated it. Our tax rate is slightly lower this quarter due to some tax credits, and the lower rate resulted in a $0.01 benefit to EPS for the June quarter. So again, without that, we'd have been at $0.63 in EPS.

Maybe that'll generate a question or two.

(Operator instructions)

And at this time, there are no questions in queue.

Okay, we'd like to just wrap up the call by thanking everybody who's on the call or through the webcast, or those who may access the transcript through the Internet. We'd like to thank everyone just for showing the interest in CorVel.

I'd characterize our mood, as we close the call today, as very pleased with our results but not satisfied. And our opportunities continue to expand in front of us, and we're very much looking forward to the remainder of the year, and meeting expectations.

So thank you, and we'll see you soon.

Ladies and gentlemen, this concludes our Conference Call for today. Thank you for your participation. Please disconnect at this time.