CorVel Corp (CRVL) 2011 Q2 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 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.

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

Now to the quarter's results. Revenue for the September quarter was $93.4 million, an increase of 13% from the September 2009 quarter. Earnings per share were $0.62 for the quarter, an increase of 24% from the $0.50 reported in the September 2009 quarter.

The quarter's results were impacted by two nearly offsetting adjustments. In the September quarter, the Company accrued $2.8 million on a pre-tax basis for an estimated liability related to the Southern Illinois class action lawsuit that has been disclosed in the 10-K and the 10-Q for the past two years. This amount is included with the general and administrative costs on the income statement.

Additionally, the Company was able to resolve some outstanding state tax issues, which resulted in a reduction to the income tax liability by $1.8 million and approximately offset the cost of the lawsuit. We do not expect any future impact from either of these adjustments moving forward. Now back to the business. During the September quarter, we continued the expansion of our strategic initiative, Enterprise Comp, adding new customers in new geographies. And our Network Solutions results continued to a slight growth in our pharmacy and directed care product lines, while Case Management results continued to improve.

From a marketplace perspective, the labor market remains soft with anticipation of a long recovery. The softness in the labor market has contributed to keep claim volumes at historic lows. However, claim costs continue to increase as medical inflation increases.

The claims volume decline is having various effects on the industry. First, without a growth in claims, industry participants are looking for ways to internalize more services and bring those services to clients in order to fuel organic growth. Secondarily, there's been an increase in consolidation activity in recent months. Consolidation is being driven by both private equity, as well as through strategic buyers, as there have been several transactions in the past few months.

The current characteristics of the industry would suggest this could continue through into the future. The industry is largely fragmented, it can provide good margins, and synergies exist with the right combination of service providers.

The industry environment only seems to confirm CorVel's strategic decision to reposition the Company. We've expanded our services and opened ourselves to new markets. These decisions and the overall quality of our products have enabled CorVel to overcome the growth challenges that face the industry today.

Now I'd like to discuss our product line performance specific results and our key initiatives for 2010.

In Patient Management, revenue for the quarter was $44 million, which is an annual increase of 23%. Profit increased by 68% over the September 2009 quarter. Included in the Patient Management results are our third-party administration product, Enterprise Comp, and our traditional Case Management product.

Our Enterprise Comp product has been a major contributor to our growth, both in the September quarter and throughout this past year. The growth that we have experienced has served as a lever to increase the level of name recognition of CorVel in the TPA business, as well as the penetration of CorVel into the employer market, the target market for Enterprise Comp.

Our growth has been fueled by both acquisition as well as organic growth. Each of the three claims administration companies that we acquired over the past couple of years have been largely integrated into CorVel, and each of them has grown since the transaction, thus providing growth platforms for us in their individual geographies, and with integration, a national platform.

These acquisitions, coupled with our increasing organic growth rate, as well as our investments in software development and infrastructure, have moved us through the startup phase to a fully mature product that's able to meet the needs of both small and large clients regionally as well as nationally. We now have 28 claims offices across the country, a growth of over 60% over the past two years. CorVel's Enterprise Comp product is no longer a boutique product, but one that's scalable and national.

Our Case Management results are enjoying a renaissance of sorts due to the strong synergies in it with our TPA business and the overall management of worker's compensation claims. Our philosophy is that a worker's compensation claim is first and foremost a healthcare issue, not a legal issue. Because of this, delivering proper medical attention and the timely delivery of care has a significant impact on the outcome of the claim, and it has re-energized our Case Management.

Now on to Network Solutions. Revenue for the quarter was $49 million, an annual increase of 6%, and profit was down 1.6%. The quarter's Network Solutions results reflect the growth of our pharmacy product and our directed care networks. Despite the decline in claim volumes across the industry, we've maintained our medical bill review volume within Network Solutions as well as grown the total Network Solutions product line. We've done this through adding new customers, but also by selling additional services to our existing customers.

We've recently enjoyed success in selling our traditional Network Solutions services, medical bill review and PPO, into the mid-tier insurance carrier market. That success, coupled with processes that will better connect the beginning stages of a claim to all managed care services, serve to improve the penetration into our PPO network and overall results.

There remain significant opportunities for us in the pharmacy and directed care product lines, so ancillary care products make up approximately 45% of the total medical dollars spent on worker's compensation, and those include the products of pharmacy, physical therapy, and radiology. We've grown that product significantly in the last couple of years. However, we have ample opportunity.

Moving forward in 2010, we'll continue our focus on four key initiatives. The first initiative is the continued expansion of the Enterprise Comp business. As I discussed earlier, our presence has been expanding in the third-party administrative business. We're making particularly good progress in critical states--California, Florida, New York, Illinois, Wisconsin, and the Carolinas, to name a few.

Our Enterprise Comp product is particularly appealing in the market for two reasons today--first, for results, and second, for service. First, from a results standpoint, CorVel's unique approach has demonstrated improved claims outcomes for our customers. The lag time of data in the worker's compensation industry is long--so long, in fact, that historically, it's taken years for true results to become apparent. However, our analytics department has done a tremendous amount of work in order to produce reporting that compresses the time frame of reporting information and works to identify trends within the claims much earlier in the process. These trends indicate favorable results from the adoption of the CorVel Enterprise Comp process.

Secondarily, CorVel's dedication to local customer service has translated well to the third-party administrative business. The Company grew through its first 20 years by providing strong results, but also by providing top-notch service. In today's age of consolidation and electronic communication, customer service has become a thing of the past in many industries. Our 110-branch footprint has allowed us to leverage our existing branch network and continue our high-touch model.

Lastly, and Gordon will discuss in more detail in the product development section, our software delivery has been accelerating. We've made significant progress these past few quarters, and we look for that pace to continue.

Our second key initiative is to keep improving our overall sales performance. We've achieved double-digit growth for four consecutive quarters, with growth rates between 13% and 14%. Our goal is to now maintain that type of growth. We've made significant investments in our sales team in terms of people, training, segmentation, and technology. And while it has taken time to lay the groundwork, our methodical approach is paying off.

The third initiative is to continue development and expansion of our Network Solutions product line. While we have many different parts in our Network Solutions product, today I'd like to focus on the dynamics of our PPO network. In the industry, there's a growing interest from customers to move away from focusing purely on savings and an increasing effort to focus on outcomes and total medical spend. One of the ways we're addressing this is the transition from the retrospective, traditional PPO discount model to a more prospective model.

In the retrospective model, a provider joins a network and agrees to provide services for a discounted price in exchange for being listed in the PPO's directory and being considered in network. In this model, one of the main drivers of worker's compensation healthcare costs go largely unmanaged--that is, the utilization of services. In the prospective model, patients are proactively scheduled with providers, and utilization and price is agreed upon prior to treatment.

The retrospective PPO discounting model is one that has existed in healthcare for 20-plus years, and that model will continue. However, moving more services to a prospective process is a high priority for us in order to better manage the total delivery of care and its cost. Today we offer that prospective model in the form of our directed care business with physical therapy and radiology. The work we're doing today in Enterprise Comp puts us in a position to improve the overall delivery of care and its cost and our overall effect of our PPO network.

Our fourth and final initiative is the continued transformation of our Case Management business. This has quickly become one of the more exciting opportunities to advance. The synergies with our Enterprise Comp business and the proliferation of mobile computing begin to unlock future business opportunities. Soon CorVel's Case Management staff will be delivering information in real time to the other constituents in the healthcare continuum, helping to remove the inherent delays in claims management and care provision.

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

Thanks, Dan. I'll cover the development issues for the quarter and results. As we've discussed in prior quarterly calls, CorVel has expanded the pace of product development this last year. The results of that expansion began to show in the September quarter, as Dan referenced, and will be more visible in software releases in subsequent quarters. The restructured development process implemented this year also includes expanded resources for software planning and the defining of business needs, which we believe is beginning to also help us with progress and development.

In addition, the pace of change in the computer industry continues and will continue over the planning horizon. Certainly, most of the high-priority projects on which we are now working would not have been possible five years ago in the formats we can deploy them today. As with past evolutions in computing, it can feel awkward to move to the next new architecture, and yet doing so inevitably orphans organizations stuck on legacy platforms.

At CorVel, we've moved from minicomputing to data centers and on to collocation facilities and now must contemplate cloud environments. The journey from command line interfaces--I'm not sure I like that phrase; I might have called that the C-prompt--but anyway, to Windows and mouse interfaces and onto the multi-touch gesture interfaces--let's call those touch screens--has been an easier set of moves.

At this point, it is still a bit unclear how much computing is going to jump from the desktop to mobile devices. But when people are spending real cash to buy virtual farms, it has to get your attention. If any of you are experienced Farmville sharecroppers, I think you can appreciate that taking this stuff to claims processing creates some confusing data, even for CorVel.

Implementing such change is also a major investment for any Company involved in information-based services, and thus it is for the insurance industry and as well for CorVel.

I'd like to cover our development in three sections--systems integration, workflow and process improvement, and information delivery. Systems integration projects include both hardware and software issues. We won't be doing as many updates on the hardware virtualization efforts, as they have become a regular part of our transitions and are no longer new to our staff or to our progress in information technology.

Uses of the cloud to share hardware investments are still in the exploratory stage as well. Our largest current effort is focused on continuing to move and to substantially advance our claims processing software in the CareMC Web portal. This is a large project that will encompass multiple years. Each run software release, though, typically includes individual projects that move us along that path.

We're working on a range of applications that combine to address the claims intake aspect of insurance administration. These include various call center activities and supporting workflow that extend CorVel's information technologies into both our claims work and into the operations of our customers.

Working more closely with our customers, though, has been a longstanding CorVel strategy. We began in the '90s with onsite minicomputer operations in our customers' claims offices. In the last decade we moved to Web-based tools, and now we're continuing to build out our CareMC website and are beginning, as Dan referenced, mobile computing.

CareMC is now a 10-year-old project that increasingly differentiates CorVel from competitors. CareMC offers the various constituents in the worker's compensation arena a platform and a central database through which to link their respective efforts to those of others involved in each claim.

Linking formerly disparate efforts to one database offers any number of synergies, but certainly it has challenged many of the traditional processes in what is a very mature insurance industry. The added complexity of individual state regulatory environments makes this a complex effort and yet one that directly addresses the existing inefficiencies of the paper-based, traditional model.

Workflow management--while typically productivity gains are the logical result of investments in technology, CorVel has instead focused primarily on improving service to be the most productive focus of our investments. During the quarter, we completed some additional functionality within our claims intake capabilities and will be implementing these new advances in production in the current quarter. We also worked to place our Ask a Nurse product, which provides telephonic help on healthcare issues to employees of our clients into our CareMC website.

The processes accepted as normal in worker's compensation were all developed in a paper-based environment. Moving such processes to a digital environment can include changes which may not be particularly intuitive and which meaningfully changes the assumptions built into the industry's standard ways of doing business. We are, though, seeing incremental improvements in outcomes from these step-by-step improvements in our process. And these outcome improvements in turn reduce the long-term cost of worker's compensation for our customers.

CorVel's information delivery--or to keep it simple, our reporting--is becoming more timely and frequent for customers. CareMC provides online access to claims information, and the CorVel analytic group to which Dan referred is steadily expanding the scope of its review of outcomes. We are, for example, now providing monthly reports that are traditionally given to customers only annually. By building such reporting into our systems, we can increasingly drive down the cost of such customer support and then expand the reporting frequency.

It is also possible to use data mining techniques to identify key parameters unique to each individual account. CareMC can accommodate complex organizational structures within our customers' enterprises and thus deliver information at the operations level in insurers and in employers. This change has the effect of making the management of work-related injuries much more a normal part of an employer's daily activities, removing the many barriers which had historically made worker's compensation a frustrating and a bit obscure part of the regulations impacting the work environment.

Demonstrating our new tools to customers is exciting these days and I believe will help us better explain the CorVel advantage.

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

Thank you, Gordon. I'd just like to add a few more items prior to opening the call to questions. The quarter-ending cash balance was $18.7 million, and our DSO was 43 days. 164,000 shares were repurchased in the quarter, and we spent $6.3 million in the quarter. We have spent $230 million inception to date, and we have repurchased 14,092,000 shares inception to date. Hard shares at the end of the quarter were 11,834,000, and diluted EPS shares were 12,104,000.

In closing, the September quarter represents another solid quarter of improved results. The Company has made particularly strong advancements in both revenue growth performance and software delivery, helping to advance our strategic repositioning. We're very proud of the work that the CorVel team has already accomplished, and we look forward to our future opportunities.

I would now like to open the call for questions.

(OPERATOR INSTRUCTIONS.) There are no questions in queue at this time. Mr. Starck and Mr. Clemons, do you have any further comments?

Just a couple of closing comments, operator. First, we'd just like to thank everyone that's joined us on the call today, as well as those that will access the call either through the archived webcast or through a transcript of the call, and we appreciate the continued support of CorVel. And the last comment for us in closing is we're all rooting for a pro-business outcome to today's elections. So thank you, and we'll talk to you next quarter.

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