CorVel Corp (CRVL) 2011 Q3 法說會逐字稿

Thank you for standing by. 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 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 document, the company's last form 10-K and 10-Q files, 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 given at that time. As a reminder, this conference call is being recorded. 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, Operator. Good morning, everyone, and thank you for joining us to review the results of CorVel's December 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, while 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 December quarter was $95.3 million, an increase of 10% from the December 2009 quarter. Earnings per share were $0.56 for the quarter, an increase of 4% from the $0.54 reported in the December 2009 quarter.

In our traditional product offering, the quarter's results reflect improved transaction volumes in network solutions, while case management results are reflective of small volume decline associated with an abnormally short December quarter. Enterprise Comp, our strategic initiative, continued to gain traction in the quarter throughout many areas of the country. From a marketplace perspective, consolidation activity within the worker's compensation industry continued in the December quarter; and 2010 was one of the more active years in memory. Acquisition activity was prevalent in all phases of the industry. Third-party administrators, managed care companies, niche product companies and software vendors. Private equity has become quite active in the industry and has served as a driving force in the majority of the transactions.

From the outside, the goal of the acquisitions appears to be the ability to expand service offerings and offer a broader product line to end customers. With a largely fragmented industry, acceptable margins, and strong cash flow, I expect that the consolidation activity will continue. While the labor market has remained soft and worker's compensation insurance premiums have remained soft as well, there appears to be early signs of a firming market. Several states, including California, have recommended fairly significant increases for worker compensation insurance rates in 2011.

From a technology perspective, the advancements in mobile computing and social media are impacting most people's lives. These have yet to find a true home in our industry; however, with the power of connecting people that these medias allow, it is only a matter of time before their application is impactful in worker's compensation. While the consolidation activity and the growing influence of technology in the industry may concern some of our competitors, we believe that the movement is consistent with our strategic direction and we look forward to taking advantage of the changes that they bring. Now, I'd like to discuss our product line performance specific results and our key initiatives for 2011. In patient management, revenue for the quarter was $44.4 million, an annual increase of 8.2%. Profits were down 8.5% from the December 2009 quarter. Included in the patient management results are our third-party administrator -- excuse me, our third party administration product, Enterprise Comp, and our traditional case management offering. The expansion of our Enterprise Comp product continues to be a major contributor to our growth, both in the December quarter and throughout this year. Our growth has been fueled by both acquisition as well as organic growth.

In the December quarter, we closed a small acquisition in the Southeast in order to expand our presence and serve as a growth platform. From an organic growth perspective, the December quarter was our best performance in terms of winning new customers. A very encouraging sign of our improving traction in the TPA space is the improved sales performance and market penetration that we are experiencing in areas of the country where we have not done any prior acquisitions, specifically, the Midwest states and a number of the Southeast states.

I spoke a little earlier regarding consolidation in the industry. Several of the major players in the claims administration business have been involved in this consolidation activity this past year. The consolidation movement has already generated opportunities for CorVel due to fewer players and customers seeking potential other options. By being included on the shortlist of large customers that are seeking alternatives, it is further proof that CorVel has moved through the infancy phase of our Enterprise Comp product to a product offering that is capable of competing on a national basis.

In network solutions, revenue for the quarter was $50.9 million. That's an annual increase of 11.6%, and profit increased 14% over the December 2009 quarter. The quarter's network solutions results reflect improved transaction volumes in all interphases of the business, medical bill review, pharmacy, and our directed care networks. We've enjoyed recent success in selling our traditional network solution services into both midtier insurance carriers, as well as large employers. That success, coupled with growth that we are experiencing with our Enterprise Comp product, has been a major contributor in our improved transaction volume.

The other major contributor to our growth is the performance of our pharmacy product and physical therapy product. Overutilization, or, more appropriately, the lack of utilization management, has been an ongoing source of concern in the worker's compensation industry, specifically in these products. Our pharmacy product is driving significant cost savings for our customers. We do that by utilizing drug formularies and increasing network penetration through our pharmacy network. With physical therapy, our clinical oversight has worked to ensure that the injured worker receives the appropriate amount of physical therapy in order to enable maximum recovery, yet not to continue indefinitely.

Moving forward in 2010, we will continue our focus on our -- excuse me, moving forward in 2011, we'll continue our focus on are four key initiatives. The first being the continued expansion of our Enterprise Comp product. Our quest to bring a unique approach to the handling of worker's compensation claims remains our number one strategic objective. Much of our current effort is aimed at improving the processes associated with the initial stages of a worker's compensation claim. Historically, the beginning of the claims management process has been initiated by the gathering of data and the submission of the necessary regulatory forms, while not necessarily focusing on the delivery of the medical care needed to address the injury at hand.

This can lead to a prolonged process and, oftentimes, delays the time frame for an injured worker to seek appropriate medical care. By improving the processes at the beginning of a claim, an injured worker will be able to access the appropriate medical care on a timely basis, while data gathering can be done in a parallel order to meet regulatory requirements. Leveraging workflow technologies that CorVel has used before, as well as utilizing our managed care background, has allowed us to improve the processes associated with claims management and work to develop a consistent application of process. Thus far, our unique approach is yielding improved results for our TPA clients, continuing to build at our workflow processes in order to not only maintain but improve those results, has led us to increase our resources in product management, product development and analytics.

Our second key initiative is to continue improving our overall sales performance. We've now achieve double-digit growth for five consecutive quarters and there's plenty of opportunity for us to maintain or increase that pace. As we advance the development of our Enterprise Comp product, as well as our directed care network products, our sales opportunities will continue to improve. The third initiative is the continued development and expansion of our network solutions product line. The combination of our MedCheck Software, its associated database, and the directed care services that we offer, provides CorVel with a comprehensive view of a customer's overall cost drivers and a unique ability to provide solutions to help impact those costs. Organizationally, we've increased the resources in order to create focus, increase consistency in service delivery, and build a scalable product. Today, the directed care network products, in the perspective nature, are providing us with a blueprint as to how to enhance our service offering in the future by moving to a more prospective model within other lines of medical care and further driving cost savings results for our customers.

By improving the early stages of information gathering and processing in the claims management continuum, this enables the connection of timely healthcare delivery and increased cost savings. Our fourth and final initiative is the continued transformation of our case management business. The advances in mobile computing are quickly making our case management opportunities more interesting. On a typical day, CorVel's field case managers, upwards of 15% of our workforce, are dispersed across the country interfacing with injured workers, enabling those individuals to be connected in real time, with all the constituents involved in the worker's comp claim, provides the basis for us to compress the amount of time between injury and treatment, as well as the delivery of information, thus removing some of the inherent delays in claims management, and improving the overall outcomes of a claim. Our investment in technology certainly is consistent with this direction.

From a product development perspective, I'd like to turn over the call over to Gordon to discuss that nature.

Thanks, Dan. The December quarter each year includes our normal investment in software and in the ongoing improvements to our computing environment, but also must address the seasonal implementation of new customers, as Dan discussed, on January 1 of each new year. This year, we have new customers for our PBM business, for the continuing expansion of CorVel's enterprise claims administration services, as well as expanding interest from the auto insurance industry.Auto carriers have always had the opportunity to add managed care to their insurance offerings, but the pace of such interest has expanded recently. As I've discussed for two quarters, we have restructured the development process to expand the resources for software planning and for the defining of business needs, as Dan covered. As we've expanded the development resources, we've seen that we need more resources in planning and in the development of software specs.

I'll cover our development in three sections, systems integration, workflow and process improvement, and information delivery. Systems integration projects include both hardware and software. When asked for an update on the progress the data center is making on hardware and infrastructure projects, the staff felt that the primary focus of their efforts in this area would not be the kind of stuff that investors would find interesting. And, I suppose that may be true, but what I'll include today, although it may sound like mumbo-jumbo, perhaps should give you some sense of the kinds of support projects in which we are involved to prepare for future growth at CorVel. We are always working to prepare our system's infrastructure for the ongoing development of the company and to accept new technologies as they become available. In systems, it can be tempting to slow or to stop the pace of movement from older systems to new, as a way of harvesting past investments and enjoying improved short-term profitability. Building out new capabilities and moving on to new computing platforms is expensive and usually doesn't provide short-term bottom-line results. None the less, without such investments, CorVel's opportunity to capitalize upon new markets or new technologies would be hampered or eliminated. Spending on technology at CorVel has never been at a higher level than it is today.

We've completed the virtualization of approximately 100 of the servers in our data center and see the opportunity to virtualize approximately another 150. The data center implemented VMware site recovery software in the quarter. Our SAN storage and virtual servers are now working through a new central switch designed to avoid congestion. Several Microsoft systems management tools have been implemented. Their System Center Configuration Manager, SCCM, is utilized by a support team to deliver Windows updates to 3,200 CorVel computers monthly. The O'Palace automation platform is being utilized for desktop software provisioning and issue remediation. The fore -- front end point protection, that's FEP antivirus rollout is also in progress. We were invited to participate in Microsoft's preproduction testing which placed us ahead of their normal product release. As a result, we have built and tested the infrastructure and are now rolling this out companywide.

A site server management dashboard was created to allow designated field operations to manage disparate local file and print servers. A mobile device management solution for iPad's airlodge is being implemented to support the device security and provisioning process. We are expanding the incorporation of Tablet and Smartphone platforms throughout the company. This effort will be -- in the coming quarters include interfaces to other constituents including our customers at more than one level in their organizations, our subcontractors, and, of course, CorVel's mobile field staff.

Our largest application effort is focused on continuing to advance our claims processing software in the CareMC Web portal. Progress continues each quarter in this effort and will continue throughout the planning horizon. In workflow management, as I mentioned in the last call, we are working on a range of applications that address the claims intake aspect of insurance claims administration. These include call center activities and supporting workflow that extend CorVel's information technologies into both our claims work and into the operations of our customers. Our CareMC Web portal 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 to which to link their respective efforts to those of others included in each claim. This project has important milestones in each current quarter and throughout the current calendar year. We've begun implementing the first phases of this project with select claims administration customers. However, the total project is quite large and will continue to evolve for some time.

CorVel's information delivery -- or that is our reporting capabilities -- are being expended each quarter. Although much of this is provided through our CareMC portal, we also continue to provide some through EDI interfaces and on the more local level through PC-based systems. Work in the quarter led to a January software release to customers which added a number of new reports in CareMC. In addition to the online reporting in CareMC, we provide special analytic reviews customized to the needs of individual clients. Our data warehouse capabilities are leveraged by an analytic group which provides new reviews of the ever-changing trends in worker's compensation claims and cost.

A not well-known aspect of casualty management these days are the new regulations regarding reporting such claims to CMS, that is the Medicare reporting unit of the federal government. CorVel is uniquely positioned as a result of our commitment to total computing solution in casualty claims management to be a leader in both clearinghouse work and also in Medicare reporting. We have a robust solution for employers and insurers in worker's compensation. This has been a very slowly-developing regulatory area, but we've reached the launch point for such services. Changes to the federal specs have been a continuing story, but we have resources dedicated to this opportunity and believe we bring substantial synergies to the effort.

I'm especially looking forward this quarter to a document management capability we are introducing. This software will much improve our user's experience accessing and working with our document storage system, improving access, and the ease of manipulating stored documents. I'd now like to turn the call back over to Dan for his closing comments.

Thank you, Gordon. I'd just like to add a few more items prior to opening the call to questions. Quarter ending cash balance was $15.8 million and our DSO was 42 days. We repurchased 238,700 shares this quarter. We spent $11 million. We have spent $241 million inception to date, and have repurchased 14.3 million shares inception to date. Our shares at the end of the quarter were 11,660,000 and diluted EPS shares were 11,984,000. In closing, the December quarter represents another solid quarter of results. Revenue growth remained in the double-digits despite the normal cyclical nature of the December quarter, and the company has made strong advancements in our strategic repositioning. We've very proud of the work that the CorVel team has accomplished, and we look forward to our future opportunities. I'd now like to open the call for questions.

(Operator Instructions)Our first question comes from the line of Jim Larkin.

Yes. Good morning, I wonder if you could just address the spending trend and kind of what we should think of for the coming year in terms of the rate at which you'll be increasing your spending. Should we think of that as growing as fast as you're top line or even faster given that mumbo-jumbo list that Gordon gave out?

Jim, one of the things that we did about a year and a half ago was -- one of the reasons we did increase the buyback was to not -- not to be detrimental to the EPS as we increased our system spending. And, I would say that our system spending is -- our plan here is to make sure that we are investing at a rate that continues to fund the growth and separate us from our competition. To a certain extent, we have to manage that spend and I don't see an astronomical growth coming, but we're also not going to cut it back, if you will. So, the rate it is at now is comfortable for us, and I could see us increasing it some, but we're not planning on reducing it. Anything that you want to add?

Yes, I would add some of the items I covered were more infrastructure-based, and I think we can accommodate the pace of investment there within the growth trends in the company, and even, perhaps, slightly below that. And, the bigger investments that are more discretionary tend to be in the claims intake discussion that Dan covered in his remarks.

And, that type of investment spending, is that going to flow through the SG&A line or is it going to more work its way into depreciation? How is that going to get into the numbers?

A little bit of both. Mostly, it's been accumulated in what will flow through depreciation.

Okay, great. And, then can you talk about pharmacy and directed care, two areas that you highlighted as having some nice growth. How mature are those offerings and how should I think about the penetration rate you have with your customers there and along with opportunity there with those products?

Sure. I would say that with both pharmacy and directed care, they are early in the game, if you will. They fit nicely with our traditional business of managed care, but they also couple very nicely in with our Enterprise Comp business. So, they can make up a fair amount of our growth as we add, again, both Enterprise Comp customers, but also deeper penetration into our traditional managed-care book. So, we feel there's a lot of runway left in the growth in those two products.

All right, and then just a last question is, I think you talked about in the press release that transactions were up. How should I think about that in terms of versus overall claims with -- this industry's just been in a continual downturn in the volume of claims? Does that say anything about claims have picked up recently? Or is that -- I can't connect those dots directly between bill review transactions and overall claims in the industry.

We've continued to see a decline in claims. At least our book experience was a decline in claims this past year. It feels that there is some bottoming potentially. There was significant rate increases recommended at least in the state of California for 2011, most of which have been largely ignored so far, and I know several other states are there. But, we had transaction volume increase from winning new business, so we added a fair amount of business over the summer, and it really showed up in the fourth quarter for us from a medical bill review volume standpoint.

And, on the sales side, have you changed your sales force that's going to help to get some of these additional wins or has it just been maturing of relationships and maybe opportunities that have come from industry consolidation or you just have a lot more feet on the street?

I'd say a little of all three. One, we've move to a more focused sales force from a segmentation perspective. We've added feet on the street, but we've also -- our product continues to mature in the marketplace and be present. And, as I said in the comments, the consolidation in the market is opening up options or more customers are looking for more options. With some of the consolidation that's going on in the last three to six months, we've actually already had opportunities that we've been excluded from in, maybe, last year.

I think we're still in the phase where our brand is not well known. I think we tend to underestimate that because we're always talking about ourselves and our business. But, I think our brand is still relatively unrecognized by a lot of the private sector employers and that our challenge is to build the business and our benefit is -- or our advantage is we have a small market share to begin with. But, we also have a lower brand recognition. Later on, we'll probably pick up a little benefit as people become more aware of our product offering. I'll comment a bit on the expenses too -- I mean, on claims. While claim numbers are down, and I think it is still something we don't fully understand, I would say the utilization rate and general cost of healthcare in worker's comp is up fairly meaningfully around the country. And, so, I think the claims' cost in dollars are actually pretty tough right now. Some of that could be this phase in the economy and you have the impact of the recession and so on, but it's definitely not a time when worker's comp is becoming less expensive for employers even though claims are down.

Okay. And, with some of the new customer success you highlighted, how much of that has been in the private sector or has it been more traditionally with some of the government or municipal customers?

I think a year ago, it was more government business, but we're beginning to gain some traction, I would say, in the private sector, its -- that's were the branding is more important. In the public sector, the bidding process has a pretty big impact, and you can come in and move more easily. I think our momentum in the private sector is picking up slowly, but it is picking up. But, I think we've also found that we can be very happy with the business in the public sector.

Great. Thanks a lot for the details, guys.

Okay, thanks, Jim.

Your next question comes from the line of Daniel Baldini.

Good morning. It seems that the operating margin year-to-date has fallen by about a point compared to the same period last year. And, I'm wondering, is that sort of a permanent change or is it this elevated level of spending, will that taper off and the margin will pick back up a bit? Thanks.

Dan, do you mean specific to the December quarter of this year versus the December quarter of last year?

Well, either that or nine months, December.

Part of that is due to this spending and some of the growth we've had -- have been in some of the lower margin business. So, we have some impact there, but also this spending that we've made from a technology standpoint.

So, do you imagine that the margin would pick back up overtime?

I think where we are today is a pretty good spot where we are. It's pretty tough in this section right in here to grow margin, especially at the rate we grew it at for about a year, year and a half there. So,I would anticipate that our margin is going to be right around where it's been this year. Our real key to growing is going to be through growth, if you will, in maintaining that margin.

Okay. Great. Thanks.

You're welcome.

Okay. Are there any further questions?

All right, Chris, are we ready to wrap up?

There are no further questions.

Great. Well, we appreciate everybody's dialing in. We appreciate the questions this go-around. It's nice to have a dialogue rather than just a monologue. And, we certainly look forward to talking to everybody again in 90 days. Thanks, everybody.

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