CorVel Corp (CRVL) 2012 Q2 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 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-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 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, operator, and thank you to all of those who have joined us to review CorVel's September 2011 quarter. I am 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 will open the call to questions.

Now to the quarter's results. Revenue for the September quarter was $105 million, an increase of 12% from the September 2010 quarter. Earnings per share were $0.68 for the quarter, an increase of 10% from the $0.62 reported in the September 2010 quarter.

In our traditional business, our Network Solutions results reflect continued strong growth, and our Case Management results are reflective of seasonally lower summer volumes. During the September quarter, we also continued the expansion of our strategic initiative, Enterprise Comp, gaining strength in our strategic repositioning of CorVel from a managed care company to a full-service provider to the workers' compensation industry.

From a marketplace perspective, while the labor market remains soft, with unemployment still above 9%, there are positive signs for workers' compensation service providers. Lost time claim volumes increased in 2010 by 3%. This is the first increase in lost time claims frequency since 1997. Severity also increased in 2010, albeit at a slower rate of 2%, its lowest increase since 1993.

Merger and acquisition activity in the workers' compensation industry remains high. The M&A activity is being driven by both private equity as well as through strategic buyers in the industry. The current characteristics of the industry would suggest that this will continue. Despite the recent activity, the industry remains largely fragmented, it is not capital intensive, and potential synergies exist with the right combination of service providers.

The industry trends are positive reinforcement of CorVel's decision to strategically reposition the Company. We have expanded our services and opened ourselves to new markets in order to position CorVel for future growth.

Now I'd like to discuss our product line performance and specific results. For Patient Management, revenue for the quarter was $49.5 million. That's 12% growth from the September 2010 quarter, and profits grew by 5%. Included in the Patient Management results are our third-party administration product, Enterprise Comp, and our traditional Case Management product.

The quarter's results reflect sustained growth in our Enterprise Comp product, as well as our continued success in firmly establishing the CorVel brand in the TPA industry. The investments made in the past few years, on both the acquisition front and in product development efforts, have effectively enabled CorVel to open significant opportunities in the employer market, the target market for Enterprise Comp.

The overlay of our unique approach to workers' compensation claims management onto our national footprint has made CorVel a viable option for local, regional, and national employers. This past quarter, we continued to penetrate new geographies by adding new customers headquartered in four new states, as well as winning new business in our well-established geographies. Our quarterly efforts are focused on furthering our sales efforts, executing the operational plans to meet our growth needs, and the continued development of the EC product.

Our Case Management results continue to find synergies with the development of Enterprise Comp. The functions of a case manager are largely an extension of the work of a claims adjuster, and by having both individuals working simultaneously on the same claims in the same database, we're able to more effectively manage the information flow necessary for improved claims outcomes.

Now I'd like to move on to Network Solutions. Revenue for the quarter was $55.1 million, which is 12% growth from the September 2010 quarter, and profits grew by 12%. The quarter's Network Solutions results reflect strong results across the entire product line -- our core medical bill review product, our specialty out-of-network review business, and the continued growth of our pharmacy product and our directed care networks.

While we are working to penetrate the employer market with Enterprise Comp, the Company's cornerstone product, MedCheck, continues to thrive with our traditional customer base as well. Advancements that we have made in the product to improve customer results and improve workflow continue to make it the preeminent medical bill review product in the industry.

I have spoken often over the past few quarters regarding the progress that we are making in our pharmacy and directed care networks for two main reasons. First, because these products have helped drive our growth, and secondarily, it is our belief that these types of networks are the next generation of PPOs.

There is movement within the industry to focus less on pure unit cost and more broadly on total medical spend. With this shift, the initial patient interaction and ongoing utilization management becomes increasingly important, as volume is the second piece of the total cost equation.

This past quarter, we continued to expand our call center capabilities and technology investments in order to meet the growing demand for this service, as well as expanding our network development capabilities. Our investment in these networks has been significant, and our growth potential is beginning to be realized.

Now I'd like to review our four key initiatives. The first initiative is the continued expansion of our Enterprise Comp product. I spoke earlier of our continued efforts of establishing the CorVel brand in the TPA industry and, more specifically, the employer market. And each quarter we continue to make progress. The reception of the product in the employer market has been positive, and yet the feedback received from the market has provided us with ample product development opportunities. We continue to invest in our system capabilities in order to build long-term sustainability and differentiation.

This past quarter, we delivered significant enhancements to our early claims intake process, including mobile access for the purpose of immediately reporting incidents and/or claims through mobile applications that enable claim reporting at any time from nearly any location. These new avenues of information flow allow immediate activity in the early stages of a claim, thus allowing critical steps to take place, including providing the injured worker access to healthcare triage and the direction of care into the proper setting.

We have increased our systems investment in the past few years and expect that our current pace will remain at a fairly stable level. We will continue to explore new ideas to leverage technology to better enable the entire claims administration process.

Our second key initiative is to sustain our current sales performance. We have achieved double-digit growth for eight consecutive quarters, and ten consecutive quarters of sequential growth. Our goal is to now maintain that type of growth. As we continue to develop our Enterprise Comp product, new opportunities in the employer market continue to present themselves.

The third initiative is the continued development and expansion of our Network Solutions product line. One of the most exciting areas of opportunity for us to build upon is the value that is created for customers by maintaining all medical payment information in one database -- namely, CorVel's cornerstone product, MedCheck. We are utilizing this unique opportunity to make advancements in areas such as pharmacy management.

In the past few years, pharmacy costs in the workers' compensation market have increased dramatically, moving from between 6% to 10% of the medical spend in workers' compensation to between 10% and 19% of the medical spend. This is due to a multitude of reasons, one of which is the ability of most to produce a comprehensive picture of total pharmacy spend for the end customer.

With the full breadth of CorVel's Network Solutions capabilities, all pharmacy transactions are consolidated into our MedCheck database. With this compilation of data, we are able to apply management processes to better improve the overall performance of a program by analytically understanding current trends within the pharmacy spend, as well as identifying emerging issues.

Our fourth and final initiative is the continued transformation of our Case Management business. This area of our business is one where we are catching the wave of mobile technology. As of today, we have deployed iPads to 90% of our field case managers, and we will be 100% complete by the end of the year. This has enabled our Case Management staff to deliver information in real time to the other constituents in the healthcare continuum, removing many of the inherent delays in claims management and care provision.

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

Thank you, Dan. As we have been discussing for the last couple of years, we continue to invest in the development of systems that integrate the various components of the workers' compensation process. The expansion we've made in the breadth of our claims services has allowed us to more clearly see the opportunities to improve the interaction of the various services, as Dan discussed, within a complete claims administration program. This effort will continue throughout the foreseeable future, and yet each quarter we have implemented new features that incrementally strengthen our total service line.

At a high level, the implications of our software development for claims processing include providing real-time early intervention; extending our workflow into the operations of our customers as opposed to only reporting at senior levels, such as to the risk manager; collapsing time delays in claims management, as Dan discussed; simplifying the work required to achieve regulatory compliance; achieving real-time reporting versus the traditional, very delayed processes in last-generation legacy systems; and enabling analytic reviews of workers' compensation.

To touch on the key areas, early intervention was one and refers to the claims intake process, as Dan discussed. Our decade-long effort to build a strong, interactive website is particularly relevant today, with mobile computing emerging into insurance claims processing.

As Dan mentioned, one of the aspects of claims processing upon which we have focused is claims intake. This is an area where mobile computing and rules engine work is especially appropriate. New applications shorten the time before assistance to employees and claims administration is begun. This improves the usage of our PPOs and helps providers get their financial processes set up properly with ours.

Various forms of information serve as our notice of new claims -- that is, we can initiate a claim from a nurse hot line, from an incident report, from a first notice, or from any other phone call. Our systems increasingly allow us to adjust our workflow to accommodate these different kinds of input. We've also much improved the assistance we can provide back to the claimants in the early stages of their episode of care.

A secondary is service integration -- that is, it is a key benefit which comes out of our holistic approach to claims administration and systems. We are, for example, adding visibility of claims information for our medical bill review analysts. This is a part of our effort to create more specialization of labor in claims administration as opposed to the more traditional processes where the claims adjuster had to be a sort of jack-of-all-trades. These changes allow adjusters to focus more attention on the situations where they can make a difference and yet be assisted with administrative tasks.

Another area of attention has to do with having the system bring ancillary information from various services and systems to the claimant's history in a format that allows those working on claims to have more information at their fingertips. Examples include pharmacy history is now included with medical and claims histories.

And lastly, workflow management. Workflow management offers a unique opportunity for CorVel. As we have discussed, CorVel is the only company in the workers' compensation marketplace that owns all of the services and software for the management of disability claims. CorVel has, for example, 100 local claims offices, its own PPO network, its own directed care networks for ancillary care, its own bill review software, its own pharmacy benefits management service, its own claims and case management software application, and its own case management and Medicare reporting facilities.

Having all of these services under our own control allows the Company to uniquely integrate the separate services. Such integration requires extensive software. To make such software possible and effective, CorVel is increasingly unifying data formats, consolidating the key steps in each stage, and rethinking the structure of the service workflow in each of the separate services.

Examples of the potential to reinvent workers' compensation processes include the unifying of the databases in case management and claims management, as Dan referenced, the sharing of patient relationship and contact management among claims management, case management, and various directed care services.

Integrating bill review with the claims intake process has allowed the Company to accelerate medical management intervention while still withholding payments until proper regulatory compliance is achieved. These efforts allow each service to deliver more value, allow us to shorten delays in healthcare and claims resolution that contribute to the unnecessary cost of workers' compensation, bring attention to claimants without delays that hurt employee commitment to return to work, allow real-time reporting and decision-making, and reduce the cost of service.

Working on this has involved a tremendous amount of effort, and while still trying to fly the plane, if you will, has kept us quite busy.

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

Thank you, Gordon. I would just like to add a few more items prior to opening the call to questions. Quarter ending cash balance was $8.1 million, and our DSO was 44 days. We repurchased 140,672 shares in the quarter, spending $6.3 million. We have spent $259 million inception to date and have repurchased 14.7 million shares. Hard shares at the end of the quarter were 11,465,000. Diluted EPS shares were 11,672,000.

In closing, we are particularly proud of the Company's strategic progress. We continue to deliver solid results in a difficult environment, and that is a tribute to the spirit of the CorVel culture. 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 to questions.

(Operator Instructions.) Daniel Baldini.

Good morning. Thanks very much for taking my call and for the good results, once again. Say, I have a question. What are the capital expenditures that you anticipate expending this year?

Dan, this is Dan. I think that our CapEx is probably going to be somewhere in the $16 million to $18 million range. Most of our investment thus far has been significant investments in our software development process, but I would say the $16 million to $18 million range is safe.

Okay, and last year was about $13.5 million. And so this is a jump up. Is this a new level of CapEx, or is it a one-time thing to improve the software?

We've had a little bit of a ramp-up, really, since late '09 through '10, and calendar '09 through '10 and '11. So it's a progressive step up. And some of it is very much directed at capturing the things and enabling the things we talked about on the costs specific to mobile technology. So we've made a nice investment there as well as just stepping up the software development overall so that we have an opportunity to really move quickly into the market here.

Okay, great. Well, thank you for the info.

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

I would just like to close with, again, we appreciate all those that have taken the time to spend part of their morning with us and those that review the results, via either transcripts or our webcast. And we look forward to talking to everybody again in 90 days in February of 2012. Thank you, everyone.

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