CorVel Corp (CRVL) 2012 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 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.

Thank you, Operator. And thank you to all of those who have joined us to review CorVel's December 2011 quarter. I'm joined by (technical difficulty). After the overview, we'll open the call to questions.

Now for the quarter's results. Revenue for the December quarter was $101 million, an increase of 6% from the December 2010 quarter, and our fourth consecutive $100 million-plus quarter. Earnings per share were $0.47 for the quarter, a 17% decrease from the $0.56 reported in the December 2010 quarter.

In our traditional business, our Network Solutions results are reflective of lower volumes and our higher-margin products, and continued growth in our directed care products. Case management results are reflective of continued lower case management volumes that are consistent with industry trends. During the December 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 an overall perspective, the volume fluctuations in our traditional business lines underscore why we chose to begin repositioning CorVel five years ago. As we continue to reposition ourselves within the industry, I anticipate that there could be some bumpy results. Yet as our past performance suggests, we have always recovered and moved beyond prior level results.

Over the past 10 quarters, we have enjoyed a strong pattern of growth in our business, while at the same time, we have been investing heavily in the system requirements and infrastructure requirements needed to be successful in the employer market. The long-term strategy of repositioning the Company is undoubtedly working; yet, in the short-term, we are addressing the challenges of balancing investment with uneven growth patterns.

The December quarters EPS results are reflective of four primary items. First, the continued strong performance in our Enterprise Comp product, both strategically and financially. Secondly, reduced volumes in our higher-margin Network Solutions products, offset by growth in our lower-margin products. Third, our continued aggressive IT investment. And fourth, we had a significant negative shift in the December quarter, compared to the December 2010 quarter, in our employee benefit costs -- a consequence of being self-insured.

During this period, when the sequencing of our expanding new products and slower growth-based services is impacting margins, I'm tempering our overhead investments by focusing our resources on the higher payoff initiatives. We've retained our long-term expectations for the business's growth, and our focus continues to be on building the business, as we believe that the road to long-term success and sustainability lies squarely in our product differentiation and system capabilities.

From a marketplace perspective, the positive indications of economic recovery should provide a much-needed boost for the labor market. For the first time in nearly 20 years, lost time claim volumes increased in 2010, growing by approximately 3%. With an improving economy, I would expect that type of increase to be continued when the 2011 results are reported later this year.

Over the past few quarters, I've consistently spoken of merger and acquisition activity in the Workers' Compensation industry. M&A activity remained high this past quarter, with much of the activity being driven by private equity. From the outside, most of the activity appears to be aimed at gaining scale in order to compete in a consolidating market.

The merger and acquisition activity has left the industry with fewer players. CorVel continues to be the only independent, publicly-traded company within our industry. I believe that the industry trends are positive reinforcement of CorVel's decision to strategically reposition the Company. We've 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-specific results. In patient management, revenue for the quarter was $49.1 million. That's 11% growth from the December 2010 quarter. And profits grew by 8%. 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 efforts towards establishing the CorVel brand in the TPA industry. The TPA business is one where new independent companies typically face the barriers to entry of not having support from insurance brokers or acceptance by the major insurance carriers.

Although CorVel has already become a national TPA, we've achieved our market position while still overcoming the obstacles of becoming known in both the brokerage community and with the insurance carriers. We expect that, over time, our capabilities and services will become more recognized and approved by other major entities in the marketplace, which, in turn, should help accelerate our growth rate. We continue to look for innovative ways for our case management business and find synergies with the development of our Enterprise Comp product.

This past quarter, we completed the implementation of iPads with all of our field case managers, in order to provide them with real-time access to our applications. This mobile access is another step in improving the timeliness of the delivery of information needed to improve claims outcomes.

Now on to Network Solutions. Revenue for the quarter was $52.3 million. That's 3% growth from the December 2010 quarter. Profits decreased by 15%. The quarter's Network Solutions results reflect lower volumes in our higher-margin products, offset by the continued growth of our pharmacy product and our directed care networks. The continued investment in our cornerstone product, MedCheck has allowed us to produce customer benefits beyond medical bill repricing, and helps us build a runway for the future.

Over the past few years, there's become a greater focus on total medical spend in the Workers' Compensation industry, and less focus on pure savings. The combination of many different service providers needed to address the needs of an injured worker, and the lack of a single consolidated database, has made it difficult for providers to address the total medical spend problem. MedCheck however, CorVel's comprehensive processing system, allows CorVel to capture all payment data and address this issue head-on.

As we move more heavily into the employer market, our ability to provide all services, and subsequently, capture all of the medical payments in the entire episode of care for an injured worker, begins to provide CorVel's out customers with a unique view.

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, as well as the employer market; and each quarter, we're making progress.

The ongoing investments in product development and systems integration have allowed CorVel to build the most complete service offering and software solution in the Workers' Compensation industry. CareMC, CorVel's award-winning Web portal, integrates the entire suite of CorVel services in one location, providing our customers with unparalleled access to information.

In 2011, we made substantial progress in many areas of our system case capabilities, including mobile applications, workflow and reporting. Our expanding systems capabilities, coupled with our existing national infrastructure, positions CorVel as a strong partner for local, regional, and national employers. In 2012, our expectation is to build upon 2011's success and achieve an even broader expansion of our Enterprise Comp product.

Our second initiative is to keep improving our overall sales performance. While our string of eight double-digit quarters, growth quarters, was broken, my level of optimism regarding future growth is very high. We have continued to evolve our sales force more heavily toward the employer market, and we continue to receive a very positive reception.

The third initiative is the continued development and expansion of our Network Solutions product line. Earlier, I spoke of the opportunity for us to build upon the value that is created for customers by maintaining all medical payment information in one database. The area of pharmacy is one that can be very impactful. In the past five years, pharmacy expense has grown from being a relatively minor portion of the medical expense portion of Workers' Compensation claim, to now contributing approximately 20% of a lost time claim.

All those expenses are growing, and as they do, concerns of over-utilization and addiction are growing as well. In the past few months, CorVel has launched an exciting new product that combines our comprehensive database and analytic processes to identify current negative trends within pharmacy spend, as well as identifying emerging issues, in order to deal with them early in the lifecycle, and hopefully, avoid either dependency or addiction.

Our fourth and final initiative is the continued transformation of our Case Management business. As I mentioned earlier, we completed our implementation of iPads with our case managers this past quarter. We're actively working on new applications, as well as modifications to existing applications, in order to take advantage of mobile access and continue to compress time in the timely delivery of information.

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

Thank you, Dan. Our development plans are reaching important milestones where we will be commercializing new features for CorVel services. As mobile computing began to erupt in the last few years, we began particularly -- we became particularly enthused with its future impact on financial services such as CorVel delivers.

At the Board and executive levels, we chose to be aggressive with our pace of investment in technology. That investment necessarily pressured our margins, causing us to become more dependent upon having a better run of business growth than would have been the case had we not so expanded our R&D expenses. Some might have preferred a lower risk strategy. When bumps inevitably come along, being aggressive creates ups and downs in earnings. But as they have in the past, our investments have begun paying off and I'm very excited about where we are today.

An interesting aspect of investing in new capabilities in our industry is that, sometimes, the benefits come from unexpected sources. This happened with our move into scanning in the early years of the last decade. We thought we'd save operationally by scanning documents. What we found, though, was that we did not; but that we meaningfully improved our services, and that the benefit to both our customers and to CorVel was, in fact, greater than we had anticipated.

Certainly, at other times, we've spent money on things that didn't pay off at all. Building the Company, while exciting and fulfilling, is nonetheless also a business style that makes for uneven results at times. During the year, management also added a couple of new improvements to our software development processes themselves. I believe that, as we look back upon 2011 in a couple of years, we'll see that these were changes that were of particular value.

It may be helpful to understand that, at the macro level, our strategy has been to continuously add new products for the customers we know best. This would be as opposed to selling existing products and services to a new geography, or the same services to an entirely new type of customer. As an operating company, we have found this strategy to be more successful for us than have been other strategies. Consequently. it is normal for CorVel to be adding new services on a regular basis.

Our systems development follows our strategy. As we have been expanding our use of mobile data entry, we've found that our new systems features are of interest to employers for tracking, in addition to their Workers' Comp claims, their liability, and even their property exposures. This requires that our foundation functionality be robust, and yet, it then offers us new business opportunities.

The December quarter marked several important milestones in our recent initiatives. We have been focused on adding mobile computing to the claims intake process in our industry; using improved claims intake to permit new workflows in claims administration, and making our Web portals more friendly and easy for clients to use; and lastly, expanding our analytic tools and their impact upon health care outcomes.

On the first item, intake, our services for reporting insurance claims have been substantially restructured by our introduction of mobile computing tools. We began building a two-way Web portal over 10 years ago. This is a critical competitive advantage, in that it allows us to take input from large numbers of remote mobile devices. Our services can now be conducted from phones, tablets, as well as from our Web portal, rather than just from faxes or phone calls.

Competing claims systems typically only report to clients, rather than exchange information on claims to and from clients. This capability of ours allows CorVel service to reach down into the organizations of our customers, rather than to interact primarily only at the corporate risk management level. The implications of mobile computing are extensive. We expect this new wave of expanding capabilities to extend over a number of years -- much as the dot-com boom, though, at first, it may have been overhyped, later grew to impact most of commerce as we know it today.

On the second item, workflow, mobile computing sets up the front-end of Workers' Compensation, liability and property claims, by including digital representations of information. This, in turn, allows rules engines to interact with incoming information to guide workflow and to segment tasks into specialties. The payoff is improved transparency and intervention in real-time. These improvements drive improved outcomes.

The implications for workflow reach into all aspects of our processes, and that has led to a very busy development schedule. Some implications that are easy to visualize include the scheduling of care; prompt interfaces to employees; the acceleration of all claims processes, and as a result, improved claimant experiences. As the mobile interfaces have become better defined, our development team has also been coordinating functionality between our Web portal and the new mobile applications.

On integration, as the intake process develops, the work is also guiding other efforts to improve the integration of our services. CorVel offers by far the most complete line of services in our industry. And since we own our service delivery, the creation of unique integration between services is an attractive opportunity.

Our market has been typified historically by unbundled services that the larger TPAs have been trying to consolidate service for a number of years. CorVel is unique, in that we are the only managed care vendor that has become a TPA. Since we've long provided services to insurers, we have a previously existing orientation to integrating such services to the claims management portion of the total TPA service. Such efforts have led us to adding outbound call centers to improve the impact of some services. Because we hold all of the information in our Web portal and have our services on that database, we can integrate our separate offerings in ways others cannot.

We'd like to also become more friendly in the way our claimants view our systems. The work on mobile computing has guided our development toward efforts to make our Web portal more user-friendly. To optimize usage, we have to have a site that works the same way that most popular Internet sites do. Improving the user experience will improve the usage of our site, and therefore, the usage of our services.

And lastly, on our analytic tools, our analytic resources have been expanded. Clinical and predictive modeling is dependent upon having the kinds of large databases CorVel maintains. Recent efforts have been to develop new tools to help target those claims most in need of attention. In addition, we've been expanding the scope of our reporting. Some of our reports are available in real-time on our Web portal, and others arrive as scheduled output.

Our goal is to help our customers improve claims outcomes, and we think we've made nice progress in that during the last year. 2011 was a productive year that set the table for a more exciting progress in 2012 and beyond.

Now I'd like to return the call 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.

Our quarter-ending cash balance was $10.1 million, and our DSO was 41 days. We repurchased 130,000 shares in the quarter, and we spent $6,260,000. We have spent $265 million inception to date and we have repurchased 14,839,000 shares. Hard shares at the end of the quarter were 11,372,000 and diluted EPS shares were 11,574,000.

We have been consistently active in the repurchasing of our stock over the past 16 years, as we believe it is a good use of our cash flow, and essentially acts as a dividend to our shareholders. Our shareholders can choose to sell some of their shares, or own a larger percentage of the Company. The Board has approved an increase in the amount of shares that we are authorized to buy back. They've increased that amount by 1 million shares from 15 million to 16 million.

In closing, the December quarter was particularly strong in the strategic repositioning of CorVel. We made good progress in our sales efforts and our software development. We're very proud of the work that the CorVel team has now already accomplished, and we look forward to our future opportunities.

I would now like to open the call for questions.

(Operator Instructions). Gregory Macosko.

Thank you for the good explanations. Just with regard to the -- you mentioned, I believe, claim volume was up, I think, fairly strong; relative speaking, was up 3%. And I guess you're suggesting that that may continue, given the better employment in the market.

Could you talk a little bit about that? And how that affects your margins a little bit?

Well, I would think that -- Gregory, I think, really, it portends more not necessarily to margin, but more of just volume within the industry. In 2010, lost time claim volumes were up 3%, and that was the first real increase since 1991, I believe, if my memory serves correctly.

And as the labor market tightens, people feel -- at least the normal course of business has been people are more free to file a Work Comp claim. We don't want people adverse to that. So that tends to, as the labor market tightens, we generally see a lagging increase in claims. So that's how that moves. And then the effect on the margin really just comes back to a volume issue, as far as there's more claims in the system drive a greater volume of claims and more transactions in the system.

So, just so I understand -- forgive me if I'm not quite understanding totally, the -- if we see the economy improve, you would expect, over time, that those claims -- that that volume of claims to not grow as fast?

No. We would actually expect that the claim volume -- as the economy improves, a little bit of a lag effect, somewhere 6 to 12 months of a lag effect of a continued increase in claim volume.

Okay. And that's obviously positive from your standpoint, in that it's more volume coming into your system?

Exactly.

Okay. Then the -- you mentioned upfront the idea that, five years ago, you began a transformation with regard to the Company and investing. If -- just looking at the top-line versus the bottom-line in growth, and you mentioned a number of things that perhaps affected the difference in the growth rates of the top-line versus the bottom line, could you talk a little bit about kind of how that investment timeframe is rolling out?

And you did mention additional things -- the mobile networks and some of the things that you're doing. Do we expect that investment to continue for quite a while? Is there some change in that rate of investment in the systems and et cetera that you mentioned?

Gregory, I'll answer a few of those and then also ask Gordon for any particular comments. As we started repositioning the Company approximately five years ago, we really moved from what we believe to be a wholesale position, where we serviced and provided services to third-party administrators and insurance companies, who later resold our services, to moving into the TPA industry ourselves and servicing the end customer, being the employer.

At that point, we moved from really servicing two lines of business -- or two products with our case management and our medical review business, adding a third component to our systems and our service delivery of claims administration. So with that, we had to significantly ramp up our investment to not only take the claims systems, but also integrate them with our bill review and case management systems, as well as then move into the mobile era that Gordon spoke about in his portion of the call, in order to take a different approach to the claims business.

And so, as we've invested over the past few years, a significant amount of our dollars have moved towards mobile applications, claims administration, and the integration of our systems, in order to have what we would establish as a retail presence, with the end-user, again, being the employers. Because of where we were with some of the volumes and speaking to the rate of investment, we are, at this point, essentially going flat on our investment for this year.

So I expect our IT spend to be very similar to, in 2012, as it was to 2011, and to -- as some of our margins increased again, look at that investing to make sure that we're building a long-term future for the organization. The Company has had a long history of investing in systems. Our goal is to make sure that, as we establish a differentiator in our systems between our competitors and us, that we continue to add investment to widen that gap.

Gordon, did you have some comments that you'd like to add on that?

Sure. I would just suggest that, as Dan mentioned, our long-term strategy has been to invest not really just to maintain our position or strengthen it, but rather, as the Company has become larger, to enter new services that expand the scope of our business.

I think the expense portion of our investment in technology is what might concern you. I would just say that I think we would expect a normal balance to return to that. We had an unusual opportunity, we felt, to get out in front of the industry on mobile computing. We continue to feel very excited about that initiative, and think it will have an impact on insurance and financial services in general.

But I do think we've gotten through a period where now, that can become a little more balanced. And on the other hand, if it maintains a reasonable balance and our earnings are where we want them to be, then I would suggest that our investment will probably continue -- I don't know if perpetual is the right word, but we're certainly looking at other opportunities to continue expanding the scope of our business.

So, I think initially here, though, we wanted to get a good foothold in the TPA space and then see that pay off. So I think in the near-term, you'll see a better balance than expenses and revenue.

Okay. So the point being that perhaps we've seen a -- not necessarily a peak, but we've ramped up that spending to some extent. And while you -- I'm not suggesting you want to stop doing that, but that investment, perhaps, may not be as intense going over the next year or two, at the very least?

Well, I think that's fair. And then also, as we're doing this, it doesn't take but a slight wiggle in something going on in a given quarter to cause the challenges that we had in the quarter just released. I don't think that our spend rate by itself creates that. It's just that being aggressive in getting into new things puts us a little bit vulnerable to even a little bobble in something going on in the business.

I think in the release, the Company talked about having a little different mix in business services in the quarter that caused the margins to be lower. I don't see that necessarily as a long-term trend, but it happens in any given quarter. And when you're being simultaneously aggressive with investments, it can bump earnings. And we're a business that runs -- with our investment rates, our margins are lower than they would be otherwise, even in a normal quarter.

Okay. I appreciate your extensive explanations. I do look forward to perhaps speaking with you offline --?

Certainly.

I hope you'll call me back. Thank you.

Mark Dickherber.

Mix shift -- could you talk about when that started? I don't know if you can break that down into a monthly basis, if it was even in a prior quarter where you started to see that?

Yes, Mark, we -- that's a good question. We had a little bit of a mix shift in the September quarter, is where a little bit of it started. It showed up a little bit more apparent in the December quarter.

A couple of things going on that we had a couple of our larger customers, that were in a very high margin product of ours, that stepped away a little bit. So their volume has decreased. They haven't left, but they -- their volume decreased a little bit. And we had to get a couple of pieces resolved from them from a service perspective, and we expect that volume to begin returning here in 2012. I don't know if that's going to be February or March, but we expect some of those volumes to ramp back up.

And we've had a continued nice growth with our pharmacy business and our directed care business, both of which are a lower -- they're a nice profitable product, but they're lower-margin product than our medical bill review and our other network bill review business. So, that started a little bit in the August/September timeframe. We really came through in the December time-frame. But as I said, we expect some of those volumes to return here in the next few months.

And I guess that would -- the volumes would return from the two customers, as opposed to you having to go out and replace?

We believe so. Our goal, obviously, from a sales effort is to replace as well. But our goal here is to make sure that the volumes come back from those groups as soon as they can. Obviously, they move at their own pace. So we'd like to make sure that we secure that business and move it back up.

And I guess when you speak of the margin shift, but when you look at the investment that you guys have been doing, any concern from an underlying ROI basis? Just seeing the mix shift in light of the spending over the last, really, couple of years, but more, I would say, my worry is the trend line -- is that something that you're cognizant of, such that we're going to see a reacceleration of the ROI as opposed to the incremental businesses just coming in at a lower ROI?

Well, I would say that we're cognizant of the shift, but I would also say that we're not going to overreact to a one-quarter drop. Our investment strategy and long-term strategy, as Gordon and I both alluded to, is to build the Company for a growth pattern that allows us to prosper over the next 20 years, just as we have over the past -- the first 20. And, at times, some of that investment is not going to line up directly with some of our growth.

So, I would -- we've had higher quarters. We've had lower quarters as far as gross margin is concerned. The December quarter was on the lower side. We're coming off a string of what was a higher margin business -- or business, excuse me -- higher-margin quarters. And so we expect it to return over the course of time. I don't know that -- my feeling is it won't go right back to the top end of the spectrum here in the next month or two, but our expectation is that we'll grow it over time.

Thank you. The -- I wish you would be able to address, from more of an industry perspective, that addresses some of the regulation that occurs within the industry? And it's more from a, perhaps, an external audit -- audits that occur quite frequently. If you could just speak to that loosely.

Sure. As part of Work Comp, and just being part of the industry, we are -- and what Work Comp in itself is legislated in all 50 states, and part of our obligation with our customers is to make sure that they're meeting the regulatory reporting requirements that are necessary. And I think that's probably a very unsung part of the business that we're in, which is, on a monthly, quarterly, and annual basis, helping our customers be compliant with any of the audit and/or regulatory reporting that's necessary in the states they operate.

So, it is a very -- it's a very big piece of what we do behind the scenes, specifically in our systems investments. And it does -- it's a big piece of what we do, and consumes a tremendous amount of our time. It never does get the light of day that it should need.

(laughter) Sure.

So.

I mean -- I guess what I'm trying to do is separate it from the likes of a derivatives market, where the regulation is somewhat nonexistent. This is a pretty regulated business, is it not?

Very regulated. Yes, there's reporting requirements in every state, of which we have to make sure we're meeting 50 sets of rules constantly, yes.

Curious on -- you've mentioned the private equity having heated up in the M&A department for the last, I think, two or three quarters. I guess, while everything is hot, you guys are the last independent, why not think about the strategic alternatives, just given the environment being supportive?

Can I translate into selling the Company? Is that --?

(laughter) It could mean that or it could mean getting your involvement buying off of some of the private equity firms as well.

Yes. I'm a -- by Gordon's standards, I'm a short-termer and I'll turn it to him from a longer-term view. But my view is, the Company has done extremely well over a 21-year history of being publicly-traded. We enjoy the fact that we are the only publicly-traded independent organization. And we feel that, for us, we want to be able to manage to the expectations of our Board and our current owners, rather than somebody else, who may have a different interest or a more short-term interest than we do.

So, (multiple speakers) Gordon, did you want to add to that?

Well, yes. I'd say that we're always open to interest from third parties. And in general, we do know that, as a public company, we would certainly have to do whatever is best for our shareholders.

I don't think it's typical for the private equity folks to show up and want to take a company that is healthy, has no issues on the balance sheet or its growth trends, and pay up for it. But if somebody showed up with $70 a share, (laughter) we'd certainly have to listen. But what they tend to show up is wanting to do something where you merge a piece of junk into something we've been investing in for 20 years, and then give them a chunk of the business to boot. And we just, I think, haven't fallen for those kinds of stories.

Sure. Sure. I guess, from an anecdotal standpoint -- nothing -- no specific example, but just more anecdotally, if you could provide how market share has been shifting, as you have seen private equity coming into play, and perhaps customers that are not as happy, if you will, with what is going on with those changes. And you're seeing shifts towards you, if you will, with your continued independence.

Mark, I think we're seeing the beginnings of the potential. A lot of the transaction activity has probably taken place in the last 12 or 18 months, and there is some fallout. While, though, I wouldn't say it's giant in nature, I think that, as transactions happen, the issue becomes making sure that as much as our competitors as we do, when we've done some small acquisitions, is to secure the current base of business.

So as that's gone forward, they've done that. And I think, certainly, it's given us -- the thing it's really produced for us is just more opportunities. When there is -- and say, call it, 10 large national TPAs, which shrinks to five automatically, we're included now in the five, from both [on] a number, but also just from the Enterprise Comp's success that's been recognized and the momentum we're seeing in the market. So it's creating that opportunity of more hits at more seats at the table, if you will; but also, there is some fallout, but I would say it isn't huge at this point.

Thank you very much. Good luck.

Daniel Baldini.

Say, in this bill review repricing line of business, how do you price that? Is it a sort of percentage of savings basis?

There's a number of different methods, Dan. One of them is a percentage of savings. And there are a couple of other industry-accepted methods.

And what are the -- what's the most prevalent method for pricing that service?

I think part of that depends actually on a customer basis and their preference for how to price some of it, some of which is actually moving to just a flat transaction fee. But there is a percentage of savings. There is another pricing methodology, which includes somewhat of a small portion of percentage of savings, as well as there's some discussion and movement, actually, towards just flat transaction pricing. So there's really approximately three models, and they all come in and out of vogue, if you will, as different things go on in the industry.

Do you imagine that the flat pricing model will sort of gain traction over time? It would seem it's more, in a way, more attractive.

It has gained some in the past. I'd say last year-and-a-half or two years, it's gained more. But I don't -- not sure how soon it will dominate the industry.

Okay. All right. Well, thanks for your help.

Jeffrey Heffernan.

Hello, there. It's Gerry Heffernan. A couple of questions, if I could. I wanted to ask you about SG&A expense.

The SG&A expense has been going down, really, in a small minority of companies that have been able to say that. And I was wondering if you could just talk about that a little bit. I presume it can't go down forever, so some view of how you see SG&A playing out and some of the reasons why it's been going down on a period-to-period basis.

Okay. Gerry, just for maybe some clarification, at least the numbers I think we've been running, approximately a 12% to 12.5% number, somewhere around there, in SG&A from a percentage standpoint.

There were two issues that were recorded in SG&A as far as settlements. In the March quarter of this year and the September quarter of 2010, that had it quite elevated. But we've been running somewhere between about a $12 million to a $12.5 million SG&A number for the past, I'd say, four to five quarters. And I would not expect that to go down any time soon. My goal would be to run that somewhat flat here in 2012 and be able to leverage that as we -- as the growth rate re-accelerates.

Okay. I was looking at it just period-over-period, the recent quarter (multiple speakers) --

Okay.

-- $12.3 million versus $12.4 million the quarter before -- where are my stinking numbers? [$12.5 million] (Multiple Speakers) --

Yes, well, last December (multiple speakers) -- yes. Last December, it was $12.4 million.

But if I look at it on a ratio basis, I go back to '07, you were running for several quarters at $13.8 million; came down to $13.4 million, $12.9 million, $12.4 million as a percentage of revenue. So certainly, leveraging that line, can that go forward? Can you continue to leverage that SG&A line?

My goal here, and our goal really in 2012, is to keep that number flat to as we reaccelerate growth; but I would say that my -- as we go forward, keeping that in the 12% range is probably a good target, as we'll continue to invest in the systems, and make the corporate investments we feel just to continue to build the long-term runway for the Company.

Okay, great. The tax rate in 2Q '10 was real low. And certainly, if you look at net income on a year-to-date basis year-over-year, there was a pretty strong skew due to tax rate. Could you remind us of what happened in the fiscal year '10 -- or fiscal year '11 year?

Yes. That was a couple of things. Well, what the tax rate issue was resolution of a tax rate from a FIN 48 issue, which was just some state tax handling issues. We had taken a fairly significant accrual, as we saw some changes -- I believe it was in late '09, and those came back to us in that -- the September quarter of 2010, which is the second quarter of our fiscal year there.

Okay. So as we're looking at this now, a -- is it fair to say a 39% tax rate is a -- what you would expect as a normalized tax rate going forward?

I think that's a safe number, yes.

Okay. And this is the one I might look like a fool for asking, but the weighted share count, 11.5 million shares, what is the fully diluted share count, if you consider everything, even stuff that may not be in the money?

Gerry, I'm going to have to get -- we're going to have to get back to you on that one.

Okay. Because you indicated that you increased your repurchase item to 1 million shares up to 16 million shares. But I don't see 16 million shares out. So I'm a little bit confused as to what's the significance of raising that by 1 million shares.

We -- what we had the authorization to move from 15 million to 16 million. The Board had previously approved us to buy back up to 15 million shares, and now they've authorized us to buy back up to 16 million shares.

But I think the point here is that we've already -- of the 15 million, we were almost to that 15 million. We had already repurchased, let's say, 14.7 million or something or 14.8 million. And so we needed another million authorization to go on with the buyback in the coming year.

Oh, okay.

It's not like we're going to buy an additional 16 million shares (multiple speakers).

Yes.

Well, that's why I was so confused about it, because you didn't have that many shares. It didn't make -- (laughter) okay. Very good, I understand.

And one last question, if I could -- and this goes back to kind of a previous gentleman's question there, as far as I'm a little bit concerned on the mix issue. When you say that two customers stepped back from a higher margin product. And given your business is insurance claims where customers don't have the ability to determine how many claims come through, right? They're a taker, as far as events occurring.

How many step away from one of your products there? Do they start doing it in-house? Did they get someone else to do it and it didn't work out so well, so that's why you think it's going to come back to you? I guess I'm missing something in the way your business works, that enables someone to step away from a service that you're offering for a short period?

A couple of things. One is, I would say you hit part of it is, is they do look at in-sourcing the service. And when it doesn't either, one, work out as well as they had or they don't receive the results they have, they come back to us. As well as just making sure that we have complete operating guidelines with them regarding how we get claims, and that they're making sure they send the right volumes to us.

Much of it is manual within the companies. And at times, the manual processes fall off-track for whatever reason that is. So one of those things we try to make sure we do is design electronic processes between, so that we're continuing that volume.

Okay. Well, were these customers trying to send you a message saying that they thought your price is getting too high? Did they screw up and just send claims the wrong direction? What is the -- what's the message that the market should interpret from these customers reducing the volumes coming through to you?

Other than the fact that they were trying to do things either internally or making sure they get the continued volume of flowthrough to us, I don't think there's a lot of interpretation. We have -- we do have some ebbs and flows as they do. We're a victim of their ebbs and flows, if you will, as volumes of claims are up or down.

And making sure that consistent flow is there, and that, quite frankly, some of the turf protection that goes on within some of the companies -- because they have competing groups within those insurance companies that don't necessarily want to send us claims. They want to do them in-house. So, we have to work through and resolve those issues, and make sure that those come back to us.

Okay. The last time your gross profit margin was down at this level was December '08, March '09, at the depths of depths of the financial crisis. Is there a similarity between now and those periods? I mean, certainly, the economy backdrop is significantly different. Is there a similarity to be drawn to that period, where we did see it snap back after that?

I would say that there's not a lot -- financially, it may look like there's some similarities. I would say that we're a significantly different organization at this point. At that point in '08 and '09, we were really trying to get -- we had done some acquisitions, and we were digesting the acquisitions and trying to get into the Enterprise Comp business.

And today, we're pretty -- we're very well on our way to being established in that business. So I think that, as the margins -- specific to margins, I'm not -- I don't think we're going to snap right back; to me, it's going to be a growth of the business over time, and our margins should increase as we go forward.

Okay. Thank you.

Are there any further questions? There are no further questions. Mr. Starck and Mr. Clemons, do you have any further comments?

I'd like to just thank everyone who joined the call today and the good discussion around the questions. And we look forward to speaking with everyone again after next quarter's results. So thank you, everyone.

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