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CorVel Corporation. (NASDAQ:CRVL)

Q4 2008 Earnings Call

February 03, 2009, 11:30 am ET

Executives

Dan Starck - CEO, President and COO

Gordon Clemons - Chairman

Analysts

Mark Dickherber - Segal Bryant & Hamill

Operator

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 files for the most recent fiscal year and quarter. These documents contain and identify important factors that could cause 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 host, Dan Starck and Gordon Clemons. Gentlemen, please go ahead.

Dan Starck

Thank you, [Cara], and good everyone. This is Dan Starck, and I would like to thank everyone for joining us today to review and discuss CorVel's December, 2008 quarter results.

I'm joined by our Chairman, Gordon Clemons. And today in our usual format, I will cover the financial results and future initiatives and Gordon will be covering product development. Shortly after our review, we will open the call to questions.

Now let's discuss the December 2008 quarter results. Revenue for the quarter was $77 million, which is a slight increase from the December 2007 quarter. Earnings per share were $0.34 for the quarter, down from the $0.43 reported in the December 2007 quarter.

In our traditional business lines, our network solutions results reflect continued expansion in customer savings as well as some mix shift in our revenue stream. Our case management results are reflective of investments made in the product line and some seasonal slowing normally associated with the December quarter.

We also continued with our Enterprise Comp expansion; our strategic initiative of bringing a new approach to claims management and our overall transition to becoming a full service provider to the workers' compensation market.

Beginning with the December 2007 quarter, CorVel had experienced a step-up in our G&A expenses in order to support our growth in systems development associated with our strategic transition.

Towards the end of the September quarter, several measures were put in place in order to provide a better balance of our spending with our overall revenue growth in strategic process transformation. The result of some of these measures have started to appear in the December quarter, as we have seen reduction in our G&A expenses on, both an annual quarter comparison and a sequential quarter comparison.

Our approach has been to reduce spending on projects that are on the periphery of our strategy and gain a stronger focus. We continued to invest in systems development, management and training for initiatives that are core to our strategy and we expect to execute on those.

From a marketplace perspective, claims volumes have continued to decline to historically low levels. Initial indications show that claims volumes dropped 11% in the first nine months of 2008, versus the first nine months of 2007.

The 2007 drop was 2.5% when compared to 2006. Frequency, that is the number of claims continues to decline. However severity, the medical cost per claim continues to increase and indications are it will increase again this year.

From a political perspective, there is legislation at both the State level and now the Federal level that will have some effect on the industry this year. States continue to develop legislation geared towards automating the healthcare transaction process.

In Minnesota for example, legislation is scheduled to take effect in July will require payors to be able to accept the bills electronically from providers. In December payments back to the providers from the payors will need to be able to be transmitted electronically as well.

At the Federal level, new reporting requirements will take effect later this year that will acquire the submission of claim data to the Federal government that has not been required in the past. The submission this claim information is geared toward ensuring that the Medicare program is not paying inappropriately, or expenses that were the results of an occupational injury.

Legislation in the form of Medicare set-asides has existed since 1992. However the enforcement of this has been minimal. However the new legislation provides the foundation for that enforcement.

While these individual pieces of legislation are important in their own right, we believe that this is part of a broader movement that will continue moving the healthcare transaction and the healthcare industry in general towards automation. CorVel is prepared to meet these challenges and Gordon will discuss this further in the product development portion of the call.

In summary, we believe that market conditions coupled with the continued movement towards electronic transactions supports our longer-term strategic approach of becoming a full service provider to the workers' compensation market and continued systems investment. Now I would like to discuss our product line performance, specific results and our key initiatives for 2009.

In patient management, revenue for the quarter was $33.3 million. This is essentially flat to the December 2007 quarter, and down 3.3% from the September quarter, profit down 24% on an annual basis, and down 10% from the September quarter.

Our initiative to reposition our entire Patient Management business continues. While the December quarter's result are not as strong as we would like to see, there has been good progress made in this business line over the past few years.

The addition of our claims administration product expands our service offering in this area and continues to open new opportunities. We will continue to emphasize progress within the patient management portion of our business as it is key to our strategic execution and future service delivery.

In the near future, we will look towards the seamless integration of our service delivery between our claims professionals and medical management professionals. By introducing work flow management and our rules engine technology, our approach to the claims process will deliver the appropriate level of medical care to an injured worker at the appropriate time, as well as ensuring the level of oversight by the claims professionals in our system.

From a network solutions perspective, revenue for the quarter was $43.7 million. This is a 1% increase over the December 2007 quarter and 0.5% increase over the September 2008 quarter. Profit was down 10.7% from the December 2007 quarter, and down 5.4% from the September quarter.

The network solutions results continues to be a major driver of our overall results. Reflected in this quarter's results is a slight mix shift in our network solutions revenue. The mix shift is reflective of lower medical bill review volume in the quarter, and continue to increases in our directed care business, mainly our pharmacy and physical therapy products.

This mix shift caused a lesser amount of gross margins associated with the revenues than we have normally seen. The complexity is of healthcare reimbursement and the ever increasing cost of medical care emphasizes the continuing need for investment in our MedCheck product and our network solutions product line.

Moving forward in 2009, we will continue to focus on our four key initiatives and their role in transitioning the organization to a full service provider. The first initiative is the continued expansion of Enterprise Comp.

Despite the continued decline in the overall volume of claims; we believe that this initiative is on point. In fact in this market environment, we believe that this initiative continues to grow their importance.

Traditionally, through our managed care services, CorVel has only had access to a small number of employer customer opportunities. The employers that purchased their TPA services and managed care services separately. This group of employers is the minority in the workers comp market.

Enterprise Comp provides the ability for CorVel to meet the needs of the larger segment of the employer market, the employers that buy their services in a bundled format. By owning all of the major components of the workers' compensation continue, claims administration, managed care and the software applications needed to integrate and execute the different business lines. We feel we are in a strong position to bring the truly differentiated product to the market.

Over the course of the past few quarters, our field operations have been busy with the all of the integration activities that must take place after acquisitions have been completed. At the same time, our IT team has been busy developing our claims management software application into one that begins to realize the vision of Enterprise Comp in the future.

Much of the December quarter involved laying the foundation of the software into our production systems and the beginnings of field implementation. Although I discussed the Enterprise Comp imitative at times it's just getting started, our claims administrations today as a company are strong.

We currently administer workers' compensation claims in 45 states, and have the ability to deliver service in all 50 today. We expect to see improving growth in this product line as our software and system's integration process continues and our sales force gain the momentum.

The second initiative is improving our overall sales performance. As an organization, we are continuing to invest in our sales process. Over the course of the past year, we have invested in our sales leadership, training programs and upgrading our CRM system. In this next year, we will be focused on sharpening our sales focus on our different product lines as well as leveraging more roles in the organization towards growth.

And third initiative is the continued development and expansion of our network solutions product line. While we had strong performance in this area, we continue to invest and ensuring its future success. The rising cost of medical care and the need to contain cost requires that development of our MedCheck software remains the top priority.

Two other components of our network solutions product line that we are continuing to develop our first PPO network. The PPO opportunity continues to be substantial. While there has been consolidation in the industry over the past couple of years, this appears to have left many purchasers looking for potential options. We are actively working strengthening our PPO via better contracting and affiliate relationships.

The second area I would like to point out is our CareIQ, or our directed care network. Our directed care network delivers savings opportunities for customers via unit cost savings and utilization. In particular, our pharmacy and physical therapy products are generating considerable interest.

I would like to speak for a moment just about physical therapy. For most our customer base, physical therapy accounts for somewhere between 10% and 30% of their entire medical spend for workers' compensation. Our approach to managing this area has consistently demonstrated significant savings as soon as the program is implemented.

We're starting to realize some of the growth opportunities in this product line due to the results that we have produced. We have made investments in call centers and software in order to deliver high-quality product to our customers and growth in this area will allow us to take advantage of the economies of scale.

Our fourth and final initiative is the transformation of our case management business. In the December quarter, we continued to expand our implementation of our paperless work environment in a number of our case management operations. This is the first step of the transformation process for us moving to a rules based workflow routing.

The implementation of the paperless work environment will allow us to implement the technologies that we have successfully utilized before in medical bill review as well as integrated with the claims management process.

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

Gordon Clemons

Thanks, Dan. The project areas I will cover today include our next-generation claims handling technologies, which Dan referred to various projects in response to ongoing e-commerce legislation affecting workers' compensation, the directed care workflow software and our reporting tools.

These projects include the claims technologies, which should impact nearer-term results and nearer also speak to the newer e-commerce initiatives that we hope we will payoff in the long run.

Before discussing these I would like to observe that all of us would wish for better times. This is the kind of market for which a company with proprietary assets, no debt and a strategic focus on information technologies is built.

Don't get me wrong, if economy is very tough on us as it is for everyone else. But the point is, the CorVel's strengths are rude in long-term investment in provider networks, software and people.

During the December quarter, we continued to progress on the key projects involved in our Enterprise Comp total workers' compensation solution. We are steadily moving selected features from our legacy claims handling software into the CorVel CareMC web portal. That is we are building claims handling functionality into the healthcare portal, we call CareMC, a facility first launched back at the beginning of this decade.

The real key to this transition is the incorporation of our rules engine and workflow tools in the management of claims. This is a larger project when viewed in it's entirety, but we are implementing portions of that as we go along.

Although the process involved in the deployments we have made, both in the past in medical bill review and in this effort in claims management involve the automation of previously manual tasks, this effort has not been focused on production cost reduction.

As we achieved in medical bill review and claims management, we expect to see improvements in the outcomes we achieved for customers. For example, we find that while ultimately paperless operations will improve efficiently, in the near-terms such implementation allows to improve workflow and production management. In turn these improvements have created better outcomes for our customers.

So quality and effectiveness are the actual outcomes from the automation of management and workflow. The first components of this project are ready for field testing now and additional steps in this process are planned thought calendar '09.

And interesting area in our development to which Dan referred earlier is the manner in which we have been able to capitalize upon our long-term investment in information processing to extend the reach of our services in response to new regulations. This includes our work in reporting to state government, our entry into clearing out services and the more recently announced introduction of Medicare agency services.

These are relatively early stage projects, although each must meet governmental timelines. A number of states have regulations designed to support the electronic submission of invoicing by healthcare providers. In response, CorVel has begun providing clearingshouse services.

Further, our medical review software has for some time been capable of receiving such e-bill submissions. The clearingshouse brings medical bills into medical review. And on the other side, on the output side of the medical review, we must also increasingly transmit bill review result to those states that require completed reviews to be submitted to governmental databases.

Our past investments in e-bill processing have positioned us to expand into these nascent electronic commerce markets. A separate and more recent effort discussed briefly in the last call is the company's decision to become what is call the Medicare agency for the transmission of claims data from private workers' compensation, auto and even general liability carriers, CMS, the federal Medicare claims processing center.

The company had previously been selling Medicare satisfied services in the claims marketplace and workers' comp. Adding the new agency services is response to Medicare's move to enforce compliance of longstanding regulations.

Private insurers are require to coordinate their claims settlements for individuals eligible for current and/or future Medicare benefit with the claims payment processing handled by CMS. CorVel services will assist insurers in gathering and submitting their claims data to CMS. The passing of records to and from other parties is an ever increasing aspect of electronic commerce and healthcare.

It seems likely the new administration in Washington will continue to sport such initiatives if not in fact accelerate them. While our efforts in this regard have limited immediate revenue or profit implications, they are logical a component of CorVel's long-term strategic investment and information processing.

From a strategic standpoint, this move was taken, because ultimately the e-commerce initiatives where we believe be among the differentiators in our workers' compensation services. These services are being offered to meet the regulatory deadlines this summer and again some more in the coming fall.

The next area is directed care networks, which are our PPO networks that include services to assist patients with the scheduling of their care. Dan discussed the initiatives in the PT markets for instance.

Such networks deliver known patients to providers and can achieve favorite pricing for our customers. These networks require a considerable administrative support and we have continued to improve the supporting software.

Now that the company is selling a complete workers' compensation solution, these services are more inerrable to our claims processing. As we are becoming increasingly involved in claims management activities, we have developed new ideas regarding how our tool should be better configured.

Development in these networks has been going on for a number of years and I expect we will continue to invest in this area over the planning horizon. The company's workflow management software originally developed for medical bill review, was also employed in the new software for these directed care networks.

Our development plan is to capitalize upon these platforms to allow such services to provide value to the claims administration function, not typically achieved by either paper based or legacy systems based network services currently competitive in the marketplace.

Medical reimbursement and healthcare administration in general is, I believe, going to be actively discussed by, both State and Federal Government in the coming years. For wealth investment in more advanced forms of network management will be important to our ability to respond to the changing view the public has of healthcare administration.

And lastly as we have commented previously, we continue to work on, both internal and external reporting tools for our users. Current efforts have focused on supporting the expansion of our claims management services. CorVel's warehouse is steadily providing increased support to our reporting and analytic offerings.

Now, I would like to turn the call back over to Dan for his closing remarks.

Dan Starck

Thank you, Gordon. I would just like to add a few more items prior to opening the call to questions. Cash flow for the quarter, net of stock repurchases was positive $5.5 million. We did spend $17 million in the quarter on stock repurchases and we purchased 767,000 shares. Quarter ending cash was $12.1 million.

Our DSO decreased 2 days to a record 45 days. On stock repurchases, we spent $185 million inception to-date, and we repurchased 12.6 million shares. Hard shares at the end of the quarter 12,972,000 diluted EPS shares were 13,439,000. In summary, we are making progress in the execution of our strategic initiatives, and the investments we are making are in support of our long-term strategy.

Historically, as Gordon commented, the company has operated from a fiscally considered approach. And this approach has proven to be quiet beneficial in this difficult economic environment.

We are very proud of the fact that the company has proprietary assets, carries no debt and has strong cash flow. We believe that this puts us in a strong position moving forward. I would like now to open the call to questions. [Cara]?

Question-and-Answer Session

Operator

(Operator Instructions).

We do have a question from the line of Mark Dickherber with Segal Bryant & Hamill.

Mark Dickherber - Segal Bryant & Hamill

Hey, guys. How are doing?

Dan Starck

Good, Mark. How are you?

Mark Dickherber - Segal Bryant & Hamill

Can you hear me okay?

Dan Starck

Yes.

Mark Dickherber - Segal Bryant & Hamill

Perfect. Just a question related to the mixed shift on both business lines. I am trying to understand, I guess this is a product of the current environment or some other anomaly in it is easily explained?

Dan Starck

I think it's a little bit of both. We have had a very nice growth in our pharmacy and PT products, and we have just experienced a little bit of bill volume decrease in the normal medical bill review.

Right now it's very close to the quarter end, and we're looking at certainly, we're being very diligent about looking and understanding whether the medical bill review volume decrease is economically related and is in the broader environment, or whether it's a customer-specific issue. But, I think it's at this point more of a broader economic issue.

Mark Dickherber - Segal Bryant & Hamill

And would that be, I mean do you have impelled [note] to be competitive related or they are going to do a competitor for the bill review or if they are just payor?

Gordon Clemons

No, I think we have seen the normal advent flow of some customers in and out over the courses of past year, but really we have seen bill volume just basically flat to maybe slightly down with our existing normal base of business.

Mark Dickherber - Segal Bryant & Hamill

Okay. And then the margins from pharma and PT, and if you could talk about I guess margin front from our return on investment front?

Dan Starck

They run a much, much lower margin than we've historically run in just our medical bill review business. And they certainly provide, there are very nice product that complements the medical bill review business, and it's just something that's traditionally run in, I would say, lower teens and even upper teens at time in that business from a margin standpoint.

Mark Dickherber - Segal Bryant & Hamill

That's basically where they would stay?

Dan Starck

Yes

Mark Dickherber - Segal Bryant & Hamill

Okay. If you could speak on the new business initiatives inclusive of the Medicare opportunity just as you related to perhaps the near-term spend, upfront spend that requires and then also the longer-term ROI picture that would be expected from there.

Dan Starck

Sure I will take a little bit, a piece of it and then I will turn it over to Gordon to talk about specifically the MSA issue. From a spend perspective, I think one of the things we have done really over the last three or four months is, as I alluded to in the call put some measures in place to make sure that we have got a nice balance of investments versus growth, and so we are being very particular at this point what we are investing in from the systems standpoint.

So I wouldn't anticipate significant spend growth on the G&A side for entering this business. I think from our perspective, there are really couple of areas, our Enterprise Comp and growing the claims business is certainly a focus of ours.

We are moving towards some specialization and segmentation in our sales force in order to capitalizing and gain focus in that area. We still have a significant opportunity in the managed care marketplace.

As times get difficult, I believe that you will see more employers, or we will see more employers that take the time un-bundle their programs. So our managed care opportunities can grow from that perspective.

And certainly, our sales time that's right in their sweet spot, so then when we really turn over to Medicare portion. I think in the short-term, it may not be a real profitable venture, but it certainly, I think, gives us the opportunity to expand our services or bring new services to our clients and potential clients that have their services spread out among multiple vendors.

So I wanted to turn it over to Gordon for his thoughts on that as well.

Gordon Clemons

Well, I would just reinforce. I think the really big opportunity for us is to succeed in the Enterprise Comp marketplace. We are delivering total solutions, the investments on Medicare set-asides are I think as Dan sort of suggested a differentiator for us in our current business. And then longer-term, it's sort of unclear where that might all lead. But strategically, our short-term interest in it relates to our existing business and workers' compensation and our investment in the electronic transmission opportunity.

But longer-term, I think its an interesting development in the marketplace. It is going to up a lot of private insurers day basis with the forms and processors that require to Medicare, and where that leads is not exactly clear.

Mark Dickherber - Segal Bryant & Hamill

From a ROI perspective more specifically on the Enterprise Comp, how long do you think it will be before we start seeing to achieve more company historical return levels?

Gordon Clemons

Yeah. I think we are really just going through the transition period where we have had some the cost of simulating some acquisitions and making some adjustments. The returns in that business are attractive, they are not quiet as high as the best returns in the network solutions, but they are better than the returns we get in our normal case management business. So, I think the margins in the overall there are slightly higher than in the mix of our normal business.

More importantly, it positions us to sell our products at retail prices to employers as opposed to wholesaling them to other payors, so it's a long-term and it should have a very good return. But we are going through the normal process that's involved in launching something that is a meaningful expansion for our company.

Mark Dickherber - Segal Bryant & Hamill

Do you think that will be two to three years before the CA, a return of the near-term spending?

Gordon Clemons

I don't think so. No, I think we are a very competitively in the marketplace right now, and we do have some things, we are planning to do in the current calendar year. And I think we probably should speak to exactly, but our goal is to differentiate ourselves from our competitors, and we believe we are closing in on some technology investments that will do that. But in the current marketplace, we are very competitive on business right today.

Mark Dickherber - Segal Bryant & Hamill

Okay.

Operator

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

Gordon Clemons

First of all, [Cara], thank you. I would just like to thank everybody for joining the call today, and certainly look forward to talking to everybody here in the, the next couple of quarters as we continue on our journey here of Enterprise Comp and transitioning CorVel. So appreciate everybody's listening today. And as always, Gordon and I are available at anytime. Thanks, everybody.

Operator

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

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Source: CorVel Corporation., Q4 2008 Earnings Call Transcript
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