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CorVel Corporation (NASDAQ:CRVL)

F3Q 2014 Earnings Conference Call

January 28, 2014 11:30 AM ET

Executives

Gordon Clemons – Chairman and Chief Executive Officer

Operator

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 and other forward-looking statements regarding future events or of the future financial performances of the Company. CorVel wishes to caution you that these statements are only predictions and that our 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 Form 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 will now like to turn the conference over to your host Mr. Gordon Clemons. Sir, please go ahead.

Gordon Clemons

Thank you for joining us to review CorVel's December quarter. Our Enterprise Comp TPA continued its growth and the development of its services. In the quarter we made substantial investments in the specialty medical review services sold to the health market. This service is well received by major carriers and we are expanding to serve new customers.

Revenues for the December quarter were a $121 million, 13% over the revenue for the December 2012 quarter. Earnings per share for the quarter ended December 31, 2013 were $0.41, up 56% from the same quarter of the prior year. Pretax margins increased to 12% from 9% the prior year.

I'll speak to margins later in the discussion of our operations. First, I’d like to discuss the market in general for our services. The impact and implications of the Affordable Care Act continue to be somewhat in flux as the implementation continues. The Act places pressures on insurers to improve their management of health costs and in turn these major carriers are looking for new tools for managing healthcare costs. We don’t expect this period to be smooth as they would seem to be any number of developing ripples from the bill. As bills emerge the participants in the industry re-calibrate their plans.

The Affordable Care Act implementation has implications for every aspect of any healthcare or healthcare insurance service. Both providers and payers are concerned regarding the funding relative to their cost of operations. The first impact on CorVel from the legislation has been an increase in the demand for our Network Solutions services, specifically our proprietary hospital bill review services, we see opportunities in each segment of the marketplace whether that is the private carrier market, Medicaid or Medicare.

We expect also incur some extra cost in our own benefit plan for our employees. In the workers’ compensation market the Company continues to seek expansions in both the sale of managed care to carriers and in the sale of our Enterprise Comp line of full-service claims management services to employers. These markets have not been directly impacted by the Affordable Care Act, but nonetheless there is a steady pace of change in each. There is a continuous drumbeat of new regulations in workers’ compensation.

These changes require adjustments in our systems and at times, subtle changes in our marketing strategies, to grow within our full-service TPA programs continues. The Company is continuing to invest in further enhancements to those services. Each year we are able to add more capabilities to our offering, as we gain scale we’re also able to increase the pace of our investments. The latter portion of calendar 2013 witnessed improved margins, and at least one analyst has published a report forecasting continuing margin improvements. At times our margins can improve as the mix of our services changes, at other times industry pricing can impact our results.

Our long-term goal has actually not been to steadily increase margins. We prefer revenue growth to margin improvements, whereas these two different approaches to building CorVel involve trade-offs, either approach can result in the same short-term gain for investors, but growing the size of our enterprise we believe provides a better long-term value for customers, shareholders and employees.

Investments in systems have had the effect of gradually making the Company more efficient. This can cause higher margins at times. Our plan has been to utilize our investments to create higher value-added services, but to capitalize upon such improvements to be more competitive in the marketplace. This effort can be expressed by being more competitive with our pricing or it can help us further increase the cause of product development efforts, either of these choice is ultimately designed to improve our growth.

In the past year, the Company was able to achieve its revenue growth without a commensurate increase in field administrative costs. This was because of last year's pretax margin increase, assisting with this gradual change and how our organization is structured has been an increase in the use of workflow software and as a result an increase in the use of call center activities that assist with branch level effectiveness.

Although not a plan which we often point, the gradual improvement in managed workflow process has continued. The Company has increasingly utilized call centers to accelerate the timeliness of our services as well as to bring specialized talents to a claim or case at the appropriate moment. Pretax margins in the quarter increased to 12.3%, which is above our long-term average. During the year we increased spending for product development in contrast to 2012 when we were cautious with corporate office level spending.

Now I'd like to discuss our product line results. Patient Management revenue for the quarter was $62.4 million, an annual increase of 12%. Gross profit increased 29% over the December quarter of 2012. Patient Management includes third-party administration that is TPA services and traditional case management. TPA services have been growing at over 20% annual rates and are an important driver of overall company results. During our initial expansion into the TPA industry, this portion of our business was dominated by existing case management services. At this point though a majority of the services in Patient Management are derived from Enterprise Comp line of TPA services.

The holiday calendar this year coupled with the weather effects on business, made for a difficult quarter for case management, offsetting that was the continued growth in TPA services. We continue to invest in new technology for the case management service, but we expect TPA services to increasingly dominate this portion of our business. Case and claims management services are increasingly integrated in our service and systems and investments in case management add to the effectiveness of our claims management efforts.

We have an active backlog of additional projects plan to continue building proprietary strengths in our services. Network Solutions is the medical reviews sold into the payer marketplace, revenue in that service for the quarter was $59 million, up 13% from the same quarter of the prior year. Gross profit was up 29% year-over-year. The December quarter included one-time expenses to expand the Specialty Bill review, we are now introducing in the health markets.

As I explained in prior quarterly discussions CorVel has a proprietary data base of in-patient pricing information which provides unique reviews of hospital reimbursement. We have expanded the infrastructure to support this business and have also been expanding the staffing in this business, to reflect the growing importance of this business the Company has branded the line of services in the health market and specifically the operations in the Dallas-Fort Worth Metroplex, under the Cirrus [ph] name.

We will be continuing to invest in our specialty services under that name, expansion in the quarter continued at rapid pace, as a result we incurred unusual expenses for office expansion, recruiting and labor. We expect this pace to slow somewhat in the current quarter, but to continue throughout 2014. Our ideal scenario will be to continue rapid expansion to service specific additional customers. We have committed to our customers that we will continue to expand to provide services as they define the needs under the new act.

The Affordable Care Act has created and will continue to create meaningful change in Medicare, Medicaid and private health insurance. Our services have application in each of these segments of the health market. All the major constituencies in health care providers, payers, employers and employees are being impacted by the changes underway, and it is difficult to forecast the breadth or depth of the change that is ongoing in healthcare reimbursement and we will experience adjustments in the strategies of the major players on a fairly regular basis.

Cirrus services are also employed in our workers' compensation business, for investments in this business are complimentary. We expect to be in a period of investment and adjustment throughout our planning horizon, is not in common for changes in healthcare, it require as many as 10 years or more to be fully reflected in the marketplace for healthcare.

Now, I would like to speak to our product development efforts. The key IT industry trends include hardware virtualization which has greatly simplified our data center configurations, workflow and document management which we use to improve the development of shared service activities, dynamic load balancing which promises to greatly reduce the redundancy involved in systems, recovery investments, lastly the ongoing progress in data storage and its costs. These infrastructure advances continue to drive three application trends important to CorVel. The move from PCs to mobile devices followed by what we expect to be as evolution in PCs, the expansion of cloud applications and cloud like configuration and data analytics.

At CorVel these are expressed as follows: in the move from PCs to mobile, CorVel real time tools for claims intake continued to be an area where we believe improvements can be made. This last holiday season witnessed what summer calling a watershed moment in the growing use of smartphone based transaction processing. We believe the same trend will impact healthcare and continue our investments in such applications.

Tablets and smartphones for our nurse case managers are adding value to our case management and claims services. Our efforts in this area are now focused on improving the effectiveness of earlier release. At the same time I expect the introduction of laptops that share the best features of tablets while allowing users to employ the best of PC based software. The movement of our onsite applications to cloud applications or in this case CorVel's private cloud continues.

In the quarter, we worked on improving the usability of CareMC, CorVel's private cloud and the reporting provided there. Data analytics continues to expand the CorVel improving the power of analytics tools available in CareMC has been a focus. Analytics continue to assist us with internal metrics that can help us manage our enterprise and the quality of our services.

Now I'd like to speak to a few additional figures regarding the quarter. The quarter ending cash balance was $33 million. Our day sales outstanding was 42 days. 106,000 shares were repurchased in the quarter and a 1,066,000 shares have been repurchased over the last year. This reduced the shares outstanding by 5% year-over-year. We have now returned $325 million to shareholders in the last 16 years. Shares outstanding at the end of the quarter were 20,938,000 and diluted EPS shares were 21,256,000 for the quarter.

I'd now like to turn the call back over to our operator for the question-and-answer period. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And I am showing – we have no questions, Mr. Clemons, do you have any further comments?

Gordon Clemons

Yes. Thank you. I did want to correct one comment I made during the text, I referred to our pretax margins as 12.3%, I think in the quarter, they are actually 12.0%. So, I just wanted to make that one additional comment and otherwise to thank everyone for joining us today. We look forward to talking to you again after the March quarter. Thank you.

Operator

And this does conclude today’s conference, you may now disconnect.

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