CorVel Corporation F1Q11 (Qtr End 06/30/2010) Earnings Call Transcript

| About: CorVel Corp. (CRVL)

CorVel Corporation (NASDAQ:CRVL)

F1Q11 (Qtr End 06/30/2010) Earnings Call

August 03, 2010 11:30 am ET

Executives

Dan Starck - President, CEO and COO

Gordon Clemons - Chairman

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 the 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 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 host, Mr. Dan Starck and Mr. Gordon Clemons. Gentlemen, please go ahead.

Dan Starck

I would like to thank everyone for joining us today to review and discuss the results of CorVel's June 2010 quarter. I am joined by our chairman, Gordon Clemons, and in our normal fashion, I'll 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 results. Revenue for the June quarter was $91.5 million, an increase of 12.5% from the June 2009 quarter. Earnings per share were $0.64 for the quarter, an increase of 30% from the $0.49 reported in the June 2009 quarter.

During the June quarter, we continued the expansion of our Enterprise Comp product, CorVel's fully integrated workers' compensation claim solution and our Network Solutions results reflect growth in our pharmacy and directed care product lines, while case management growth is reflective of increasing volumes.

From a marketplace perspective, the labor market remains soft and with national unemployment near 10%, there are no signs of affirming of the labor market in the near future.

Workers' compensation claim volumes continue to decline, yet the average total cost per claim continues to increase. The increase in total claims cost is being driven by the growth in total medical cost thus emphasizing the need for cost containment.

Industry participants are looking for ways to bring expanded service offerings to clients in order to fuel growth to overcome the declining claims volume. The expansion of service offerings by our competitors is coming in the form of both, acquisition consolidation as well as strategic partnerships.

In this difficult economic period, the employers' decision to move their workers' compensation program is very difficult. Change and the associated frictional costs are becoming reason enough for companies to remain with their current workers' compensation service provider. This has prompted the new and creative approaches to pricing as well as performance-related metrics in our industry.

Now, while some of these items may be perceived as obstacles for CorVel, these dynamics only underscore the importance of executing our strategic transition to being a self full service provider.

As a full service provider, CorVel is able to offer solutions to meet the needs of the wholesale buyer of the industry both, insurance carriers and third-party administrators through our traditional managed care products as well as the retail buyer, the self-insured employer to our Enterprise Comp product.

Now, I would like to discuss our product line performance-specific results and our key initiatives for 2010. In Patient Management, revenue for the June quarter was $43.3 million. This is a 31% increase over the June 2009 quarter, and profit increased 126% over the June 2009 quarter.

Revenue increased 5% from the March 2010 quarter and profits increased 14%. Included in the Patient Management results are our third-party administration product Enterprise Comp and our traditional case management product.

CorVel is positioned in the third-party administrative business through our Enterprise Comp product is gaining stronger footing. Once thought of as a new comer to the business, we continue to advance our presence and gain momentum in the market through our unique approach to claims management and improved customer outcomes.

CorVel's unique approach has provided strong early results for our new customers and our dedication to local customer service has translated well to the TPA business. Not unlike manufacturers in other industries that have moved to consumer direct marketing and sales, the transition to providing a product directly to the end user has opened a considerable number of market opportunities for CorVel and as we gain traction in the third-party administrative business, CorVel's presence in the employer market growth.

In our case management product, we are benefiting from things we've learned in the TPA business. The view from that perspective has provided us with the fresh new look at the importance of case management in the total claims process, and we are actively working to incorporate our learnings in order to deliver a more impactful product.

In Network Solutions, revenue for the June quarter was $48.2. That's flat to last year's June quarter, and profit is down 6%. Sequentially, compared to the March 2010 quarter, revenues increased 4% and profits increased 7.5%.

Network Solutions continues to be one of the main drivers of our overall results, and investments in MedCheck, our medical bill review software continues as is the strengthening of our PPO network.

Two areas of note, Network Solutions that are beginning to realize their growth potential are our pharmacy product and our directed care network. We have made long-term investments in both, people and systems that are beginning to pay dividends.

Medical expenses continue to increase on a per claim basis both, in terms of hard dollar impact as well as a percentage of total claims cost, and pharmacy costs and physical therapy costs now consume approximately 35% to 40% of the entire medical spend in workers' compensation.

CorVel is able to bring savings to our customers not only through unit price reduction in both, pharmacy and physical therapy, but also through our utilization management programs.

By leveraging our integrated bill review platform, the ability to access and leverage data and our dedicated resources, we are able to bring together the entire continuum of care.

In pharmacy, the key to improving savings is the ability to drive network penetration. In our visibility into the data, has allowed CorVel to have market-leading penetration rate. With physical therapy, managing utilization to the appropriate numbers of visits, to maximize the efficacy of treatment is our top priority. Our clinical oversight and involvement allows CorVel to collaborate with the injured workers' treating clinicians in order to meet that goal.

Now onto the key initiatives. The first initiative is the continued expansion of our Enterprise Comp product within which we have two main objectives. The first is to establish the CorVel brand by increasing our national scope and reach.

And as with any geographically dispersed company, some geographic areas outpace others. In the June quarter, and really through the first six months of 2010, we have gained ground in a number of geographies, most notably the Southeast than the Midwest.

By leveraging our branch network, we have been able to capitalize on our existing presence and existing infrastructure. We also continue to look for strategic acquisitions that would give us added strength in specific geographies.

The second objective is to deliver a differentiated product through our software and workflow capabilities. In order to accelerate our pace of deliveries of specific Enterprise Comp software, we have increased our re-sourcing in the IT function.

Brining together the different facets of claims administrations is a large and complex job, but we're incrementally delivering software that will lead us to improving both, quality and timely delivery of care.

Our systems integration provides us with the ability to bring together all of the different constituencies involved in workers' compensation claims in ways that have not been done before.

Our second key initiative is to keep improving our overall sales performance. Our stated goal for the past two years has been to return CorVel to double-digit growth rate. We have achieved that growth for three consecutive quarters now, and our goal is to maintain that type of growth.

We believe that overall sales performance are made up of the combination of the pure sales effort, but they are very much aided by having products that not only meet, but exceed a buyer's expectation.

The third initiative is the continued development and expansion of our Network Solutions product line. While we have had solid performance in this product, we have made some organizational investments and operating changes in order to improve our performance.

Earlier in the overview, I mentioned the work that we are doing in the pharmacy product and directed care network.

Two of the other areas that we continue to focus our efforts are PPO, strengthening the breadth and depth of our PPO through our better contracting as well as adding strong affiliate networks in specific geographies, in order to improve total discounting.

The second area in Network Solutions that we continue to work on is our enhanced bill review product. This product generates incredible savings for our customers on their most expensive bills out of network hospital bills. Our proprietary database continues to set the bar for the industry and differentiate CorVel from our competitors.

Our fourth and final initiative is the continued transformation of our case management business. The mobile computing age is upon us and the technology advances that are available today have some exciting implications in our case management business. We expect to leverage them in the near future.

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

Gordon Clemons

Thank you, Dan. The June quarter included our largest increase in fixed assets in one quarter in the company's history. While we clearly want to control expenses and to be prudent, investing in our future has been a key to our success.

With a long-term investment pace over the years, we have been able to gradually move our market position forward. As Dan discussed, the current success in claims administration is one such example.

As much as it may seem that increasing spending must be carefully controlled, in fact, it is not easy for a relatively small company such as CorVel to meaningfully expand its investment pace in technology. Processes have to be changed. Over the last year, the development team has been working to address larger projects and to carefully evolve their processes to accommodate larger goals.

As the company has grown, the approach to development has had to become more defined processes we used 10 years ago might have been okay for a smaller company, but at some point, CorVel had to make investments in its development processes in order to become a much larger enterprise. Dan and his team have been doing that.

In the early phases of such a transition, these investments can cost more than they produce and can lead to lumpy results. As you can appreciate, the impact of Sarbanes-Oxley is naturally to discourage investment moves that can create bumps in earnings. However, successful investment is necessary for long-term growth, and therefore evolving our processes is necessary to our journey to being a more meaningful player in the insurance industry.

Although understandably, Dan and his team don't want me to overstate their successes, I would like to compliment them on having have the determination and have taken the hard work necessary to make these evolutionary changes and investments. This is also a timely change in the outside world of technology. The pace of development in the IT and software industry continues to impress us and to encourage our own initiatives.

Although, over a long period of time, the pace of technological events seems relatively steady, of course, we see good periods and yet other times when less is happening. At this time, new generations of software tools, hardware virtualization and evermore advanced communication technologies promised to continue changing the landscape in the insurance industry. This pace of change makes training and implementation planning evermore important in CorVel.

I'd like to discuss our projects for the quarter organized in areas that Dan has also covered. That would be systems integration, workflow and process improvement and thirdly information delivery.

Systems integration projects have been focused on moving our claims processing software to the CareMC web portal. This is the long-term project area that will encompass a number of years. Each month software releases though typically include individual projects, which move us along that path.

We are also increasing the use of our Scan One organization as the data capture center for the company. Scan One provide services design to help organizations expand the scope and effectiveness of their workflow implementations and specializes in data intake, and in the converting of information from image to data.

We want to capitalize upon the fact that CorVel offers the wider range of the many service components involved in casualty claims than new other administrators to build unique integrations of these services.

The second area is workflow management. While typically productivity gains are the logical result of investments in technology, we have found at CorVel that instead we are able to achieve improved service for our clients and customers around the country.

During the quarter, we added additional functionality to our check writing and reimbursement management systems, codified content of value in our early intervention tools and services was also added to our claims processing software.

We are also working on our 24/7 product, which provides telephonic help on healthcare issues to the employees of our clients. We want here to have this service more well-integrated with our claims management processes.

The third area is information delivery. Information delivery is another focus of our current development to the data warehouse upon which we worked for a number of years, has become increasingly valuable and our analytic group is capitalized upon it to produce new reports and analysis for our customers.

We are expanding features, which capitalize upon the data in our systems to address the needs of employers that are tangential to workers' compensation claims management, but outside the normal world of claims management companies.

Stewardship reporting at levels below the consolidated corporate level has also been launched, and we continue to expand our reporting of workers' compensation data to the center for Medicare services.

In a very busy year, we are as this quarter's results demonstrate enjoying some of the advantages of prior years' investments, and yet capitalizing upon those gains to increase the pace of the further development of our enterprise.

I'd now like to turn this call back over to Dan.

Dan Starck

Thank you, Gordon and I would like to add just a few more items prior to opening the call to questions. Quarter ending cash balance was $13.7 million, and our DSO was 45 days.

Under our current share repurchased program 153,287 shares were repurchased in the quarter. We spent $5.5 million in that quarter. We have spent $224 million inception to date and we have repurchased 14 million shares inception to date. This represents a 54% repurchase of our entire outstanding shares. Hard shares at the end of the quarter were 11,907,000, and diluted EPS shares were 12,187,000.

In closing, the June quarter is our fifth consecutive quarter of increased growth. The results of our product evolve the work that has been done over a number of years that tends to be lost in a moment like this. We are very proud of the work that CorVel team has done, and continues to do on a daily basis to lay the ground work for future growth.

I would now like to open the call for questions.

Operator

(Operator Instructions).

Dan Starck

Kate, may be if I could offer one item while we are waiting for questions if there are any. I did want to clarify for the group on the phone a little issue around our tax rate, and I want to make sure we clearly communicated it.

Our tax rate is slightly lower this quarter due to some tax credits and lower rate resulted in a $0.01 benefit to EPS for the June quarter. So, again, without that we would have been at $0.63 in EPS. Maybe that will generate a question or two.

Question-and-Answer Session

Operator

(Operator Instructions) At this time, there are no questions in queue.

Dan Starck

We would like to just wrap up the call by thanking everybody who is on the call or through the webcast or those who may access the transcript through the internet. We would like to thank everyone just for showing the interest in CorVel.

I'd characterize our mood as we close the call today as very pleased with our results, but not satisfied and our opportunities continue to expand in front of us and we are very much looking forward to the remainder of the year and meeting expectations, so thank you and we will see you soon.

Operator

Ladies and gentlemen, this concludes our conference call for today. Thank you for your participation. Please disconnect at this time.

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