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CorVel Corporation (NASDAQ:CRVL)

F2Q11 (Qtr End 9/30/10) Earnings Call

November 02, 2010 11:30 a.m. ET

Executives

Dan Starck - President, CEO & 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 September end 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.

Revenue for the September quarter was $93.4 million, an increase of 13% from the September 2009 quarter. Earnings per share, was $0.62 for the quarter an increase of 24% from the $0.50 reported in the September of 2009 quarter. The quarter's results were impacted by two nearly offsetting adjustments. In the September quarter the company accrued $2.8 million on a pre-tax basis for an estimated liability related to the to the Southern Illinois class action law suit that is being disclosed in the 10K and the 10Q for the past two years.

This amount is included with the general administrative cost in the income statement. Additionally the company was able to resolve some outstanding state tax issues which resulted in a reduction to the income tax liability or buy $1.8 million and approximately offset the cost of law suit.

We do not expect any future impact from either of these adjustments moving forward. Now back to the business, during the September quarter we continued the expansion of a strategic initiative Enterprise Comp by adding new customers in new geographies and our network solutions results continue to reflect growth in our pharmacy and directed care product lines.

While case management results continue to improve. From a marketplace perspective, the labor market remains soft with anticipation of a long recovery.

With softness in the labor market is contributed to keep claimed audience at historical lows, however claim costs continue to increase as medical inflation increases. The claim volume declined as having various effects on the industry. First to our growth and claims, industry participants are looking for ways to internalize more services and bring those services to clients in order to feel organic growth.

Secondarily, there has been increase in consolidation activity in recent months. Consolidations is being driven by both private equity as well as two strategy buyers as there has been several transactions in the past few months. The twin characteristics of the inventory would suggest this could continue further into the future.

Industry is largely fragmented, it can provide good margins and synergies exists with the right combination of service providers. The industry environment only seems to confirm the CorVel strategic decision to reposition the company.

We have expanded our services and opened ourselves a new market; these decisions and overall quality of our products have enabled CorVel to overcome the growth challenges that face the industry today.

Now I would like to discuss our product line performance specific results and our key initiatives for 2010. In Patient Management, revenue for the quarter was $44 million which is an annual increase of 23%, profit increased by 68% over the September 2009 quarter.

Included in the Patient Management results, our third party administration product and our price comp and our traditional case management product. Our Enterprise Comp products has been major contributor to our growth both in the September quarter and throughout this past year.

The growth that we have experienced has served as a level to increase the level of name recognition of CorVel in the TPA business as well as the penetration of CorVel into the employer market, the target market from a price comp.

Our growth is been achieved both by acquisition as well as organic growth. Each of the three claims administration companies that we acquired over the past couple of years have been largely immigrated into CorVel and each of them is growing since the transaction.

Yes providing growth platforms for us in the individual geographies and with integration and national platform. These oppositions coupled with our increasing organic growth rate as well as our investments and software development and infrastructure have moved us through the start of phase to a fully matured product that's able to meet the needs of those small and large clients regionally as well as nationally.

We now have 28 claims offices across the country. A growth of over 60% over the past two years, CorVel is on price comp product is no longer a boutique product the one that scaleable and national.

Our Case Management results are enjoying, our renaissance is still it's due to the strong synergies and with our TPA business and the overall management of workers compensation points.

Our philosophy is what our worker compensation claim is first and foremost the healthcare issue now a legal issue because of this there have been proper medical attention and the timely deliver of care has a significant impact on the outcome of the claim and it has reenergized our case management.

Now on the network solutions, revenue for the quarter was 49 million, an annual increase of 6% and profit was down 1.6%.

The quarters networks solutions result effect the growth of our pharmacy product and our directed care networks. Despite the decline in claim by coffee industry we maintained our medical review volume within network solutions as it was always grown the total network solutions product line.

We done this through adding new customers but also by selling additional services to our existing customers. We recently enjoyed success in selling our traditional network solution services, medical bill review, PPO into the mid-tier insurance carrier market. That success, coupled with processes that will better connect the beginning stages of a claim to all managed care services served to improve the penetration into our PPO network and over our results.

We remain seeking opportunity always in the pharmacy and directly care product lines to ancillary care products make up approximately make up approximately 45% of the total medical dollars spent in workers compensation and those include the products with pharmacy, physical therapy and radiology.

We have grown that product significantly in the last couple of years. However we have ample opportunity, moving forward in 2010 we will continue our focus on four key initiatives. The first initiative is as we continue to expansion of our Enterprise Comp business.

As I discussed earlier our presence has been expanding on the third party administrative business when they can particularly make good progress in critical stage, California, Florida, New York, Illinois, Wisconsin and the Carolinas to name a few.

Our Enterprise Price Comp product is particularly appealing and the market for two reasons today. First for results and second for service, first from a results stand point, CorVel's unique approach is demonstrated in improved claims outcomes for our customers. The lag time of data and the workers compensation industry is long. So, long in fact that historical it has taken years for true results to become apparent. However, on our analytics department they have done a tremendous amount of work in order to finish reporting that compresses the time frame of reporting information and we are still identifying trends within the claims much earlier in the process.

These trends indicate favorable results from the adoption of the CorVel's Enterprise Comp process. Secondary, CorVel's dedication to local customer's services translated well to a third party administrative business.

The company grew through its first 20 years by providing strong results but also by providing top notch service. In today's age of consolidation and electronic communication, customer service has become a thing of the past for many industries.

Our 110 branch footprint has allowed us to leverage our existing branch network and continue a high touch model. Lastly, Gordon will discuss in more detail in the product development section our software delivery has been accelerating. We made significant progress these past few quarters and we look for that pace to continue.

Our key initiative is to keep improving our overall sales performance.

We have achieved double digital growth for four consecutive quarters with growth rate between 13% and 14%. Our goal is now to maintain that type of growth; we have made significant investments in our sales team in terms of the PPO, training, segmentation and technology. Of all this it has taken time to let the groundwork, our methodical approach is paying off.

The third initiative is the continued development and expansion of our network solutions product line. Yeah we have many different parts in our network solutions product. Today I would like to focus on the dynamics of our PPO network. In the industry, there is a growing interest from customers to move away from focusing purely on savings and an increasing effort to focus on outcomes and total medical spend.

One of the waves we are adjusting this is the transition from the retrospective traditional PPOI discount model to a more prospective model. In the retrospective model and I have provided joints in that work and agrees to provide services for a discounted price in exchange for being within the PPOs directory and being considered in-network.

In this model one of the main drivers of workers compensation healthcare cost go largely unmanaged that is the utilization of services.

In the prospective model, patients are proactively scheduled with providers and utilization and price is agreed upon prior to treatment. The retrospective PPO are discounting model one that is existed in healthcare for 20 plus years and that model will continue. However, moving more services to a perspective process is a high priority for us in order to better manage the total delivery of care and its cost. Today we offer that prospective model in the form of our directly care business with physical therapy in radiology. The work we're doing today in Enterprise Comp puts us in a position to improve the overall delivery of care and its cost and our overall affect of the PPO network.

Our fourth and final initiative is the continued transformation of our case management business. This has quickly become one of the more exiting opportunities to advance. The synergies with our Enterprise Comp and the proliferation of mobile computing begin to unlock future business opportunities. Soon CorVel's case management staff will be delivering information in real time to the other constituents in the healthcare continuum helping to remove the inherent delays in claims management and care provision.

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

Gordon Clemons

Thanks Dan. I'll cover the development issues for the quarter and results. As we've discussed in prior quarterly calls, CorVel has expanded the pace of product development this last year. The results of that expansion began to show in the September quarter as Dan referenced and will be more visible in software releases in subsequent quarters. The restructured development process implemented this year also included expanded resources for software planning and the defining of business needs which we believe is beginning to also help us with progress and development.

In addition the pace of change in the computer industry continues and will continue over the planning horizon serving most of the high priority projects on which we are now working would not have been possible five years ago in the formats we can deploy them today. As we've passed evolutions in computing, it can feel awkward to move to the next new architecture and yet doing so inevitably orphans the organization stuck on legacy platforms.

At CorVel we move from mini computing to data centers and onto co location facilities and now must contemplate cloud environments. A journey from command line interfaces, I'm not sure I like that phase. I might have called that a C prompt but anyway to Windows and mouse interfaces and on to the multi touch gesture interfaces -- lets call those touch screens has been an easier set of moves. At this point it is still a bit unclear how much computing is going to jump from the desktop to mobile devices.

Dozens of people are spending real cash to buy the virtual farms that have to get your attention. If any of you are Farmville sharecroppers I think you can appreciate taking this stuff to claims processing creates some confusing days even for CorVel. Implementing such change is also a major investment for any company involved in information based services and thus it is for the insurance industry and as well for CorVel.

I'd like to cover our development in three sections, systems integration, workflow and process improvement and information delivery. Systems integration projects include both hardware and software issues. We won't be doing as many updates on the hardware virtualization efforts as they have become a regular part of our transitions and are no longer new to our staff or to our progress in information technology.

Uses of the cloud to share hardware investments are still in the exploratory stage as well. Our largest current effort is focused on continuing to move and to substantially advance our claims processing software in CareMC Web Portal. This is a large project that will encompass multiple years. Each month's software release though typically includes individual projects that move us along that path.

We're making -- we working on a range of applications that combine to address the claims intake aspect of insurance administration. These include various call center activities and supporting workflow that extends CorVel's information technology into both our claims work and into the operations of our customers.

Looking more closely at what our customers do has been a long standing CorVel strategy. We began in the 90's with palm sized mini computer operations in our customers' claims offices. In the last decade we moved to web based tool and now we're continuing to build on our CareMC website and are beginning to end reference mobile computing.

CareMC is now a 10 year old project which increasingly differentiates CorVel from competitors. CareMC offers various constituents in a workers compensation arena, a platform and a central database through which to link the respective efforts to those with others involved in each claim.

Linking formerly disparate efforts to one database offers any number of synergies but certainly has challenged many of the traditional processes in what is a very mature insurance industry. The added complexity of individual state regulatory environments makes this a complex effort and yet one that directly addresses the exiting inefficiencies of the paper based traditional model.

Workflow management, while typically productivity gains are a logical result of investments in technology, CorVel has instead focused primarily on improving service to be the most productive focus of our investments. During the quarter we completed some additional functionality within our claims intake capabilities and will be implementing these new advances in production in the current quarter.

We also work to place our Ask a Nurse product, which provides telephonic help on healthcare issues to employees of our clients into our CareMC website. The processes accepted as normal in workers compensation were all developed in a paper based environment. Moving such process is to digital environment can include changes which may not be particularly intuitive and which meaningfully changes assumptions build into industry standard ways of doing business.

We all have seen incremental improvements and outcomes from the step by step improvement in our process and these outcome improvements in turn we do for long term cost of workers compensation for our customers.

CorVel's information delivery or to keep it simple reporting is becoming more timely and frequent for customers. CareMC provides online access to claims information and the CorVel analytic group to which Dan referred is steadily expanding with scope of its review outcomes.

We are for example now providing months of reports that are traditionally given to customers only annually. By building such reporting into our systems we can increasingly drive down the cost of such customer support and then expand the reporting frequency.

It is also possible that you take mining techniques to identify key parameters unique to each individual account. CareMC can accommodate complex organizational structure to win our customers enterprises and thus deliver information at the operations level in insurers and employers.

This change will be effective making the management of work-related injuries much more a normal part of employer's daily activities. We are moving the (inaudible) 0:03:42 which have been struggling maybe workers compensation frustrating and bit of secured product of the regulations that's impacting the worker environment. Demonstrating our new tools to customers is exciting (inaudible) 0:03:52 and I believe it will help us better explain the CorVel's advantage.

I would now like to turn the call over to Dan.

Dan Starck

Thank you Gordon. I'd just like to add a few more items prior to opening the call to questions. Quarter ending cash balance was $18.7 million and our DSO was 43 days. 164,000 were repurchased in the quarter and we spent $6.3 million in the cash. We had spent $230 million inception-to-date and we have repurchased 14.092 million shares inception-to-date. Our shares at the end of the quarter were 11.834 million and diluted EPS shares were 12.104 million.

In closing the September quarter represents another solid quarter of improved results. The company has made particular strong advancements in both revenue growth performance and software delivery, helping to advance our strategic repositioning. We're very proud of the work that the CorVel team has already accomplished and we look forward to our future opportunities. I would now like to open the call for questions.

Question-and-Answer Session

Operator

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

Dan Starck

Just a couple of closing comments, operator. First we'd just like to thank everyone that's joined us on the call today as well as those that will access the call either through the archive webcast or through a transcript of the call and we appreciate the continued support of CorVel and last comment for us in closing is we're all rooting for a pro business outcome to today's elections. So thank you and we'll talk to you next quarter.

Operator

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

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