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CorVel Corp. (NASDAQ:CRVL)

Q1 2015 Earnings Conference Call

July 29, 2014, 11:30 AM ET


Gordon Clemons - Chairman and Chief Executive Officer



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.

(Operators Instructions) I would 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 June quarter. Revenues for the June quarter were $124.4 million, 5.3% over the $118 million in the revenue for the June 2013 quarter. Earnings per share for the quarter ended June 30, 2014, were $0.3901. Earnings per share for the prior year were $0.3909. Gross profit increased 3% compared to the same quarter of the prior year.

New sales, which have been strong in 2012 and were somewhat softer last year, have picked up again this year. New sales do not impact our results for at least a year following the sale. G&A in the quarter increased 11%, a couple of one-time costs were the reasons for the increase in G&A.

Network Solutions continued to improve. The Enterprise Comp product line growth continued, but margins decreased. After a period of rapid improvement in results in the fiscal years 2012 and 2013, from that higher plateau, we have consolidated our gains and have been making increased investments in the next leg of our journey.

Now, looking at the overall market. First, the health market continues in a period of rapid transition. Our [ph] Sirius hospital review product positions the company well in this market. Insurers have moved cautiously forward, making sure to test results and to review all possible implications of increased reviews of the inpatient facility charges.

The volume of prospects in the workers compensation TPA market have been more plentiful this year than last. Private equity investors have continued to be active, unsettling both target companies and large carriers, who must assess the impact of the changing ownership in managed care and in the TPAs.

Private equity investors dominate the M&A activity, taking much of the industry into leveraged temporary ownership. These owners focus on scale, short-term growth and synergies. It will be interesting to see how this cycle evolves. Some of these influences make for competitive market, where we see the opportunities to make investments and where we also have to adjust our strategies.

Looking now specifically at the health market. The pace of change there continues. The impact and implications of the Affordable Care Act continue to have direct as well as ripple effects in the market.

In the June quarter, carriers continued, as they had last year and through the March quarter, to explore methods of better containing cost. CorVel continues to expand in this segment of the market. Each of the major carriers operates in multiple segments of the total market, and each business unit within each carrier makes separate decisions regarding the use of new services.

Carriers are expanding their use of medical review, but doing so cautiously. We have expanded our management team and facilities in the Sirius unit within CorVel. CorVel's sells Sirius services through its existing national branch network. Our product strength in this market is its proprietary architecture, which allows us customer savings they may not feel otherwise. It's fair to say that all constituents in the healthcare marketplace feel pressure to produce more for less.

Changes in the reimbursement processes require contractual support in the provider network agreements, which in turn can extend the implementation process for new sales. While implementation of ACA continues to include imponderables, the uses improved medical review services appears to fit with any of the likely features in this market.

As you can appreciate interpretations of the act from appellate courts, reactions from key providers, pressures to interact in the market that includes new healthcare exchanges, all introduced additional considerations. The environment is understandably challenging for our customers.

Now moving to the comp market. The workers compensation market as I mentioned is being impacted by private equity M&A activity. The industry has been consolidated into fewer, but more horizontally integrated firms. In addition, some assets consolidated through M&A into health carriers are subsequently sold off, placing them back into organizations focused on workers compensation.

The structures of these service organizations being sold and resold are typically restructured during the changes in ownership. This has introduced a period of uncertainty for the customers of these organizations. In addition, these enterprises typically attempt to reduce overhead during such changes, which force stalls investments and development.

The impact of these repeated changes in ownership is a period, where it is important for CorVel to make adjustments in our plans as opportunities open in the market. We respect the talented management and ownership teams being introduced to our market. They bring specific strategies to the combinations they create, strategies appropriate to the goals of private equity firms. Clients normally difficult to extract from old relationships, can be inclined in this period through considered contingencies during such periods of disruption.

To simplify the impact of these forces, they press upon pricing in search of volume increases and they open opportunities to act during unique windows of opportunity. This is a period in which the landscape in our market is being considerably restructured. During this period of disruption CorVel is inclined to capitalize upon our strength and technology, and upon our strong capital structure to compete aggressively for business and to press our investments in long-term product development.

As I discussed last quarter, there are a number of services and service ideas trending in the marketplace. Integrated disability that is the merging of workers compensation and STD remains of interest, as it has been for a couple of decades. This concept ever more supported by new technology continues the expansion of the definition of disability management to include non-work related injuries as well as other forms of absence.

CorVel's investment and the claims intake process lend themselves to deployment in integrated disability. Interestingly the market shares for key underwriters are also in a state of fairly rapid flux. The positions enjoyed by key participants, long rather stagnant, are now changing. The industry has a new leading underwriter and a couple of other carriers with dynamic expansion plans.

At the same time, some of the long-term leaders are seeing meaningful losses of market share. And this year we've seen attention in the market and with regulators is the effort to seek better quality PPO network administration. The tools provided to assist patients, seeking care, are called upon to meet higher standards each year.

Data analytics and mobile computing continue to expand throughout the market. The company has introduced a claimant application, designed to assist patients for their administrative activities during an episodic care. This is a mobile app that will experience a fairly rapid expansion in these features.

Making such an application, very powerful and yet very easy to use, requires the kinds of integration of information in which CorVel has been investing for a long time. We also expect the end of the current calendar year to witness the introduction of next generation wearable devices.

The continuing of devices used by all of us is moving from one of PCs sitting over the top of tablets, in turn sitting over smartphones to one potentially of PCs sitting over smartphones, sitting over wearables. For just a year ago, it was vogue to reference the demise of the PC, now the PC is perhaps going to evolve to where it severely limits the use of tablets as we've known them.

Wearables are expected to assist with the diagnosis phase of an episode of care as well as in the monitoring of the recovery phase. The rapid evolution of these devices has very important implications regarding the foundation of claims systems, with which they will have to interact. CorVel has been making the kinds of investments necessary to allow true interactions across the spectrum of its computing resources.

Integrating devices and services is complicated by the amount of information necessary to manage healthcare. The new reforms of integration have implications for even the manner in which healthcare is managed. Hopefully, the process can become less intrusive and more efficient.

From a strategic perspective, I would offer that in the world I just described, our investments and technology continue as the cornerstone of our business development.

The Affordable Healthcare Act has increased customer interest and improvements in medical review services. Implementing constant change while protecting the value of local branch and service networks CorVel has build is an important aspect of our technology strategy. And as always, we're looking to continue evolving our service continuum during the planning horizon.

Now, I would like to discuss our product line results. Patient management revenue for the quarter was $65.4 million, an annual increase of 7%. Expenses outpaced revenues reducing field margins by over 20% compared to the strong June quarter a year ago. Patient Management includes our full-service workers' compensation solution and our traditional case management product. We have increased our allocation of overhead through the Enterprise Comp product to reflect the focus of sales efforts in that market segment.

Our case management business is increasing in the retail segment addressed by the Enterprise Comp TPA services and is pressured in wholesale market. Mobile computing applications in this service will be most effective, as we more tightly integrate them with the claims management services. The mobile platform improves the value of the service by improving the immediacy on the information of service producers.

Network Solutions revenue for the quarter was almost $59 million, up 4% from the same quarter of the prior-year. Profit was up 22%, impacted by improving results in the health market. We have increased the investments in future development for this product line and are also involved in a long-term project to place this service on a next-generation technology platform.

Opportunities to expand Network Solutions are coming from new workers' compensation regulatory initiatives in key states, as well as the impact of changes of ownership among important competitors. Developments in the health market will play an increasing role. Our product development costs continue to dominate our corporate overhead expenses.

The current fiscal year continues the strategic project areas, we have discussed previously. Those are: the claims intake process and how it integrates with claims administration; new claims systems features; extending our use of web portals; Network Solutions investments; and added foundation strength for our systems and data centers.

Back to the claims intake process, which continues to evolve, CorVel is uniquely positioned to integrate the various pieces of claims intake that is, ask-a-nurse type hotlines, claims intake, triage and telephonic claims management, as we provide each through proprietary CorVel assets. Leading these into the workflow of claims management is a complex, but promising area of development.

New claims features included the integration of all services included in a workers' compensation through the accomplishment of this at a data management level in CorVel systems, the capability, which differentiates our services results. Investments in the speed and stability of these systems, was an area of emphasis in the quarter.

More friendly systems interfaces for our customers will improve the use of our product. The development and implementation of mobile application features for patients is a current project with promise. Our ability to bring unique features to such an application is enhanced by the integration efforts we have made in all related claims management components.

As I discussed earlier, Network Solution is undergoing a major rewrite. This began a couple of years ago and will stretch forward for another couple of years.

Investments in the foundations to our systems continue throughout the current year. The new data center continues to come online, expansions continue to our use of .net software and web services. We're gradually including new programming languages and tools, as well as continuous improvements to the hardware we employ.

Now, I'd like to cover a couple of additional statistics. The quarter ending cash balance was $34 million. And our DSO, that is day sales outstanding and receivables, was 42 days compared to 39 a year ago.

123,400 shares were repurchased in the quarter for $5.7 million. We have returned $344 million to shareholders in the last 17 years, repurchasing in that period of time 32,270,000 shares. Shares outstanding at the end of the quarter were 20,881,000. And diluted EPS shares were 21,210,000 for the quarter. Shares were reduced 2% this last year as we allowed our cash balances to increase.

I'd like to now turn the call back over to the operator to open the question-and-answer session. Thank you.

Question-and-Answer Session


(Operator Instructions) It appears there are no questions at this time. I would like to turn the floor back over to Mr. Clemons for concluding comments.

Gordon Clemons

Thank you. Thank you all for joining us. We'll look forward to talking to you again next quarter. Good bye.


Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. And you may disconnect your lines at this time.

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