CorVel's (CRVL) CEO Gordon Clemons on Q4 2015 Results - Earnings Call Transcript

| About: CorVel Corp. (CRVL)

CorVel Corp. (NASDAQ:CRVL)

Q4 2015 Earnings Conference Call

February 2, 2016 11:30 AM ET

Executives

Gordon Clemons - Chief Executive Officer

Analysts

Operator

Thank you for standing by. Welcome to the CorVel Corporation Quarterly 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 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 filed for the most recent fiscal year and quarter. These documents contain and identify important factors that could cause the actual events 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 brief 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. 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. We’ve been investing in the development and deployment of improved operations management metrics and reporting throughout all of our services.

Revenues for the December quarter were $124 million, 1% over the revenue for the December 2014 quarter. Revenues were impacted by a temporary slowdown in some of our Group Health business as customers continue to adjust their programs for the Affordable Healthcare Act.

Sales of new accounts continued at a good pace. Earnings per share for the quarter ended December 31, 2015 were $0.34, up 3% from the same quarter of the prior year. The December quarter is always impacted by the holiday calendar, but otherwise we experienced improving operations I’ll discuss later.

And now to our markets. Extremely low interest rates, high corporate and personal tax rates and continuous technology advances are gradually changing many of our markets. In the big segments, oil or banking, the changes are very visible. In markets like ours, the changes don’t get much publicity.

For market participants like CorVel, the changes matter and it’s important for our management team to adjust strategies in light of the new world in which we live. Change can seem slow for long periods of time, but eventually, a critical mass of change vectors is reached and then change can seen sudden.

The last couple years have been a time when we have been making meaningful progress in the evolution of our processes. We’ve been strengthening the foundations for our services and expect more visible results in the next couple of years. We believe this period will lead to a time of market share change.

Our business thought remains to achieve good returns on equity as we work through transitions in our business. The markets for workers compensation have seen more change in the last couple of years than in prior periods. The largest comp carriers have lost market share. Middle-market carriers have picked up that share changing longstanding relationships.

The TPA segment of the total market has consolidated. Perhaps only four or so firms are really competitive in most large bids. During the financial transactions involved in industry consolidation, it is inevitable that buyers provide reasons by the latest acquisitions create tremendous competitive advantage, while some strengths of these consolidations are real, other asserted strengths are either overstated or a distraction from new problems created by or tend [ph] to the mergers.

Technology has a similar impact. Over the long run, it is changing our business considerably, but in short timeframes, it is challenging to use it to make a big change in the market. Technology is though changing the manner in which claims are managed. As is often the case when technology changes an industry, the pace of new ideas comes more quickly than the actual implementation of those ideas.

A number of information management technologies are involved in our industry, some are really not all that new in general commerce, but their implementation in claims management is fairly new. Increasingly, new technology is generally incompatible with the legacy systems common in the insurance industry. This has made it economically challenging for industry participants to remain as leaders across multiple computing paradigms.

The cost of staying on the technology curve is an added expense for any company trying to do so and it can be winked at for a decade or so. However, eventually, failing to implement new technology catches up. Several of the largest firms in the insurance industry have been hurt by a lack of investment in technology.

In our segment, we’ve seen one claims management firm seize the ongoing development of their longstanding software and move to leased software. Another large TPA is experiencing problems than having to spend substantial amounts on fixed capital to address evolving needs.

In contrast, CorVel has invested continuously from our inception in new technology. Replaced older software, such as mini computer and claim server applications, first with datacenter applications and then increasingly with variations on cloud computing. Our long-term plan has been to take our software platforms to each new generation of technology.

This creates annual investment expenses that do not produce immediate incremental returns. But over the long run, these expenditures have kept our services vibrant. No strategy is risk-free. Ours requires a good and always renewing team of development and product management people and we have to morph at times toward emerging customer interest.

Today we see the market wanting to implement the kinds of improved interactivity enabled by new technology. Although cloud computing is regularly overhyped, it is clearly a trend whether to public or to private clouds. Our sense is that our customers and prospects want to be with the firm that has the ability to stay relevant as service models and technology evolves.

At the same time, the market expects technology to reduce the cost of service and to improve the effectiveness of our services. Doing all of this at once makes for a very full plate.

The group health market continues its ongoing adjustments to the Affordable Healthcare Act. Since our last quarterly review, some pushback from major healthcares against the exchange model has occurred. Managing enrollment in the small case and individual markets is costly and was perhaps underestimated by the act.

Healthcare inflation continues and yet providers are also frustrated with the implications of ACA. The act has resulted in some very large mergers. These consume the management time of those involved. It is also first the development of new systems, which also diverts resources and time. The election year promises to include a lot of hyper delays that may also cause participants to pull in their horns.

The combination of these trends creates a period where the introduction of new services to these carriers has been slowed. At the same time, the need to control cost is high and this favors the use of our services. The net of all of this is a somewhat lumpy period where we have more variability in our service volumes than in the past.

All in all though, this is the time made for companies built to flex to market needs and who are looking to make new inroads. It’s a busy time for us and an interesting one.

Now I’d like to turn to our product development area. The new datacenter on which we’ve been working is now fully functional. This improves our back-up capabilities and is a part of the long-term investment in our system. During the quarter, we were able to close the older back-up datacenter in Fort Worth, Texas.

We are at the same time, also exploring the use of cloud-based resources and expect this blended approach to computing infrastructure to increasingly be how we optimize our capability. The next phase of the continuous improvements to our hardware platforms will be the move to solid state storage, which further improves access speeds.

Each of these upgrades improves user experience adding power to our platforms. The new datacenter site in Portland has been a real success. The office design is now a model for other new locations in our field organization. We’ve combined our IT and IS staffs with the Scan One document management business. This was helped with collaboration between those two groups.

Scan One is a leading vendor of business process automation services for automating and analyzing web-based purchase cycle management. While many interesting applications are now practical for the automation of important business and personal activities, much of the data streams for these applications will remain in paper-based environment.

Clearly, this will change in the future, but for a long time, there will be a lot of information on paper, particularly in healthcare coming into these new applications. Scan One operates mailboxes and other forms of image data intake and converts such image data to digital input to the newer system.

While this can sound mundane, the processes and the mindset necessary to efficiently handle large volumes of data former productive business and as data streams change, Scan One has had a history of evolving with the pace of change in business communication.

Our challenge is to effectively communicate these capabilities to the major corporations that can most effectively employ them. It would seem logical that CorVel’s corporate resources would assist Scan One. However in most instances, it’s interesting to note that our workers compensation operations are steadily employing more and more of Scan One’s advanced approaches in the management of workflow and transaction processing.

The medical community is highly fragmented and employees are bewildering a rate of different systems. Expansions to the automation of our base business are gradually evolving our approach to the management of healthcare in both workers compensation and in general health claims.

In addition to improving the data intake for casualty transactions, we are expanding a fulfillment center which provides automated forms of communication and the financial payment management to our carrier customers and our own enterprise comp, TPA services.

In between the management of incoming upstream information and the downstream outputting of fulfillment communications, we are expanding the use of real-time interfaces with major carrier partnered systems and improving related document management processes. While our CareMC customer portal is an advanced application, much can be done to further improve its ease of use and friendliness.

Web services techniques help us to exchange seamless, real-time information directly with the carrier system. The implications of these kinds of applications are still in their nascent stage.

Now I’d like to discuss our product-line results. Two important initiatives currently underway are, A, the improving of our use of production metrics to help us better manage operations and B, continuing the evolution of our organization structure to reflect the changes in business created by our investments in technology.

During periods such as we’ve been in, when our growth is below our long-term goals, we seek improvements to the efficiency of our business model. We have a number of projects active for the coming year. Patient management, the first of our two segments includes the third-party administration TPA services and traditional case management.

Revenues for the quarter were $68 million. Gross profit declined 9% from the prior year. TPA sales continued to be active. We are past the early launch phase of this service and now beginning to work on improvements to our early approaches. We’ve gained experience and see a number of areas where we can improve our operations.

Case management is the mature product line and yet one in which we believe we can make important improvements to operations. Results in this segment remain below the levels we believe we should produce.

Network solutions revenue sold in the wholesale market for the quarter was $56 million, up 4.5% annually. Gross margins were up 10.5% annually. Sirius services are sold primarily in the health market and are included in our network solutions total. Expenses were reduced at Sirius during the quarter, which will be more visible in the March quarter.

Now I’d like to cover a couple of additional statistics. The quarter ending cash balance was $27 million and our DSO, that is our days sales outstanding and accounts receivable was 41 days, compared to 42 days a year ago. 223,000 shares were repurchased in the quarter for $8 million.

We've returned $387 million to shareholders in the last 19 years, repurchasing 33,775,000 shares or 63% of the total original shares. Shares outstanding at the end of the quarter were 19,608,000. Diluted EPS shares were 19,852,000 for the quarter. Shares outstanding were reduced 4.5% this last year.

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

Question-and-Answer Session

Operator

Gordon Clemons

Thank you, very much and thank you to everyone for joining us today. We look forward to talking to you again at the end of our March quarter. Have a good day.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

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