CorVel Corporation Q4 2007 Earnings Call Transcript

Feb.19.08 | About: CorVel Corp. (CRVL)

CorVel Corporation (NASDAQ:CRVL)

Q4 2007 Earnings Call

February 5, 2008 11:30 am ET


Daniel J. Starck - President and Chief Executive Officer

Gordon Clemons - Chairman


John Szabo - Flint Ridge Capital

Brandon [Fazio] - Brant Point Capital


Welcome to the CorVel Corporation’s 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 has filed 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.

(Operator Instructions) I would now like to the conference over to your host Mr. Dan Starck and Gordon Clemons. Gentlemen, please go ahead.

Daniel J. Starck

First, I’d like to thank everyone for joining us today to review and discuss CorVel’s December 2007 quarter’s results. I’m joined here by our Chairman, Gordon Clemons, and as we have for the past couple of calls, I will be covering the quarter’s results and future initiatives and Gordon will be covering product development. After our overview, as we always do, we’ll open the call to questions.

Now, onto the December quarter results, revenue for the quarter was $76.7 million, which is a 15.2% increase from the December 2006 quarter. Earnings per share were $0.43 for the quarter, up 61% from the $0.27 reported in the December 2006 quarter. During the December quarter, in our traditional business lines, Network Solutions savings continued to expand and we recorded a second consecutive quarter of improvements in our Case Management product line.

We continue to advance our Enterprise Comp expansion, our strategic initiative of bringing a new approach to claims management, and we also made substantial investments in our current technology foundation as well as ensuring that we are prepared for future growth by relocating our data center to a Colo facility.

From a marketplace perspective, claims volumes continue at historic lows and premiums have been soft however, it appears that things may be stabilizing. California always seems to lead the way for the rest of the country. However, there have been a number of years of double-digit premium rate reductions there appears to be bottoming and even reports of a potential slight increase in rates for 2008. While claim volumes continue to be low, the severity, that is the cost of claims, continues to rise.

From a political perspective, states continue to develop legislation mostly geared towards automating the healthcare transaction process. Several states have fairly significant legislation that took effect either in 2008 or will take effect in 2009, Texas, California and Minnesota to name a few.

Industry consolidation has been significant this past year, especially in the PPO area. While this has disadvantaged some companies that lease access to technology or PPO networks, we believe this change has favored CorVel because of our long-term investments over the course of the history of the company, and we own our own proprietary assets in our PPO and our systems. Overall, with current market environment, and the positive trends in CorVel’s results, we are confident in our strategic direction.

Now, I’d like to spend a few minutes to discuss the product line performance specific results, and our key initiatives for 2008. In Patient Management, revenue for the quarter was $33.3 million. This is a 29.3% increase over the December quarter of 2006 and a 5.7% increase over the September quarter of 2007. Profit improved 174% over the December 2006 quarter and 26.1% over the September 2007 quarter.

As most of you are familiar with, in the first-half of 2007, CorVel acquired two claims administration companies. The results of those acquisitions are included in our patient management results. We’ve continued to reposition our entire patient management business.

In our Case Management product line, we have shown improved performance over the past couple of quarters, with both revenue growth and margin improvement. Over the past couple of years, we’ve made a conscious decision to move away from low price business as well as improve internal efficiencies. While on the surface it is easy to talk about, internally these strategies are difficult to execute at the field level.

As a result of this move, our Case Management revenues declined in 10 of 11 quarters. Expenses trailed down, just not as quickly as we would have liked. Now though, it does appear that we may have found the bottom, and we are starting to see an upturn in this product.

In the past two quarters, the September quarter and the December quarter, we have seen a strengthening in our Case Management revenues, while our corresponding expense reductions have reached more appropriate levels. This has produced two consecutive quarters of meaningful margin improvement in the Case Management business, and had a positive affect on the company overall.

With the addition of our claims administration capabilities this past year, CorVel is now moving into new markets and new services. The expansion of our service offering has been well received from both our current customers and prospective customers. As we continue to integrate our service delivery this next year, we will be able to deliver our integrated product to customers across our national footprint.

The transfer of our internal operations from our client/server applications to our CareMC platform continued as well. This will allow us to continue to evolve the workflow processes in the Case Management business.

In Network Solutions, revenues for the quarter were $43.3 million. This represents a 6.2% increase over the December 2006 quarter and a 3.3% increase over the September 2007 quarter. Profit increased 15.6% over December 2006 and 5.7% over the September 2007 quarter.

CorVel has now reported 12 consecutive quarters of margin improvement in our Network Solutions product. These results are made possible by our continued efforts in a number of areas: growth, savings improvement and internal efficiencies.

First, from a growth perspective, in spite of a very difficult environment with work comp claims declining by upwards of 35% or more over the past few years, we continue to see revenue growth in this product line.

Second, on savings improvement, we continue to make meaningful strides in our savings performance, producing a significant benefit to our customers. The combination of our MedCheck software, national PPO, and specialty review service produced us results that we believe outperforms the rest of the industry.

As I mentioned earlier, there has been significant consolidation in the workers’ comp PPO industry. In order to ensure that CorVel can compete head-to-head, we continue to invest in the development of CorCare, our national PPO. In September, we announced that we had added Integrated Health Plan, IHP as an affiliate to our PPO.

Third, from an internal efficiency standpoint, with the implementation of scanning, workflow tools, and smart routing, CorVel has been able to utilize technology to leverage the growth in the Network Solutions product line by moving work to the most appropriate resources.

Now, I’d like to switch focus a little bit and talk about our focus for our key initiatives for 2008. The first initiative is improving our overall sales performance. We continue to expand and emphasize our sales efforts locally, regionally and nationally. While this is not a short-term return, we believe that we are starting to see some positive momentum in this area. Our sales opportunities continue to improve and we will continue to add additional sales resources where appropriate.

The second initiative is the continued expansion of our Enterprise Comp initiative. Enterprise Comp involves providing new claims management technologies to all of our customers, employers, insurers and PPAs. In 2007, our Enterprise Comp team successfully expanded our service delivery capabilities to include claims administration and they continue today to build both our presence and our capabilities across the country.

From an acquisition perspective, both the financial and business objectives have been met by the acquired companies and we expected to build on those successes in 2008. During the December quarter, the integration process continued on all fronts. Culturally, both organizations have aligned well with CorVel.

From a systems perspective, during 2008, we expect to achieve a fully integrated data platform for all of our lines of service. That data platform will be the underlying foundation from which we will continue to refine the delivery of our fully integrated suite of services. All of this information will be accessible externally to our customers via our CareMC portal. Overall, we’re very pleased with the progress of this initiative.

The third initiative is the continued development and expansion of our Network Solutions product line. The performance in the Network Solutions line continues to be a major contributor to our overall performance and we will continue to invest in its future.

Over the course of the past year we’ve really focused in on a number of areas and we will continue with those in 2008, first of all, software. Our MedCheck software is the bedrock of our network solutions business. We have and we will continue to invest in its development. As we move forward, we will expand its depth and complexity in order to deliver a top quality product to our customers.

From a PPO perspective, strengthening our PPO network via better contracting and affiliate relationships will continue in 2008.

And lastly, the Specialty review. Over the course of 2007, ensuring that this product was seamlessly integrated into our medical review process was a high priority. We believe that there is significant opportunity with this product in the future. Additional resources have begun to pave the way for growth in this product in 2008 in both the workers’ comp market and potentially in the A&H market.

We also continue to make our MedCheck software available on an ASP basis. This offering continues to generate significant interest.

Our fourth and final initiative is the transformation of our Case Management business. I spoke earlier about our most recent successes in the Case Management product line. While we’ve had some very nice gains over the past couple of quarters, our goal continues to be to reshape the delivery of this product in order to capitalize on our technological capability.

CorVel went through a similar transformation process in our Network Solutions business. With the implementation of a paperless work environment, workflow tools, rules engine implementation, and smart routing technologies, we believe that we can make meaningful and sustainable progress on the delivery of Case Management which will in turn continue to improve the financial outcome.

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

Gordon Clemons

Thanks Dan. Our development teams have never been busier, and I’ll summarize some of that for you. I’ll consolidate the various projects under the operating priorities Dan discussed.

It is important though to remember that healthcare information processing becomes more and more sophisticated or as it does and workflow tools become involved everything is really integrated and all of our separate projects really deliver information and customer value through our CareMC portal. We have been steadily adding more and more customer value to CareMC over the years. This is an initiative that began in 1999.

On the sale side, of course, our first goal is always to try to build a better mousetrap and all of the projects Dan discussed work in that direction to support our salespeople with the best possible products.

In addition, on the administrative side, we have efforts underway to improve our systems in support of our sales efforts, for example, CRM systems are an important investment. We’re improving systems in this area primarily through leased software, as those kinds of tools are readily available. We are also now working with business intelligence vendors to improve our knowledge of the marketplace.

On the Enterprise Comp side, our vision is to bring employers and PPAs throughout the country to a new and more effective approach to claims management. The key to this new service is a combination of rules engine and workflow management processes developed over the last five years in other areas of our total systems environment. Dan spoke to both the effort and the results in the Network Solutions area. We are now looking to bring that into the claims side.

We installed our medical review systems in the companies joining Enterprise Comp or joining that family of services. In addition, we will be integrating claims management software gained in our acquisitions into CareMC.

First, we want to have a seamless continuum from the management of incoming claims commission through to claims management and medical management. Secondly, though we want to bring our new concepts for the management of workers’ compensation claims into the operations we have acquired. These are each meaningful efforts that will stretch out in phases throughout the coming year and certainly in the years beyond that.

The combination of the various aspects of this total development effort will combine to create a new approach to claims management. We have seen what is did in our Network Solutions service and expect to take what we learned there into the Enterprise Comp vision.

On the Network Solutions side, during the quarter we added a major in-patient network to our national CorCare network, this has already begun to add to our results. In the coming quarters, we expect to continue to bring our MedCheck Select, our specialty review systems, into improving interfaces with both our MedCheck bill review product and to our CareMC portal.

We will also be improving the electronic connections between our customers and both the specialty and medical review portions of this product and our PPO. We are adding features to facilitate the integration of additional PPO affiliates as well. Improving total savings is a key business priority as Dan discussed, and new forms of smart routing are an ongoing initiative that improves results for our customers.

Recent legislation in some states is pushing for more electronic submissions of medical billing. Our Phase I product was introduced January 1 of this year. Clearinghouse services extend our processing for providers and payers from the receipt of bills from providers for transmission to medical review and on to payers and all the way through the entire system, to the posting of payments back to providers. We would like to participate in this entire continuum.

Smart routing of supporting documentation will also be included. This work is related to the electronic medical records and member card initiatives you read about and that are already underway in other segments of the healthcare industry.

Expanding our Case Management services in CareMC has been the key development project. During the quarter, we began the use of workflow management tools in the routing of work through the claims intake process and on through triaging and into case management. These features have been installed with one customer. We are learning from that implementation, we will be adding refinements as we go through the year.

In addition, we have made the investments necessary to bring scanning and document storage to both our case management and our expanding claims management processing. The combination of rules engine, workflow management and document imaging form the foundation for the smart routing we plan to continue developing in these services.

In addition, for both our Enterprise Comp customers as well as for those customers buying just a subset of our service, we’re continuing the development of dashboards. These tools will be configurable to each customer individually and we hope will improve the user experience within CareMC.

Care IQ systems, which are our directed care networks, have been the most complex of our efforts. Our Care IQ services involve us in the healthcare community in ways not included in other managed care activities.

Building the many complexities involved in healthcare into a managed workflow environment is a complex task. Several modules though were completed in the quarter.

During the quarter, we moved our primary data center to a co-location facility to improve redundancy features and to prepare for future expansion as Dan discussed. Much expanded storage systems were installed as well as we continue to scan an ever-larger volume of documents. This was a planned part of our long-term system strategy. At this point, we have over 200 people now involved in the development, testing, implementation, and support of our systems.

Over the years, the efforts of our development and operations management teams have been keys to our success and to our strong position within the workers compensation marketplace. We have had consistency in our strategic directions and our R&D leadership group has proven over and over that people are more important than the machines involved.

That concludes my comments on our product development area. And I will turn it back over to Dan.

Daniel J. Starck

Thank you, Gordon. I just like to add a few more items prior to opening the call to questions.

Cash flow for the quarter was positive $2 million with quarter-ending cash balance at $11.3 million. Our DSO maintained at 48 days.

We repurchased 171,473 shares in the quarter, spending $4 million. We’ve spent $162 million inception to date and have repurchased 11.7 million shares. Hard shares for the quarter were 13,731,000; diluted EPS shares were 13,964,000. Although we had not planned to buy back stock last quarter, market conditions changed and at that point we felt that it was appropriate to restart our share buyback.

In summary, we’re pleased with the progress that we are making in a number of areas. We have achieved record earnings and made significant investments in the future of the business. We are starting to show growth in each of the main business lines while at the same time improving our internal efficiencies.

Last, we have been able to make substantial progress in our strategic initiatives and our price comp. Our ability to execute in all of these areas is only made possible by the outstanding work of the entire CorVel field organization.

This concludes my comments and I’d like to open the call to questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Szabo - Flint Ridge Capital.

John Szabo - Flint Ridge Capital

What was the impact on the operating expenses from the move of the data center?

Daniel J. Starck

The expense in the quarter was approximately $400,000.

John Szabo - Flint Ridge Capital

Should we assume that would not be an on-going expense from here or will there be additional expenses related to that change going forward?

Daniel J. Starck

It happened partway through the quarter so, there could be some additional expenses, but our goal here obviously would be to start leveraging that business. My thought here would be if we are going to have opportunities continue to make substantial investments in that facility which will leverage the growth of the company, we will continue to do that.

But I think from our perspective, we’ve come a long way and where our systems are maintained and how they are maintained, we feel like we have a Class A facility now that any company would be proud to have, and we’ll look to leverage that going forward.

Gordon Clemons

There will be some ongoing expense to lease access to a Colo facility and that’s not trivial. We were involved in a data center that was in a high-rise building jointly with our development team and we are probably going to continue to occupy all that space. So, I think that for the next year or so, there will be a little more expense than there was in the past.

John Szabo - Flint Ridge Capital

So, if I look at admin expense, the G&A, that $10.584 million, it took quite a jump from the prior quarter. So, as I sort of think about how that’s going to go for the next several quarters, I should probably assume that $10 forms a decent run rate or it maybe it falls back slightly year-over-year?

Gordon Clemons

Yes, it could vary a little bit. But I think our efforts are focused on the top line and we struggle a little bit with that expense and internally we’ve had some serious discussions about it. But I think investing in our future and the platform there has been our overriding interest.

John Szabo - Flint Ridge Capital

And then I’m curious about your comments about a potential bottoming in the volumes. And Dan, I think you said that you saw an upturn in case management volume, and I was just curious, was that beyond the volume you may have gotten out of the two acquisitions? So, in other words was it more than just that?

Daniel J. Starck

Yes, it was John. We have seen a strengthening on the case management revenues in the past couple of quarters and so, whether that’s a leading indicator for claims volumes, we are not sure. But there has just been some reports that we have come across here in the last little bit that indicate there may be some slight premium rate increases coming in ‘08.

John Szabo - Flint Ridge Capital

You mentioned the Accident & Health market. Could you maybe just help us size that market and what the potential would be? And did that contribute to any of the revenue growth in the quarter or is that something that is sort of a multi-year effort before it becomes a material driver of your top line growth?

Daniel J. Starck

It is a small part of our network solutions business today. We have shown some growth in it over the course of the past year, and the A&H market is significantly bigger than comp, upwards of eight to ten times larger than the comp market.

But I think, John, it really is a multi-year effort for us here as we go forward. The specialty review product and our specialty review product specifically do very well in that market, and we’ve hired some resources to try to sell into that market specifically.

John Szabo - Flint Ridge Capital

Maybe you can just help me out when you say “specialty review product” what exactly does that entail?

Daniel J. Starck

It is really our out of network bill review process.

John Szabo - Flint Ridge Capital

So, then it will –be out of your network or someone else’s network? I mean are you agnostic about that?

Gordon Clemons

John, we are agnostic about that I think but this would be a carrier or TPAs volumes and they would take their PPO discount where they can, and then they have some percentage of their volume that falls outside the network.

We have a product that is based on some specific database processes and is not just a simple fee negotiation product. So, it’s fairly conservative in its approach and is attractive to people in the A&H marketplace for that reason and we have seen some improvement in the interest in that product.


Your next question comes from Brandon [Fazio] - Brant Point Capital.

Brandon [Fazio] - Brant Point Capital

I was just looking at the numbers, usually December quarter’s been, I guess, a seasonally a weaker quarter with revs and margins typically lower. This quarter it seemed like you had lower gross margins but certainly the operating margin was flat and the revenues certainly went up. Could you just talk about some of the components there that may drive that or what kind of drove the better than normal December quarter results?

Daniel J. Starck

A couple of things, I think contributed to that. One, on a sequential basis, we had 4.3% revenue growth, which we traditionally haven’t seen in the fourth quarter. There was actually the same number of days in the December quarter versus the September quarter this year. And so, we had some very nice pick up again on the revenue piece and just really have had, we feel momentum on the sales side which I think really carried us through the quarter.

Brandon [Fazio] - Brant Point Capital

So, this is really all sales driven as pretty much the little better than expected business wins or is it just some of your new products taken off?

Daniel J. Starck

There were some new wins. We really saw growth, actually not gigantic growth but small growth in all business lines.

Gordon Clemons

I think it is a little early for us to know, but it would appear that the underlying claims volumes on a same customer basis improved a little bit. And then it is hard for Dan to say, but I would note that there is a remarkable correlation between his time with the company and two successively improving December quarters. So, not to cast aspersions on the prior CEO, but I think Dan has done a hell of a job.

Brandon [Fazio] - Brant Point Capital

Less impact from the holidays or whatever else?

Daniel J. Starck

That is tough to say because the way that calendar fell, it actually didn’t work very well because Christmas and New Year were both on a Tuesday which meant that Mondays were normally fairly soft as far as the level of work getting done or the amount of people at work. So, it really feels like we’ve got a little bit of sales momentum here. One quarter does not is not a trend to make. But certainly we are very pleased with where revenues came in for the quarter.


There are no further questions at this time.

Daniel J. Starck

We have certainly appreciated everybody joining in the call, and look forward to talking to everybody again soon.

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