Daniel Starck – President, CEO and COO
Gordon Clemons – Chairman
Dick Herber [ph] – SBH [ph]
CorVel Corporation (CRVL) Q1 2009 Earnings Call Transcript August 5, 2008 11:30 AM ET
Thank you for standing by and 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 actually events or results may differ materially. CorVel refers to you the documents the company files from time to time with the SEC, 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 actual results to differ materially from those contained in our projections or forward-looking statements.
(Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Dan Starck and Mr. Gordon Clemons. Gentlemen, please go ahead.
Thank you, Tina. This is Dan Starck, and I would like to thank everyone for joining us today to review and discuss CorVel’s June 2008 quarter results. I’m joined by Gordon Clemons, our Chairman. And as we have for the past several calls, I will be covering the financial results and future initiatives and Gordon will be covering product development. After our overview, we’ll open the call to questions.
Now to the June 2008 quarter results. Revenue for the quarter was $78.2 million, which is a 5% increase from the June 2007 quarter. Earnings per share were $0.40 for the quarter, up 3% from the $0.39 reported in the June 2007 quarter. When comparing the June 2008 quarter to the June 2007 quarter in our traditional business lines, Network Solutions results continued to improve from our expansion in our customer savings and growth in unit volumes. The Case Management business line also showed improved margins and revenues as well.
We continued with our Enterprise Comp expansion, our strategic initiative of bringing in a new approach to claims management, and becoming a full service provider for the workers compensation market. With our traditional business growth, our Enterprise Comp expansion, and the infrastructure required to support our transition, over the course of the past year we’ve experienced growth in our general and administrative expenses. As we’ve discussed before, CorVel is in the process of becoming a full service provider to the workers compensation industry. And in the past 18 months, we’ve acquired two claims administration companies in support of this initiative.
Following the completion of the acquisitions came a period of analysis and the setting forth of development plans. At this point, we are now investing to implement our plans for Enterprise Comp. Our investments have been in three main areas. First, information technology – our objective is to bring a unique solution to the workers comp claims handling process and the foundation of that plan is systems driven. As with many projects, upfront investment is required to ensure long-term growth and stability and we believe this situation is no different. While the investment has been significant, we expect that it will begin to pay dividends into the future and will be the foundation upon which we were built.
The second area we’ve added is in people and resources. We’ve added senior level managers to CorVel in order to manage and integrate our acquired companies as well as support the continued development process of the entire Enterprise Comp product line.
From a training and integration standpoint, the third area – we’ve added additional services and capabilities and we’ve invested in training our account executives and all of our managers on our new products and services. The result of this is a total expense run rate that is a little higher than we would prefer, and we’ve already implemented some cost containment measures to try to reduce that.
Now from a marketplace perspective, the workers compensation market continues to be soft. Claims volumes have continued at historic low levels and medical costs continued to climb. The average medical cost per claim continued to climb in 2007 rising by about 6%, while medical benefits now make up nearly 60% of total losses. For comparative purposes, only three or four years ago the medical costs contained only – only were approximately 40% of losses. While industry consolidation was busy this past year, it’s been relative quiet thus far this year. However, last year’s activity is still generating considerable activity in the marketplace. Overall, with the current market environment and opportunity that we see ahead, we are confident in our strategic direction.
Now, I’d like to discuss our product line performance specific results and our key initiatives for 2008. In Patient Management, revenue for the quarter was $33.3 million. On an annual basis, that’s a 10.2% growth rate and on a sequential basis, it’s a 1.3% growth rate. Profit on an annual basis is up 32.3% versus the June 2007 quarter; sequentially it’s down 14.7%. Our initiative to reposition our entire Patient Management business continues.
In Case Management, we’ve been actively moving away from low price business over the past couple of years as well as working to improve our efficiencies. While our strategy is basic, it is translating into better results as our revenues affirmed even slightly improved and margins have improved. With our Patient Management business we continue to develop our claims administration capabilities, bringing this product to the market allows CorVel to service all types of buyers in the workers comp market. As I’ve already remarked, we have made significant investments in this area over the course of the past year in all phases – systems, management, and training.
From a Network Solutions perspective and product line, revenue was $44.8 million for the quarter. This is a 1.7% increase compared to the June 2007 quarter and 1% increase over the March 2008 quarter. Profit is up 5.7% over the June 2007 quarter and down 1.7% from the March 2008 quarter. Despite a soft market and a continuing decline in the industry’s total volume of workers compensation claims we continue to see growth in our Network Solutions product line. Our MedCheck software and smart routing technologies have helped our savings performance continue to deliver significant benefits to our customers.
While medical charge inflation has grown at a rate of 7% to 11% over the course of the past few years, our savings improvements have outpaced the increases. Across our national book of business our recommended payments for our customers are trending lower.
Changes via consolidation in the PPO market continue to create opportunities for us this year. Moving forward in 2008, we will continue to focus on four key initiatives. The first initiative is improving our overall sales performance. We’ve made significant investments in our sales team in a number of areas – headcount, training, and CRM systems. As I mentioned earlier in the call, this is also a piece of our overall growth in expenses and part of our long-term investment. Some of this will dissipate in future quarters but the process of education and training is one that we will be invested in as we continue to execute our strategic change.
The second initiative is the continued expansion of our Enterprise Comp product. Enterprise Comp is our unique approach to managing workers comp claims, one that we believe will improve total claims outcomes. Earlier I spoke about the investments we have made to help ensure our future success with this initiative. The June quarter was focused on customer implementations, systems integration, and the ongoing organizational development necessary to expand CorVel’s ability to present itself to the employers’ marketplace.
The third initiative is the continued development and expansion of our Network Solutions product line. While we’ve had strong performance in this area, we continue to invest to ensure its future success. Development of our MedCheck software is always a top priority. Few of [ph] the other pieces of our Network Solutions product line that we continue to develop are, number one, our PPO, while we’ve begun a process to both evaluate and strengthen our PPO network via better contracting and affiliate relationships. In CareIQ, our directed care network – our directed care network deliver savings opportunities for customers in both unit cost and utilization management, and we continue to develop it and it is generating significant interest in the marketplace. While this is only a small portion of our revenue today, we expect that directed care will play an increasing role in the future.
Our fourth and final initiative is the transformation of our case management business. As I said earlier, we’ve seen better performance in this area over the past few quarters. In the June quarter, we continue to expand our implementation of a paperless work environment in a number of our case management operations. This is the first step of the transformation process. The implementation of the paperless work environment will allow us to add workflow tools, rules engine processing, and smart routing technologies so that we can make meaningful and sustainable progress on the delivery of case management.
Now, I would like to turn the call over to Gordon to discuss product development. Gordon?
Thanks, Dan. The June quarter was a particularly busy period for the development teams. Historically, companies evaluating information management technology have been focused primarily upon the capture of data and upon its use in the traditional processes within a company in fact many have used systems primarily for financial reporting. In CorVel’s business, systems often manufacture our product, if you will; further the focus of our development now includes more than just recollecting and storing of information. Also now part of development is the analysis and capturing of CorVel business intelligence in our rules engines and CorVel’s domain expertise in our workflow management tools. Such efforts bring with them a requirement for new types of business development efforts more involved than just capturing and just storing the data processed within the business.
These initiatives are also an important part of our vision for Enterprise Comp. Enterprise Comp in the quarter included the adding of the two new large Enterprise Comp customers and completing the work necessary to meet their unique needs. Efforts will continue throughout the coming year as well to migrate claims applications from our acquisitions to the workflow and rules engine based systems that we are building in all of our service areas.
In the CareMC area – CareMC is central to all of our services as well as to how we intend to produce unique results in the workers compensation, claims management marketplace. During the quarter, we added vocational management tools to CareMC incorporating our preferred workflow management tool sets. We are now implementing the resulting application. As we add new features or transfer of features from legacy platforms, we are simultaneously converting the new implementations to the rules driven workflow process that increasingly are the foundation for our new products to claims management.
Software we picked up in acquisitions must be both integrated to CareMC and rewritten to incorporate workflow techniques – that’s workflow management software. This can be a complicated total task and these efforts, as Dan discussed, have added to our expenses.
In the medical review area, this was our MedCheck and related PPO processing technologies, we had some changes in the marketplace that we’ve discussed in prior calls which have improved the opportunities for lease PPO access, we call this the ePPO market, that is electronically connecting to our PPO, and those changes in the marketplace have added opportunities for the company.
During the quarter, we added improved processing for ePPO customers and completed systems work related to adding a couple of new customers in that service. Reviewing and queuing [ph] customers’ claims downloads is also a CorVel strength related to our PPO processing and bill review. Cleaning data in this manner improves our ability to create superior results for our customers and improves their own use of the same data. In the quarter, we had improvements to this particular subset for our total service program.
Although yet to be completed, we also continue to work on a new operations dashboard we expect will improve the management of our internal processes in medical review. On the workflow management software side, our new version of software for our CareIQ, directed care network as Dan discussed, was completed for diagnostic imaging. The new software incorporates the company’s workflow management tools. This is an important milestone as the directed care marketplace requires complex service delivery and yet must also meet the time intersects of [ph] patients, the claims professionals patients, and health care providers. As we have said before in these discussions, we expect directed care to increasing being integral component in both or patient management and provider management service areas.
On the IT infrastructure side, we had a busy quarter as well. In anticipation of the computing needs of the future, the company has made some large investments to build out an increasingly strong hardware and communications platform. Further, we are investing in systems virtualization, a technology that facilitates server consolidation and the provision of hardware redundancy. Developing both new software and new hardware technology simultaneously is financially and resource intensive, but what is critical to CorVel’s goal of providing total disability management solutions to major national employers.
This concludes our discussion of our product development. I will turn the call back to Dan.
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 a positive $3.8 million with quarter-ending cash balance at $21.8 million. Our DSO maintained at 46 days.
We repurchased 100,000 shares in the quarter and spent $3.7 million on the repurchases. We’ve spent $166 million inception to date and we have repurchased 11,787,000 shares. Hard shares for the quarter were 13,758,000; diluted EPS shares were 14,045,000.
In summary, we are making progress in the execution of our strategic initiatives. We believe that we are making the investments necessary in order for us to become successful long term. We are seeing positive organic sales growth in a difficult claims environment and our cash flow continues to be strong.
These results only made possible by the contribution of the entire CorVel organization.
And I’d like to now open the call to questions. Tina?
(Operator instructions) And we have no questions at this time gentlemen.
I’m sorry sir. We do have a question now from Dick Herber with SBH [ph].
Dick Herber – SBH
Dick Herber – SBH
Can you hear me?
Dick Herber – SBH
Okay, very good. Just a question on the upfront spending on initiatives and the – I guess he disconnect for revenue generation with them, if you could speak to how long those initiatives have to be put in place before we will see positive impact?
Dick, it’s a little hard to say just because of the strategic transition I think we are in right now. We’ve certainly made the two acquisitions, we’ve seen benefit from the acquisition activity on the revenue side as well as some synergies from that. And now as we do the integration of the software and really develop the underlying foundation that should be – that lead time is a little difficult to project simply because we are really embarking on an area where we are going to put workflow management into something that really hasn’t been done before. If I could liken it to a couple of things, maybe the company’s venture before, it took the company a couple of years to move from basically a two to three year process of moving from a completely paper-based system on its bill review business to move into scanning and implementing workflow technologies. We’ve like to think or I like to think that we’ve learned a lot in that process and it won’t be a two to three year process, but certainly we are moving into a new product line. We are completing against some formidable competitors, but once we believe we can take on and do well against by bringing a different solution and not bringing just the same what I would say traditional solution to claims management. So, we would like to see more traction on the sales side. However, we also understand what we are up against and we are selling a combined service today that we believe is very good and we believe will continue to evolve that process here in the next six months to 18 months as we get the software integrated and are able to really convince that market that we have a different and differentiated product.
Dick Herber – SBH
And the two new large customers on the Enterprise Comp, I guess, if you could speak to that a little bit related to how you own those and also then also the upfront work that needed to be completed this quarter? It sounded like maybe that’s in front of truly having revenue recognition with those two new wins.
I think that is. And there is two – let me – I won’t name them individually, but there is certainly two different customers. One of the customers was a traditional managed care customer of ours. And they are now an Enterprise Comp customer and added claims administration. We did a fair amount of programming to bring them up. They are a national customer and we have now representation in all 50 states and are able to handle claims in all 50 states based on their needs. Another with the customers was specific to California that did require a significant amount of upfront programming and hiring, if you will, just to make sure that we were able to facilitate their business, and how they wanted to be able to report and look at their business. The piece that I think was very strong in both of those new customer sales was their ability for – or our ability to relate where we are going with claims management to them. And they believe in where we are going and we thought that is a very positive sign.
Dick Herber – SBH
When you look at your historical ROE based on business and the new model, if you will, could you speak to that, I know it’s way early to truly know how that shapes up, but your expectations on a trend line whether it would be in line, little bit less than or greater than with the historical ROE trend line that’s been on your new business adds.
This is Gordon. Now I kind of enjoy those things, so I’ll grab that one. I would say that the margins in the Enterprise Comp area are little better, at least our sense is that they will be a little better and they have been so far than in our historical business position in just managed care. I don’t think we see the capital intensity and the Enterprise Comp here is being meaningfully different than it is in the managed care. And in fact, in many ways it’s due to tightly [ph] learning. As a managed care vendor we were a subcontractor to TPAs and insurance companies, as we remain. And so the services are fairly similar, the margins are a little better, I would think the return on equity trends would be similar. We are spending more on systems, but I feel that’s handy. In the short term there is a little bit of an investment and some of those, as Dan mentioned, we took our customers that wanted us to service them nationally and in one year CorVel moved from hardly being in the business to handling national customer needs. So, there were upfront costs there, but do we trend out over the future, we would like to think that the balance of the economic will be similar in the Enterprise Comp market if not a little better than what we experienced in managed care.
Dick Herber – SBH
My last question just related to dimension [ph] of cost containment measures, just curious if there is any additional commentary (inaudible) on that.
We are looking at all the opportunities. I think the think that what I want to make sure that I think if we come a late in the call that is we are significantly invested and we are going to move forward with all the projects and the items related to our strategic initiatives and the execution. I think we don’t have a large scale what I would call cost reduction plan. We are going to focus on driving the initiatives. We are looking at items unrelated to the strategic initiatives as to where we can contain costs. But John – or Dick, for us what we want to make sure we do is drive through the initiatives in the investment period.
Dick Herber – SBH
(Operator instructions) And we have no questions.
Okay. I would just like to thank everybody for joining the call and certainly appreciate everybody sticking with us here. And we will close the call. Thanks everybody.
Ladies and gentlemen, this does conclude today’s teleconference. You may all disconnect.