CorVel Corporation

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. Gordon Clemons.

Gentlemen, please go ahead.

Thank you for joining us to review CorVel's September Quarter. In the quarter, our TPA business continued to win clients and to enjoy its emerging reputation.

New investments in our Network Solutions business are underway.

Expense reductions continued. The productivity management and efficiency projects started in the June quarter continued to progress toward implementation in the December quarter.

Revenues for the September quarter were $105 million, 1% over the revenue for the September quarter 2011. Earnings per share for the quarter ended September 30, 2012 were $0.58, even with last quarter.

EPS for the September quarter of 2011 was $0.68.

The market for self-insured and high deductible programs for employers values the market for CorVel's full service programs remains active. The insured market continues to firm which is an important driver of trends in the company's services.

Our TPA services we sell under the Enterprise Comp name are gaining momentum. Both the recognition of and support for CorVel has continued to improve.

We also continue to expand approval of CorVel as a manager of high deductible programs for insurers.

The private employer marketplace requires these approvals to use us in their programs. In addition, we had to build out our liability claims administration services.

Although, we've been handling liabilities for many years, we have been bringing the software in that new line of services up to the level of our workers compensation offering.

Workers compensation claims continued to increase in cost. Healthcare and Specialty Pharmacy costs continued to inflate as rate -- at rates well in excess of trends elsewhere in the economy.

This has raised interest in our pharmacy management solutions.

As we discussed last quarter, corporations have increasingly been hesitant to make major decisions until the election and the fiscal cliff outcomes are resolved. The Group health market in particular is concerned to see how the election impacts the implementation of Obamacare.

It is possible that our plans could change based upon the outcome of political events and as a result, we have let our cash balances increase this year. CorVel's return on equity remains at a high level, which in turn creates the cash flow as we look to invest or return to shareholders.

The decisions made in Washington over the next few months are likely to impact where we invest in the future.

In this uncertain market environment, our strategy remains as it has been to build the increasingly friendly and effective services for the management of employment-related processes, such as but not limited to workers compensation for our clients.

To pursue this vision has taken us from our beginnings as a regional provider of vocational counseling services through all the managed-care service expansions and now to being a full-service prior workers compensation TPA services.

This quarter we're adding a new suite of liability management service features but our quest will in the future takes us into an increasing role in the management of employer productivity.

We're in the phase of expansion of enterprise comp in which we are establishing our brand with brokers and carriers. This phase follows the launch and initial expansion of anew service line and typically as a bit of a sweet spot along the growth curve for such services.

However, depending upon what one most enjoys, each phase of any product expansion brings its own interest in development. CorVel's Group health services though slowed by regulatory uncertainties, continues to gain market recognition.

The liability service improvements we worked on this year will be implemented in the December quarter. Phase 2 improvements are planned for the coming year but will consume a smaller portion of our discretionary development budget.

The preening of resources will allow us to prioritize projects in claims workflow automation.

Across all of our services, our goal has been to take our service interface directly to the plant foreman or office supervisor. We want to bring healthcare transaction information directly from the production floor into our CareMC cloud.

CareMC has always sought to be an essential database interacting with all the constituencies in an episode care.

As you all know, every quarter the computing tools that facilitate our vision are increasingly reaching critical mass in terms of their power, affordability and wide spread use. Today I'll provide more visibility into this developing scene in CorVel's business.

As we discussed last quarter, the company has been working to reduce overhead cost. In addition, we have 2 efficiency projects begun in the summer that are now beginning to improve our results.

In discussing our product line results, today I'll provide some increase perspective regarding the trends in our business. The prior breakout will be included and additionally I'll provide some visibility into other segments of our results.

Patient Management revenue for the quarter was $54.5 million, an annual increase of 10%, gross profit increased 15% over the September quarter of fiscal 2012 and 2.5% sequentially from June.

Patient Management included third-party administrative services that is TPA services and traditional case management. TPA services have been growing at over 20% annual rate and have become an important driver of overall company results.

Network Solutions has normally reported as the medical review sold into just to pay your marketplace. Revenue in that segment for the quarter was $51 million down 7% from the same quarter of the prior year.

Gross profit was down 20% year-over-year.

Revenue though for all medical review services combined, that is including the medical review in our Enterprise Comp offering, was $67 million flat in the prior year. We're making some changes through our activities in this segment of our business to return this CorVel areas strength to improve growth.

This product line includes services of growing interest in the group health market as well. Although implementations in group health are moving slowly awaiting the unfolding political environment, pilot results have gone very well paving the way for the service launches in the next calendar year.

We're continuing to develop this market segment and look for improved results next year.

In product development, to build the most effective management of healthcare and related employee productivity, the company has always leveraged the information management technology as to how we seek to achieve our strategic goal. The trends in technology continued to favor this strategy.

the hardware virtualization, which has greatly simplified our data center configurations; workflow and document management, which supports our automation of previously manual service processes; dynamic load balancing of our data centers, which promises to greatly reduce the redundancy involved in systems recovery investments; and the ongoing breakthroughs in data storage and related costs.

These infrastructure advances, in turn, drive important waves of change in how we're employing technology. They also make our strategy ever more affordable.

In addition, these increases in computing and communications power are driving 3 current trends throughout all industries in the applications that are now feasible.

The power of current technology is driving important change in the very nature of how applications which touch more than one constituency and be conceived and delivered. I'll go into some detail on these -- on each of these items.

They are, first of all, the move from PCs to mobile devices, secondly, a movement of onsite applications to cloud applications and, lastly, what's referred to a big data or data analytics.

We certainly did not anticipate that all that has happened over the last decade would come about. When in 1999 we began our investments in CareMC, our claims management private cloud, that is -- we did launch our work with the vision of an interactive website for use by our separate constituencies.

Now, as mobile computing makes interacting with such as private cloud much more convenient, and an increasing part of everyday activities, CareMC positions CorVel to introduce entirely new ways of managing insurance claims. In the move from PCs to mobile, CorVel real-time tools for claims intake will be critical to managing the cost of healthcare.

Making smartphones an effective insurance claims reporting vehicle is a key part of our move to taking our service directly to the shop foreman or office supervisor. Secondly, tablets and smartphones for our nurse case managers are differentiating our service in the marketplace and adding value to our case management services.

These tools can shrink delays in claims management, facilitating more timely outpatient care and speeding the approvals necessary to return the employee to work. The movement of onsite applications to cloud applications allows our customers to choose subsets of the total process they'd like to self-administer while still using CorVel's powerful systems.

From the outset, CareMC was built as the foundation of CorVel's interface with our clients. CareMC provides end-to-end solutions for employers and payers in casualty programs.

Private cloud environments allow CorVel to handle the technical and specialty tasks involved in claims management and yet share the employee-facing activities with the employer and with healthcare professionals.

And, lastly, data analytics have become a key to many business decisions. We're hardly involved in the big data definition as they have come to be used to describe the analysis of web traffic.

And yet on our own scale, CorVel is involved in transaction processing and healthcare.

With all transactions in one database, we have the ability to eliminate data redundancies in healthcare activities, use immediate access to information to improve patient assistance and smooth the reimbursement difficulties typical of healthcare transaction. This is a large and complex undertaking and has been a long-term mission of ours.

With CareMC is increasingly productive in this regard, as I've discussed in previous calls, our analytic resources have been expanded and have become a key to our ability to help our clients better understand their insurance risk and how to best improve their outcome.

Improvements to the usability of CareMC and to the reporting tools within it are also ongoing projects. And now a couple of additional statistics in closing.

The quarter ending cash balance was $20 million, our DSO was 42 days. 72,000 shares were repurchased in the quarter.

We have now returned $278 million to shareholders in the last 15 years. Shares outstanding at the end of the quarter were 11,239,000 and diluted EPS shares were 11,376,000 for the quarter.

And that concludes my comments. And I'd like to turn it back over to the operator for the Q&A session.

Thank you.

Just a few questions, if I could. Towards the end you talked about the long-term mission with regard to the data base, et cetera.

Has that been part of the cost increase relative to cost of revenues et cetera? Is that where that increase -- is that more of a fixed cost than a variable cost going forward?

Well, I wouldn't say its fixed going forward, but I wouldn't want to say that it is -- or the reason for some of our margin deterioration. I'd say that the margin drop from last year is really a mix change in our business and we were taking some steps to address that.

On the other hand, on the cost side of your question as far as the development of systems. We did have an increase in the fixed cost in G&A for depreciation on assets employed in the systems area.

That peaked, I would say, maybe 6 or 9 months ago and we had finished a two-year period where we did ramp-up expenses in that area.

We've since cut back a little bit, and made a few other changes that are gradually reducing our G&A expenses. So in that sense, I don't think of them as being fixed but there is a burden that comes in through depreciation.

But it's not the reason for the change in the operating margins of the company.

So the primary reason on that score is the mix change, is that and that's just the, as you said, the slower growth in the network business were the decline?

Well, yes. And I would say that business -- the base of that business is fine and is growing.

We did have one meaningful customer that was -- that we lost and that's happened to us before. And it's a good business in terms of margin.

So that one account changed the results there. And this will be the last quarter that we have that comparison year-over-year, and then we will be back to more favorable comparisons.

Could you just talk about new customers? Has there been any added in that area, or are there any particular number of new customers or any numbers around that score?

Yes. We -- I mean we don't announce individual names, but we have had a couple of nice wins in that segment.

And then I would say, as importantly, since I became more involved last spring, we really have put sort of re-emphasized that area.

That is the highest technology part of our business. It's the place where we have the largest barriers to entry and the greatest employed assets for value-added services to our customers, and I believe it's a critical part of our business.

So it is also CorVel's strength. We've had long-term investments in that area, beginning all the way back in the early '90s.

So we are looking to be more aggressive in that segment of the market in the next year or 2.

And then with regard to workers comp, you said it was increasing. Are the number of claims that people are filing increasing, is that part of the patient revenue that, that 10% increase in patient revenue?

Well, I think as you get through a recession like we had and the labor market improves, there may be some change in that business that's more on a macro scale. But really the growth in that area is coming from the fact that we are a relatively newer entrant in the claims management business as defined in the TPA space that is managing the entire program.

And we are having -- we are growing at rates greater than 20% in that segment, but that's really market share gain as opposed to changes in the business.

Okay. So just on a macro basis I realized that you may not be as close to it -- I mean you are closer to it now, you may not have a comparison basis but you are not really seeing the workers comp side on a macro basis increase at this point?

Well, I'd say it's -- I think it stabilized. There was a long-term drop in claims and on the other hand it was really at least in my personal opinion a drop in some of the less serious claims and some of the more frivolous claims.

And that's why people always say the severity went up, really what happened is the claims that are coming in are more and more the real claims and less and less claims that aren't as serious. So, I don't think the business has changed a lot over the years.

Right in here, there is some expectation that because of the investment opportunities having changed so much for insurance companies, they can no longer afford to run combined ratios that are as negative as they could with better investment returns. So there is at least logic out there for hardening of the insured market.

When that happens, it usually favors the self-insured market, that is companies retain more risk when they see the insurance markets hardening.

There is some evidence that that's beginning. I think the -- what I have seen so far is that it's quite preliminary and it isn't really the driver of our growth in that segment.

We are in a place where we kind of have it in our own control in the sense that it's up to us to expand our market share and we're in a nice place to do that I think.

Yes. Okay, a good explanation.

And then with regard, just back to the SG&A line, it has to come down and do you -- are you expecting to see additional cuts in the G&A line?

Yes. I would like to.

I think I have to admit in that area, I probably don't do this the way people like to. I hear lot of people saying, there should be one big, huge drop and then you're done with it.

And I've just never been smart enough to figure that all out in one step. So we will just kind of gradually, I think, see some improvements there.

We have made some changes that will have an effect in the coming years.

So some of it's already in the cake, I'd say. But a big chunk of our G&A is systems investments.

And those are -- that is an area where I have to admit also inclined to spill some milk as we go along. So we'll continue to be aggressive on technology and to believe that, that's kind of the core of our business.

But we have found a number of opportunities to, I'd say, incrementally reduce our G&A.

What we look for some kind of long-term ratios, I would say, we kind of expect a certain pre-tax percentage margin in the business and it has to be -- we have to fit the G&A in, in a way that allows that. So, until we get back to the balance that we like to see, we'll be cautious on our expenses.

Okay. In terms of your longer terms goal I know that quarters past you have given I believe goal of -- in terms of income from operations something, I think talked on a longer term basis, 15% or so?

Well, I don't know. I'd like to get there.

But I don't think so. In a service business like ours, I feel that there is a natural pressure in the marketplace to keep margins down.

We've tried to be around 10% after all in -- all expenses in. And yet, we could live in a business that had a lower margin.

We don't like it and we'll -- we're trying to get back toward 10%.

But, as technology improves there are changes coming. And we're -- we think we're positioned with technology to be more aggressive than our competitors.

So, we don't really look for the highest margins, I would rather see us building our business. And this year, as I mentioned in the call, we've expanded quite a bit in the liability area.

We're adding some other features in our service at the same time.

So, we have really just an ongoing expense associated with expansion and at times it doesn't pay off in total. I know our total growth rate has been disappointing the last couple of years, but our strategies are to continue to that.

So, I would not see our pre-tax getting above 10%.

And then with regard to building the business that should continue throughout next year, I mean is there a sort of a goal with regard to that building new products, new services et cetera?

Well, right now, we're investing a lot in the building out of our private cloud, which supports the current and more traditional definition of a TPA. But we do have our plan set on taking advantage of mobile computing and cloud computing to have our services reach, as I mentioned more deeply into the organizations of our customers to provide I'd say a much more real and real time kind of service support to the employees of our customers.

And that's more of a long-term strategy. It has to move at the same pace as the industry developments in mobile computing.

But we've had a 3 year investment in mobile computing. This year, we've had two nice implementations, one on smartphones and one on iPads.

And we see those -- we started with 4 different projects and we narrowed it down to 2 and those have really gotten some traction.

So, I would say our investments in growth will definitely continue next year. And as we get to be a bigger company, we always raise that percentage -- we keep the percentage of our investment as a part of our revenue fairly constant.

So, as our business gets bigger, we try to expand our in -- our pace of investment.

I've asked a lot of questions, you've been very kind. The last one, I promise.

Was the buyback of 72,000 shares, did you -- I mean the cash clearly built on the balance sheet. Do you -- does that -- did you hold back on the buyback relative to wanting to have cash available for opportunities and perhaps, acquisitions?

Yes. We did -- we didn't cut it a lot, but we didn't invest as much in our stock as we could have.

And as you point out, that caused cash to move up and maybe, I thought that is kind of a nice indicator. I thought that was a positive in the quarter and it reflects both our operating results as well as being a little more careful with some of our capital investments.

So, we do want to be in a place where we are flexible to take action here depending on what develops over the next maybe 4 or 5 months.

How much did you spend on the buyback?

Let's see. Just a second.

I think $3.7 million.

Yes. So, just in closing, I know we're going through a really tough time in the Northeast for probably a lot of people on this call.

CorVel does have operations in the Northeast. We were down yesterday in New York, Connecticut, Maryland and New Jersey.

Today, we're -- and we had operations going on as we were able to in those states. We just had our offices closed.

We do have operations open in all of those today. I think we have a remaining outage in New Jersey, because of the lack of power.

So, we can be affected. We don't have any expectant -- our expectations for substantial impact on operating results as a result of the storm but I did want to just mention that.

We do operate in all 50 states and do have offices throughout the Northeast. So it's affecting our employees and their families, as it is everyone else.

So, we're hoping things move forward and expecting that we'll be back to normal pretty quickly. And that really completes what I had to say today.

I'd like to thank everybody for joining us on a day when I know a lot of you in the Northeast are probably preoccupied with more important matters. We'll look forward to talking to you again next quarter.