CorVel Corporation
Q3 2014 Earnings Call Transcript

Published: 28 Oct 2014

[Operator:]

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 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. 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. Sir, please go ahead.

[Gordon Clemons:]

Thank you for joining us to review CorVel's September quarter. Revenues for the September quarter were $123.7 million, 4% over the revenue for the September 2013 quarter. Earnings per share for the quarter ended September 30, 2014, were $0.37 down 7.7% from the same quarter of the prior year. In the quarter our enterprise comp TPA product continued to grow at rates over 20% annually as did our Sirius hospital review products. The trend toward integrated programs and the workers compensation favors CorVel's proprietary program, but this trend has caused the sale of standalone managed care into other employer accounts to become more difficult. This has cost us some volume in the wholesale market segment of our long standing managed care business. First I'll speak to the markets for our services. The health insurers are continuing to adjust to the implications of the Affordable Care Act, implementing changes which can reduce their healthcare costs. CorVel's Sirius line of hospital bill review programs continues to expand, but not without adjustments to the evolving market conditions. After a period of rapid initiation of pilot programs, carriers are now evaluating results, substantiating payment integrity and adjusting operations to incorporate this service on a larger scale. The scope of the various strategy changes being considered by private sector carriers is considerable, taxing their resources and at times slowing projects with CorVel. Opportunities for the Sirius products continue to be promising in each segment of the marketplace that is the private carrier market, Medicaid and Medicare programs. In workers compensation, the company continues to expand into the market for self-insured and high deductible programs. Although, we've been approved by almost all major carriers, the brokerage community, a collection of many individual producers is still learning of our offering and becoming more comfortable with CorVel as a major vendor. Establishing brand recognition and gaining acceptance with individual producers is a lengthy process. But as this space continues, we should reach more and more of the total market. Worker's compensation, claims management has historically been a fragmented market with many independent vendors that offer only one of the many services required of a total program for any employer. As information processing has become more sophisticated though, integration of these separate services has opened new opportunities to increase the value of our services. CorVel is the only TPA which owns all of the managed care components in a typical workers compensation program. Some buyers remain accustomed to unbundled programs but the trend to integrated offerings is gaining momentum driven by the advances in information processing technology. TPA is going to require each separate vendor to interface at an EDI level with their systems, but each separate company has their own codification structure for the details of each service and EDI is a batch process which does not facilitate real time interaction. CorVel owns each component of the managed care continuum and uses the unified codification structure operating in one computing environment. This enables a very different level of true integration of service. Another important trend in the worker's compensation market remains the influence of private equity firms. At this point, most of the participants in the industry are now owned by these PE firms. CorVel, A.J. Gallagher and Crawford & Company are exceptions. PE firms look to flip their investments within three or so years and thus seeing volume increases in a relatively short time frame. In pursuit of volumes such firms can be inclined to sacrifice price, unless these firms have created some price pressure in the marketplace. As cost cutters though, they tend to make less investments in technology than do strategic participants. While this presents opportunity, these participants are impacting the market and have their own strategies to pursue. The net effect is a more consolidated industry, increased price pressure and increasing importance to having a clearly articulated strategy. Product development has been expanded in the last few months. This is an increasingly interesting time for product development. We are adding a couple of new constituents to our CorVel workers compensation, computing ecosystem. The claimant and the provider. CareMC our private cloud for our workers compensation was originally designed to accept entries from each of the constituents in the entire process. To managed care professionals, the employer, the claims adjuster and potentially the employee and healthcare provider. However, until just recently some of these constituents did not have a convenient platform from which to participate in CareMC. Also we always have to accept the reality, that some may not find the process convenient or understandable. This is changing though. 10 years ago, our industry presented summary information to risk managers and seniors claim staff at insurers. This was subsequently expanded to presenting analytic reviews to the supporting staffs involved with our clients. Within the last few years, we have extended claims intake activities to the shop foreman, store or office manager of our clients. And now we are introducing tools for the employees of our clients. This engagement at the employee level places much increased demands upon our systems and that cuts across hardware, software, communications and the look and feel of our tools. In the last quarter, we introduced tools from both the claimant and for their healthcare provider while ongoing development will involve these initial entries or evolve these initial entries considerably. Their presence brings much increased substance to our mission of having a fully integrated total ecosystem for workers compensation. We are retooling to take applications to scale which previously existed on less capable platforms. Regulatory authorities are inclined to receive substantial volumes of data these days and are specifically interested in the format of information exchange between payers and providers. Our computing infrastructure is now in the new colo, and the 64 bit processing is being introduced to our environment. These changes assist us in achieving the kind of response time is required of consumer interfaces and are part of the ongoing scaling out of our operations. We have resources dedicated to adapting to Internet Explorer 11 to implementing Web services and to moving in some instances to a newer programming language. Our systems increasingly take in electronic invoicing from providers, interacts with clearinghouses and support electronic banking operations. Developing mobile applications has become important to extending our computing to the employees of our clients and to participants in our managed care environment. We've had a mobile application for our field case managers for several years. We're continuing its expansion more tightly integrating into our claims operations. We've introduced a claimant application design to assist claimants during their episodes of care. Reimbursement providers and automating the posting of such payments for their practice management systems has been improved by the addition of a provider portal. This Web site helps providers with accounting for their receipts, additional functions will further integrate them within our computing environment. Mobile apps are both a necessary part of our future and yet a challenge to incorporating appropriately in the current environment. We've had some learning experiences in their development and implementation, however we've continued to make progress. At this point we have an application for employees involved in an episode of care, a provider portal to assist our healthcare partners, a mobile app for field case managers and of course our long standing private cloud CareMC. Other applications had been developed and yet were later found they lack sufficient utility. Integrating applications with patient engagement activities through call centers is an area of current development, where we're adding functionality to our managed care process. A component of this work is the increasing codification of information contained in the claims in healthcare environment. All of our applications operate in the same computing environment and common codification formats and protocols permit the integration necessary to create an eco-system. This allows each real time access to information developed in one of the service modules and makes that information available immediately to the employers, to providers, to adjusters and claimants. While we're certainly not dealing with the kind of volumes implied by references to Big Data, analytic work has an increasing role in our business. Cost of workers' compensation is highly skewed to a very small percentage of our claims. As a result predictive analytics are critical to the focusing of resources on the right incidents, there is much more to do in this area but all of the various projects I've discussed above combined to create increasing opportunities for further progress to increased understandings of the cost drivers in workers compensation. Subsequent to the end of the quarter we had a release of our software which meaningfully improve the speed of our systems. As we constantly add features to our environment, improving speed is always a priority. Now I'd like to discuss our product line results. Patient management perhaps increasingly becoming patient engagement, includes third party administration TPA services and traditional case management. Revenues for the quarter were 67 million, an increase of 10%. Gross profit decreased 1.5% from the September quarter of 2013. TPA services have been growing at over 20% annual rates and are an important driver of our overall company results. Case management sales in total were down slightly however case management sold as a standalone service declined year-over-year by 9% as a result of the industry trend to the consolidation of claims in managed care activities. By this I refer to the trend toward the integrated claim services where the employers' no longer purchasing individual managed care services directly from vendors other than their TPA. A trend to integrated programs favors CorVel's Enterprise Comp model where we have the industries only fully integrated systems platform for all services. But it has caused us a time to lose a customer for our standalone managed care services. We saw this trend coming a decade ago and chose to expand into a sale of fully integrated claims management services. The company remains focused on healthcare management as a service, increasing employee in TPA services as a channel. Network Solutions revenue sold in the wholesale market for the quarter was 57 million, down 2.8% from the same quarter of the prior year. Total network solutions revenue including volume sold as a part of Enterprise Comp was up 5% year-over-year. Gross profit in the wholesale business was down 9% year-over-year. Sirius services sold primarily in the health market are sold primarily in the health market and are included in our Network Solutions total. For the quarter Sirius continued to increase year-over-year. However the quarter was temporarily reduced from our expectations, as two large customers had implementation configurations to make which caused reduced services, while these changes were being implemented. We are again at normal volumes for these customers in October. The prospects for this business remain bright and we expect improvements in the pace of this business as we go forward. Now for a couple of additional statistics. The ending quarter cash balance was 28 million, our DSO in day sales outstanding for receivables was 44 days compared to 41 a year ago. 186,500 shares were repurchased in the quarter for 7.4 million. We've now returned 342 million to shareholders over the last 17 years, repurchasing 32,457,000 shares. Shares outstanding at the end of the quarter were 20,727,000. Diluted EPS shares were 21,050,000 for the quarter. Shares outstanding were reduced 2% this last year and recently we've increased the pace of our purchase of shares. I'd like to now turn the call back over to the operator to open the question-and-answer session. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions) I'd like to go ahead and turn the floor back over to Mr. Clemons for any closing remarks.

[Gordon Clemons:]

Thank you. I'd like to thank everyone for joining us this quarter. This is a particularly active time, so we'll look forward to joining you all again for the next quarterly release. Thank you.

[Operator:]

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