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Edited Transcript of CRVL earnings conference call or presentation 30-Jan-18 4:30pm GMT

Thomson Reuters StreetEvents

Q3 2018 CorVel Corp Earnings Call

Irvine Feb 8, 2018 (Thomson StreetEvents) -- Edited Transcript of CorVel Corp earnings conference call or presentation Tuesday, January 30, 2018 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael G. Combs

CorVel Corporation - President

* Victor Gordon Clemons

CorVel Corporation - Chairman & CEO

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Presentation

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Operator [1]

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Thank you for standing by. Welcome to the CorVel Corporation Quarterly Earnings Release Webcast.

During the course of this webcast, 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 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-Q and 10-K 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.

I would now like to turn it over to Mr. Gordon Clemons.

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Victor Gordon Clemons, CorVel Corporation - Chairman & CEO [2]

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Thank you, and thank you for joining us to review CorVel's December quarter. Joining me today will be Michael Combs, CorVel's President.

Revenues for the December quarter of 2017 were $141 million, 9.6% over the revenue for the December 2016 quarter. Earnings per share for the quarter ended December 31, 2017, were $0.50, up 39% from the same quarter of the prior year. This reflects a combination of the operating effectiveness upon which we've been working as well as, of course, the impact of the new tax law change. The tax rate reduction for us is expected to take us from approximately 38% for the combination of state and federal to about 25% to 26%.

Our Enterprise Comp, TPA, continued its growth and the development of its services. Results in our CERiS medical review services entity also had a strengthening quarter. The results for the quarter continued the recent demonstration of the operating improvements we have been making in the Network Solutions portion of our business.

As I discussed last quarter, every quarter is impacted by, what most refer to as, onetime events. Although typically, such references are to unusual expenses, we are impacted by onetime events that are both positive and negative. Where once we could pick out an occasional item of this nature, in recent years it feels as though every quarter has some. Each is, yes, a onetime event, but every quarter has a number of such onetime events, so in the aggregate, they are really not onetime in nature.

Michael Combs will provide more detail on these items. I would like to discuss them at a more conceptual level here.

We believe the tax law change adds to our competitive advantage, in that it improves our cash flow and net of taxes paid relative to that of our PEO and competitors. This is due to the limitations the new legislation places upon the deductibility of interest for tax purposes. The limitation impacts any firm highly leveraged as are most of the PEO and firms.

In the quarter, we also had operational issues, which adversely impacted our operating margins. We incurred some expenses related to the fair value of some of our investment in startups. We also had a philosophy of making continuous investments in technology and in the expansion of the services we can provide or the markets we serve.

Such investments are important to the long-term success of the company, but inevitably result in quarters where we have short-term expenses. Ultimately, our focus has to remain long term in nature and on producing ever more productive services for our customers.

Turning to the state of our markets served. The markets for all of our services remained in a healthy condition during the quarter. Strength of the current economy and related labor markets has reduced unemployment to record levels.

Once such tighter labor markets have been in place beyond the initial recovery, workplace injuries have a tendency to increase. This period comes toward the end of most recoveries, as employers push into segments of the workforce less trained and less acclimated to work and should improve the market for our services.

I would add that this improvement, should it occur, would be an offset to the long-term decline in claims reported, which has typified the worker's compensation market for the last couple of decades.

Automation continues to be a theme in the marketplace. Last quarter, we discussed the impact technology is having to encourage outsourcing. We had a particularly busy quarter upgrading our interface to our customers. This change involved increased customer support, as we rolled out the new claims management workstation for many of our customers. This upgrade kicks off a series of regular upgrades to our interface with major customers. In turn, this is expected to make the outsourcing of key functions ever easier for our insurer partners.

In our markets, most vendors sell either service or software. CorVel is unique in that our offerings include software as a pre-component of our service. This and the growth of the cloud place ever-increasing pressures on companies that either sell only service or only software.

We are all aware of the movement toward distributed ledger approaches to transaction processing. Our approach is to interface with existing legacy platforms at our clients and to bring with our service free usage of a claims management workstation. This technology brings the advantages of current technology to those carrier customers wanting to extend the life of their legacy platforms and, yet, still want to access current technology.

The sale of a service or a product is increasingly bundled with the software to manage the transaction and related accounting and payments processing. For the health care provider community, we also provide a portal, which presents the ledger status of their accounts receivable with CorVel and with the carriers we represent.

These applications were a highly -- were a high priority for us last year and will remain so in the coming year. Improving the velocity and dependability of health care transaction processing is the goal of the various application launches currently underway.

Separately, our sales mix continues to reflect the impact technology has had upon the relative value contributed by each form of care management. For example, our older case management product revenues have declined. This has been more than offset by the increase in our Enterprise Comp TPA sales. In fact, the automation of interfaces and record-keeping is reducing the need for consultative connection support, such as case management provided to traditional claims management.

Instead, we employ our technology to connect the parties involved in a worker's compensation claim and to increasingly integrate them. This change is occurring quietly and relatively slowly, but it continues to evolve the environment in which patients find themselves as they pass through an episode of care. The Edge adjuster workstation, now being expanded incrementally each month, already serves approximately 3,000 claims professionals.

CorVel is bringing outsourced business functionality to markets beyond insurance. We do this under the brand name, Symbeo. This business unit began many years ago by doing subsets of the transaction processing cycle and is now offering to do the entire payables function for large corporations. Symbeo is setting up our first facility dedicated entirely as a hub, delivering turnkey transaction processing, both within and outside the insurance industry.

The broader health care market continues to be an important -- to CorVel's overall results and future plans. The cost of health care continues to increase at rates above the rate of increase in average incomes. New therapies, biotech cures and treatments and improved diagnostic technologies drive ongoing cost increases per employee. Thus, approaches to reducing the cost of health care tend to be eagerly reviewed. We expect to expand the scope of our service program for the health market.

I'd now like to turn the call over to Michael Combs, who will discuss our operating results and product development.

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Michael G. Combs, CorVel Corporation - President [3]

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Thank you, Gordon. I'll first discuss our operating results. Patient management includes third-party administration, TPA, services and traditional case management. Revenue for the quarter was $79.4 million, an annual increase of 11.2%. The year-to-date fiscal year growth rate for patient management was 9%.

Our TPA services recorded another strong quarter of growth. The level of service and outcomes that we are able to provide is due to a combination of the expertise of our team and our technology. The risk manager of one of our new customers recently commented, "Seriously. I have never experienced anything like this. We wanted a best-in-class, superior TPA and I really think that we found it." We're looking to build on the momentum that we have achieved.

Network Solutions revenue sold in the wholesale market for the quarter was $61.4 million, up 7.7% from the same quarter of the prior year. Gross profit in the wholesale business was up 4.9% year-over-year.

In the CERiS segment of Network Solutions, development is focused upon expanding the services into the clinical and coding areas of line item hospital bill payment integrity, enhancing the results that we are able to achieve for our customers. Multiple implementations will be finalized with our new 2017 clients, which will continue to expand and deepen our partnerships.

The Symbeo business franchise includes our treasury and fulfillment service unit. We have experienced solid growth on our managed accounts payable automation service through both direct and partner sales channels. The service handles the entire invoice capture, validation, matching and approval process.

By partnering with Symbeo, our clients eliminate the manual functions associated with preparing invoices for payment, while retaining oversight and controls to ensure that the highest level of exception-free accounts payable processing is achieved.

We are committed to the strategy of using technology to differentiate the solutions, more specifically, the results that we are able to deliver to our customers. Owning our own system affords us a level of agility that is unusual in the industry.

Current broad areas of focus include enhancements to our claims management platform. These include the successful implementation of our new adjuster interface, CareMC Edge, for the insurance carrier market. Current efforts include improved absence and turnover management as well as enhanced medical management codification and pharmacy inventory management. A next phase of the Edge will include realtime integration with TPA systems used by our wholesale Network Solutions carriers.

Continuing to build the next generation of medical review, we're currently working on the third full implementation of our proprietary medical bill review software. It has been our consistent experience, over the past 25-plus years, that being on current state-of-the-art technology allows us to not only leverage the latest technological innovations, such as machine learning, but also affords us the ability to attract and retain the best information technology talent.

Ongoing improvements to our claims intake and Return-to-Work processes, we continue to evolve our claims system, so that we are able to engage the appropriate expertise throughout the claim continuum, ensuring the optimal opportunity for a positive outcome.

And finally, conversion to the cloud. Transitioning to the cloud will be a methodical multiyear effort. Initial work has been focused on internally focused administration and marketing functionality.

These are a few of the current initiatives underway. We have a rich queue of projects planned to further distinguish the results that we are able to provide to our customers.

I would like -- now like to review a few additional financial items. As Gordon mentioned previously, there were several, largely offsetting, onetime events during the quarter ending December 31, 2017. Following is additional detail regarding the largest of these items.

We recorded a $3 million benefit related to the changes in the tax law; a $2 million increase on our own self-insured health care benefits; a $700,000 increase in reserves related to an incubator venture investment made several years ago; and a $150,000 increase in reserves related to operational matters.

The quarter ending cash balance was $53.5 million, and our DSO, that is days sales outstanding and receivables, remained unchanged from the prior quarter at 42 days.

That concludes our remarks for today. Thank you for joining us. I'll now turn the call over to our operator.

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Operator [4]

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This concludes today's webcast. You may now disconnect your lines at this time.