Q3 2024 CorVel Corp Earnings Call

Participants

Michael Combs; President & CEO; CorVel Corp

Brandon O'Brien; Chief Financial Officer; CorVel Corp

Presentation

Operator

Thank you for standing by, and 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 performance 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 that 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.
I would now like to turn it over to Michael Combs, President and Chief Executive Officer.

Michael Combs

Good morning. Thank you for joining us to review CorVel's December quarter. Brandon O'Brien, CorVel's Chief Financial Officer, is on the call with me today. Today, I will review business performance, the current environment and market trends, and progress on new product and service offerings. Brandon will then provide additional details on the financial results for the quarter.
The December quarter revenues were $202 million, a 13% increase over the $179 million of revenue for the December 2022 quarter. Earnings per share for the quarter were $0.99, a 3% increase from $0.96 per share in the same quarter of the prior year. We ended the 2023 calendar year with a 34% increase in new business sold with balanced bookings across CorVel's Network Solution and Patient Management segments.
Customer retention as measured by gross revenue retention for the year was 95%, while net revenue retention was 108%. These achievements are testament to the diligence and determination of our sales, account management, and operations teams. While we're pleased with customer retention and new partner bookings, the path to meaningful growth can be uneven. The quarter's results were adversely impacted by elevated costs for our self-insurance healthcare as well as in the commercial health sector, volume-based price adjustments, and continued tuning of the DRG review process. The items adversity affecting results were primarily offset by a one-time work in progress with adjustment.
In our P&C business, the [WIP] cycle is relatively short, meaning work is completed, and revenue is generally recognized within 30 days. The WIP revenue recognition cycle can be much longer on the commercial health side, especially with post-pay programs. Based on the actual experience with DRG claims reviewed, we've modified the WIP process to more accurately reflect the percentage of work completed earlier in the review cycle. The one-time adjustment benefited the December quarter results.
There is increased activity in the property and casualty segment of the business with companies that have been loyal to their current vendors for many years, even decades, now exploring other options in the market. The effective application of advanced technology and the corresponding program impact is an increasing expectation.
The historical table stakes, however, program continuity, consultative engagement, quality and consistency, operational excellence, and ultimately, results have not changed. These are items we have been and will remain focused on, which is a key part of what makes us such an attractive option to potential partners in the current environment. The escalated activity in the market can be attributed to the cracks that have appeared in many programs due to the pandemic, great resignations, and for some, the increased cost of servicing their debt load.
At CorVel, we've maintained modest claim loads, redoubled efforts in the area of operational excellence, and doubled down on the investment in our people, technology, and advancing our systems. With hyper focus on these critically important areas, we look to build upon the business development momentum achieved in 2023.
In the P&C arena, carriers seek alliances that improve the value proposition to their customers. Integration efforts consume and stretched limited IT resources. In the industry, it is not unusual for implementations with new vendors to take months, if not years, longer than initially planned. A consistent message from our carrier partners during the recent advisory conference was their desire for assistance in easing their IT resource constraints. We're collaborating with our partners to offer platform capabilities that enable them to engage with top-rated vendors while minimizing the burden on their technical teams.
In the commercial health market, medical care ratios have deteriorated due to increased costs of care. While of the drivers of the increases in cost is senior seeking services, we see delay due to the pandemic. Large payers are seeking innovative solutions to achieve cost of care savings and increased our ally from payment integrity vendors such as CERiS. We are responding to the evolving market requirements by expanding the team focused on bringing additional payment integrity reviews to fruition and enhancing system automation and augmentation. The current environment increases the appeal of services provided by CERiS.
Turning now to product development and operations. The quarter included additional enhancements to CorVel's business systems. Our investment strategy has been to focus on the ongoing development of technology and its application to our business. We've been incrementally optimizing processes within services to improve the operating efficiency. As it is in other industries, we view technology as vital to success in our industry, and we'll expand upon how we are seeing its benefits later in the call.
Current efforts with generative AI are enhancing document viewing and processing, allowing for on-demand, predefined, and ad hoc searches; annotation capabilities; and the identification of critical data elements. Our claims team, the viewer reduces time spent on routine tasks, which allow more time for focus on essential activities, items requiring critical thinking which directly impacts patient experience and outcomes.
Our professional review nurses are seeing a higher percentage of data accuracy and reporting process improvements of up to 50%. Advances like fees, in addition to the benefits already shared, will increase productivity, which will ultimately hold down costs for our partners during a time when costs are generally rising.
Pharmacy drug costs are a subset of medical costs and are dynamic in nature fluctuating throughout the year. During the quarter, the increase in generic drug costs was higher than usual, which resulted in the pharmacy programs gross margin experiencing a slight decline. These normal fluctuations typically balance over time. The design of our pricing model encourages the dispensing of cost saving generic drugs, which resulted in greater pharmacy savings to our partners.
Another example of rising costs and claims management is wage inflation. Average weekly wages reported nationally continue to rise. Liability claims costs are also experiencing steady growth due to the costs of labor and materials for property damage repairs and jury verdicts on bodily injury claims. The focus on automation and augmentation to enhance operational performance and the team's diligent investigation and negotiation of claims as early as possible in the claim life cycle ameliorate the effects of inflation for our partners.
At CorVel, we work diligently to curb the great resignations effects on our team being a great place to work, where people are treated with respect and have growth opportunities is tremendously important. While the great resignation has eased from its high early last year and rapid increases in compensation demands have slowed, we remain committed to intentionally attracting and maturing talent. The launch of CorVel University last year, we are taking deliberate steps to grow and develop claims professionals.
In addition to hiring and training, the augmentation and automation being applied to our systems will help retain current team members and streamline the process for getting the next generation of claims professionals up to speed.
The P&C and commercial markets have faced interesting challenges these last several years and remain dynamic in nature. While we've made some adjustments to operating parameters and technological focus, CorVel's core operating principles, conservative financial position, ongoing investment in technology, and our people and a long-term view of success position us well for further expansion in the current environment.
Brandon will now provide additional texture on the financial results for the December quarter. Brandon?

Brandon O'Brien

Thank you, Michael, and good morning everyone. As Michael indicated at the top of the call, revenues for the December quarter were $202 million, 13% over the $179 million of revenue for the December 2022 quarter. Earnings per share for the quarter were $0.99, increasing 3% from the $0.96 per share in the same quarter of the prior year. The revenue for patient management, including third-party administration, TPA services, and traditional case management for the December quarter was $132 million, an annual increase of 11%. Gross profit increased by 9% from the December quarter of 2022.
CorVel's TPA business continues to be the leading growth driver in this segment. The TPA Enterprise Comp business experienced 50% growth in new client, closed annualized sales in 2023 compared to that of closed sales in the prior-calendar year. New client accounts generally take between 6 to 12 months to achieve their expected run rate and thus are expected to drive patient management revenue growth throughout 2024.
The revenue for Network Solutions sold in the wholesale market for the December quarter was $71 million, up 17% from the same quarter of the prior year. Gross profit in the wholesale business was up 1% from the December quarter of 2022. CERiS, included within Network Solutions, is actively broadening its range of services and enhancing scalability to meet the diverse and evolving needs of key health insurance clients.
In the short term, activities such as strategic adjustments in pricing, continued tuning of the DRG offerings, plus initial capital and expenditure investments, temporary profit growth, but have been instrumental in reinforcing our partner relationships. This approach ultimately aligns the company for securing long-term profit growth with our top carrier partners. The current roadmap is robust with opportunities for increased volume through existing and expanding new services for the market.
I would now like to review a few additional financial items. During the quarter, the company repurchased 43,991 shares at a total cost of $9.3 million. From inception to date, the company has repurchased 38 million shares at a cost of $785 million. Through the program, the company has repurchased 69% of the total shares outstanding. The repurchasing of shares continues to be funded via the company's strong operating cash flow. The DSO, as in days sales outstanding, of receivables was 42 days, the same as from a year ago. The quarter ending cash balance was $107 million. CorVel's strong and debt-free balance sheet generates improved earnings in contrast to many others in the segment facing increasing debt loads with associated interest rate cost headwinds.
That concludes our remarks for today. Thank you for joining us. I'll now return the call to the operator.

Operator

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