Gordon Clemons - Chief Executive Officer.

Brian Ross - Fulton & Company.

Thank you for standing by. 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 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..

Thank you for joining us to review CorVel's December quarter. Revenues for the December quarter were $122.4 million, 1% over the revenue for the December 2013 quarter. Earnings per share for the quarter ended December 31, 2014, were $0.33, in the same quarter of the prior year earnings per share were $0.41.

Sales continue to grow in the enterprise comp TPA services and in our Sirius hospital bill review services.

As in the September quarter, we continue in this quarter to operate between new sales that will be implemented later in the March quarter and some managed care sales lost due to consolidation into integrated programs that occurred earlier last year.

We expect no new wins going live at the end of the quarter and at the end of the current quarter to offset the losses from last year and for our momentum in the more rapidly growing services to again be visible in our results. Integrated programs for workers comp claims is the general trend in the industry.

Integration is particularly suited to CorVel’s product mix and business strategy. I will discuss this further later on the call. Major TPAs attempt to control as much of each program as possible. We are in a good period here regarding the new service features we are introducing and our growing position in the market.

We have had a mismatch of changes in our business mix, but I feel good about the momentum in our business. I will speak first to the market environment. We expect this year in the Healthcare Insurance markets to include continuing adjustments by the large carriers to the Affordable Care Act, responses which reflect the planning done last year.

Programs which slowed in 2014 are indicated to pick back up this year. CorVel’s Sirius line of hospital bill review operations were expanded last year. Our expansion got ahead of the market trends and we are gradually rebalancing that effort.

After a period of rapid initiation of pilot programs, carriers slowed to evaluate results and adjust strategies. That period appears to be passing and new commitments have begun for the coming year. The scope of various strategy changes underway by private sector carriers has required adjustments in their provider relations as well.

However, the phased implementation of the Act continues and carrier plans continue to evolve. At Sirius, we have added to process of the support production and continue to see this is an opportunity for CorVel to build a meaningful position in the much larger health insurance market outside of workers’ compensation.

Although, the Sirius results last year were below our expectations internally, this product line continues to grow rapidly becoming a more and more meaningful part of CorVel’s total results. The workers’ compensation market has been in the period of consolidation. Private equity firms continue to buy up and resell assets.

One large sale stalled last year though and banks are becoming less willing to support high leverage for these transactions.

The uncertainty created by these transactions has impacted everyone in the industry, with large portfolios of service now potentially changing ownership regularly we at CorVel see an opportune time to continue our investments for the long-term and to take actions to improve our market share.

This is a time when increasingly employers are seeing services levels constrained in firms seeking economies that will support a quick flip for their ownership. The pursuit of quick re-sales has understandably pressured prices as well in the marketplace.

Brand recognition for our TPA service continues to increase and we are seeing an expanding flow of bidding opportunities. Last year, we lost a couple of good managed care accounts through consolidation with integrated programs. We have had recent sale to replace those volumes. Implementation of the new programs will occur later in the current quarter.

The increased integration of service component is a trend in the marketplace. This has reduced the market for standalone managed care sold to employers. This has caused us to lose business where we sold managed care on an unbundled basis in the past.

Our recent strategy has been and continues to be to take advantage of our ownership of the managed care components of worker’s compensation to build the uniquely effective integrated offering.

Our entry into the claims management segment of the market was also driven by our expectation of this period of ongoing consolidation and integration of service.

In our product development, which I'll discuss later, we are linking more and more of the information in the separate services within worker’s compensation and are finding synergies in that process. We’ll be adding a steady stream of new synergies throughout the coming year. This effort is gradually adding efficiency to our total TPA solution.

Pharmacy segment of market is increasingly the focus of legislative changes. Opioid consumption is increasingly recognized problem among worker’s compensation claimants. Drug consumption patterns can be predictive of outcomes of worker’s compensation as can the patterns of distribution for substances employed in pain management.

CorVel’s pharmacy benefit management that is our PBM service is tightly integrated with our medical review and provider network that’s PPO services. This allows CorVel to be more carefully -- to more carefully monitor potentially harmful pain medication, consumption patterns and to have a differentiated capability to respond.

Interacting with the various providers in the outpatient arena can be complex. And we expect our service development to continue evolving over the planning horizon. Product development is progressing nicely on several fronts.

Our goal in our software development is to have the rules engine guide the work on each claim through a logical process managed in part by the system. This is as opposed to the firefighting nature of traditional claims management. It is also important that we move well beyond the alerts and triggers approach to typical efforts in automation.

Claims management can be so detailed and complex that generating alerts result in a blizzard of such items lacking in structure. The effort necessary to codify many of the elements in each important component of managed care is a significant challenge and very importantly, the codification structures must be consistent across all services.

Our multiple year effort is paying off in unique dividends. As importantly competitors sell a matrix of services from different subcontractors and cannot hope to find that a collection of different companies will have magically all chosen the same codification structure necessary to allow them to provide true integration.

Integrating the key managed care activities is opening new opportunities in key aspects of disability management. We are achieving much earlier claims management interventions, interpreting clinical data to guide next steps and now introducing entirely new phases in the process.

The journey away from paper processes has exposed aspects of claims management, which were necessary only because of the paper-based processes over the past. Real-time integration allows us to provide assistance to patients not practical using traditional models.

Another industry’s mobile apps are exposing and reducing inefficiencies in traditional commerce. Both healthcare and insurance are filled with long-standing inefficiencies. Amazon would be a good example of an area where new technology is allowing a large organization through meaningful reduce some of the inefficiencies in the market palace.

Reducing administrative cost in healthcare is often cited as a goal of automation. But thus far that goal has been elusive. The complexities in healthcare coupled with regulatory environment involved, unique to each state of workers compensation make this a difficult task.

We faced the same complexities, but have been working on this challenge for over a quarter century and have perhaps a better chance of making progress now.

In addition, our ability to integrate activities normally found in separate company but in our model owned by CorVel allows us to build common data structure and achieve somewhat simpler solutions. As I discussed in previous calls, CorVel CareMC system is facing five separate constituencies into one data base.

Employers, claimant, adjusters, case managers and healthcare providers are all connected into CareMC. So providers are particularly integrated as an indication of retail pharmacy and PBMs and other such as individual healthcare practitioners will take longer to integrate. The provider portal introduced last fall by CorVel is being expanded.

Those providers in our preferred provider network that is our PPO will be increasingly connected, because CorVel has its own contracts with the members of its PPO. We are able to work in ways not possible for competitors who must lease access to third-party PPOs.

Competitors using leased access to PPOs cannot enforce the contract of a third-party and thus are not able to have truly managed environments. Claimant app will have a steadily increasing amount of information exchange with CareMC. The goal is to increase the patient’s engagement in their own recovery and return to work.

We have found opportunities to bring the employer into better interaction with our own efforts to return employees to the workforce. This is where the rubber meets the road in workers’ comp and we are enthused about the prospects to improve this important phase of our service.

In the quarter, we consolidated case notes from three different services and one central database. This is part of our efforts to make the information in workers’ compensation more available and easier to use. We continue building out the codification of claim statuses and the related tasks for adjusters and case managers.

Improving the scope of the system’s activity is related to the vocational aspect of claims is another area of recent focus. Here, we work with the major customer who can help us with the scope and plans for software expansions.

Previously, we have integrated claims reporting and asked a nurse call center activities both for customer interfaces, as well as within our databases.

During the current year, we are expanding the scope of our early patient interactions, combining and restructuring the number of activities typically involved in the early phases of an episode of care. Facilities and hardware are a key to our ability to continue to scale our systems and services.

Our newest co-location facility is taking on increasing workloads. Coincident with this effort, we are moving applications to the latest versions of the operating system and browsers we employ.

As we’ve previously discussed, we are also rewriting our entire medical bill review system to take advantage of software development since our last rewrite over 10 years ago.

Moving to new platforms, so as to incorporate the latest advances in technology is an investment, which raises our current period expenses but we believe is very important to having long-term solutions, which can leverage future advances in computing technology.

These ongoing investments are intended to allow our computing advances to avoid the bottlenecks legacy platforms created for competitors.

I would suggest that just as our lack of debt on the balance sheet speaks to our having built a financially healthier enterprise, which has the capacity to act if an unusual opportunity arises, so to do our technology assets include value relative to that of our competitors, not reflected perhaps on our balance sheet.

This value becomes visible as new trends emerge in our industry. For example, our computing must address a rapidly expanding population within our customers’ organizations. 10-years ago, our industry presented summary information to risk managers and perhaps to senior claim staff.

This was subsequently expanded to present analytic reviews to the supporting staffs of our clients. Within the last few years, we have extended aspects of our service into the operations of our customers. And now, we are introducing tools for our employees -- for the employees of our clients.

This engagement at the employee level places much increased demands upon our system and that cuts across hardware, software, communications and of course, the look and feel of our tools. New technology that can enhance both the building of new applications and the power of their operation is increasingly available.

But in most instances, such new tools require the foundation software to be in a relatively current technology as well. This is a never-ending cycle of life in information management, but it does gradually obsolete competitors. Now, I’d like to discuss our product line results.

Patient management perhaps increasingly becoming, what I would call patient engagement includes third-party administration TPA services and traditional case management. Revenue for the quarter was $68.6 million, an annual increase of 10%. Gross profit decreased 7.7% from the December quarter of 2013.

TPA services have been growing at 15% to 20% annual rates and are an important driver of our overall company results. We had a period in late calendar 2013 and into the first half of calendar 2014, where we didn't adjust to a change in industry pricing tactics and as a result had lower sales wins.

We adjusted and since then, new sales have been back on track. The lagged effect of that slow patch has impacted current quarters. Case management revenues in total were down slightly. We lost one in managed care account, which the customer consolidated with their existing TPA and the integrated service model I described earlier.

Otherwise, the case management business has become more attractive as our own TPA programs expand. The trends of integrated program favors CorVel’s enterprise comp model as we have the industry’s only truly integrated systems platform for all services. For the last 15 years we have been investing in our interactive platform, CareMC.

Case management and claims management are together in one database, employing a unified codification structure. We believe this meaningfully enhances the value of resources invested in the various forms of case management.

Network solutions revenue sold in the wholesale market that is directly to carriers for the quarter was $54 million, down 8.4% from the same quarter of the prior year. Total network solutions revenue, which includes volume sold as part of the enterprise comp, was flat year-over-year. Gross profit in the wholesale business was down 15% over the year.

We had a customer we lost as a result of their having been acquired by competing TPA and we lost the second quarter customer when the service was consolidated into a competing TPA’s program. These kinds of events confirm our strategy and yet they do create bumps in our trendlines. Sirius services continue to grow nicely.

The results were below our plans for the year, which reflected the continuing adjustments health insurers are making to incorporate expanded medical review in their programs. Growth at Sirius continues and this business is an important part of CorVel’s future. Now I would like to cover a couple of additional statistics.

The quarter ending cash balance was $31 million. Our DSO, that is days sales outstanding and receivable, was 42 days, just as it was a year earlier. 274,500 shares were repurchased in the quarter for $9.5 million. We have returned $351 million to shareholders in the last 18 years, repurchasing 32,732,000 shares.

Shares outstanding at the end of the quarter were 20,475,000 and diluted EPS shares were 20,786,000 for the quarter. Shares outstanding were reduced 2% this last year. We have recently increased our purchase rate. Now I would like to turn the call back over to the operator to open the call to the question-and-answer session. Thank you..

[Operator Instructions] We do have a question coming from the line of Brian Ross from Fulton & Company..

Hey, guys. Good morning. Thanks for taking my questions here. I guess, first, I was wondering if you guys could maybe elaborate a little bit more on the Sirius product and some of the pilots that you have been working on. The past few quarters you have mentioned that your carriers were evaluating results and considering the service on a larger scale.

So just wondering if you can talk about what percentage of revenues at businesses today, kind of where we are in the related growth trajectory, and maybe some of your outlook for growth, and the timing of when we might or maybe see that business to ramp a little bit more materially as some of those pilots move to full commercialization?.

Sure, yeah. And good morning, Brian. This is Gordon.

Let’s see the service is actually a large database, which cross-maps the chargemasters of different hospitals into a common database, so that what it creates is the ability to compare hospitals both within the community and across different communities by bringing all of their chargemasters into one standard format.

The result is the ability to both keep track of how given hospital is invoicing over time and what discounts they have accepted in the past, as well as to understand the pricing practices of hospitals in the community.

Usually, it’s not -- I wouldn’t say efficacious to compare a hospital in Los Angeles with a one in Boston, but within the LA Basin, you can make comparisons and understand what the market will bear.

So it provides a very detailed way of understanding hospital billing and has been popular both in workers compensation and in the regular healthcare marketplace. Understanding where it’s going to go is a challenge. The major carriers operating in regular healthcare, as well as administering some Medicare and even Medicaid programs are all interested.

They have substantial volumes, but in fairness they do have existing practices, not the same as what Sirius provides, but they do have existing practices. And they -- so to pick us up they have to make changes.

Also our reviews tend to save more money or reduce hospital bills more than they normally have been and the provider community can react to that. Our reductions are based upon the detail and as opposed to a negotiation, so they’re accurate, but if they may not pleased that the people who are seeing a lower compensation.

So I think as the carriers try to figure out how to be competitive under ObamaCare, they’re going through quite a few evaluations on their end and it’s been bumpy for us.

We get things going and we get us to set up quite a bit of production and then people will pause to see how they feel about some of the kind of pushback that they get from the providers. So it’s been a good growth business for us but we did set up for quite a bit of expansion and we haven’t had as much as we would like.

And I think it’s -- the market is dramatic in size compared to CorVel, but the real unknown is to what degree adoption will be picked up and I don’t think we’re in least so far. We’ve not been the best of predicting that, so I’d be hesitant to give any real guidance on that..

Okay. I appreciate that.

And there are a couple pilots I think that you talked about in the past -- talk about some -- maybe just sort of some large carriers where -- are those still in that pilot phase or you’ve done some work upfront to evaluating the results and considering at a larger scale maybe across the full geography organization? Are those still on pilot form?.

Well, I’d say, yes. We are working with almost all the major carriers and they do have small volumes relative to their total potential with us. Some are little better, the one or two are little better established and have chosen certain segments of their business where they employ this.

It can require in some of their programs, but they actually re-contract with their networks, so that they can take some of the discounts with a little more comfort and little more, let say, advance warning to the providers. So there are and they do re-contract annually, so some of this can be dragged out for a year or so.

And then they can put the programs in either to review bills before they paid or they can review bills after they’ve been paid and to attempt to get refund. So there are a number of different segments of their business.

So we might be in and working normally in one segment and then piloting in the couple of others or we might be with the carrier who has piloted for awhile and has paused to evaluate the result, it really varies quite a bit..

Okay. All right. That’s helpful. And then just switching over on the TPA side? Can you just give a sense of -- is the relative size of the enterprise comp TPA business to really, I guess, the standalone, where I know, you’re seeing nice growth in the enterprise comp side, but some of that’s been offset by as you lose some of the standalone business.

So just trying to get a sense of how big is that that the growing enterprise comp versus what were you losing a little bit on the standalone side?.

Yes. We actually don’t break that out. Although, there may come a time in the future where we have to, obviously, as it grows. Our business was almost all managed care and as a result, most of it was either sold to carriers or some unbundled programs were sold to employers.

A large employer can be a very attractive customer for a standalone piece of the business and we had and still have a number of those. The industry, I think change has come where a couple of the other big TPAs are trying to consolidate. They don’t like having us in their claims operations and we understand that actually. We still sell that service.

But we don’t on likewise on our TPA service we are seeking to have an integrated environment. We feel our form of integration is sort of a complete generation ahead of what they're talking about. But nonetheless, they still don’t like this in their service. So I would say the TPA business is growing in the 20% range. It varies at times.

We are seeing, I would say a nice increase in the number of bids that we are involved in this year, but the main change there for us as we go through the current years is that the brokers are gradually becoming better aware of us. That’s been I think the biggest remaining hurdle is just to become better known in the marketplace.

At this point many of them do you know as well, but an individual producer in a large brokerage firm might just not have had an account, where we were involved and that would be fairly common two or three years ago. So it’s quite a learning curve going on there. But our market share in that business is, we estimate in the 4% range.

The industry is give or take maybe $5 billion. So it’s those kinds of number roughly but there are -- Sedgewick is the largest TPA and they would be well over $1 billion in revenue..

Yes and that’s helpful. And I do I think to expand in the future. It would be helpful to see at least maybe some sort of supplemental on breaking those two apart just given the different I guess growth dynamics of those two pieces but I appreciate that commentary.

And on the gross margins over the past few quarter looks like it’s just been, it’s come down a little bit. And I know you’ve talked a little bit about the different businesses that it might have some revenue pressures from pricing in the markets.

So just curious, do you think in the most recent quarters what’s the biggest driver here, is it the pricing pressure that’s driving margins, is it the upfront investment maybe you're making in the anticipation of customer launches or I guess, you talked to us some of the computing advancing investments what’s -- looking at that margin upon the past few quarters, what’s been the biggest driver?.

I would say at the corporate level, the biggest impact on our margins usually comes from mix changes in our business. So if we expand in the TPA space, which for us has had lower margins than our standalone bill review product or medical review products. So the combination of bill review and PPOs is a higher-margin business.

If we lose a customer there and offset it with a customer in the full service TPA business, we are going to have a mix shift to the negative side on margins. In addition, I think it is appropriate I think to say that the industry is fairly price competitive right now.

The private equity firms that have own couple of the TPAs are motivated to resell those businesses fairly quickly at least in the long-term planning horizon we think about. So they are anxious to build volume as quickly as they can, and then look for a sale. So that has brought more price pressure into the business than there was.

But in fairness, I’d say at the same time CorVel is small and looking to expand. So we probably also compete on price when necessary, I think we like to feel that because we own our own software and our own PPO, we can be more price competitive than anybody in the business.

So that has a negative short-term effect on our margins, but our goal is to look for scale in our own way just as the others are..

All right. Okay. And a last, I guess last one to just housekeeping on the SG&A just I saw, I guess, it’s up maybe a little over $1 million sequentially. And I know Q1 was higher but there was a comment about some one time items in there.

So just curious if in this quarter if there is any one time items that pushed that higher if that is just -- in some of the investments you’ve been talking about and then the last piece I had just on the tax rate. I saw that it came in a bit lower than where it’s been.

I was just wondering if there is anything unique in there and then like what level we should think about for going forward? Thanks..

Yes. I‘ll take the one I don’t like as much as the other. First, I don’t like to see our tax rate reported bounce around much that’s a function of Sarbanes-Oxley, I think to some degree which is a lot more of texture in that than there are used to be in. We’ve to adjust it to actual changes.

The mix of our business by state can have some impact on our tax rate. I don’t see our tax rate changing a lot. It is a little lower than normal in the quarter I just reported though. And I would expect it to move back toward where it has been and I’m being told -- 38.5. Yes, I think something around 38.5 is probably, roughly where we expect to see it.

But we’re -- sometimes it will move a little above that or little below that so. But it won’t be meaningfully below that, I would say. And then on G&A, which is a good question and one that I enjoy more, I guess. We try not to cut back on system’s development.

And yet I would say that where we are having a more difficult stretch as we are in here that would not be an unreasonable expectation of say investors. But as you might understand not an expectation of our customers and we feel, we are pressing our advantage in that area. So, I would say I have been reluctant to economize in that area and we did.

We are spending a little more than we were and maybe a little more than we like. But on subjects that are exciting and of interest to us, we don’t have sudden wins where we just create something that preempts the marketplace completely. But overtime, we do gradually create an advantage for ourselves and we’ve been able to move up in the marketplace.

We began 30 years ago as the case management company. So, we’ve steadily worked our way. I’d like to think of it up into the industry and into the better segments and into better control of our business. So we have an ever more valuable asset. One-time, I’m nervous about saying, well [gee]; we don’t expect one time issues this quarter.

And I think most companies have more one-time issues than they like to think. So, we did have a few in the December quarter. I hope we don’t have any this quarter. But all things equal, we do get surprises as we go along.

And we are trying to expand in a business where regulation changes and there are forces out there that create issues for us at times, so that can happen. But we’ll probably be more cautious with overhead. I would say, for the next couple of quarters until we see ourselves back where we want to be.

And on the other hand as we get bigger and things get -- results get better, we have a tendency to continue to invest in systems..

All right. Thanks, guys. That’s all I’ve got..

Okay. Thank you..

Thank you. [Operator Instructions] If there are no further questions, I will turn the call back over to Gordon Clemons for closing comments..

Thank you. And thank you all for joining us. We look forward to talking to you again next quarter. And thanks for attending our call today..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation..