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CorVel Corporation (NASDAQ:CRVL)
Q4 2019 Earnings Call
Feb 4, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 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 -- President and Chief Executive Officer

Thank you for joining us to review CorVel's December quarter. On the call with me today is Brandon O'Brien, CorVel's Chief Financial Officer. Today I will be discussing market trends, the services on which we are focused, and the progress that we've made on our key initiatives. Brandon will then provide an overview of our financial results for the December quarter.

Revenues for the December quarter were $148 million. Earnings per share were $0.50, a decrease of 7% from $0.54 per share in the same quarter of the prior year. Each quarter has positive and negative one-time events. While each may be unique and appropriately categorized as one time, the occurrence of such items is not unusual. In the December quarter, the adverse one-time events exceeded those which were positive. The quarter included one-time expenses related to our recovery from the security event from the prior quarter. We've had a change in sub-contractors used by CorVel, and this created both some one-time expenses, as well as a period of time where some of our specialty revenues were disrupted.

Within the March quarter, we will be operating under more normal conditions. CorVel's results for the quarter also include the investments we are making in the ongoing digital transformation in healthcare, advances in computing power, the impending 5G evolution in communications, and in general, the multifaceted implementation in healthcare of improving information management, combined to create acceleration in the pace of change in our industry.

The overarching trend in the healthcare market is ongoing rapid computing power advances, which is bringing more practicality to the coming uses of artificial intelligence in healthcare. The innovations resulting from the application of machine learning and AI promise to improve healthcare, as well as to make it more affordable. However, a fundamental prerequisite is a dramatic improvement in the codification and storage of healthcare data.

To make healthcare data useful in this emerging environment, healthcare information must be able to be integrated across services, specialties, and related sets of diagnostic and treatment activities. Within the managed care industry in casualty healthcare, only CorVel possesses an integrated database that includes all of the critical managed care specialties.

Concurrent with the advances in the use of computing power is the imperative to protect personal healthcare information. Investments required to make the necessary assurances are substantial and ongoing. A significant implication of the security mandate is the direct correlation in the inherent risk as the number of vendors connected in an unbundled workers' compensation managed care model increase. Workers' comp claims environments grew out of the very early entry of property causality insurers into the first workers' comp laws. As the industry evolved, new forms of managed care developed. Typically, each innovation came from a different new vendor, and thus, today's programs usually include a dozen or more different vendors, most of whom are relatively small firms, which exposes patient information to a wide array of vulnerabilities.

Just as other industries evolved toward full-service vendors, the managed care industry's move in that direction is being accelerated by the need to close down the vulnerability of patient information to the complexities created through the access many small entities have to ensure information flows. CorVel's fully integrated system allows insurers to reduce outside access to their computing platforms significantly.

The power of telehealth is perhaps the most widely accepted new development in treatment modalities. To employ telehealth productively, a patient must have immediate access telephonically to an advocate who can triage as appropriate. CorVel initiates healthcare episodes from a telephonic nursing hotline, and triages incoming incidents to telehealth. Expanding this supporting technology has been a priority for us.

And lastly, CorVel is expanding its position in the much larger health markets, Medicare, Medicaid, and group or private pay healthcare. The Company's CERiS division has been expanding more rapidly in the last few years. CERiS is developing a broader product line and beginning promising projects in segments of the market heretofore unaddressed.

There was noteworthy M&A activity in 2019, which has in part been driven by low interest rates. One aspect of the movement has been an increase in corporate debt, which has doubled to nearly $10 trillion over the past 20 years. The implications of this increase in debt are unclear, though there is concern that if we were to experience an economic slowdown, the impact could be significant. We observed a glimpse of what might be on the horizon with a large player in the healthcare market this past quarter. CorVel is well positioned to execute a meaningful acquisition while maintaining a fiscally sound position. We continue to review synergistic, reasonably valued opportunities. If a slowdown were to occur, we would expect to see the number of compelling acquisition opportunities increase.

The December quarter was one of the most significant in our Company's history regarding the strategic software enhancements released. The enhancements leverage two of our most valuable assets, the vast volumes of data which we manage and our proprietary systems. The work on which we've been focused represents an essential shift in the role data plays within our business systems. Yes, data is still captured, presented in our application interfaces, used to generate reports, received and transmitted, presented in visually appealing interactive dashboards using advanced analytics, and consumed by our propriety rules engine. But each of these traditional uses of data doesn't fully realize the potential of digital transformation.

Within our data-centric approach, data is being used dynamically to generate recommendations for action, predict outcomes, and facilitate data-driven and data driving capabilities. Data is playing an increasingly active role in our business systems, as we focus on the methods in which information is captured and leverage advanced algorithms to distill and apply the signal from within the data.

Following are several highlights of our data-centric approach. We've optimized how case management clinical information is captured, facilitating systematic review of the data, which results in actions being recommended to the claims and case management professionals. A new claim interface has been developed, which provides an interactive, holistic view of the development of the claim. We've introduced a universal intake interface, which simplifies the process of capturing the data related to an incident of injury, the first step of the process, which compresses the time that it takes to connect a patient with the most appropriate medical care. Shortening the time that it takes to connect an injured employee with the proper medical professional is proven to reduce the cost of the claim and is best facilitated by our fully integrated system.

The Edge interface, the core of our data-centric model, has been enhanced to prompt action from our case managers and claim specialists. One example being when the signal within the data indicates that optimal R2W is in jeopardy. There is much work and opportunity with AI and business intelligence in our data-centric model. We are excited about the progress that we have made and the impact we intend to have in this space.

Brandon will now provide an overview of our financial results for the December quarter.

Brandon O'Brien -- Chief Financial Officer

Thank you, Michael, and good morning, everyone. Revenues for the December quarter increased to $148 million, producing a net income of $9.4 million. Earnings per share were $0.50 for the December quarter, a decrease of 7% from $0.54 per share in the same quarter of the prior year. Revenue for patient management, including third-party administration, TPA services and traditional case management for the December quarter was $98 million, an annual increase of 7%. Gross profit increased by 9% from the December quarter of 2018.

Our third-party administration services hit record levels, and continue to be well received in the marketplace, driving annual growth of patient management. As mentioned earlier, a subset of the patient management services experienced a temporary capacity decrease due to a change in sub-contractors. This transitionary disruption lowered the total output of utilization management services, leaving some of the demand for these services partially unfulfilled by CorVel. We expect to achieve the supply and demand equilibrium of these services again during this current quarter ending March 2020.

Revenue for network solutions sold in the wholesale market for the quarter was $50 million, a decrease of 8% for the same quarter of the prior year. Gross profit in the wholesale business was down 8% from the December quarter of 2018. Gross margins were maintained while experiencing cresting customer churn primarily in the casualty wholesale market.

Anticipated growth of the CERiS business within network solutions represents an opportunity of new revenue at accretive margins. Investments in our security positioning contributed to higher G&A period costs from comparative quarters. Professional consultant services contributed as one-time or short-term increases. These investments are expected to positively impact our long-term growth potential by expanding our customers' assurance in our current services and expanding into new service capabilities in the ongoing digital transformation of healthcare.

I would now like to review a few additional financial items. Operating cash flow in the quarter was strong at $20 million, and together with our strong balance sheet continues to position the Company well for new investments. During the quarter, the Company repurchased 240,000 shares for a total price of $19.2 million. Inception to date, the Company has repurchased 36.1 million shares for a cost of $514 million. Through this program, the Company has repurchased 67% of the total shares outstanding. The quarter ending cash balance was $90 million. Our DSO, that is day sales outstanding in the receivables, was 41 days, up two days from a year ago, and down three days from the September quarter.

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

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 13 minutes

Call participants:

Michael Combs -- President and Chief Executive Officer

Brandon O'Brien -- Chief Financial Officer

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