CorVel - Q1 2025

Executive Summary

• Q1 FY2025 delivered solid top- and bottom-line growth: revenue rose 11% year over year to $211.7M and diluted EPS increased 10% to $1.25, with gross margin expanding to 22.7%.
• Operating margin eased slightly year over year (13.24% vs. ~13.37% in Q1 FY2024) as G&A grew faster than revenue; however, gross profit increased 15% to $48.2M, indicating healthy core profitability.
• Balance sheet remained strong (cash and equivalents $131.9M, no debt) and buybacks continued ($9.5M repurchased), supporting per-share compounding.
• Management highlighted ongoing AI deployment and an enhanced CareMC integrated communications platform as drivers of efficiency and outcomes; these initiatives remain a key narrative and potential stock reaction catalyst.

What Went Well and What Went Wrong

What Went Well

• Revenue up 11% year over year to $211.7M; diluted EPS up 10% to $1.25; gross margin expanded to 22.7% and gross profit rose 15% to $48.2M.
• Strong liquidity: $131.9M cash and equivalents, no borrowings; continued capital returns via $9.5M buybacks in the quarter.
• Strategic tech advances: “enhanced communications platform integrated in CorVel’s proprietary claims system, CareMC,” and AI used to “identify anomalies” in clinical bill review—aimed at improved outcomes and cost containment.

What Went Wrong

• Operating margin declined modestly year over year (13.24% vs. ~13.37% in Q1 FY2024), driven by G&A rising to $20.1M from $16.45M (+~22%).
• Limited disclosure: no formal guidance and no segment revenue breakdown provided for Q1 FY2025 in the press release/8-K.
• Industry context suggests persistent medical cost inflation pressures (2.5%–3.5% range) requiring continuous efficiency gains and payment integrity efforts—a potential ongoing headwind for payers and partners.

Transcript

Operator (participant)

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 the 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 CEO)

Good morning. Thank you for joining us to review CorVel's June 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 June quarter revenues were $212 million, which represents an 11% increase over the $190 million of revenue for the June 2023 quarter. Earnings per share for the quarter were $1.25, a 9% increase from $1.14 per share in the same quarter of the prior year. We experienced higher healthcare costs for our employee benefits plan in the June quarter. Since CorVel is self-insured, cost variations are a risk that we acknowledge and are consistent with our financial principles.

Additionally, the results for the quarter were impacted by an increased number of legal settlements and the upfront implementation and staffing costs for a large new account. We are currently reviewing all operations closely and have initiated several adjustments in costs and the monetization of the services we provide. The higher general and administrative expenses were offset by strong business fundamentals, resulting in the increase in EPS for the quarter. In the quarter, we had positive new bookings, including a new partnership with a large national retailer, adding to the list of noteworthy customers we've signed in recent years. Our focus is on building on the sales momentum from last year in the first half of calendar 2024. The industry's positive response to the ongoing investments in technology, the engagement of our team, as well as the results we're delivering to our partners, is validating.

We are happy to share that both of our largest recently signed accounts have been successfully brought on board. The first account became active in early May, the second in early July. These accounts are expected to have a positive impact on our financial results in the back half of the year and beyond. The feedback we've received from our partners on the implementation process is affirming. The quality of engagement, in combination with the malleability of CorVel's systems, gives us a level of agility that is unique in the industry. The new partners' willingness to act as references for us serves as a testament to the results of the process. In addition, the extensive system enhancements we've implemented during the process benefit the new as well as existing partners and strengthen our suite of services, increasing CorVel's value proposition for the market. Transitioning now to market insights.

In the P&C market, pharmacy pricing and costs are coming to the forefront once again. Although NCCI reports a decrease in claims involving prescriptions, there was an increase in the cost of pharmaceuticals per claim. The drivers include high-cost topical medications, increased use of out-of-network dispensing channels, and a rise in the dispensing of high-cost drugs. In an effort to increase drug cost transparency, 49 of 50 states have proposed rules surrounding pharmaceutical costs in healthcare. At CorVel, our pharmacy solution promotes a workers' compensation-centric formulary that limits the day's supply of opioids and encourages the use of generics and the conversion to lower-cost drug alternatives. We also offer different pricing models to meet customers' needs, all of which integrate pharmacy cost transparency with a high-touch model.

This strategy leads to significant cost savings, improved health outcomes for injured workers, reduced administrative burdens with streamlined processes, and enhanced negotiation capabilities, which ultimately provides a stronger return on investment for our partners. The payment integrity market continues to be dynamic, with payers seeking options to reduce cost-of-care dollars. CERiS' engagement and proven results drove an expanded book of business with multiple large payers during the quarter. To eliminate administrative costs and provider friction, there is a shift in the market from post-pay, also referred to as pay-and-chase, to the pre-pay review model. As a result, CERiS will be launching pre-pay DRG in the current quarter. The new offering allows us to provide an additional service to the market and builds on CERiS' decades of pre-pay expertise. This not only provides a better experience for payers and providers, but it also shortens the revenue recognition cycle for CERiS.

Furthermore, this quarter, CERiS deployed product and technology enhancements beyond those focused on the shift to pre-pay. Strategic efforts are balanced between capital investment to enhance our service offerings and areas that improve overall efficiency and cost management to drive incremental improvements in profitability. In all markets, mental health remains a hot topic, and as such, supporting mental health is a focus for many organizations. Given that behavioral health affects both mental and physical health, we need to be equipped with the best resources in behavioral medicine, which includes aspects of psychology, occupational therapy, preventative medicine, and biofeedback. At CorVel, our care advocates are trained to identify mental health issues associated with work injuries. There is an increased emphasis on identifying mental health opportunities in the critical first 30 days of a claim.

Once identified, we work with employers and treating physicians to provide education and holistic treatment plans to promote mental well-being during the recovery and prevent delays in healing and return to work. We are sharply focused on efforts to drive growth and profitability, many of which are based on artificial intelligence. Algorithms and generative AI are being used to drive workflows and automate manual objective tasks, which streamline work and allow our team members to focus on higher-value activities such as interacting with injured workers. Artificial intelligence is also being used in medical imaging, drug history, and predictive analysis for early illness detection and to personalize treatment plans. Chatbots and virtual assistants are being leveraged to interact with injured workers during their health journey, creating a personalized approach to healthcare and more efficient use of medical resources.

In the quarter, we introduced an enhanced communication platform, which facilitates two-way SMS messaging between claim staff and injured workers directly from our proprietary claim system, CareMC. While SMS messaging is not new, having the functionality integrated within CareMC yields a level of efficiency that is unique in the industry. This functionality has greatly improved communication with injured workers, as texting has been increasingly embraced by claimants. To further strengthen communication with claim stakeholders, we have integrated the capability to make calls directly from the CareMC platform to injured workers. As the model runs through our claim system, it utilizes the advanced security features that are already embedded in the system and prevents unintended communication, thus reducing patient security risk. These enhancements are fostering better collaboration and have improved the overall claims professional and injured worker experience.

With clinical bills, AI-enhanced reviews are helping our users focus on reviewing procedures, identifying anomalies, and consistently documenting activities. This ensures that CorVel achieves optimal cost containment through the augmented processing of medical bills. On the analytics front, CogentIQ has released new dashboards to visualize the claims journey. The claims journey dashboard displays interactive metrics for claim characteristics, including items like nature and cause of injury, severity and outcome, legal, and cost value metrics, allowing partners to easily analyze key aspects of their program. We have a dedicated team focused on executing a robust queue of enhancements for our systems. We look forward to the market impact of the continued evolution of our systems. Brandon will now provide additional texture on the financial results for the June quarter.

Brandon O’Brien (CFO)

Thank you, Michael, and good morning, everyone. As Michael indicated at the top of the call, revenues for the June quarter were $212 million, 11% over the $190 million revenue for the June 2023 quarter. Earnings per share for the quarter were $1.25, increasing 9% from the $1.14 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 June quarter was $139 million, an annual increase of 9%. Gross profit increased by 7% from the June quarter of 2023. Patient management services, primarily led by revenues from our TPA customers, have grown organically at over 10% per annum for the past 15 years. Our partner customers have welcomed our continual investment in product development and innovative features, resulting in quantifiable positive outcomes benefiting both their organization and their employees.

The revenue for network solutions sold in the wholesale market for the June quarter was $73 million, up 16% from the same quarter of the prior year. Gross profit in the wholesale business was up 24% from the June quarter of 2023. CERiS, part of network solutions, has driven growth by expanding services and scale with both our carrier and payer partners. One improvement involved expanding the disallowed items, increasing review volume. Additionally, the maturation of services for clients onboarded in the March and early June quarters drove the improvement in results. I would now like to review a few additional financial items. During the quarter, the company repurchased 38,138 shares at a total cost of $9.4 million. From inception to date, the company has repurchased 38 million shares for a cost of $803 million. Through this 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. Our DSO, as in Days Sales Outstanding of receivables, was 42 days, up 2 days from a year ago. The quarter-ending cash balance was $132 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.