CorVel - Earnings Call - Q3 2025

Executive Summary

• September quarter (Q2 FY26; calendar Q3 2025) delivered solid growth: revenue $239.6M (+7% y/y) and diluted EPS $0.54 (+20% y/y). Gross profit rose 15% to $58.2M with 24% gross margin.
• Sequential progression continued: revenue up vs June quarter ($234.7M) and EPS up vs $0.52, supported by margin discipline and lower direct costs.
• Management highlighted agentic AI adoption, workforce development via CorVel University, and stronger payment integrity solutions as structural drivers; segment contributions included ~$12M growth in Network Solutions and ~$4M in Patient Management (claims operations).
• EPS growth was tempered by one-time items (~9 percentage points), and the company provided no formal quantitative guidance; consensus estimates were not available from S&P Global for this quarter.
• Balance sheet remains a catalyst: $207M cash, no borrowings; continued buybacks ($12.8M) and improved DSO to 40 days support earnings quality and capital deployment flexibility.

What Went Well and What Went Wrong

What Went Well

• Durable top-line and margin execution: Revenue +7% y/y to $239.6M; gross profit +15% y/y to $58.2M at 24% margin, with operating income +25% y/y to $35.9M.
• Strategic wins in AI and efficiency: “Recent AI-driven enhancements have improved both capacity and precision in identifying medical bills and claims with potential savings… enabling us to conduct a greater number of reviews per claim” (Michael Combs).
• Strong financial discipline and cash generation: Ending cash $207M, no borrowings; repurchased 143,774 shares for $12.8M; DSO improved to 40 days (−2 days y/y), helping earnings quality and working capital turns.

What Went Wrong

• EPS uplift muted by one-time items: “The combined effect of one-time events in the September quarter softened the increase in EPS by approximately 9 percentage points” (Brian Nichols).
• Commercial health pricing pressure: Service division operating under elevated pricing pressure, necessitating increased savings and efficiency delivery to payers.
• Industry-wide workforce headwinds: Demographic shift reducing experienced professionals in workers’ comp; CorVel is investing to mitigate but the macro backdrop remains challenging.

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 filings 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 (CEO)

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 quarter's financial results. Revenues for the December quarter were $228 million, a 13% increase over the $202 million of revenue for the December 2023 quarter. Earnings per share for the quarter were $0.46, a 39% increase from the $0.33 per share in the same quarter the prior year. Earnings per share for the nine months ending December 31st, 2024, were $1.32, compared to $1.09 during the nine months ending December 2023. The earnings per share figures for the current and previous year have been adjusted to account for a three-for-one stock split on December 24th, 2024.

The decision to execute a stock split reflects CorVel's strong financial position and progress in the market through our strategic initiatives. The successes we've achieved have led to a significant growth in the stock price over the past few years. The stock split enhances the accessibility of shares for a broader range of investors, including CorVel team members. From CorVel's inception, investing in technological innovation has been key to setting CorVel's services apart and improving outcomes for our partners. Although a focus on technology and innovation was unique when we launched in 1988, innovating and effectively leveraging technology has become crucial for competing in our industry today. A key to CorVel's success and continued differentiation is the organization's structure, the depth and tenure of the development team, and the lack of impedance in translating business needs into the development and implementation of functioning systems.

Following are a few differentiators for CorVel. Our development leaders are unique. Most have been with CorVel for over 20 years. This longevity brings numerous benefits stemming from their deep institutional knowledge. In addition to fostering strong team dynamics, we experience enhanced consistency and continuity in development, increased efficiency, stronger relationships with shareholders, and improved problem-solving capabilities. Furthermore, this longevity facilitates more effective knowledge transfer as we expand the team. Given their tenure, our in-house developers possess extensive technological and industry knowledge. This deep understanding gives them insight into leveraging systems to benefit our team members and partners. Our IT team is closely aligned with the operations team, resulting in reduced feedback loops that enable the swift implementation of enhancements. In addition, we regularly gather feedback from internal users and engage partners in advisory group meetings. These groups provide input on current and future development.

The combined feedback is vital to guiding CorVel's development roadmap. Thanks to the depth and strength of our IT team, we release system updates and new features every week. This enables us to progress rapidly in enhancements and advancements in automation and innovation. While discussions about other companies' AI platforms are increasing, we focus on what truly matters: demonstrating return on investment and improved outcomes, increasing CorVel's value proposition. In the December quarter, Generative AI-based functionality was implemented to streamline the processing of demand packages, IME, Med-Legal files, and takeover claims. The enhancements support the review and data extraction of large document sets and the evaluation and validation of their content. Additionally, the system was updated to identify key claim milestones, allowing team members to review and approve information prompted by the system. We believe that actively enhancing systems and workflows is a valuable investment.

These improvements help contain claim costs, improve the experience for injured workers, and make day-to-day tasks easier for our teams. This also allows team members to focus on higher-level activities like interactions with injured workers. Chatbots and virtual assistants are playing an increasingly significant role during the claims process. They are designed to offer a personalized approach, leading to better patient outcomes and more efficient use of medical resources. One example of improving patient outcomes is an integrated communication platform, which operates within our proprietary system, CareMC. While direct voice communication will always be an essential component of effective claims management, we are more heavily leveraging text messaging, as studies indicate that the majority of people prefer texting over calling due to its convenience and quicker response times.

Text communication also enables the use of templated messages, facilitates the sending and receiving of documents, and allows sentiment analysis to inform the claims management process. We deeply value technology and believe it works best when it enhances the performance of our team members. While automation and generative AI support their work, the core responsibilities of our staff involve executing essential tasks effectively. Maintaining service quality is a top priority for the supervisory and management teams. Delivering high-quality execution and engagement is how we achieve outstanding results. Continually measuring and improving our operational excellence remains a key focus at CorVel. In addition to technology trends in the industry, medical inflation continues to be a significant focus, as underscored in the NCCI 2024 carrier survey.

Although its effect on workers' compensation remains moderate, falling within a range of 2.5%-3.5%, state fee schedules serve as a vital mechanism for cost containment by capping payments to healthcare providers. Distinct from commercial insurance, medical inflation in workers' compensation is shaped by unique factors such as fee schedules, utilization management practices, and the specific nature of workplace injuries. These elements underscore the complex dynamics of cost management in this sector. With access to comprehensive medical and claims data within an integrated system, CorVel is uniquely positioned to address these challenges. Our advanced dashboards offer payer clients the tools to benchmark medical costs effectively. These dashboards provide deep insights into critical trends, including year-over-year inflation rates, enabling clients to develop data-driven strategies for optimizing both cost management and care delivery.

By leveraging these analytics, stakeholders can navigate the intricacies of medical inflation with precision and drive meaningful outcomes for their organizations. As more tools and resources are required to identify not just cost savings, but also the most suitable providers for claims, in addition to dashboards, we also leverage advanced analytics to analyze clinical outcomes using data points such as geographic region, physician specialty, injury type, diagnosis, and affected body parts. These tools enable efficient benchmarking of provider performance, empowering clients to make data-driven decisions that enhance outcomes and optimize care delivery. In the healthcare market, the persistent upward trend of medical costs is causing ASOs, that is, administrative services-only customers, to seek additional medical savings and greater cost efficiency in claims. CERIS is ideally equipped to solve the growing demand by offering multiple audits and lowering claim thresholds.

With our expertise in prepay, CERIS is able to accommodate ASOs and payers with the tools needed to reduce medical spend without additional administrative overhead. Additionally, during the quarter, CERIS onboarded clients through platform contracts. This allows payers to access multiple payment integrity vendors with one integration point and creates additional savings by shifting business upstream. These partnerships open a new sales channel for CERIS by enabling access to long-standing platform relationships in a business segment with shorter revenue cycle times. Brandon will now provide additional texture on the financial results for the December quarter. Brandon?

Brandon O’Brien (CFO)

Thank you, Michael, and good morning, everyone. As Michael indicated at the top of the call, revenues for the December quarter were $228 million, 13% over the $202 million in the December 2023 quarter. Earnings per share for the quarter were $0.46, increasing 39% from the $0.33 per share in the same quarter of the prior year. During the quarter, we completed a three-for-one stock split. All earnings per share figures discussed today, including those for prior periods, have been adjusted to reflect the stock split on a post-split basis. The revenue for patient management, including third-party administration, TPA services, and traditional case management, was $146 million in the December quarter, an annual increase of 11%. Gross profit increased by 15% from the December quarter of 2023. Patient management services led by our TPA business grew primarily from new customer implementations.

Our Enterprise Comp product and service offering has a strong and growing reputation in the market, adding new customers across many industries, including hospitals, food service, and universities. Consistent, intentional investment in our patient management business includes a growing suite of proprietary AI and process automation tools for our trained professional staff. These tools facilitate differentiated, meaningful, positive outcomes for our customers. The revenue for network solutions sold in the wholesale market for the December quarter was $82 million, up 16% from the same quarter of the prior year. Gross profit in the wholesale business was up 33% from the December quarter of 2023. Network solutions, including CERIS, have made significant strides in achieving efficiency gains. This process stems from the successful implementation of GenAI and other process automation tools, plus streamlined workflows.

Management has effectively leveraged these advancements to enhance competitive advantage by balancing improved margins with lower price points. This approach has not only boosted operational performance but also strengthened relationships with partners. I would now like to review a few additional financial items. During the quarter, the company repurchased 85,710 shares at a total cost of $9.6 million. From inception to date, the company has repurchased 114.4 million shares for a total cost of $823 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, the same as from a year ago. The quarter-ending cash balance was $163 million.

CorVel's strong and debt-free balance sheet generates improved earnings in contrast to many others in the segment facing increasing debt loads and 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 (participant)

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