Insight, analysis & opinion from Joe Paduda


ExamWorks – another opinion

I received this comment from a reader in response to my post about ExamWorks and their recent financials. It is quite thorough and well worth consideration on its own merits.
Thanks Joe for a very interesting post. The market is always right, but not necessarily at the right time. The recent conference call for EW was posted on the SEC site.
Here are some excerpts:
Richard Perlman – ExamWorks Group, Inc. – Executive Chairman: Notwithstanding what we believe to be a fantastic year for ExamWorks as reflected by our guidance, we feel that it is important to share what we believe will be lower than expected Q1 results due primarily to the severe weather conditions that impacted many of our geographical markets. We have repeatedly referenced that the IME business did not exhibit much seasonality and that it is immune to the cycles of the general economy; however, it isn’t immune to weather.
The high incidents of storm-related issues was quite significant. In some locations, every link of our logistical chain was challenged, whether it involved clients closing operational centers, doctors travel to their officers or, most importantly, claimants travels to their appointments. Obviously, not all service centers were affected and we did state that in markets like Florida and California we expect to have solid first quarter results that are in line with our internal plans.
However, as we sit here today, we believe that this could have a 5% to 8% negative impact on our Q1 revenue plan and an even higher impact on EBITDA, due to the reverse operating leverage these revenues imply. That being said, we are confident that almost all of this business will or has been rescheduled and will be recognized in the subsequent periods.
Jim Price – ExamWorks Group, Inc. – CEO: To wrap up the progress report, we have a few comments on our go-forward marketing strategy. MES is a formidable, premium brand with a long operating history. Because of this, we will retain the MES brand, providing assurances to the MES clients that their high quality service and support to which they are accustomed will continue…One of the distinguishing features of the IME business is that it is very relationship-driven. The current marketing and support teams will continue to service their respective accounts.
ANALYST QUESTION: Great. Thanks for taking my question. I guess I’d like to spend a little bit more time on the opportunity to maintain the MES brand and what it means for markets where there’s geographic overlap between the two companies…I guess my question centers around basically if insurance companies in a given market are using a variety of different vendors; I had assumed it would treat the ExamWorks Company in a market as a consolidated entity with the MES Company now that the merger is completed. Can you let me know if that is not going to be the case? And also, I’ve love to just get your thoughts on where there is the geographic overlap, and any assumptions for cannibalization of revenues in the guidance.
Richard Perlman – ExamWorks Group, Inc. – Executive Chairman: Yes… But, let me talk about the cannibalization. I think what we’ve tried to do in our guidance is be fairly conservative, and really we’ve built something in that in our conservatism. We have no reason to believe that it will occur….
Jim Price – ExamWorks Group, Inc. – CEO: In a lot of the insurance carriers and partners, they have multiple — we’ll call them baskets, where the adjusters will put files to be picked up or received. If they’re not going electronically, they’ll be in a partner’s basket. So there may be a MES basket, there may be an ExamWorks basket, or it may even be one of our local or regional companies’ names on that basket. So, the goal is to keep the existing structure and flow working well…. we are keeping both entities’ sales structure going forward…
ANALYST: Okay. So can I just be sure I’m understanding. The assumptions — so even though — please let me know if I’m capturing this correctly. Your conversations with the insurers where there is market overlap have indicated some comfort that they will continue to treat the MES — they will treat MES separately from the ExamWorks company and they will not treat it as one consolidated entity where there’s market overlap.
Richard Perlman – ExamWorks Group, Inc. – Executive Chairman: That is correct.
This call is an example of the challenges they are facing. First of all, anyone who knows the IME and claims business knows that weather issues quickly result in rescheduling of events. ExamWorks has a national footprint, including many areas where there were no weather issues. Furthermore, issues with weather were quite temporary. Claims shops closed at best for a day or two. Exams would likewise see very limited cancellations. Most importantly is that weather is an annual event somewhere, and even more critically is the fact that claims are time sensitive and the vast majority of weather related issues in January and February would be rescheduled and completed well before the end of the quarter. Yet management is already trying to manage a 5-8% decline in revenue attributing this to the weather. Looks like they are having other challenges. I think there is no other way to say it on the weather excuse: ExamWorks management is likely not being truthful. They are not meeting their projections and it is not about the weather.
The other excerpts are about the MES acquisition and revenue cannibalization. They claim that they will keep two brands and teams. Help me understand how this will work in reality. Will there be two sets of sales people selling the same product to the same customers, presumably telling these customers why one is better than the other? Are the hundreds of staff and management members of the combined companies willing to buy off and capable of executing on this strategy?
Joe, your posting links to ExamWorks financials. One of their comps that we know in our managed care space is Corvel. Corvel has real income, about 44 million pretax on revenues of 366 million, with a market cap of 586 million.
[Paduda note – I haven’t written about Corvel in a long while; their P/E is around 21 which is pretty awfully very high for a company with decent but not great revenue growth in a mature market with declining claims frequency that hasn’t sold a big national account in quite a while. WIll remedy this oversight shortly.]
ExamWorks on the other hand has negative income, claims a run rate of about 350 million but has no real evidence of achieving it, and has a market cap of about 700 million. If investors really believe that they are capable of converting their challenges, based upon their current strategy and clear revenue challenges to profit, have at it.

Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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