Maximus Inc (MMS) 2002 Q4 法說會逐字稿

Good day. All sites are all on the conference line in a listen-only mode. If you need assistance at any time, please press the star and zero on your touch-tone phone. At this time, I'd like to turn the meeting over to Lisa Miles, Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us. On the call today, I have David Mastran, Chief Executive Officer and Richard Montoni, Chief Financial Officer. Before we begin, I'd like to remind everyone that a number of statements being made today will be forward-looking in state. Please remember that such statements are only predictions and actual events or result may differ materially as a result of risks we face including those discussed in the SEC filings. We encourage to you review these findings in the form 10-k. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances. And with that, I'll turn the call over to Richard Montoni, Chief Financial Officer.

Thanks, Lisa. Good morning and thank you for joining MAXIMUS. I will first review some key highlights followed by a detailed discussion of financial results and other metrics. Our results for the quarter and for the year speak to the resiliency of our pace business.

Despite a very difficult environment, we recognized a 7% year-over-year increase for the top line for the fiscal year and the foundation remains solid as indicated by stable operating margins, cash flow from operations and free cash flows. We recorded fourth quarter revenues of $134 million and our full year $519 million. Other key highlights include, we improved DSO's to 90 days on September 30th, 2002. We generated $23.3 million in cash from operations and free cash flow of $20.1 million in the fourth quarter. We continue our active share buyback program repurchasing in excess of 1 million shares in the fourth quarter and we exited the year with approximately $95 million of cash on hand.

Lastly, we enter fiscal 2003 with a very solid base of recurring revenues and excellent opportunity for growth. I'll begin the detailed discussion of the financial results with revenue. This morning, we reported total revenues of $134 million for the quarter. This is a $1 million sequential increase over the revenues we reported in the third quarter, and is a 6% increase compared with revenues of $127 million of the fourth quarter of 2001. However, this revenue for the quarter was slightly less than the company's guidance. Revenue for the 12 months ended September 30th, 2002, totaled $519 million, 7% gain over revenues of $487 million reported in fiscal 2001. Our organic revenue growth for that year was 4% and for the quarter, organic growth was essentially flat. Here are the revenue details by business segment.

Our consulting services segment, consulting revenues with $35 million for the fourth quarter which is up about $500,000 sequentially. The full year revenues for this segment declined about 6% to $138 million when compared to revenues for the same period last year. The year-over-year decline is predominantly a function of the economic environment where some clients at state levels were rethinking budget initiatives and in some cases growth did not materialize. A large impact came from the decline in I.T. consulting as agencies shyed away from major installs and thus there was decreasing demand for our consulting services in that arena.

For the health segment, it posted fourth quarter revenues of $40.7 million which is down slightly on a sequential basis. This is due to contract modifications which eliminated in one case eligibility for one of our larger contracts and there was a scale back in mailings under another contract. On an annual basis, health revenue grew 16.7% to $157 million. This compares to revenues of 134,500,000 for the 12 months ended September 30th, 2001. 2002 growth was largely driven by upselling new services to current contracts and as we move into 2003, we've taken significant steps to increase our marketing business development and effort to increase new incremental business in expanded areas that are complimentary to our current service offerings.

The human services segment, fourth quarter revenues for this segment were $37.3 million. This remained relatively flat over last quarter. The group reported full-year revenues of $146,500,000 which is a 6% increase compared to last year. In our systems segment, fourth quarter revenues increased 8% to $21 million versus 19.4 reported in the third quarter. Fiscal year revenues increased 14% to 77.3 million dollars compared to 67.6 reported for the prior year. We're really quite pleased with the performance and outlook for the systems segment. We've seen key contract awards across all vertical markets and the strength in 2002 was driven by growth and asset solutions E.R.P. and justice solutions.

On SG & A operating margin, we finished the year with operating margins of 12.8% for the fourth quarter, and for the full year, 12.4%. Wheel gross margin typically trends even, SG & A does tend to fluctuate. For example, during times of heavy proposal preparation, such as the latter part of 2002 SG & A trended upwards since staff costs are driving SG & A line. Investments in infrastructure also contributes to increases in SG&A. And lastly, relative to our acquisitions in 2002, we did acquire some companies that added SG&A costs to MAXIMUS. Over the long term, these investments are necessary as we seek new opportunities in complimentary vertical markets to augment the current business. Onto accounts receivable and DSO metrics, we continue to pursue our management of receivables into the fourth quarter.

We believe we are seeing the benefits of the improved financial processes that were put in place six to nine months ago. And we have placed senior financial staff on the operation sides of the house to improve the focus on cash and collections and by our operations folks. I think they've done a great job to achieve excellent results. Total receivables have improved three quarters in a row in total 133.2 million for the fourth quarter. This is a 6.4 million dollar sequential improvement.

For the three months ended September 30th, 2002, it improved to 4.8 million, improved 4.8 million to 108.1 million and unbilled improved 1.5 million coming in at 25.1 million dollars. As a result, our day's sales outstanding improved to 90 days in the fourth quarter and despite this continued improvement, we continue to be conservative thinking that 95 to 105 days remains a reasonable range, however, we clearly will strive again to deliver DSOs below this level.

On cash flow from operations and free cash flow, we exited the year with ample cash on hand and great cash flows. In the fourth quarter, again, we generated 23.3 million in cash from operations compared to 15.4 in the comparable quarter last year. Free cash flows fourth quarter was 20.1 million as compared to 13.6 million in the fourth quarter of 2001. And as a result for the full fiscal year, our cash from operations was 58.4 million versus 45.5 million for all of 2001. Free cash flow was 48.5 million for the year, compared to 27.2 for fiscal 2001. Cash balances. Balance sheet strong, quite healthy, cash and marketable securities 95.1 million as of September 30th, 2002. Again, free cash flow remains robust and our balance sheet remains debt free after spending approximately 26.1 million on the stock repurchase program this quarter.

We're particularly pleased to end the quarter with this $95 million cash on hand. As it relates to our stock repurchase program, as you may recall, our board of directors approved the program and allocated a total of $60 million plus option proceeds towards executing the buyback. And our repurchase program did remain active in the fourth quarter during this quarter we repurchased 1,075,600 shares for a total purchase price of $26.1 million. In aggregate for fiscal 2002, we purchased 1,871,869 shares of common stock for a total cost of $50.8 million. As a result at September 30th, we have approximately 15.9 million dollars remaining under the authorizations to purchase stock in the future. And our intent is to remain opportunistic with this program. As a result, weighted average shares at the end of the quarter were 22,028,066.

And one quick comment on forecasting and guidance. David will discuss in detail our guidance for fiscal '03. I do want to acknowledge that we have focused on the need to improve the company's forecasting capabilities. This was clear from prior experiences. I believe we have made substantial progress. We've developed and refined our processes and methodologies for forecasting and acknowledge the prudence to view guidance from a conservative perspective. These are key elements within the FYO 3 guidance that David will soon share with you. With that, I'd like to turn it over to David.

Thanks, Rich. Good morning and thanks again for joining us. As we have said in previous calls, fiscal year 2002 is a challenging year as we all adapted to the new world after September 11th. In spite difficult macro and economic environment, the top line for the fiscal year grew by nearly 7% recording fourth quarter revenues of 134 million and full year revenues of 519 million. As Rich said, our EPS for the quarter was 50 cents and we had 20.1 million in free cash flow in part because of a reduction of our DSO's to 90 days. We bought back over 1 million shares last quarter, demonstrating our firm belief in the future of MAXIMUS.

In terms of key wins overall, our operations remain on track. We were able to secure significant wins on 2002, which contributed to the strength of the business face. These include Rev Max, Windsor, Kansas, Indiana, New Jersey and several counties in California such as Orange, River Side, San Diego, and Sacramento. Key consulting wins in the child welfare area. A difficult situation that local governments are facing, an area which promises great potential for us. Wins in the systems using smart cards for facility security. At the treasury department at the New York City federal building. MAXIMUS has also been awarded systems contracts implement package software, solutions in the courts for state wide ERP implementations and the education marketplace.

We've also been successful in winning vehicle maintenance and facility management software from state and local governments. We also had key rebid wins in our human services group in Wisconsin 19 million through 2003 and Orange County, California, 19.8 million. And Tennessee child support contract for 6.5 million. We've recently announced two other contract wins, $6.7 million contract awarded by Maryland's department of human resources to continue to provide child support enforcement services in Baltimore and Queen Ann's county. The $59.7 million contract when to continue to operate the New York Medicaid choice project through June 2004. In addition, we have recently been notified of two new additional health care enrollment contracts and two mid side states.

In terms of our management team in 2002, we took steps to strengthen the team with the addition of Richard Montoni as CFO and we also have a new addition to the team. Since joining us in March, Rich has been improving our internal financial processes and already achieved significant successes in the areas of DSO management and cash flow. Our fourth quarter results clearly underscore the progress in these areas. Last week, we announced David Johnson joined us from Delloit Consulting where he was most recently responsible for managing their federal government practice. His leadership and managerial experience combined with his direct government expertise will enable him to contribute to our growth. Dave will report directly to me as will Tom and Lynn Davenport.

Also during the course of 2002, MAXIMUS increased our investments in several key areas to fortify our infrastructure and bring more cohesive approach to our business efforts. These investments included adding key managers throughout the front line of the organization as we continue to break ground in new areas and broaden our current portfolio. Upgrading our marketing systems to track existing account activity. Completing key acquisitions to broaden our geographic reach and workforce services and solidify our position in providing software solutions to public sector transit agencies and utility companies. Implementing new training and education procedures across the organization. This is an important step as we improve our overall processes in order to ensure high quality project across the board. And also operationalizing our centralized proposal senter to increase a level of sophistication of the responses to RFP's. As a result, MAXIMUS has been much more aggressive in pursuing opportunities. In addition, we've raised the bar on the overall quality of our proposals.

We're starting to see the benefit and have been named finalists on several proposals in areas where we haven't been dominant but which are complimentary to our existing core competencies. Although it's too early to be satisfied, the evidence is clear that we have significantly upgraded our proposal capabilities. I'd like to spend some time discussing how we review the election results and our general outlook on the operating environment. As you know, the vast majority of our businesses with state and local government so we need to stay on top of what is going on, and we have been. The results of the gubernatorial elections two weeks ago were a net positive to MAXIMUS. As you know, there were 24 governors elected to office, new governors and 20 party changes in control for governorships. I think we're well positioned for these administration changes.

We spent a significant amount of time in marketing. We've met individually with 16 of the new governors prior to the elections discussing opportunities to help address the budget crisis and actions they could take to have an immediate impact. These elections present new opportunities for MAXIMUS. The insights we gain give us a clear picture of what the new governors are going to focus on, and as importantly, a head start on developing detailed strategies and solutions as the new administrations transition them and prepare to implement their initiatives. We fully appreciate the budget difficulties many states are facing in fiscal '03. This may temper growth in the next quarter or so, but based on early intelligence, we believe the new administrations are like likely to turn to companies like MAXIMUS to deliver valued added solutions that increase productivity and reduce costs.

At the federal level, with this new mandate, President Bush is requiring a fresh look at outsourcing across all major departments. We believe this will help set the tone for more outsourcing in the state markets as well. In addition, the new homeland security department will inevitably create many contract opportunities for MAXIMUS. While the past year has been difficult for all businesses, we remain confident in the resiliency of our business base in fiscal '03. Approximately 70% of our business is federally backed.

Since there has been a lot of discussion about a perceived exposure to state budget deficits, we thought it would be useful to provide additional visibility by detailing our revenue by customer segment, which would offer insight into the strength and diversity of the base. 59% of our revenues come from state governments, of which the vast majority is federally mandated and funded. 30% of our revenues are attributable to local governments, which generally enjoy a less volatile tax base. The remaining 11% of revenues largely attributed to federal contracts, commercial clients and foreign government agencies that are independent of the state budget deficit. While we have seen some effects of reduced tax revenues, they appear short term in nature.

Let's look at each of our business segments for fiscal '03. In terms of systems, we started to see the increased activity in the second half of 2002, and we expect that trend to continue into 2003. This segment in general has been particularly quiet over the last few years following Y2K. Many agencies don't have plans for massive system implementations, many are looking to do smaller scale projects and in fact we've already seen the benefits. The pipe remains active in such areas as ERP solutions and justice solutions.

As I have previously indicated, we are also becoming active in the education marketplace for systems. We have had good success in selling our school max system across the country. In terms of health care management, we're spending a significant amount of time in the areas of marketing and business development. However, the sales cycle for this business segment is long and as a result, we anticipate only modest growth in 2003. Nonetheless, we are actively exploring opportunities in the areas of long term care which compiments our current portfolio and takes advantage of the demographic changes the country's undergoing. More importantly, the base business in our health care management group remains solid. There are plenty of opportunities beginning to surface that focus on health care cost containment that we can take advantage of.

In our consulting business, FY 2002 is a challenging year in IT consulting where the demand was soft. We believe it was attributable to the political environment as state spending returns to more normalized spending, we believe we are well positioned for 2003. As I alluded to earlier, we had discussions with the several new governors taking office and early indications tell us there is a significant interest in our cost containment services. We have a number of solutions that help clients save money, which are precisely the services that will be in demand for fiscal 2003.

Looking at the pipeline, there's some really significant consulting opportunities also in school-based claiming, child welfare improvement programs and technology support that could be significant growth. We feel good about consulting. In our human services, market activity has been somewhat flat in the core services, however, we've stepped up initiatives to expand our capabilities. We are now providing services to employers of welfare recipients. We have also created a new children services division and are designed to focus on child care program management and systems implementation. Both of which are growing markets.

The division currently provides business process outsourcing for child care services and it's currently in contract negotiations to develop and deploy child care systems utilizing a new MAXIMUS J2EE human services application framework. We're finding that technology is becoming a differentiator in the marketplace and this reverses a trend where the exclusive focus was on software functionality. The return on investment job care is compelling and we're responding to RFP's of both the state and county levels. I'd now like to turn to our pipeline statistics which we'll report on next quarter and the numbers look surprisingly good. As you recall, in the pipeline, we start with an rfp that we track then we can bid on that rfp which is in the category proposals and process. We submit that our proposal goes into a category of proposals pending. The government is evaluating it. You get notified of an award which is awarded but unsigned.

Finally, the contract signs. So the five stages. In terms of contracts last year, we were down from 570 million in FY 01 to 527 million in fiscal year '02. Many procurement decisions were delayed. As a result, our proposals pending this year are up 40% over last year and the quality of the proposals pending is higher, meaning we expect to win a larger percentage. The current proposals pending is $406.9 million versus 289 million last year.

Looking at our total market opportunities, which comprise the rfps and the proposals pending, we have almost 900 million being reported versus 793 million last year. Last quarter, the number was only 712 million. So we're seeing a lot of rfp activity in the last quarter. In terms of our guidance for fiscal year '03, we are confident in the guidance which reflects annual revenue growth of approximately 10% beginning primarily in the second quarter. There's a potential that a couple of contracts could result in higher growth for 2003. These contracts were in areas where we traditionally would not have been a big player but are to complimentary to the core areas. There's clearly upside potential. As a reminder there is a certain level of seasonality in the first quarter related to time off for the holidays in our corporate offsite. Therefore, revenue expectations range from 134 million to 136 million with a range of 47 cents to 49 cents on the bottom line. Our full fiscal year 2003 guidance is for revenues ranging between 570 million and 580 million and the diluted EPS between $2.05 and $2.10.

Finally, I'd like to close with corporate governance. Long before Sarbanes actually became the new buzz word, MAXIMUS already employed a high standard of corporate governance. As I mentioned on the last conference call, we've always had a separation between the chairmanship and Chief Executive Officer. With the recent appointments, we now have four independent board members and are considering additional candidates to provide a majority of outside directors. We have an active audit committee chaired by Peter Pond, our chairman. MAXIMUS has a long standing ethics program that's been in place for several years and all new employees are required to participate in a rigorous training session that includes an ethics module.

As you know, we also have a compliance officer and internal audit function. We take the highest corporate ethical standard very seriously, and our efforts in that area both recently and over the years have amply demonstrated that. In summary, we believe we is turned the corner. Our infrastructure development is just about complete. Our opportunities are in place, and as our Chairman, Peter Fond says, "it's show time." With that, I'll open it up for questions.

Thank you. At this time, if you would like to ask a question, please press the one on your Touch-Tone phone. To withdraw your question, you may press the pound key. Once again, if you would like to ask a question at this time, please press the one on your touch-tone phone. And we'll take our first question from Charles Trafton with Adams, Hartness and Hill. Please go ahead.

Hi, thanks. Good morning. Dave, you mentioned that based on some new intelligence you thought that some of the privatization initiatives were going to pick up around the country. Do you want to elaborate on that?

Sure. In some of our discussions with the governor-elects, at the time they were running, they were interested in the outsourcing solution to help contain the state budget, so I think there's going to be a fresh look at outsourcing with these new governors coming in.

Any of them in particular do you think have privatization on their -- as a major agenda?

Most of them are looking at it.

Okay. Rich, you had mentioned that you are working on ways to tighten up the -- the way you guys do projections and the way you are looking at your future financials. Do you want to give any detail behind that

Charles, I'll be glad to do that. We've, as you can imagine, there's many touch points in the processes, the methodologies, the procedures that the company uses to work up information relevant to forecasting. And it ranges from such things as what probabilities do you use when you probability affect your sales pipeline? Is the company consistent using those probabilities across the board? We've worked to refine, define and educate folks in terms of which probability should be used. You want to avoid such things as the things like pie in the sky or very distant. And one of the toughest things in this business is not -- there's two hurdles that you need to go through, Charles, in forecasting. One is will the company win and then secondly when will the work begin. So you have two really tough hurdles here to forecast. And your forecasting precision is a reflection of, I think, the standardization and sometimes the judgment that goes into those calls. There's many many things that we're putting together to improve that, and that's just one example that I've given you.

You mentioned that you now have a new service to the employers of, what's it, is that former employers of unemployment recipients? What are you doing now for employers?

Now we're helping them process tax credits so that they're eligible for it when they hire welfare recipients.

And is that a significant business now? How big do you think that can get?

Well, we've just acquired a company that's in that business. It's small at this stage. We're now working with them to refine their processes. We expect it to grow over time since we're well distributed throughout the country.

Okay. Thanks. I'll let someone else on. Thank you.

We'll take our next question from Charles Strauzer with CJS Securities. Please go ahead.

Hi, good morning. Just a couple quick questions. When you talk about -- can you talk a little bit, Rich, if you could, about Cap Ex expectations for '03, if you can?

First off, my view is that this is not a terribly expensive Cap Ex business. You know, we have normal Cap Ex that we need to spend for furniture and fixtures, so as we grow and get bigger, we have to replace these items, computers are pretty significant expenditure. And you will find that our Cap Ex tends to run around I will say a million and a half, $2 million a quarter is the range that tends to be our normalized range. If we were to decide to go into a major systems overhaul, which is not decided at this point, then you might find us having an abnormal spend, but our normal range is a million and a half to 2 million a quarter.

Nothing on the horizon that you can see to cause that to be abnormally higher is what you are saying?

I don't think so.

When you talk about the pipeline and the five stages and you broke out the kind of the proposals being around 900 million, are you including just RFP's that have been formally issued or ones that you know are in the writing stages or what you know has been issue smd

Let me answer that in more detail. In RFP's tracking that category was 388.7 million is measured on November 18th. That means these are opportunities, RFP's that we see coming up within the next six months for sure, three to five months. 95% chance they're going to come out and we're definitely going to bid on them and have at least no less than our normal chance of winning them. So it's a screened list. Sometimes we see very big opportunities in that list and we cut them way back to reflect the probabilities. So that is a realistic number in terms of the opportunities we're going to be bidding on. In terms of proposals and preparations, we're reporting 103 million. That's actual hard numbers that, you know, we can, I think, in all of these cases we can tell you exactly what the opportunities are in our estimated value. Then proposals pending, we have 406 million that are pending. So they're real.

Gotcha. And can you just expand a little bit more. You mentioned long-term care as a possible opportunity down the road. There is a lot of talk about the cliffs, if you will, about how some of the long-term care operators are facing your potential issues there with potential revenue short falls. Some of the things you are targeting is trying to help them manage their costs better.

Okay. MAXIMUS, there is a pilot project in Houston, Texas that MAXIMUS operates. To my knowledge it's the only such pilot project in the country of enrolling elderly people in the Medicaid managed care plans. Texas A&M recently did a study that pointed out that the managed care plan resulted in a 17% savings. In this case, 123 million for that group of people and at the same time, improved access to care and satisfaction with the program. This has a lot of significance in terms of helping states save money. That particular component of Medicaid programs is only about 20% of the people, but they spend 67% of the money. So we think that the states will be looking pretty hard at Medicaid recipients that could be placed into managed care and not only save money but give them better care as well.

Gotcha. And just elaborate a little bit, too. You mentioned there are new justice opportunities out there. Are you seeing any pickup at all on the statewide systems? I know, there's been talk about the local county level. Have you seen any pickup in the generation of RFP's there?

We definitely are. We under the finals in several statewide competitions right now. And we don't -- the courts aren't affected so much by state budgets because they are funded differently. They've had the money and there's a lot of activity going on right now. More than we've ever seen in fact.

Have you seen anything new at all, new opportunities in the employment area that you could potentially attack?

In terms of welfare to work? Is that what you are talking about?

More just in the unemployment systems area.

No. There's nothing that's on the radar screen of any significance in that area.

Okay, great. Thank you very much. I'll turn the call over to someone else.

We'll take our next question from Bill Loomis with Legg Mason. Please go ahead.

Thanks, Legg Mason. David, very good outlook on the -- with your proposal and total pipeline. I noticed the SG&A has also increased as a percent of revenue. How much of that increase is related to the initiatives you put in around your centralized proposal system and being more aggressive on bidding? Can you give us a sense of that?

Yes. I think the increase is due to centralized proposal center are not that -- they're not that big. But adding key management staff has added costs and insurance costs have gone up as you know. Those are probably bigger drivers of the cost than the proposal center.

Bill, one other point you need to be aware of. The time that people spend working on proposals gets charged to SG&A. And I know that causes a little bit of modeling challenge, but that's reality. Functionally, they are working on a sales effort as opposed to a project, and that's pretty much common practice in government entities. So you will see some bumpiness in the SG&A due to that fact, and in particular, in the June and through the September quarter, we have people working really hard on proposals. That's what you'll see in the SG&A situation.

Okay. But what I'm looking at the incremental increase in SG&A, most of that increase seems to be coming from business investment, either I didn't necessarily mean the centralized proposal cost, but like you said, Rich, about people spending more time on proposal activity. Is that the case or were there also some facility costs and other costs that may not be related to straight business development initiatives.

I think your first depiction is correct. It's important to keep in mind the labor that goes into the proposals. And of course the other part of the equation is the fact that we've made some acquisitions that bring with them some SG&A costs that's additive on a sequential basis.

What's the tax rate going forward? I noticed it's a little lower in the fourth quarter?

It was lower in the fourth quarter. This is a good story because David spoke about the tax credit processing capability that we have. We took a look at, and actually uncovered some tax credits in a couple of states that were to our advantage in the fourth quarter. And normalized rate year-over-year, I think, 40, 40.2% is a good estimate, Bill.

Okay. And finally, just looking at some of the -- with the pipeline, I know you gave some figures in the fourth quarter, but where do you see a huge increase sequentially in your business pipeline? Where do you see that going in the next quarter, the December quarter? Do you think that we're not going to see very many new opportunities or do we see an acceleration post the elections here?

Surprisingly, we're seeing a pickup in RFP's. We thought with the election and new transition teams coming in, there would be a moratorium on new activity, but especially in the health care area, there seems to be a lot of stuff coming out. So I don't want to make a generalization across all business, but we were surprised in certain areas that there's plenty of activity.

Okay. Very good, thank you.

We'll take our next question from Tom Meager with BB&T Capital Markets. Please go ahead.

Yeah, hi. Actually, Rich, maybe a follow-up on Bill's question. Obviously, you are in the share buyback program. Can you give us any expectation about the share going forward might somebody

We'll be opportunistic about that. The number one driver will really be the price of the stock. You know, if the price of the stock goes up, we're less inclined to buy shares. If it goes down, we're more inclined to buy shares. It depends on what happens to the price of the stock.

I guess for forecasting purposes, if we were to keep the 22 odd million that you have out there, we'll be in the ballpark --

Also remember as the stock goes up, you have more common stock that you need to feather in 100,000 a quarter.

Okay, great. Then, David, just a couple of quick questions. I think on the last call, you mentioned you might be seeing pricing pressures as people are scrambling to get work. I was wondering if you could comment on that and pursuing work in what you might call noncore areas and new areas for us. Can you give us some illustration into what areas you are specifically looking at? Thanks.

In terms of pricing pressure, it's been spotty a little bit. But not as much as I probably thought a quarter ago. So just a couple of instances of pricing pressure. In terms of noncore competency areas, in the child support business, we've bid on the is centralized state distribution unit, which we historically have not been in that business but we're starting to bid on that. We think there's opportunities there, and --

Okay, great. I'm sorry, go ahead.

So I think that's probably one that you would be most interested in.

And do you guys actually have a pact? I know you mentioned before the child support enforcement payment estimates and stuff like that. Do you actually have a program built or, you know, a system in place that addresses that need?

Yes, we do.

Okay.

One other area that you might find interesting that we're getting into a little bit is election systems. We've teamed up with Hart Civic company in Texas and we have bids pending in Southern California to help with elections.

I think you've also if I'm not mistaken, Microsoft units and some of the other guys have gotten into that business as well, though, is that correct?

Yes, we've seen a lot of players there.

Okay. Thank you very much.

We'll take our next question from Cynthia Holton with RBC Capital Markets. Please go ahead.

Hi. You know, one of the things I wanted to get a little more color on is DSOs improved fairly significantly for the quarter, but the range you are giving is still in the 95 to 105 days. Could you give us a sense of why we might see DSOs pick up so much and why it's kind of a 90-day range wouldn't be a more realistic target?

Cynthia, the answer has a couple aspects to it. One is just to be conservative. And I do think the nature of the business and this really gets to the heart of our contracts and new contracts and where they are in their life cycle. They will go through different stages. So if we've got a large contract with up front investment, unbilled will get larger and that will put pressure on the DSO situation. We're entering a period here where we do expect growth, we expect new contracts, and I do think in certain quarters, we will get increases in our unbilled and unbilled becomes billed. And what I want to do is set expectations so people really understand our business cycle as a project goes through this phase, it will ripple through our balance sheet. And I say this so that people don't get alarmed as that happens. We're going to work really hard to hit 90 days again. And I don't want to make that the clear cut expectation quarter after quarter.

Okay. And then the next question on share buyback, you said you have 16 million lots remaining of potential buyback. Is there discussions going on, in increasing the amounts since obviously you did a fairly large amount of stock repurchase this year?

We did have in our board meeting a discussion of increasing it again. We felt that the 16 million authorization at this stage was sufficient. But we can always have a telephone board meeting if we need one.

Okay. And then the final question, just some update on what's happening in Australia in terms of what the revenue contribution from that segment was this quarter and just what you are seeing there?

Australia, in fact, I was just there a couple of weeks ago and visited some of the project sites. We have a great team down there. They're in the middle of bidding on or doing some rebids. They recently won a new contract with a new agency. We feel there's a lot of potential down there, and it's kind of fun being down there. For the year, you want to say that, Rich?

Revenues were $7.2 million for the year from May through September.

Great, thank you.

We'll take our next question from Jennifer Child with Bear Stearn. Please go ahead.

Good morning. A couple of questions. One, I was hoping you could give us a little more color on why you missed your revenue guidance? Were there contracts that weren't renewed? You mentioned something about losing eligibility for a contract. Could you elaborate, please?

I would be glad to. We had a few situations that contributed to the lower than guided revenue range. We had a couple of contract where's there were delays. The customer decided to delay and delay sometimes can get stretched out. We're hopeful that it will continue. We also had some scope reductions, and that's what I mentioned in the health services arena. I could give you two particular examples. So that would be two existing contracts either postponed or scope reduction.

Probably the most significant situation related to one particular contract, and this is a court systems contract that we're very, very excited about. We have made significant progress with our partner. We worked on this well over a year, submitted a proposal to install the court system as part of this, we would sell the license to the customer. This is a transaction of about a million one, Jennifer. And delivery had occurred by September 30th. The customer had accepted it. All of the terms were in place. There was a contract letter signed. However, it still remains for the definitive finalized contract to be executed. And under that circumstance, the right thing to do is to defer the revenue. So we've deferred that revenue. By the way that also had not only a $1.1 million top line impact, but that was the impact pretax.

Okay.

And as a result, all of those would have pushed us north of that bottom range.

Okay. Were there any contracts that weren't renewed in the quarter of any size? Any large contracts coming up for renewal in 2003 that we should be aware of?

Let me answer the second part of your question, first. And this ties into the backlog circumstance of September 30th. We have approximately 20 contracts that are up for rebid in fiscal '03. In the total contract value for those 20 contracts is a bit over $220 million. What's really interesting, though, is that the impact or when's on the table as it relates to fy '03 revenue is approximately $18 million, which is 5% less than what we think our range revenue will be next year, so the rebid situation is important to next year, but it's really an fy '04 significant circumstance. And obviously, we'll continue to track and monitor those 20 rebid situations and we're quite pleased to go into this year with having a historical rebid win rate of approximately 90%. In regards to significant contracts that are not going to be renewed or canceled, David would like to talk about that.

Yeah, this really weren't any. Although, some of the existing welfare to work contracts were trimmed back a little bit in California because of the budget crisis, but not significantly.

Okay, thanks. Does the hiring of David Johnson imply you will be seeking more federal awards?

Well, certainly, we want to take advantage of his knowledge of the federal marketplace. That's one of the areas he will be looking at, yes.

Okay, and then finally, I know the accounting for rev max has changed, but could you comment on the backlog at this time relative to last year?

The backlog in total, Jennifer?

Yeah.

Sure.

Of rev max.

Just in general, the activities are continuing to pick up there and that I don't think we have an exact figure for it but it's certainly higher than it was last year.

Okay, thank you.

We'll take our next question from Seth More with Garth Research.

Just following up on the reference that you made for the 20 contracts that are up for rebid. Are most of these in the outsourcing area or could you just sort of give a sense of the breakdown between outsourcing, systems and consulting?

Yes, they are I think almost exclusively in the two segments that deal with outsourcing contracts.

Oh, okay. And Gavin talked about life secure, that program in a long time. Is that going to be significant or is that fairly in the infant stages?

While the concept still is going around, I think it's going to wait. The homeland security department to determine what they are going to do. They have some procurements out there that would utilize smart cards for security. But I don't see a -- I wouldn't count on any major impact of fly secure and MAXIMUS over the next year.

On the homeland security front, I mean, at this point, is there any realistic expectation of fiscal 2003 impact or is it still murky?

Well it's murky, but it does, I think, if the continuing resolutions, if they finally fund these departments, they have procurements in the ready, ready to go. So it's just how fast they want to release them. All of the work's been done on it. They just didn't have the authorization to go forward.

And finally, I'll just ask one more. Looking at the consulting revenues, in the last quarter, what percentage would you say prized rev max as opposed to the other consulting services some

Consulting revenues for that quarter, according to my information here is $35 million even.

Right. And rev max represented what, approximately or roughly?

Of that piece, it's going to be roughly a fifth. Hold on.

Once again, if you'd like to ask a question, please press the one on your touch-tone phone and we'll take a follow-up question --

We need to close the loop on here. Roughly 20% of that is rev max.

Okay, great. Thanks a lot.

We will take our next question a follow-up from Charles Strauzer. Please go ahead.

Just a follow-up. On the billed versus billed, I didn't know if you did that or not.

We haven't given that out, but the 90 comprised of billed 73 days and unbilled 17 days which is slightly improved on the unbilled situation over June. It had been 18 days. The 73 days is four days' improvement over the June situation.

That's great. David, can you talk more broadly, um, as it relates to M & A? I know that the focus has been more hunkering down on a difficult environment now. Now you kind of turning the corner, as you said, are you going to start focusing a little more on m & a opportunities? Has your focus changed from where you might have been a year ago? Give us your thoughts there, if you can.

In terms of m & a, we continually look at companies, and we're more opportunistic than having a specific quote or goal. We'll continue to look at them, but we want to make sure that we can manage what we have in house and we have everybody on board before we start assimilating another company. So at least over the next three months, I don't expect much m & a activity.

But in terms of particular areas you'd like to enhance over time?

What we've learned is that if we take a company and bring a company in, we can immediately energize them with better marketing, better controls. So anything that's at least on the periphery in terms of the core competency as a candidate to acquire. We don't anticipate acquiring any companies that are in totally different areas than we're in right now. There's plenty that's close to what we do that we could acquire.

So it's not in any active heated discussions.

We had one heated one, but I don't think it's going anywhere.

Okay, just going back to SG & A, did you see any pickup at all in your lobbying expenses or campaign contribution expenses in the quarter just given the sheer number of governor's races in the quarter?

In the prior quarter, yes, we did. We also have a pact that funded some of that. Our lobbying expenses we're reviewing all of our lobbyists as new governors come in obviously, people -- different people emerge. So that whole program is under review.

And just lastly, a competitive situation in terms of are you seeing a lot of different players right now? I know there's a lot of talk that IBM is trying to heat up more going after the government contracts. Obviously, you are focusing on a smaller opportunity versus some of what they would go off to be more larger billion dollar sized opportunities. Are you seeing them trickle down more into your area?

Well, in two of the bigger ones for us that we're involved in right now, they under both of them. So we are seeing them. And the bigger ones what we would call our bigger ones.

Gotcha. Any other plays that you haven't seen before that that kind of caught you by surprise a little bit?

Not really. One of the things I with ill say is that in some of our traditional competitors, we've been successful in the last few bids in coming out on top.

Thank you very much.

We'll take our next question from Adam Waldo with Lehman Brothers. Please go ahead.

Good morning, David and Rich and Lisa. Thanks for squeezing me in. A few cleanup questions if we could. I just want to try to see if I could pin you guys down on this sg & a expense issue because certainly I think it is the crux of the visibility around your 205 to 210 guidance for next year. If we postulate, we're talking 3 to 5% as I model it on top line growth. Give us a sense for why we should expect that low are rate of growth in sg & a especially in light of the sequential uptick in the fourth quarter.

First off, Adam, I tend to take it from an operating margin perspective. That is really the more consistent I think baseline view I think. The difficulty is in forecasting folks being working on proposal engagements, selling opportunities versus productive. What we really do is manage the business to the operating income percentage. I'd suggest you first take a look at what operating income percentage. Your model yields with that 10% revenue growth and working it into the EPS factor. I think you'll find you should gravitate to what you judged to be for reasonable achievable operating income percentage. Consistent with the trends that we've had in the past. The other take I would give su that we've made investments in infrastructure. We've got several people on board here. I'm not aware of extensive plans to add additional significant fte's as David has commented. We've accomplished a lot in building our infrastructure so if we have additional costs, I'd say they are clearly incremental, and I'd also say, you know, we need to manage our costs so that we don't grow beyond the rate of inflation and, you know that's our job to squeeze some productivity out of our existing situations.

Rich, would your guidance then effectively assume flat ft head count or in that vicinity or are you expecting some potential further modest head count reduction?

My reaction is head count should fluctuate based on the volume of business. As we do new business or hire new people, I think our fundamental value is that we will not add FTE without additional revenues.

Okay, great. And then I guess just a couple of cleanup issues. If you could give us a sense as you, you know, look forward from a corporate governance standpoint, David, what the board's current thinking is, in terms of allocating surplus capital amongst acquisitions, stock buybacks and potentially dividends given the contemplated elimination of the double taxation of dividends.

That's the topic the board discusses. And there has been talk of dividends. But I think we don't have a clear sense of exactly what we're going to do other than being opportunistic. If that comes to pass, we'll look very hard at it. If there is a good opportunity that comes up, we'll look hard at that. If our stock price drops, we're going to look at that. We've got a reserve of cash that we're ready to move in a direction to the best advantage of the company.

And your guidance for next year includes no change in treatment of options, is that fair?

That's correct.

Okay, thank you, all.

You bet.

We'll take our next question from a Colin Gillis. Please go ahead.

Yes, hello, everyone. Just a quick follow-up for Cynthia Holton. Do you have contract mix by percent of revenue performance base type thing?

We do have that. My reaction is that it's amazingly consistent with what we've disclosed in prior periods. Our fixed price is 35% of our portfolio. Performance based is 28%. Cost plus is 22%. Timing material is 15%. And I think all of those are within a percentage point of what we disclosed last year.

Indeed, indeed. Not for the full year fiscal 02, right?

That's right.

Thank you.

Sure.

We'll take a follow-up question from Charles Trafton. Please go ahead.

Thanks. The new line this quarter was noncash equity based comp? Is that from the money options that you granted last quarter?

Yeah, I think we touched upon it previously, Charles.

Sorry, I might have missed that.

That's okay. It's some restricted stock units that we had issued during the June quarter.

Will that recur?

It will recur the same amount will recur.

Okay, for how long do you amortize that over?

Six years maximum.

Oh. So is that 24 quarters times $260,000?

That would be the --

6.25 million of restricts stocks?

Actually it was 5 million.

5 million?

5.1.

And Rich, now that you've had a couple of quarters under your belt as CFO, do you see anything there that any additional or less disclosure that you might give or different measurements or things that you'd want to talk about with the street that you think would be helpful to us in analyzing the company?

Well, I think first off, I'd have to say, yes, we always preserve the liberty to best communicate with our shareholders so if we think there's something that the investment community would like to know, we're going to be receptive to suggestion for improvement and have actually received some great suggestions for improvement, and we're moving in that direction. So I think you should expect to see from a directional perspective, us continuing to go in that vein. We did share with you some rebid information on this call that I think is new, and also, I think, the backlog information is something that people would like to hear about. We did give you one metric, Charles on the call. David mentioned that 70% of our expected next year revenue is in the form of backlog. And, you know, to give you a little bit of background on that, that number comes from our backlog, which we've calculated September 30th '02 of $598 million, which is roughly a 15% increase of what our backlog was in the prior year. It was $519 million. And when we did the backlog this year, we did something a little different. We went through and said how much of that revenue do we expect will be recognized as revenue in fiscal '03? That's $400 million. It's the $400 million of the $598 that gives you the 70% metric that David shared with you earlier.

Right. Do you think you will be talking about that quarterly going forward? That's usually been an annual number that you guys give out.

Let's preserve the right to talk about that one further. Backlogs are a tough number to nail.

Right.

We've put in a new tool to start better measuring our pipeline. We want to give that a time or two around the track before we commit.

Right. And final question. Do you -- how do you think you'll balance, you know, if 10% revenue growth and at the high end of your earnings guidance would be 21% revenue growth, growing earnings twice as fast as revenue, how would that balance between gross margin increases and EBIT margin increases? I think somebody asked that question earlier. Do you think it will be half the margin expansion from gross and half from operating expenses or 60/40?

I wouldn't lean one way or another. You know, I think, again, we're going to find we'll look for improvements where we can find improvements. The company historically has had a very consistent gross margin percentage. You do know that systems is on the upswing swing and it has higher gross margins but it also has its model as it does have higher sg & a. It will have another upshift as the fastest growing segment will likely be the systems group. So they'll tend to pull gross margin up a little bit, but again, it's not 20% of our business today.

I'm sorry, one more question. Of the 400 million of next year's revenue that's already in signed backlog, could you brek that down just back in the envelope even between outsourcing and consulting? Is that 80/20 type of did

I can't do that right now. We have to scrub that.

Okay, thank you.

Take our next question from Bill Loomis with Legg Mason. Go ahead.

Just Legg mason. Thanks. Looking at the operating margin. The gross margins were generally in line with our estimate. But you mentioned the one justice information system that you also had a 1.1 million impact on the bottom line. I assume that's why the systems operating margin was so low in the quarter despite the attractive revenue growth and could you also comment on human services gross margin came in align with our estimate, but the operating margin quite a bit below because of the higher sg & a. Could you comment on those two?

I'd be glad to do that. On a systems, obviously that would have been much hi higher had we recognized that license sale on the fourth quarter. So that's the number one answer, Bill, as it relates to systems but also you need to realize that in that June quarter, that 13.9% had a couple of license sales that really spiked it up in that quarter, so I think it comes sequentially off the quarter where it had more license sales and absent that one pore d.c. as a result, you've got that 6.6% operating margin which is what you are probably looking at.

Okay. And the human services?

Let's see, human services. Human services operating margin trim ready down from 10% to 7.5. I think that's the intercept situation. We have one product offering that's IRS intercept. It is very seasonal third quarter p that's when all of that action happens that spikes up from the June quarter and goes back down to normal.

It looks hike the sg & a increases the higher percent of revenue than gross margin decline. I saw the big smile you had on third quarter on human services gross margin, but was there just incremental business development expenses as well in human services? Do we expect the, you know, the 7 1/2% type margin to go forward on human services?

It really speaks to that same theme, bill in terms of proposal activity and a lot of proposal activity. I guess I'd say it would be fortunate if we continue to have a lot of proposal activity. Again, also to the operating income percentage in terms of, I guess, looking for something that's proper predictable than the sg & a percentage.

So operating margin could still be in the single digits for the first quarter for human services?

I think that's reasonable.

Okay, thank you.

Due to time constraints this does conclude our Q & A session today. I would like to turn the meeting back over to management for concluding comments.

We'd like to say thank you very much for joining us this morning. If you have any additional questions, you can place the call to 703-251-8637. We will be around all day, and thank you very much.

This concludes today's teleconference. You may now disconnect. Have a good day.