Maximus Inc (MMS) 2003 Q2 法說會逐字稿

Welcome to the MAXIMUS conference call. I would like to turn the call over to your host, Miss Lisa Miles, please.

Good morning and thank you for join us on the conference call today. With us today is David Mastran, Chief Executive Officer and Richard Montoni, Chief Financial Officer.

Before we begin I would like to remind everybody that the number of statements being made today will be forward looking in nature. Please remember that such statements are only predictions and actually events or results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 in our SEC filings.

We invite you to review the summary of our risks in 200 10K filed with the SEC on December 20, 2002. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

With that, I'll turn the call over to Richard Montoni, Chief Financial Officer.

Thank you, Lisa. Good morning and welcome to our second quarter call for fiscal 2003.

This morning we reported revenue for the second quarter totaling130.7 million with earnings per diluted share of 32 cents n line with our revised guidance.

As noted on April 2nd, in our April 2nd release the sequential decrease in revenue and profitability was attributable to the following:

Delays in contract signings which impacted results and in particular we did not recognize revenue on a large court systems contract which was awarded but remained unsigned at the end of the quarter.

This contract has sense been signed. Due to the terms of this contract and depending upon the timing of customer acceptance, we expect to recognize the revenue in either the third or the fourth quarter and it's already assumed in our fiscal '03 guidance.

We also encountered work start delays in certain systems in consulting contracts. And under these delays, we were ramping up in anticipation of work so in addition to the impact on revenue, we incurred costs which also affected profitability.

Moving on to the quarterly revenue details by business segment. In our consulting segment, revenues were lower at 33.6 million for the second quarter. This compares to 35 million for the second quarter of last year.

As we've talked about over the last couple of quarters, we continue to see softness in management studies and IT consulting, largely due to broader market conditions; however, our financial consulting practice which includes revenue generation services such as school base claiming, child welfare, revenue maximization and cost services continues to perform on target.

As we discussed in our prerelease, post election procurements have not picked up and we've also excluded large awarded but unsigned contracts from our revised forecast.

As a result we're forecasting modest growth in a consulting sew segment in the second half of the year.

The health segment posted second quarter revenue of $39.9 million in line with our expectations and this compared to revenue of34.6 million reported for the second quarter of last year. This remains resilient and reasonably predictable.

We expect health revenues to trend at similar levels for the remainder of the year. We do expect growth in 2004 for our health segment driven by the new California Healthy Families Award that was announced last week. We expect that we will begin recognizing revenue in the second quarter of fiscal 2004 on this award.

However, we do expect to incur approximately 18 million of reimbursable cost as we ramp up for the operations launch on January 1st, 2004. Since these costs will be deferred in our expected to be amortized over the five-year operating period starting in January of2004, we do not expect negative margin implications associated with the ramp-up.

Human Services segment. The second quarter revenues for the Human Services group were sequentially down as expected at36.0 million, but increased 5% compared to34.4 million reported in the first quarter of 2002. -- second quarter of 2002.

This year-over-year increase was due to acquired businesses. Demand continues to be weak in certain lines of this segment, particularly workforce services where we have experienced program reductions which in the aggregate are impacting the overall segment.

In addition, our Australian operations are moving through a transition period following the results of a major re-bid. David will discuss the specific details later but portions of the re-bid were one, including some new opportunities but we did lose parts of the existing contract consequently we are winding down server certain offices and at the same time ramping up for new work which we have factored into our forecast.

And as previously discussed, the Human Services segment should benefit in the back half of the year from seasonality associated with certain lines of business related to IRS intercepts and tax credit work. As to our system segment, on the second quarter revenue was $21.2 million which was down 1.9% sequentially but increased 18%year-over-year.

As noted earlier, the delayed systems contract impacted both revenue and profit for the quarter. We continue to expect growth for-- from the system segment for the remainder of the year driven by Justice Solutions, ERP and new winds in our intelligent technologies division.

I would like to note that beginning April 1st, 2003, we transferred our public systems division moving it from the system segment into the health services segment. Our public services division develops, implements and operates at financial health systems for government health services. These services are a logical and practical extension of the services provided under the health services segment. For financial reporting purposes we will reclassify segment information and we intend to file an 8-K in the June quarter which will provide you all of the historical details on the re-class. So heads-up in terms of that re-class that will becoming towards you.

Moving on to profit, we reported earnings per-share of 32 cents in the second quarter. As you may recall we provided specific details in our April 2nd release as to why we expect an improvement in profitability in the second half of the year and here is a brief refresher.

First we reduced resources in area that have been weak and if necessary we will take additional efforts to take the proper balance of resources and demand.

In addition, certain work start delays have had an impact in the second quarter and we expect the system segment will benefit in the second half of fiscal 2003 from the commencement of previously delayed work primarily in Justice Solutions and information technology divisions.

Also, the consulting segment was also impacted by certain work start delays primarily in the education school MAXIMUS offering which are not expected to recur in the third quarter. Licenses fees were not realized this quarter should occur either in the June or September quarter and lastly, seasonality from businesses associated with IRS intercepts and tax credit services should help improve profitability for the segment in the back half of the year.

On SG&A and operating margin, we ended the quarter with 8.4% operating margin and we expect improvement going forward. The sequential decline in gross margin in the lower operating margin is a reflection of the weekend performance in the quarter as previously discussed.

The sequential increase in the amount of SG&A is due to increased building and proposal initiatives and we dodo believe these efforts are in fact used us benefits. For example, our team spent a significant amount of time on the California Healthy Family's opportunity in this March quarter.

I would also say that utilization has also impacted SG&A and on a year-over-year basis, acquisition have increased SG&A. As to accounts receivables and DSO metrics, we are pleased to announce that DSO have proved for98 days for the second quarter both build and unbuild sequentially and we expect to receive a normal range for DSO in the 105 to 95 day range.

On cash flows and free cash flow, we're also very pleased about cash from operations and free cash flow improved significantly in the second quarter. The company reported cash flow from operations of$19.2 million. We reported free cash flow of$15.8 million. These increases are primarily attributable to improvements in receivables. We will continue to use cash to execute our stock repurchase program, seek potential acquisition opportunities, and fund the reimbursable program cost associated with the California project.

As to cash balance and stock repurchase activity, the balance sheet remains healthy and debt free. We exited the quarter with $92.8 million of cash in marketable securities. During the quarter we did repurchase shares. We repurchased approximately369,000 shares for a total purchase price of approximately $8 million.

In March, 2003, the Board of Directors authorized an additional $30 million for our stock repurchase program and we do intend to remain opportunistic as we continue to execute our stock repurchase program.

Consequently at March 31st, 2003, we had $31.5 million available for future stock repurchases. Our diluted weighted average shares outstanding at the end of the quarter for approximately 21.3 million shares.

On guidance as we previously discussed, we have overhauled our methodology for forecasting and we have taken a far more conservative approach to guidance and this environment we're timing of signing new contracts is often unpredictable. We think this makes no sense.

As part of this modified approach, we exclude certain larger opportunities which have been awarded but not signed due to the general uncertainty that we have experienced in finalizing the contracts in beginning work. We do include certain smaller opportunities which are awarded but unsigned where we're more confident in our prospects and timing tends to be more predictable.

Therefore, today, we remain cautiously optimistic about the remainder of the year and continue to expect earning per-share of at least $1.60 conference for fiscal '03.

With that I'll hand the call over to David Mastran.

Thanks, Rich. My remarks I'd like to explain where MAXIMUS is now and where we're going. From an outside perspective it may look like we're under pressure but it has done well in winning some sizeable new contracts. While we're experiencing scope reductions in some core businesses due to state and local government and financial crisis, at the same time we're winning contracts in new are as with significant growth potential. I'll try to sort this out for you today and explain what it means for the future.

Let's start with the second quarter financial results. As Rich indicated, revenue for the second quarter was 130.7 million, up 7.1% from last year and in line with our revised guidance. EPS was 32 cents and also in line with revised guidance for the quarter. We continued to benefit from a revenue base driven by a number of programs that are federally mandated and federally funded which provides us with considerable stability.

Year-over-year organic growth was essentially flat, however. As you know, the second quarter was a difficult period for MAXIMUS as we waited while government agencies either delayed the implementation of work already won or prolonged negotiations on contracts awarded. Many of our staff were unbillable during the quarter waiting for the contract work to begin.

There were also slight scope reductions in several contracts and we had to cut back our operations. For example, the media reported recently that most states had cut become their child care programs. The states difficult not eliminate the programs, just reduced the subsidy levels. Some of our contracts are being trimmed five to 10% as well.

While in this transition period we also wrote many proposals, several of which came to (inaudible) this time spent on proposal writing was not billable and further depressed our profits. The good news is that the delayed contracts are now being signed and we won a lot of proposals that we wrote.

Despite the current market challenges we have been working diligently on maintaining our core base of business, broadening and strengthening our capabilities and pursuing new opportunities. We have been investing new systems and hiring people to strengthen our company.

Over the years we have developed a sense of that confidence that we will be successful and grow as long as we invest. We have kept a focus on controlling costs and managing resources in line with demand as well as managing our cash flows to fuel growth in initiatives and to fund our stock repurchase program. We have also made some staffing cut backs across the companies in areas not performing well. Overall, we're a stronger firm.

As usual, our pipeline remains active. Significant - signed contract wins as of April 30th total 238 million. New contracts that were awarded but unsigned totaled539.8 million. And that includes the newly awarded $418 million contract by the California risk management insurance board. Even without the California contract, the contract total rose over last year.

Total marketing opportunities topped out at just over 1 billion as of April 30th. Of that,458 million were in proposals pending compared to196 million a year ago. We had 52.7 million of proposals in preparation and 497.1 million in RP's we're tracking. So our marketing pipeline remains full.

Despite this, we are facing greater competition now, both in terms of numbers of competitors and price pressure so our win rate may decline slightly. But the overall tenor of the business pipeline is good and we're optimistic.

I'd like to look at the marketing activity by business segment for you. Keep in mind that we're trying to show you that the government continues to procure new work despite the budget crises. There is a lot of activity going on in selected areas.

As discussed, our health services group won a five-year, $418 million contract for two critical California contracts, healthy families program for children and the access for infants and mothers program. Under the contract, MAXIMUS will provide abroad range of administrative services, including application processing, eligibility determination, collection and processing family payments and providing call center and web-based customer systems. $70 million pass through men's there is no overhead or fee so the contract is really like a $348 million contract.

The California healthy family contract award is a significant new win for MAXIMUS. In addition to providing a substantial new revenue source beginning in 2004, this win proves again that MAXIMUS can win very large contracts against the biggest names in the industry.

Our history is one of winning against strong competition. The win skull dates our position as the premier healthcare program Management Company for government. The group is also bidding on other healthcare administration contracts with the department of defense for the first time and we're hopeful we can build business there as well. In the'80's, MAXIMUS did considerable work for the DOD of Department of Health affairs.

There are also four re-bids in our health segment which are scheduled to be released in mid 2003 but the customers have decided to extend our contract through September. We'll provide you with the status updates on these re-bids adds information becomes available.

Our systems group, once again we had a new of key wins in our system segment all four all rating divisions won important contracts. In our ERP solutions division we announced earlier this month a $3.9 million contract with a public utility in the state of Washington. Implement People Soft Solutions.

We've also won a $12.1 million contract in a large Midwestern city to provide people soft implementation services. There are other smaller wins in this active market.

On Friday we announced a $14 million contract win in the City of Houston for their Municipal Court system. Houston is the fourth largest city in the U.S. We also announced last quarter a state-wide contract for implementing court view in the Massachusetts trial courts and also in the District of Columbia.

Our court view proprietary software product is now being recognized as the most functional package in the industry. MAXIMUS is becoming the dominant court system provider. Our asset solutions division we announced that the Chicago transit authority had selected our fleet focus and real focus solutions to manage operations and maintenance activity for its fleet and rail assets.

Contract secured through competitive bid is valued in excess of 5 million. We are entering the mass transit industry for the first time. As for intelligent technology division just last week the transportation safety administration, TSA, announced an award to MAXIMUS of a five month $3.7 million contract to field test various technologies that will be common and universally recognized as the transportation worker identification credentials or TWIK -- our(inaudible) EBS is the subcontractor.

The smart card will ultimately be rolled out to roughly12 million transportation workers at sea ports, airports and land transportation hubs across the nation. MAXIMUS is directing the effort to field test various smart card technologies to create a common biometric credential for all the transportation workers.

During the evaluation phase we will evaluate different types of access control technologies at multiple facilities across different modes of transportation, at several pilot sites in the Mid-Atlantic region as well as the Los Angeles metropolitan area. An important aspect of this win that is TSA originally announced and fully intended to make two awards and have a fly off competition between the two contracts to determine the technology to use.

Instead, TSA awarded a single contract to the MAXIMUS team and we believe this is a strong verification of our leading position in biometric integration projects. Although the award of the pilot contract certainly does not guarantee award of the larger implementation contract, we believe we will be well positioned to participate on a team competing for the full I don't deployment of12 million cars across the U.S. This opportunity is a considerable strategic importance for MAXIMUS and we're clearly very excited about future prospects in this area of homeland defense.

Our Human Services group also had some key wins. The work force services division on Friday we issued a press release describing a $26 million win for the Orange County California voting system. We will be implementing new voting machines and training pole workers in this large County of 1.2 million registered voters. This is a great new area for us and we're attracting several other opportunities in electronic voting. Our Australian subsidiary, MAXIMUS networks just provided a contract of -- there-bid was expected and the re-bids mixed with some sites won and others closed.

We structured our acquisition of the Australian business with this re-bid in mind and designed an earn-out provision. We are modeling the results to the re-bid with a new paid points in the contract and moving forward through the transition.

In the second quarter we saw decline in profitability due to this transition in Australia. We expect the profitability of these operations to stabilize then improve in future quarters and see positive business potential from our Australian operations.

In our child support division, MAXIMUS won a new full-service child support contract in the five counties surrounding Memphis, Tennessee, but lost a re-bid contract in Nashville. This was a surprise given our excellent performance over a long period of time.

The new win makes up for some of the loss revenue resulting in a revenue reduction of about 3 million annually for the Child support division. This is an example of pressure in our core areas. We're also in two re-bids now in Baltimore and Georgia.

In terms of our consulting group, MAXIMUS also recently scored a large revenue maximization win in Florida and another one in Mississippi. There continues to be considerable opportunities for helping states claim federal money. Four more key opportunities have also opened up which we are tracking.

Our child welfare business is also doing very well. We are helping some high-profile jurisdictions improve the administration of their child welfare programs.

We've had some favorable press in the Miami Herald to help revitalize and restructure their current child welfare program. Our school max system is gaining attention. We earned a key contract in Birmingham, Alabama and a final stages of procurement in a large West Coast County.

During the quarter the consulting group also won a$7 million consulting re-bid for quality assurance and IT management consulting services and several smaller other smaller bids. The new contracts became effective in the second quarter and will help improve utilization.

In terms of new management talent, MAXIMUS has continued to broaden our management talent to position us for future growth. We currently have offers outstanding for the following key positions: Executive Vice-President for Human Capital Management to help us strengthen the recruiting and management of our staff; Director of Federal Project Management office to help us go after more federal business in a more systematic manner.

We already have a broad base of business in the Department of Treasury, Department of Education, Department of Defense, Social Security Administration, Veterans Administration and others. We need a focal point to coordinate all our activities and initiate new ones.

Also, the position of Chief Marketing Officer for MAXIMUS going to strengthen our state and local government sales force to help us grow relationships with prospective clients.

Additionally, we added a person to our Board of Directors. In keeping in the spirit of strong corporate governance we recently announced the appointment of the Paul Letterer (ph) to the board increasing the total to nine with outsiders representing the majority.

Paul brings in more than30 years of business experience and has been at the health of multi-billion dollars businesses. He is a welcome to MAXIMUS. So you see we have a lot of wins and high potential growth areas.

Basically we believe these wins are offsetting some of the softness in our core areas. Business in these new areas are replacing slight contractions in our existing markets. Despite these movements forward, we will have set backs but we continue improving. MAXIMUS has been a growth company for 28 years.

Sometimes the growth has been unabated and sometimes periods of flatness. During these periods of flatness we have always invested in our company in terms of people, infrastructure and systems. And we have realized excellent returns from these investments.

I believe these investments are paying off again and we are seeing the early signs of another growth period. As the economic climate improves, our core businesses should start to expand again adding to the growth being achieved in these new areas.

Finally, I want to thank all of you for continued support during these challenging time. We were disappointed about having to reduce our earnings expectations for the year. Although we are still contending with state and local budget deficits, we're very excited about the opportunities opening up across all our business lines.

We continue to be aggressive and seek opportunities for growth. A behavior which is an ingrained part of our corporate culture. With that I would like to open it up for questions.

+++q-and-a.

Very good. At this time if you would like to ask a question please press the star and one on your touch-tone phone. You may withdraw that question any time by pressing the pound key. Again to register your line for a question please press the star and one on your touch-tone phone.

We will go first to the line of Adam Waldo with Lehman Brothers. Go ahead, please.

Good morning, David, Richard and Lisa.

Good morning

Good morning, Adam.

David, in your prepared remarks you talked about the evolution of our business pipeline and the evolution of pricing pressure on win rates. I wonder if you can give us a little more quantification as to the change in duration of outsourcing sales cycles that you have seen in recent months as well as if you can quantify recent trends in win rates versus historic norms.

Okay. In terms of duration of the sales cycles, I think they're about the same other than once --for re-bids they're the same because they have to --operation must continue. In the new types of contracts, they have not done before the sales cycle has lengthened because they have more discretion in terms of wanting to make the award.

In terms of our win rates, they're running very high actually on some of the new stuff and we had previously won 90to 95% of our re-bids but we're seeing pressure now from some of the competition reducing their prices. So we don't think our 90% rate is going to hold up. It may drop to 75 to 85% range so it is not a significant decline but we can see that it is there.

Does that answer your question?

Yes. And just if you could in terms of sales cycles maybe just a little more quantity fix on new business and how that is trending versus historic forms

Okay. The new businesses expanding considerably. The win -- obviously the win in California even if you take that out, the voter registration win, the school max business that we have coming up, those are -- and there are some other areas that we're currently in our -- in the process or being evaluated by the government so hopefully we'll end up favorable that represent, you know, significant new areas for us and each of them having their own growth potential. We're pretty optimistic.

And my final question is for David and Richard both, I guess, I wonder if you gentlemen could both comment on the extent to which you're starting to see those state of municipal governments more and more wanting you, to if you will, enter an outsourcing agreement in which you put up more capital up front to purchase fixed assets from the government and then to do so in exchange for longer duration agreements than you've historically seen. Could you comment on the extent to which that is increasing and also give us some sense what the perspective margins of those types of deals might look like versus historic norms if you are seeing more of that?

Well, we are seeing more pressure from states that front more money. The California contracts is an example where they would not pay the up front cost. We had to amortize it over the duration of the contract. But we are in a very interesting procurement right now where the state basically wants to us front all the costs for four years and then have a huge return at the end. And we're debating internally exactly how to handle that. So we are seeing states that are trying to up-load some of the costs to a contractor up front and pay it off as the revenues increase and we look at those very carefully and in some cases we're participating and some cases we're declining

Thanks very much.

Yes.

The next question comes from the line of Charles Trafton with Adams, Harkness & Hill. Please go ahead,.

Thanks. You gave out figures for the contract activity I guess for the four month ended in April. Do you have what it was for the three months ended March?

Generally we -- what we do is just before every conference call, we report the figures so what we do have is the comparable figure for the prior quarter which is on January 27th and we have the comparable figure from a year ago which is also on April 30th in the year of '02. Would you like to hear those?

Sure, yeah.

Okay. In terms of signed contracts we had 238 million that we just reported. Of roughly three months ago, January 27th, it was 119 million.

Right.

And the same quarter a year ago was 220 million. In terms of contracts awarded but not yet signed we reported 539.8 million this quarter of roughly a quarter ago it was 92.8 million.

Right.

And a year ago at the same time it was125 million.

Okay.

Considerably higher. If we added those two numbers you would get 770.8 million at this quarter versus 347 million the same time last year.

Right. But the -- the -- wasn't the proposals pending in preparation are fee numbers you gave out earlier in the call -

Yeah.

Through April and not through March?

It's really as of April 30th. Those are more like a balance sheet -

those are snapshot numbers?

Those are snapshot numbers, Charles.

)) If you want the proposals pending -- a year ago it was 196 million

Uh-huh. Sounds like you've let go some people in the last several months. How many was it and where were they? What capacity were they mostly functioning in?

Lynn Davenport is General Manager of SBU

In our consulting practice we had about 35 people that we've -- we are in conversations with.

And on the other, Tom Grissen.

Primarily they resided in the Human Services group and some of our field staff and others were management staff.

Charles, this is Rich. Let me give you an overall comment on the headcount so you can appreciate the metric from a total company perspective. As you appreciate our approach is to balance the resources with the demand including opportunities. David in his presentation talked about the fact that we do pursue growth and that does take resources so we will make investments in people.

The largest swing factor tends to be new projects adding or completed projects expiring so balancing the resources with those situations is something we have to deal and the normal course.

In addition, we will reduce personnel for service offerings that are soft in May and we may invest our carry people where we expect growth. And we had all of this in the March quarter. The March quarter we just had several of these come together.

We had all flavors of this in the March quarter. Overall headcount for the March quarter decreased 131 or2.4%. We ended the March quarter with 5246 headcount.

The operating margin of 8.4% this quarter was the lowest in probably at least six years. Is there some severance pay and some related expenses to those lay layoffs in there and do you expect -- do you expect that to rise sequentially because the SG&A will be down?

Charles, you're right about the operating margin and the drivers behind the lower operating margin are several major drivers which I think we've talked about but it does include some high margin licensees that didn't happen which will have a tremendous impact on operating margin and it had all of those things related to delays including caring individuals and then we had some work that we expected to start that didn't start that is just pure bench time, if you will, or lower utilization and we did as a consequence take some personnel actions. It's probably not the biggest factor but-

So it is more of a gross margin issue than it is an SG&A?

That's correct.

All right.

But one point is that sometimes when you take personnel actions, it does take a cycle or two to really realize the benefit of that action. So we're kind of in that mode at the moment.

Uh-huh. And have you -- have you narrowed the range then on full year '03 revenue what you think it might come in? Or is it the same as before?

It really is the same as before. I'm thinking as it relates to the full year is that a couple of points. We shared with you beforehand that we expected to be at $1.60. That is still our - at least one dollar 60 cents and we remain in that camp. You know, our preference is given the environment not to get overly optimistic and enthusiastic as we move forward.

Right.

On a quarter by quarter basis, we're not going to give you any specific guidance for the June quarter versus September quarter rather than just give you a full year metrics and one of the drivers there is we do have some things that could either be June quarter or September quarter. We're confident it is going to be one or the other, but at this time it is more in the customer's hands whether it is June or September.

Sounds like things really picked up in April. Do you think that was the function of a couple of big deals got loosened up or are you seeing some post-war release, some pent-up demand that you have not seen in the past few months? What is the deal with the strength mainly?

I think that is it. They made decisions. I guess the new teams got in place and they started making some decisions. So there was, I guess, a backlog of things that got flushed out recently. There are still more there, I think

Okay, thanks.

Thanks, Charles.

Our next question comes from the line of Thatcher Thompson with CIBC World Markets. Please go ahead, please.

Hi, folks.

Good morning, Thatcher.

On the sales opportunity number that is over1 billion, does that include the state of California contract?

No, that is in the -- that is in another category call and in this case it was awarded and unsigned. That is not in there

Was it in there last quarter?

It was in there last quarter but significantly reduced. What we tend to do is to - probability weight the items in there so we don't let something like that distort the picture.

Okay. How big of a factor was it in last quarter's sales opportunities line?

50 million.

50 million?

Yeah.

Okay. And let me just take a quick look here. The total at the end of December was 849 million. Now you're over 1 billion and you lost that 50 billion so you're up 200 million in the space of three months?

Right. Well, we do have a couple of large re-bids going on in child support right now that is about 100 million of that, Tom, something like that? But otherwise, yeah, we are up.

Okay. And this contract, there seems to be a new twist on it. 18 million of reimbursable cost that will be incurred between now and when revenue starts to come in. You're going to capitalize the cost or that expense?

Well, some of that cost actually is going to be equipment that we buy which, you know, we can either lease or capitalize and I think there is really only about 6 million in real expense there that we had have to deal with in terms of cash flow.

So 6 million of deferred expense; is that correct?

Correct.

And will that don't back to you evenly over the next five years or at the end of your five?

Evenly over the five-year period. There is a fixed monthly payment over the five-year period representing payment for those reimbursable costs.

And I would assume that is a unique situation given the size of the contract. You don't have any other contract that is structured that way?

Well, we do, but generally the start-up cost would be in the 1 million or $2 million range

Okay. And then, Rich, can you tell me was the move of the public services segment of systems to health services, was that done in this quarter?

It was done affective April 1st so in the numbers that you're reflecting there under the old classification system, the prior classification system, Thatcher. We didn't want to confuse this quarter with the reclassification so we're going to print this quarter using the same numbers so they're comparable to what you have seen in the past. Okay. And then we will produce an 8-K that re-classifies all of the segment information, including historical segment information for every quarter based upon the re-class so I can say refresh your model for the re-class and we're going to try to do that outside your busy season

Okay, sounds good. Thanks

We'll move next to the line of Jennifer Childe with Bear Stearns. Please go ahead, please

The fact that it is dropping does that mean you don't want to reclassify to keep business and what is sort of your hurdle return on new business?

Well, that is a good question. That is - that what is we have to deal with. Do we want to accept a lower margin or do we -- or no margin or retain the business and that is done on a case by case, Jennifer. So far we have not decided to retain our profitability. We would rather be profitable than have revenue without profits.

And how about the California contracts? Do you expect the margins on those to be consistent with your existing business.

Yes.

Thank you.

You're welcome.

We will move next to the line of Arnie Ursaner (ph) with CGS Securities. Please go ahead.

Thank you. Could you give us the percent of this year's expected revenues that you have in hand at this point?

We can. I think on the April 2nd call, Arnie, we told you it was at least 92% in the form of backlog, smaller probability affective, et cetera. We have not snapped that to the point where I want to republish the 92%, but it is at least 92%.

Okay. On the contract for smart card it sounds like that is a very major potential opportunity. When do you do you expect the contract to be awarded for full deployment?

That will be done in, I think, October of this year. It is to be five months from now.

Did I hear you right, you basically are the only person in a beta test site now or a demo for this card?

It's not so much a demo as it is to determine what the particular technology is going to be for the card but it will get to a demo, yes, we are.

Okay. Can you comment on any additional federal work that you might have in your pipeline?

Well, we have a number of bids out there. We're not -- I would rather not get into specifically what they are, but I think this TWIK card which what is it is called is the most interesting now.

My final question, on your Rev Max you indicated you had some business in Florida and Mississippi. Can you comment did you incur expenses in the quarter that just ended and are you building in some Rev Max contribution in Q4 from these two states?

We have not incurred any costs yet both jobs are just starting this week. We anticipate that because of start-up time on these jobs is probably going to be four to six months before they really start to yield revenues. We have modest projections of recoveries to report this year.

Okay. But you will be incurring expenses for those in Q3?

Yes, we will be.

I guess one more final question if I may. You had a problem back with a contract in New Jersey, last year, David?

Yes.

And sometimes in your position you can negotiate arrangements with states where maybe they agree that there should have been some better arrangement put in the first place. Was there any reversal or positive contribution from New Jersey in renegotiations?

Actually, the renegotiations are in process renegotiations are in the process right now but it is not losing money. We're breaking even on it right now. But there are renegotiations where we capture some funds where we have not been paid, yes.

Okay, thank you.

Our next question comes from the line of Bill Loomis from Legg Mason, please.

Thank you. When you talk about the increased competition in pricing you mentioned the Nashville contract losses as an example. Was that a new competitor that came in and then also can you just talk generally, I mean, sounds like business has bottomed out as far as margins and your outlook is more favorable and profitable yet we're fairly early on in the state budget deficit cycle and you talked about increase competitors and pricing and probably going to get I would think worse before it gets better. Where is your -- why is your confidence so high that business turns around?

Okay, in terms of the Nashville re-bid loss, we were very surprised with that since we had increased collections 24% more than any other part of the state. We had great relations with the clerks. Sometimes states make decisions that you can't quite understand so I don't think that had anything to do with pricing. I think it was -- we don't know what it was but that is what happens.

In terms of our outlook, we have won some major jobs against some major competition and have not sacrificed our margins at all. So we're pretty confident that, you know, you've got a string of wins like we have had, the voting system was the first time we had done a voting system bid and we beat Debowls (ph), we beat and Sycoia (ph) and we beat established firms. In the smart card bid, our competitors were Nortcgerman (ph) and others in the West Coast so we're encouraged by our ability to beat significant contracts and at the same time sustain our profitability so that is why I'm optimistic.

So on these new wins you said California margins will be similar to historical margins and then you said you're not sacrificing marginal on these new businesses so that is the main point is that you're finding ways to bid these programs better in the competition and maintaining your margins?

Exactly. We don't want to start sacrificing margins.

And just looking at the four units on an operating margin basis, can you give some guidance sequential -- to sequential improvement? For example, you mentioned systems, you had some licensed sales and I assume that 2% will go back up to double digits and, you know, where does Human Services go from about the break even operating margin. If you can just talk those four units and help us out with our model. Thanks.

Bill, this is Rich. I think you're directionally correct as it relates to systems. Their all rating margin was down because they did not have licenses and it was impacted to a certain extent by the utilization factor in the quarter so we think that is going to directionally improve. Let me give you an overall comment of the total company operating margin.

You know we're at 8.4% for this quarter when you look at a trend you'll see that the company historically has performed from I'm going to say in the 12% range and in times has even been north of15% which is significantly higher than the 8.4%. So I would look for the 8.4% to gravitate back towards that level. I wouldn't encourage you to get north of that say the lower end of the range until we've had another chance to kind of see how things have turned, but I would expect directionally total company-wide we head back towards that level. I think you would expect improvement in the systems group, consulting remained reasonably strong from an operating perspective at 15.3% this quarter.

I would expect them to continue to be strong. Health management services was 13.2% which was sequentially down but they really had a solid December quarter with one particular contract that helped them a lot. So that 16.2% was a little bit out of the norm. I think they could do a little bit better than the13.2. The Human Services, we'll have to see. That is the segment that is having some reductions. They have got some good opportunities, but we'll have to see which way that one heads.

Okay, thank you.

Our next question comes from the line of Colin Gillis with RBC Capital. Please go ahead.

Yes, thank you for taking the questions. Could you go over any major contracts that are up for bid in the next six months or so?

Okay, we have the -- I mentioned in child support Baltimore and our Georgia contract. Our Arizona works contract was up for re-bid but I believe the government is going to extend that. It may come up for I guess that will be a year from now. We've won several -- I don't think there is much more than the child support and one in Kansas.

Okay, great. Is there any visibility on when in May we h might see the California contract signed?

Well, we're -- that -- the buzz on the E mails right now we're hoping to get them to sign it - we were hoping late this week but looks like it might be early next week now.

All right, thank you.

Yep.

We will move next to the line of Drew Figdror (ph) with (inaudible)

Quick question, what is your thought on acquisitions in this space in particular we notice I guess Acore (ph) made a bid for computer horizons, much cheaper multiple than what you're trading. Just wondering what you thought one on consolidation of the sector at this time and any thoughts on that in particular?

We're pursuing acquisitions and we believe that there may be some opportunities for consolidation so as you know we haven't been aggressive in terms of making acquisitions but we're vigilant and I think there will be one announced smaller announced shortly and then we're looking at some other ones.

Uh-huh. Any thought on computer horizons given its cheap multiple?

No, I have not looked at that one.

What criteria do you typically look for in your acquisitions, anything in particular?

They have to be a better buy than our stock. They have to be able to grow 25 to 30%. They have to be in the government business. We don't want a company that has been a cheap business because it has been a minority business or woman business. It has to compete in the open market. Can't be a subcontractor but must be a prime contractor so we know they are stable. Management has to be willing to stay on and work with us, those kinds of criteria.

Okay, excellent, thank you.

You're welcome.

Our next question comes from the line of Patrick Tenny (ph) with Eastline capital. Please go ahead.

A couple of questions. In the quarter were there any acquisitions in the quarter and I didn't hear the exact organic growth.

There were no acquisitions in this quarter and actually organic growth was zero to 7.1% was from acquired businesses. Effectively flat.

Okay. And the -- you just mentioned an acquisition that is forthcoming. Is that included in your guidance?

No.

It is not.

It is a small one and it won't be material.

Great, thanks very much.

Okay.

We'll move next to a follow-up from the line of Adam Waldo with Lehman Brothers. Please go ahead.

Just a quick follow-up on this topic that several people have asked about getting to your current on capital. Rich and Dave. Can you give us as to what you think about call on capital as to acquisitions and share repurchases, you know, buying back your own stock on your guidance is about a 5% year one cash-on-cash return and give us a sense, if you would, sort of how you evaluate comparatively perspective cash-on-cash returns in your one from M&A versus acquisitions?

Adam, our view is first off, repurchasing our stock clearly at prior levels and even at this level is from a financial perspective a wonderful opportunity. It's very accretive to our shareholder base so we're very willing to do it and we're pleased that we have a model that has continued to provide positive cash flow from operations, free cash flow, so we tend to refresh the bucket, if you will, in terms of available dollars to pursue that.

Yet in the same breathe, David Mastran will tell you here you cannot buy a company by buying back its stock and that is what is important in acquisitions. It is strategically very important for MAXIMUS as a company to be able to deliver world class leading edge solutions to its customers so that it remains a leader. So we really do view the acquisitions as strategic type investments in terms of how do we bring new products and new offerings to our existing customer base. We do have financial metrics and hurdles that you need to get over and, yes, they are important. And David mentioned a couple of them in terms of what we expect for growth, what we expect for return on investment, et cetera. And it will vary. So there is no hard and fast but we do have financial hurdles. My point is it is very strategic from -- it's as strategic as its financially important when it comes to acquisitions.

So all other things being equal, you're inclined to acquire revenue by buying back your stock on cash-on-cash returns from your win on both approaches because you go for growth?

We go for growth but stock, you know, at certain prices it is irrespective resistible.

I understand. Thank you very much.

Next is a follow up from Bill Loomis with Legg Mason, please

Thank you very much. On the Australian contract, how much -- what was the net effect of the loss of some portions gained and some portions on the re-bid when we're looking at a quarterly run rate or annual-- the net effect there?

Bill, this is Tom Grissen. We're right now working through the results of the tender and the new tender the re-bid has a series of different pay points which we're modeling and re-forecasting both the cost in revenue and profit contribution. We have a mix of new offices and other offices -- we're opening other offices and other offices we're closing. We're somewhere in the 80% range which should contribute approximately -- well, right now conservative estimate would be around 10 million U.S. that we're -- again we're working through that as we speak

10 million net reduction?

No, no, I'm sorry that would be gross.

So 10 million in -- I'm just trying if you takeaway your won versus your losses and I'm looking at the model, what should I take out of the conservative segment?

Last year's revenue -- last 12 months revenues was approximately 15 U.S. and so we're -- I was just there last week and we're remodeling as we speak the mix of new offices and closed offices and so at this point in time that is where we are.

Good. To 10 million. And on the -- the one example that David, you mentioned some states were looking to get big costs basically have the contractor pay for the contract until the very end. What type of programs are you seeing that in? Which segment?

That is generally in the EPER (ph) procurement area where you're billing (inaudible)allowing setting up systems for states to procure goods and services electronically.

So they're basically saying that you get a percentage of fee based on transactions in kind of a performance based model that is what you're referring to?

That is exactly it.

But you're not seeing that on things like more traditional Health and Human Services programs?

Correct, we're not seeing that.

Okay, thank you.

Next we'll take a follow-up from the line of Jennifer Childe from Bear Stearns.

I have another question on the California contracts. Are there any risks? In other words, do appropriations need to be signed before the contract can be finalized, anything like that?

The contract does have to go through their general services administration which is a traditional route for all contracts, but if you follow Governor Gray Davis' pronouncement, they're very much in favor of this program and I don't think it has taken any cuts. If anything, they're wondering how much they should increase it. I think the risk of a legislative cutback is fairly low. A lot of the promise is paid for by the Federal Government.)) Okay, thanks.

It appears we have no further questions at this time. I would like to turn the call back over to management for any closing remarks.

We would just like to say thank you very much for joining us today and let us know if you have any questions. Thank you.

That does conclude today's teleconference. You may now disconnect your lines and thank you for participating.