Maximus Inc (MMS) 2003 Q3 法說會逐字稿

Good day. All sides are now on the conference line in a listen-only mode. You've joined the Maximus third-quarter earnings call. (OPERATOR GIVES CALLER INSTRUCTIONS). At this time, I would like to turn the program over to your moderator, Ms. Lisa Miles.

Good morning and thank you for joining us on the conference call. On the call today is David Mastran, Chief Executive Officer, and Rich Montoni, Chief Financial Officer. Before we begin, I'd like to remind everybody that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions and actual events or results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our 2002 10-K 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 Rich Montoni, Chief Financial Officer.

Good morning and thanks for joining us for our third-quarter call for fiscal, 2003. Overall, we are quite pleased with the sequential improvement in the third-quarter results. This morning, we reported revenue for the third quarter totaling $141.7 million with earnings per diluted share of 43 cents. This was above consensus estimates of 39 cents. Other highlights for the quarter include generating solid cash flow from operations of $15 million with free cash flow of 12.6 million and DSOs improved to 96 days.

On our last conference call, we anticipated sequential improvement in profitability in this third quarter, and we're pleased that we achieved this. The improvement was driven primarily by the commencement of work that had been previously delayed in our Systems and Consulting segments.

Moving onto the quarterly results by segment, our Consulting Services segment -- it's revenue for the third quarter grew 12 percent sequentially to $37.5 million and increased nine percent from 34.5 million reported for the same period last year. Included in the third-quarter Consulting revenue was approximately three million in pass-through revenue related to hardware and software for a SchoolMAX contract. As you are aware, our Consulting Service segment consists of two components, Financial Services and Management Services. As we discussed last quarter, Financial Services continues to perform on target and even outperformed expectations for this quarter. These services include revenue maximization, child welfare, school-based claiming and cost services. During challenging economic times, these types of services are in demand, as states do seek to alleviate budget pressures and also seek out additional revenue sources. We anticipate that demand for these services will continue to be strong. Last quarter, we experienced work start delays in our Management Services segment aspect of this segment. However, it's performance improved this quarter, largely driven by the commencement of work on several new contracts. We expect the Consulting Services segment to perform at similar levels in the fourth quarter.

Health Services segment -- the Health segment revenue for the third quarter of 40.9 million was in line with expectations and relatively flat as compared to the second quarter. Our Health segment continues to generate solid recurring revenue and remains reasonably predictable. Health segment margins were impacted slightly from additional costs that were incurred as we commenced pursuit of several significant (indiscernible) opportunities in fiscal 2004. We expect Health revenues to trend at similar levels for the remainder of the fiscal year. David will provide an operational update on the progress of the California Healthy Families project later in the call.

Human Services segment -- third-quarter revenue for this segment was $38.5 million versus $36.0 million reported in the second quarter and 38.1 million reported for the third quarter last year. We closed an acquisition of Correction Services on May 1st, which contributed just over $2 million in revenue in the third quarter. Demand continues to be weak in certain lines of business within this Human Services segment, particularly work force services, where we experienced a number of program reductions. As discussed last quarter, we are moving through a transition period in Australia and we're making solid progress in that regard. Commencing with the startup of the new contract, we've taken significant steps to balance resources, including cost-cutting efficiencies and consolidating offices. We expect improvement in profitability as we move forward from these operations. This segment's fourth-quarter results are expected to include approximately $13.5 million in lower margin pass-through revenue from a hardware sale as part of our contract with Orange County, California to provide a direct record electronic voting system. While this will drive a large sequential increase in Human Services revenue, we expect probability of this segment will be consistent with this quarter.

Systems -- we posted a very solid performance on the Systems side. This quarter, revenue was $28.4 million, representing a 24 percent increase over last quarter and a 40 percent increase compared to the same period last year. In the third quarter, we did recognize a $1.1 million license fee from a Justice Solution contract that was previously delayed. We had initially anticipated recognizing this revenue in the fourth quarter. However, our team did a great job in accelerating certain deliverables and as such, we realized the revenues in this quarter. Our Systems segment remains strong with solid contributions across all divisions, including Justice Solutions, ERP and new wins in our Intelligent Technology division. We expect fourth-quarter revenue to be consistent with third-quarter revenue but profitability may trend down slightly related to the one-time benefit of the license fee revenue that we recorded in this third quarter.

On SG&A and operating margin, operating margin in the third quarter improved 180 basis points over the second quarter to 10.2 percent. Both gross margin and SG&A as a percentage of revenue improved slightly over the last quarter, but were not as favorable compared to the prior year comparable quarter and year-to-date. I know some of you have had questions about the fluctuations in our margins. There are a number of reasons for this, so let me give you a few examples. First of all, some of our business can be lumpy with such things as one-time sales, i.e. license fees, which carry very high margins, versus pass-through revenue involving hardware and often mailings, which carry much lower margins. Another example is that the type of work activity being performed can result in fluctuations between cost of revenue and SG&A. For example, if our consulting folks are working through a large number of proposals, those labor hours and the cost of those hours are not billable, but rather the labor is charged to SG&A expense. Upon completion of these proposals, when the folks return back to specific jobs, then the project and then the labor and the cost becomes billable and is consequently charged to cost of revenue. So, you get movement between cost of sales and SG&A, depending upon what they are working on. Additionally, some of our practices are contingency-based and while they are high margin businesses generally, there is lumpiness as we absorb costs in anticipation of future revenue. For these reasons, I do encourage you to focus on the operating income percentage rather than the gross margin percentage or SG&A percentage in isolation. We continued to take action over this last quarter to balance our resources and demand, which has been reflected in this quarter's performance.

On DSOs and receivables, we are pleased with DSOs. The improved sequentially from 98 days to 96 days for this third quarter, and we continue to expect DSOs in the range of 95 to 105, going forward. Billed Accounts Receivable -- it was up approximately 8.5 percent, which was largely attributable to increased billings in our Financial Services group and unbilled AR improved, i.e. decreased, sequentially.

Cash and cash flows -- the balance sheet remains healthy and debt free. We ended the quarter with $89.6 million in cash and marketable securities. This is approximately $4.25 per share. The Company reported cash from operations of 15 million and free cash flow of 12.6 million for the quarter. Year-to-date cash flow was 34 million and free cash flow was $24.9 million. Cash from operations and free cash flow will be impacted by transition costs associated with our new California Healthy Families contract. In total, we expect to incur up to $18 million in transition costs, which will be capitalized and amortized over the life of the five-year contract. Future transition costs will result in the use of cash or maybe not; if the Company enters into a lease financing arrangement for a portion of the cost, the use of cash would not be reflected until the lease payments are made. For your convenience, these costs have been separately identified on the balance sheet; we've created a new caption this quarter. We've labeled "Deferred Contract Costs". It totaled $1.1 million as of June 30, 2003. As a reminder, operations will launch in January '04 and therefore, we do not anticipate any revenue or profit from this contract until that time frame, which means the second quarter or March quarter of fiscal '04.

During the quarter, the Company utilized approximately 10.5 million in cash for an acquisition in Correctional Services and approximately 4.9 million for the purchase of approximately 246,000 shares of our common stock as part of our ongoing Stock Repurchase Program. At June 30th, the Company had 27.8 million available -- remaining available under this Share Repurchase Program. As such, diluted weighted average shares outstanding at the end of the quarter were approximately 21 million shares. As it relates to the use of cash, we will continue to remain opportunistic in both our acquisition strategy and our stock buyback program.

A quick comment on guidance and forecasting -- in this environment where contract wins, timing of signing and commencing new work remains, to a larger extent, unpredictable. We believe the best approach remains one of cautious optimism. As such, we maintain our full-year guidance of at least $1.60 per share. As discussed earlier, with the acquisition of Correctional Services and the expected revenue contribution of approximately 13.5 million in pass-through revenue related to the Orange County contract, we expect total revenue for fiscal 2003 will approximate 550 to $560 million. With that, I'll hand the call over to David Mastran.

Good morning, everyone. While not up to the prior-year level of performance, I am pleased to talk today about the progress that the entire Maximus team has made in improving sequential profitability and winning new contracts in the third quarter. As you know, in the second quarter, we experienced drop in profitability, (indiscernible) both contract signings and work on signed contract were delayed. Much of this business flowed through to the third quarter, contributing to our improved performance. We still expect the full fiscal year to be in line with our previous guidance, as Rich just said.

Let's look at our third-quarter results. (indiscernible) of the delayed work in the third quarter, including work in Justice Solutions as well as a significant SchoolMAX win, we were able to improve our operating profitability compared to the preceding quarter. As Rich discussed, third-quarter revenues improved 6.5 percent to 141.7 million from last year and was up 8.5 percent from the second quarter of this year. EPS reached 43 cents per share. Importantly, we improved our operating margins from 8.4 percent in the second quarter to 10.2 percent in the third.

Even though our performance exceeded expectations, the current dynamics of the state and local government markets remains challenging. Budget deficits continue to put considerable pressure on our government customers -- although, as you may note, our revenues are increasing. As commented over the last few quarters, we've experienced reductions in discretionary spending and certain outsourcing contracts, while at the same time, budget pressures have driven increased interest in our Financial Services, including revenue maximization, child welfare and school-based claiming services. Demand, however, remains soft for large system development replacement projects, but the pipeline (indiscernible) flow remains strong for smaller system projects across all our markets.

With that said, the overall business conditions have held steady from the second quarter and we believe there are some indications suggesting that conditions have even improved slightly. In this regard, Maximus remains fully committed to the government marketplace. We believe that over the long-term, we will achieve superior results because of our demonstrated ability to help improve government performance. The government represents over one-third of our economy. Maximus is one of the few companies that focuses exclusively on all levels of government and we believe that our strategy will pay off significantly.

In terms of the marketing pipeline, as I indicated last quarter, competition for government contracts has intensified somewhat. Nonetheless, to date, of the 20 Maximus (indiscernible) set for fiscal 2003, we have won 11, obtained extensions on six, including most of our large Health projects, lost two, one of which was the Tennessee Child Support Enforcement contract, and the other is under appeal in Baltimore. One remains to be bid with the RR (ph) expected in September.

Looking at our new business pipeline in aggregate, signed contract wins through July 31st totaled 941 million, including the newly awarded and signed (indiscernible) an $18 million California Healthy Families Contract. This compares to 305 million in contracts signed for the same period last year. In the increase is a jump of 636 million in contracts signed and is still notable even if the California Healthy Families Contract is eliminated. New contracts pending were 59.3 million, compared to 539.8 million last quarter. The decrease shows the movement of the large contracts through the pipeline. Sales opportunities totaled 899.5 million, compared to 712 million for the same quarter last year. Of the 899.5 million, proposals pending were 314 million, proposals in preparation -- 46 million, and RPs (ph) tracking increased to 539 million from 250 million last year. This was driven primarily by our expanded business development and pre-marketing capabilities implemented as part of our Proposal Operation Center. What's particularly excited about the new contracts and proposals is the activity in several different areas, including new RFP flows in Health Services, Consulting and Systems.

Let's look at our various segments. Within our Consulting segment, we're still seeing softness in our traditional Consulting divisions, such as Management Services and IT Consulting, but there continues to be considerable opportunities for helping states claim federal money. The Financial Services group secured a couple of critical awards that are expected to be long-term mainstays. Continued success in several current contracts bode well for business portfolio and diversification. In particular, we are experiencing an increase of demand for RevMAX (ph) school-based claiming and child welfare services. We had believed earlier that if state and local governments faced continued budgetary pressure, the demand for these services would increase, particularly in the spring, as new governors transitioned in and searched for additional revenue sources. While it has taken longer than originally anticipated, there is now considerably more interest in these services than what we had experienced in the earlier part the calendar year. Recent wins in this area include contracts in Florida, Connecticut, Louisiana, Iowa, Pennsylvania and Oklahoma. There is also substantial pressure for states to improve the administration of the Child Welfare programs. As such, our Child Welfare business has been in considerable demand and we're working with several states to improve their programs, including Florida, Pennsylvania and Indiana with interest from several other states.

During the quarter, we also announced several school-based claiming contracts where we prepare claims for kindergarten through 12th grade schools so they can recover the cost of providing Health Services to Medicaid-eligible students. These contracts are performance-based, where we are compensated based upon a percentage of revenues the schools receive from the federal government. With strained education budgets, many schools are extremely interested in this service. We have had continued success and our new wins in Mississippi and Miami-Dade County, among others, add to our base of 1400 schools.

In the Education area, we've had several key wins in our SchoolMAX system, including Los Angeles, the second-largest school district in the country. L.A. has over 1000 school locations and a student population exceeding 750,000, which is a huge strategic win for Maximus. We've gained market share in the SchoolMAX product with additional wins in Albuquerque, Fremont, California and Birmingham, adding to our momentum in this growing market. Our new J2E Web-based SchoolMAX system is gaining wide acceptance in this marketplace.

Health Services segment -- our Health Services segment remains a cornerstone of our recurring business space. We signed a previously announced five-year, $418 million contract for the California Healthy Families Program. Despite the budgetary actions being taken in California, we expect that the new California budget will not affect our contract. We started work on transitioning the project and to date, we've achieved all contractual milestones on or prior to the planned due date, including the acquisition of permanent project space, the hiring of a highly experienced Systems deployment team, the revision of all forms and correspondence templates for the state, the development of key components of our new MAX E Squared (ph) eligibility system, and the start of the conversion of historical data. We are pleased with the progress to date and we are on target for our January 1 operational launch.

We've also been notified of an award for a large Health Services rebid to continue to administrate Children's Health Insurance Project for a Midwestern state. The three-year contract, which includes two additional one-year options, is for the administration of State's Children's Health Insurance Programs designed to provide healthcare benefits to uninsured children throughout the state. We've operated this program for five years and this project includes enrollment, eligibility, processing, outreaching and marketing, in addition to new system efficiencies, which will move the entire program from paper-based files to an electronic filing system using the new Max E Squared (ph) Web-based system. This win underscores the importance of our solid reputation and track record in the business. We were awarded this contract based on our historical performance, as well as our expertise in the revamping and creating system-based efficiencies, which provide the customer with long-term benefits in the overall processing of caseloads. While remaining rebids in our Health segment will likely be fiscal 2004 events -- since RFPs have not been issued to date -- as we move into fiscal 2004, we have also set our sights on securing options years on several large, ongoing Health Services projects.

Human Services segment -- as mentioned earlier, we've experienced continued softness in the Human Services outsourcing segment over the last several quarters. We expect profitability will run at similar levels in the fourth quarter, as we integrate the Corrections Services acquisition and continue to the transition of the new project start-up in Australia, where we have made significant progress to date. Looking at the different divisions, in Workforce Services, we've secured extensions on our Arizona Works and Prince George's County, Maryland projects, and we also won two small rebids during the quarter. We expect continued softness in the core offerings in this division as we focus on maintaining the base business, however.

Our new voter registration initiative is in response to the Help America Vote Act of 2002, which requires uniform and nondiscriminatory election technology to be implemented in all states by the November, 2004 election. We've announced previously our win in California's Orange County, the fifth largest county in America, and we have identified several new opportunities as we turn up the heat on our marketing efforts under this initiative. We have several excellent strategic partners and we're optimistic that our efforts will produce results in the coming months.

There is also considerable activity in Texas and Florida regarding to overhaul of the Tanas (ph) Medicaid and food stamps programs. Under Texas Bill 2292, the State is seeking to implement significant changes in Health and Human Services policy to achieve cost efficiencies and increase revenues to finance services. We believe a series of RFPs are likely to be released in 2004, which will include eligibility, outsourcing, call centers, quality assurance and consulting, to name a few. Florida is also diligently working on outsourcing eligibility determination and we expect progress to continue in the coming months. Hence, there may be a significant pickup of activity in the Welfare business lines.

In Child Support, we've experienced considerable pressure. Maximus remains the lead vendor with experience, successfully operating child support programs in large urban areas. We believe that remains a competitive advantage for us. We've been notified of another rebid award to continue to operate one of the largest child support enforcement projects in the country. We've operated this program since 1997 and over the next five years, anticipate that child support collections for families will rise to nearly $600 million. The one contract -- one-year contract is for a one-year renewal license. Under terms of the project, Maximus will continue to provide child support enforcement services in six judicial circuits. In addition, we obtained a six-month $5 million extension to continue to provide child support services in the Baltimore and Queen Anne's (ph ) County areas.

In terms of Systems, our Systems segment is doing very well and posted significant improvements in the third quarter with revenues up 24 percent sequentially and 40 percent over the same quarter last year. The third-quarter operating margins improved to 12.6 percent from 3.7 percent reported last quarter and from nine percent reported for the same quarter last year. Improvements in revenue and profitability were driven by increases across all lines of business, including ARP, Justice Solutions, Asset Solutions and Intelligent Technology. The increase was largely driven by the commencement of work on previously delayed contracts.

Maximus also recently made three key management hires in the Systems segment. These persons have considerable experience and capability in our lines of business, allowing this segment to continue to grow rapidly. We are very optimistic about the future of Systems. Let's take a look at the divisions. In ERP solutions, we've begun work on a $11.2 million contract in Kansas City to manage the implementation and system integration efforts of a ERP (ph) software applications. We were also awarded a contract to implement a Web-based eProcurement software solution for the State of Indiana. This is a strategic win which positions us in the maturing eProcurement marketplace. Despite the ongoing commotion about our implementation partner, PeopleSoft, we have not experienced any immediate impacts. We've partnered with PeopleSoft for over a decade and they continue to provide our government clients with quality choices and solutions.

Demand for our Justice Solutions product offering remains strong and the division has been notified of an award of an additional $15 million in new contract wins. We've gained significant marketshare, particularly with key wins in critical markets such as Massachusetts and Houston and Fort Worth, Texas. The sales pipeline is quite healthy and we hope to have continued success as we move into 2004.

Our Asset Solutions division recently launched its newest fleet transit management software solution, FleetFocus M5, which is the industry's first fully Web-based fleet management solution. Earlier this week, we announced the award of five new contracts to implement the Facility Focus software for several higher education clients, further expanding our presence in the growing higher education market. The new contract wins include the University of Oklahoma, Washington State University, Northern Alberta Institute of Technology, Tallahassee Community College and the H. Lee Moffitt Cancer Center and Research Institute at the University of South Florida.

In our Intelligent Technologies division, our contract with the Transportation Security Administration to evaluate smart-card technologies for the deployment of the transportation workers' identification cards is on track. We expect the TSA will likely issue its RFP for the prototype phase during the fall with an award likely at the end of the calendar year. In addition, we have been awarded a contract by the Federal Deposit Insurance Corporation for a smart-card computer access system. Overall, pipeline activity seems to be picking up with expected RFPs to be issued for various federal projects over the next few months.

In terms of infrastructure, Maximus continues to develop infrastructure. Notably, in the last quarter, we strengthened our Human Capital Program with the addition of Bill Roche (ph). We held a President's Development Program in June to help define the role of the Division President at Maximus and provide the understanding and tools available to help them do their jobs better. We are focused on succession planning and the development of our middle management tier. We are consolidating several departments under Human Capital, including our Center for Employee Development.

In conclusion, as we move into the fourth quarter, we have reason to be cautiously optimistic. Sequential profitability has improved, new business wins have increased substantially across several of our business units and the state and local fiscal landscape -- while not healthy by historical standards -- appears to be stabilizing. Our 2004 budgeting and planning exercises are well underway and while it's too early to provide '04 guidance, we believe many of the recently signed contracts in our backlog create a good foundation that should contribute to our performance in 2004.

As you know, during the last quarter, we revamped our forecasting methodology to reflect the dynamics of the market environment that were resulting in project delays and prolonged negotiations on awarded contracts. While some of the delayed work has since begun, including Consulting and Systems work, we feel it is prudent to stay with a conservative baseline forecasting methodology at this time. So, for the 2004 fiscal year (indiscernible) 2003 fiscal year, we are on track to meet our revised earnings estimate of $1.60 per share or better. At this point, we would like to open it up for questions. Lisa?

Before we get into -- (technical difficulty) -- one minor clarification -- free cash flow year-to-date is $26.5 million. We pulled the wrong number off the chart. It's not 24.9; it's 26.5 million.

At this time, we will take questions. (OPERATOR GIVES CALLER INSTRUCTIONS). Adam Waldo with Lehman Brothers.

Good morning, everyone. Nice quarter! A question about the New Jersey Healthcare contract, which I believe is the only major renewal you have left coming up between now and calendar year-end. Could you give us a sense for what you expect there?

John Boyer, head of our Health group, will answer that question.

At this time, we are in ongoing discussions with the State client. While there has been no definite action on their part, it looks very encouraging that we will continue our operations there.

John, when you say continue your operations there, would it be appropriate to infer at similar funding levels to the last contract cycle?

Yes, it would.

Switching gears to new business, we've been hearing some rumblings about a TWIC deal. I wonder if there's anything you can say with respect to that.

Nothing more than I said.

Fair enough. Then finally, if we switch back to the California contract, can you give us a little better sense now as to when you think that contract will be fully ramped as we go into FY '04 in terms of generating monthly or quarterly revenue consistent with the full annualized value of the contract?

Yes. That contract has almost an eight-month transition period, which is long by our standards, so we are actually going to people in place and ready to go during the full month of December. So on January 1, when the revenues start, it will be 100 percent operational.

That's great news. That's really great news! I wasn't sure that was going to be the case. That's great. Finally, on capital allocation -- buybacks versus dividends versus acquisitions -- you guys have been very good buyers of your own stock, historically, from a pricing standpoint. You are obviously over-capitalized. David, with the stock around 30, $31, how do you all think these days about dividends under the new tax law versus share buybacks, versus acquisitions and new technologies?

Let me give that to Rich, since he's been working on it.

We do view the pool of available cash plus, in the long-term, cash generated from operations as available for several purposes, and there's a balance between these several purposes. One, obviously, historically, Adam, has been to use it for mergers and acquisitions and also the Stock Buyback Program. With the changes in tax law, we have discussed -- haven't quite concluded yet on the dividend policy, but it is under discussion. The last point I would say as it relates to stock buyback, you know, that's really a function of price. We had a greater appetite at $20 a share and if the price increases, we have a lesser appetite. There's no hard algorithm, but you keep in mind, it's still accretive up to $90 a share, so they have a lot of room.

(LAUGHTER). Chairman Greenspan has made the accrual accounting easier but the cash economics still are a bit lower-priced. Thank you very much.

Jennifer Childe, Bear Stearns.

Good morning. Of the contract wins you listed, both in the press release and verbally, what percentage would you estimate are new competitions versus those that you're taking from incumbents?

Jennifer, let me try to answer the question this way -- the year-to-date wins we would classify 79 percent -- and that's $941 million -- we would classify 79 percent of that as new work. The Delta, or $190 million, would be rebids and extensions, but that's our work. I don't have the metric in terms of what we've taken from other competitors. Obviously, the largest one is California Healthy Families, which we took from another competitor, so that would answer your question from a macro perspective.

Even if you take out California Healthy Families, 69 percent of our wins are new work. Does that help?

That's great. Rich, when you say a segment is expected to perform at a similar level, do you mean similar year-over-year growth, or similar absolute dollars?

We look at things more so sequentially, Jennifer.

So similar sequential growth?

Correct, similar sequential performance.

Okay. Finally, could you provide a little bit of color on the Baltimore child support situation?

Okay. Basically, we lost the contract. The valuation panel awarded it to Public Policy Studies Inc. We have protested the award based upon the way the RFP was structured and evaluated. We have appealed the decision and it is scheduled for a hearing in September. We feel we have a very strong case, and in the interim, we are continuing to operate the project.

What's the annual contribution?

About 12 million a year.

Thank you.

Charles Strauzer, CJS Securities.

Good morning. Nice job on the quarter, first of all. I just wanted to ask a couple of quick questions. First of all, can you talk a little bit about the percentage of total revenue in the quarter that came from the pass-through hardware in the quarter?

Yes. We had one large situation of up $3 million; otherwise, it's not material in relationship to the total picture.

I got you. Rich, can you break up the gross profit by segment?

Yes, I can do that. I think we will provide all of that in our Q, but gross margin by segment would be as follows -- Consulting, 41.2; Health Services, 20.8; Human Services, 19.7; Systems, 42.8, all of which combines for an overall gross margin percentage of 29.9.

Any conjecture on the trend in those margins going into Q4?

Again, I really do tend to focus on operating income percentage because we just get so much movement between cost of sales and SG&A, so I think I'd really stick to what we said in terms of direction as it relates to the segments from and operating or profitability prospective.

David, maybe this question is for you. What are you seeing in terms of the overall sales cycle on a macro basis? Obviously, it's been a challenging year or so. Are you seeing any kind of (indiscernible) sales cycle shortening, staying the same or lengthening?

Given those huge wins that came through, I think they are shortening. I guess the governors are in place and it's time to do something!

Are you afraid, though, with still some of the -- the budget still kind of in flux, are you afraid there's maybe another leg down in cutbacks? What are you seeing there in terms of what potentially could endanger some of your programs? (inaudible).

I have thought about that and I don't want to sound too optimistic, but I think we've seen most of it. In California, for example, the biggest cutbacks -- it won't affect our biggest contracts there. You never know what's going to happen, but I don't expect another leg down here.

Rich, maybe you can break this out, this last question -- you gave out the sales opportunity pipeline and you broke that out for this year, but can you break that out versus last year -- proposals pending, proposals in preparation and RFPs tracking, just to break that up?

We can give it a try. You want it for the same quarter last year?

Yes, if you could just break that down.

Okay, proposals pending were 314.1 million this year versus 351.0 last year. Proposals in preparation, 46.1 this year versus 111 last year; RFPs tracking -- 539.2 this year versus 250 even last year.

I got you. Thank you.

I do want to revisit one point that Jennifer raised a short time ago on consistency. When we say consistent performance is expected to be consistent, particularly in the fourth quarter versus the third quarter, we're really referring to dollar levels of performance. So if you had, let's just say, an increase in profitability in the third quarter, we're not meaning to say that profitability will increase that same percentage sequentially in the fourth quarter.

Cynthia Houlton, RBC Capital Markets.

Just a couple of questions -- first, you talked a little bit about margins, I know, for the current quarter, but what can we think about a little more on a normalized basis? I know you said not to focus so much of just growth or SG&A. Next quarter, I think you said they are going to be sequentially down based on you won't have the one-time fee. How should we think about that, going forward? I mean, back into kind of the 13-plus percent range, or what's the right to think about operating margin targets?

From a macro perspective, Cynthia, my observations on total Company operating margins -- and when we said that we expected the fourth-quarter profitability might be tempered by that license sale, I think we are talking in the Systems groups, so that commentary really relates to the Systems segment rather.

For total Company, I would tell you this -- that year-to-date, we are 10.3 percent; last year, we were 12.4 percent, so we are behind where we were for the full-year last year. We did trend up in this quarter to get to 10.2 percent operating margins. So, we've got a bit of room to go to get back to historical trends and we are going to try real hard to get there. That's really the focus is to challenge the Company to get back to improved operating margins. Again, we've got seasonality factors that come into it. Lisa's here telling me we've got fluctuations from quarter-to-quarter as well, so we've got one quarter left.

Okay. I know you don't want to give specific guidance for next fiscal year, but just to get a relative range, just doing some basic math on what's been awarded recently, as we look out to next fiscal year, it looks like there should be 100-plus million in incremental revenue and then potentially some -- you know, you obviously have to account for maybe some contracts that are not renewed -- but is that the right ball park that we should think of in absolute dollar increase, or am I missing something, or is that the relative range for revenue next year?

We're going to have to defer (inaudible) commenting on that until the next call. We are right in the midst of doing our FY '04 planning, so I think it's appropriate to hold on that until the next call -- probably give you more guidance then.

Okay, but on a relative sense, I guess maybe then not so much on what's been awarded, but in terms of the dollar value of maybe the next 12 months type of renewals? Could maybe we get a range of what that value is?

Not today. I think when we talk about FY '04, we'd like to do it and address all of the important pieces that are relevant to FY '04. That would be part of it, the relative rebid activity that we have, and we will address it. We will also -- you know, our policy is to give you the annualized backlog when we talk about the year-end results as well, so we will give that to you.

Thank you.

(OPERATOR GIVES CALLER INSTRUCTIONS). Ted Janis(ph), Palo Alto Investors.

Could you talk about the competitive landscape and how it's affecting your business?

Okay. Obviously, we have just won a lot of work, so we're doing very well competitively. We have had -- you know, we lost two jobs to Public -- PSI Policy Studies -- in the child support area, so we've renewed our efforts to be more competitive with them. We've done very well in RevMAX (ph) area, winning almost everything we've gone after. I think we're looking very good competitively.

Margins are affected, though, sort of your competitors offering pricing that is really affecting your margins?

Yes, that's one of the reasons those margins are down somewhat is that competitors are being more aggressive in terms of the margins they're bidding.

Anyone else besides PSI (ph) that you are seeing out there that's winning business from you?

Nope. That's the only one on my radar.

Okay, good work! Thank you very much.

Jennifer Childe.

Rich, you were kind enough to give us gross profits by segment. Can you give us operating profit as well?

Operating margin percentage by segment, for just the quarter -- quarter-ended June 30, 2003 is as follows -- Consulting is 18.9 percent; Health Services, 9.7 percent; Human Services, .8 percent; Systems, 12.6. All of that blends to 10.2 percent consolidated.

Okay, thank you.

Dana Walker (ph), Calmar (ph) Investments.

Good morning. Could you talk about why you believe PSI is in a position to take business from you? Is it strictly price, or are there other factors?

It's difficult to understand why they've been -- why they won these two jobs, frankly. In both cases, we are more qualified. Perhaps we haven't done enough pre-marketing in terms of being confident that we were the winner. We don't see they offer any advantage over us.

I presume, though, you will rededicate yourself to doing more than what you have done to keep what you already have and what's yet --.

Dana, we're looking at all of their rebids right now.

How big an operation do they happen to be?

They're probably -- I don't know exactly because their contracts come and go but, say, (indiscernible) 75 and 100 million. Probably 100 million would be a better guess.

Are they more similar to your role in child support enforcement rather than the role we've seen that ACS and Tear (ph) have played?

Yes. They are exactly in our role, whereas Tear (ph) and ACS are not at all in our role.

David, when you mentioned earlier that you were seeing pressures in child support enforcement, were you strictly talking about these competitive rebids, or were you also talking about your success in gaining back wages that then in turn go to your clients?

Just in the re-bids.

So you haven't seen any performance attrition In the business?

No.

The Healthy Families Contract, which you mentioned that you expect to start at full bore (ph) -- would you expect your profit margin to evolve over time in that business, or would you expect it to start at a level similar to what you would hope to attain for the whole contract length?

I think the margins will be the same, but the contract itself does ramp up over time slightly, so it's not a level contract. It's anticipated that, for example, that the number of people in the program will go from 750,000 today to closer to 900,000, so there is a slight increase over time. Because we will be 100 percent operational, I would think that our profit margins will hold throughout the period.

Given that that will be as much as ten percent of your overall revenue if we were to ex-out the pass-through, would you expect that contract alone to have any dampening influence on your ability to attain higher levels of operating margin, as Rich was talking about earlier?

No, operating margins in that contract should not do that.

One final question -- could you talk about the RevMAX (ph) environments. The appeal, obviously, is profound. I'm trying to -- win monies from the federal government. Can you talk about your success in winning such appeals, and whether you have had to tone down your expectations or the way that you market expectations to your clients?

Basically, the answer is that things are as they have been. Although the federal government has taken some specific exceptions (inaudible) certain components of our RevMAX (ph) programs, which we are backing off of. But they're so much else out there that it hasn't affected us overall.

Are you in a position to provide a "for-instance"?

I would rather not.

Okay, keep on going. Thanks.

Mike Lewis, BB&T Capital Markets.

Good morning. Could you talk a little bit about -- with regard to other pass-through revenues other than the 13.5 million that you would expect in Human Services in the fourth quarter? Are there any other substantial pass-throughs that you would expect?

I think we did talk about we expect a pretty significant amount of onetime pass-through in the fourth quarter related to the Orange County contract, and that is -- we estimate to be between $13.5 million.

That's in the Human Services segment, right?

That's correct. Again, that's the fourth quarter; that's what we expect (inaudible) (indiscernible) September quarter.

Okay. I just wanted to clear that up. Thank you.

Shamma Rosenbaum (ph), Legg Mason.

It was a good quarter. I just want to look at sort of the movement in the revenue guidance, up sequentially about 30 million. Just focusing back on the pass-through, I want to see how much of that is going to be some of this pass-through revenue, how much you guys expecting from the acquisition, how much would be just growth in the business.

Okay. Well, I think we just answered the first piece in that we've got roughly $13.5 million related to pass-through revenue. As it relates to the Correctional Services business, we had it in our fold for roughly two months, and it was approximately $2 million for that two-month period, so I guess (indiscernible) about $3 million in revenue in the September quarter. So I think that gives you the two pieces necessary to then calculate the delta, which would be effectively organic type growth.

Would you direct it to one particular segment that you are expecting it in, the 15 million?

Would I attribute it to any one particular segment? No, I mean, I would go back to those segments that have performed strong and not attribute all of it to any one particular segment.

Thank you.

At this time, there are no further questions in queue, so I'd like to turn the program back over to Lisa Miles.

We would like to thank you very much for joining us on our third-quarter conference call. If you have any additional follow-up questions, please feel free to give us a call. Thanks. (CONFERENCE CALL CONCLUDED)