Maximus Inc (MMS) 2003 Q4 法說會逐字稿

Welcome to the MAXIMUS fourth quarter earnings conference. With that, I will turn the program over to Lisa Miles, Director of Investor Relations. Go ahead, ma'am.

Good morning and thank you for joining us on the conference call. Speaking on the call today is David Mastran, Chief Executive Officer; and Rich Montoni, Chief Financial Officer. In addition, Lynn Davenport, our newly appointed President and Chief Operating Officer, is also present.

Before we begin I would like to remind everyone 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 filing. 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.

And with that I will turn the call over to Rich Montoni, Chief Financial Officer.

Thank you, Lisa. Good morning and thank you for joining us for our 2003 fiscal year-end and fourth quarter conference call.

We're very pleased with the fourth quarter and year-end results. The Company has made notable progress in the last few quarters, demonstrated by several key financial metrics. Those key financial metrics are as follows. We have record backlog of $1.06 million at September 30, 2003 and contract wins for fiscal 2003 of $992 million, and David Mastran will talk about this later. Revenue for the fourth quarter totaled $153.2 million, which included approximately $13.4 million in product resale revenue. And full-year revenue was $558.3 million. Net income for the fourth quarter totaled 9.4 million or 44 cents per diluted share. This is above consensus estimates of 41 cents per share. The Company reported net income of $35.3 million for fiscal 2003. This compares to $40.3 million recorded for fiscal 2002. While we are pleased with the sequential performance, the anticipated year-over-year declines were primarily the result of reduced government spending in certain areas.

Cash from operations totaled $21 million for the fourth quarter, which brought us to $55 million for the full fiscal year. DSOs improved to 86 days at September 30th '03. This would have been 94 days if adjusted for the impact of the product resells. And we exited the year with cash, cash equivalents and marketable securities of $117.5 million.

I'd like to move on to a view of quarterly revenue by business segment, starting with our consulting services segment.

As expected, consulting revenue for the fourth quarter decreased sequentially to $35.2 million and was essentially unchanged when compared to the fourth quarter of 2002. As a reminder, last quarter the consulting segment benefited from a onetime $3 million hardware and software sale for a certain SchoolMAX contract which did not repeat in the fourth quarter. Consulting revenue for the full-year was $139.4 million, a $1.5 million increase over the $137.9 million we reported for fiscal 2002.

Health services segment, its revenues for the fourth quarter were in line with expectations, totaling $39.5 million. Fourth quarter year-over-year health revenue declined as a result of nonrecurring revenue recognized in the fourth quarter of fiscal of 2002. Overall full-year health revenue remains stable, totaling $162.5 million, which compares to $161.2 million reported for fiscal 2002. Our health segment continues to generate a solid recurring revenue and remains reasonably predictable. We do expect significant growth in the health segment starting in the second quarter of fiscal 2004, driven by the California Healthy Families Contract which we estimate will contribute approximately $40 million in revenue for fiscal '04. Of the $40 million in revenue, about 10 million will be lower margin pass-through revenue.

As to our human services segment, its fourth quarter revenue was $52.2 million versus 38.5 million reported in the third quarter of '03 and 37.8 million reported in the fourth quarter of last year, of fiscal 2002. As we explained last quarter, the sequential increase in this fourth quarter revenue is attributable to 13.4 million of product resell revenue associated with the Orange County Electronic Voting System Contract. For fiscal 2003 human services revenue totaled $165.1 million, as compared to $148.7 million reported for fiscal 2002. And although profitability for the full-year was below historic levels for the segment, an action plan is underway to improve the group's profitability for fiscal '04.

The human services segment made moderate progress in the fourth quarter, posting operating income just shy of $1 million. In the fourth quarter the segment benefited from seasonality related to tax credit business, as well as improved performance from our Australia operations. Looking ahead for fiscal 2004, we're planning continued increases in human services profitability. We believe staffing levels are more in line with demand, particularly in work force services. And we also expect continued profitability improvement in our Australia operations.

On to systems, the systems segment improved sequentially by $1.5 million, posting fourth quarter revenue of 26.3 million, which is up 28 percent over revenue of 19.1 million reported in the fourth quarter of 2002. Full-year 2003 revenues totaled 91.3 million, compared to $70.9 million reported for fiscal 2002. The systems segment benefited from the contribution of new contracts signed in the third quarter and performed slightly better-than-expected as a result of license revenue associated with the Marcone County (ph) Justice Solution Contract which we initially thought would hit in fiscal '04.

A related but forward event involving segment reporting is that effective October 1, 2003 -- obviously the start of our fiscal 2004 first quarter/fiscal year -- we implemented certain organizational changes. To the extent our future segment reporting is changed, we will share this with you by filing an 8-K which retroactively will restate fiscal 2003. Specifically, we plan to file that Form 8-K with the restated numbers shortly after we file our Form 10-K for fiscal 2003.

I'd like to spend a bit of time on operating margin. Operating margin in the fourth quarter was 10.1 percent. This is consistent with the last quarter. And we exited the year with a full-year operating margin of 10.2 percent. Gross margin was down on a sequential basis primarily as a result of product resale revenue related to the Orange County contract. Excluding this $13.4 million product resale revenue, for the fourth quarter gross margin would have been 31 percent and operating margin would have been 11.1 percent. Hence, we see this as positive. While not back to historical levels, the adjusted margin of 11.1 percent is improved over the June quarter, which was much improved over the March quarter. In conclusion, margin, I believe, is headed in the right direction.

DSOs improved sequentially to 86 days, impacted in part by the increase in revenue. Excluding the impact of the Orange County Voter Contract, our DSOs would have been 94 days, which still is sequentially improved from the 96 days reported at June 30, 2003. In fact, it's our best DSO number in fiscal 2003. We're pleased with the progress in DSOs, and it represents real accomplishments by our people to focus on collections.

One important point to note, we do experience seasonality in DSOs, with September traditionally being our best and December being the highest DSOs. This pattern has held for the last couple of years, and I believe the December spike is due to a typical slowdown in processing and approvals by our customers at the end of December caused by the holidays. As a result, I expect that DSOs will likely increase sequentially in December. As to how much, I still maintain that 95 to 105 days is normal range for our business, and I now think that the upper end of that range is most appropriate for the December period. I would like to mention, however, that we do have some large contract specific situations that may help the December 31, 2003 DSO count.

On to the balance sheet, it remains very healthy. With the exception of 4.6 million in capital leases, we have no debt. We ended the quarter with 117.5 million in cash and marketable securities. During the quarter the Company used $1.5 million in cash for the purchase of 45,700 shares of MAXIMUS common stock as part of our ongoing stock repurchase program. As of September 30, 2003 we had $37.3 million available under the share repurchase program. As such, diluted weighted average shares outstanding at the end of the quarter were approximately 21.5 million.

A guidance and forecasting update -- as most of you know, we revamped our methodology for providing guidance in the middle of fiscal 2003 and we're taking this approach for fiscal 2004. We estimate that full-year revenue will be in the range of 600 to $630 million, reflecting expected strong revenue growth from health services and systems and somewhat lower or moderate growth from our consulting segment. EPS consensus estimates for fiscal 2004 currently stand at $1.88. We're fairly confident that we can achieve this. Much of our forecasted growth in fiscal 2004 is anticipated to commence in the second quarter when certain larger contracts are expected to begin to generating revenue. Our first quarter is also subject to moderate holiday seasonality. And as a result, earnings for our first fiscal quarter may be slightly sequentially down.

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

Good morning and thanks again for joining us. I'm pleased to report that our overall results for the quarter and fiscal year were better than our April forecast. This morning MAXIMUS reported revenues for the fiscal year of 558.3 million, a 7 percent increase in revenues over 518.7 million reported for fiscal year 2002. As Rich noted, diluted EPS for the quarter was 44 cents and $1.66 for the full fiscal year. Although our overall profitability was down 12.4 percent for the year, we did very well in difficult times for our clients. Once again, as Rich stated, the Company generated solid cash from operations -- 21 million for the quarter and 55 million for the full fiscal year.

From a broader market perspective we believe we've seen a stabilization in demand, which helped both our top-line and bottom-line results in the second half of fiscal 2003. We're encouraged by the deal flows and RFPs, which I will discuss later. We're also pleased that the sales cycle appears to have become more predictable where we're not exterior not experiencing delays in singing contracts, a factor which impacted the second quarter and resulted in modified expectations for the latter half of 2003.

While MAXIMUS management may have underestimated some of the challenges in fiscal year 2003, we acknowledged last year that we could face softness in some areas. To that point, we accelerated expansion into new areas, diversified our revenue stream and mitigated risks where possible. As we all know, markets change and successful companies change with them. In the past year alone we moved into several new areas to grow and diversify our risk, including education systems and services, voter services and correctional services. Despite of these results and movements the overall business performance for fiscal year 2003 can be characterized as mixed.

The human services group and certain divisions of the management services group were significantly weaker than historical levels due to reduced spending in these areas by state and local governments. The lower performance by these two groups resulted in lower net income in fiscal 2003 versus fiscal 2002.

Within the human services group, program scope reductions in our workforce services operations have largely cycled through and staffing levels and related costs and resources have been adjusted accordingly. The Australian operations made improvements in the fourth quarter and we expect this performance to continue in fiscal 2004. Our child support division has been struggling with the market fairly quiet and not many new opportunities. We need to reinvigorate this division. The education division and management studies division within the management services group had good sales but struggled to deliver profitability last year. We have made organizational changes and taken other improvement actions. We expect both divisions to increase margins this year.

In stark contrast to these two groups, we experienced solid demand in our other three groups, including financial services, health services and systems services. We expect continued strong growth in these groups in fiscal 2004.

Demand has remained strong in financial services because states are desperately seeking additional sources of capital. They're doing so by tapping into our contingency based revenue maximization and school-based claiming services. Last year we won several RevMax jobs, including those in Florida, Louisiana, Connecticut Iowa and others. We recently won several new RevMax jobs which we will be announcing in the coming weeks.

The health services group continues to benefit from a solid base of recurring revenue. We won a critical re-bid in Kansas during this year. Other health services group contracts scheduled to be re-bid in 2003 were extended by the client. We have a number of contracts that are up for option year exercises in fiscal 2004, and we believe that based on our strong performance the options years will be taken rather than re-bid.

Work on the large California Healthy Families Contract is well underway and we remain on track for full operations launch in the second quarter of fiscal 2004. Recall, this is a $418 million contract over five years with $18 million in transition costs. We have been notified that MAXIMUS passed the readiness test and will be given the green light to go live on January 1st. This is a major accomplishment for MAXIMUS. We effectively have ramped up a major project, developing a major system enhancement in eight months. We have never before accomplished anything this large and this complex. It marks a major watershed for our company and proves that we can take on larger and larger contracts and be successful. As an example of the scale, we tested and interviewed over 800 people in one weekend for positions on the project. This contract alone should contribute approximately 40 million of revenues on the year. As Rich noted, 10 million of that will be pass-throughs revenues which typically carry lower or no margins.

The systems group continues to grow at a healthy clip as well with several new projects underway. We are benefiting from the ongoing implementation of smaller projects. Demand has continued as customers seek to improve processes and implement cost efficiencies. As such, we've seen an ongoing growth, particularly in justice solutions and ERP implementations.

In the federal market we have a number of initiatives underway for federal agencies such as the Department of Defense, the Transportation Safety Administration, the Department of the Treasury and the Federal Deposit Insurance Corporation, or FDIC as you most probably are familiar with. In addition, we're learning as an organization to spot problems more quickly and deal with them. Looking forward, we have reason to be optimistic. Our management team is definitely stronger.

Many of you have been concerned about the continuing deficits in state and local government and their impact on our business. While these deficits are real, we continue to see an increasing willingness by these governments to consider outsourcing to save money and improve service. We're currently responding to two big opportunities right now, one in a large state that may result in the outsourcing of all eligibility operations throughout the state and one in Canada to outsource the management of a health plan in a particular province. MAXIMUS is a viable contender in both procurements, but decisions are not expected until July of next year. We're also working on proposals for two large federal health care outsourcing opportunities, one involving call centers at health and human services and another involving appointment scheduling for military families worldwide. We just won a $25 million health care quality assurance contract from the Department of Defense, so we have a new client beachhead for MAXIMUS there. The point is that there are plenty of opportunities out there.

Let me give you a reorganization update. Last quarter I told you that we were in the process of evaluating our succession plan. As part of the plan, Lynn Davenport has been promoted President and Chief Operating Officer of MAXIMUS. His responsibilities are to handle the day-to-day operations of the Company under my direction. I remain in the role of Chief Executive Officer. Both Lynn and I serve on the Board of Directors and are working closely together.

Lynn came to MAXIMUS 12 years ago as a partner in Deloitte Touche. He has served in various capacities, most recently as general manager of our health and consulting strategic business unit, which represents over $300 million in business annually. With a career spanning over 25 years, Lynn brings tremendous experience in health and human services program management to this position.

In addition to Lynn's promotion, we have broadened the management team to add a new level of depth and expertise. The reorganization better aligns certain divisions with their customers. It also reassigns certain senior team members to ensure we're taking advantage of the experience we already have in-house and benefiting from the leadership and knowledge of our top people.

In addition to the systems segment, Tom Grissen will now take the lead on management services consulting practice. Much of the work in this practice has a systems component, and the two groups are complementary to one another. With over 20 years of government operations experience, Tom is the natural choice to lead these two lines of business. As part of this plan we moved the education division to the systems group to take advantage of management expertise which already resides in-house.

Bob Fallon, attorney and former director at the Rhode Island Department of Human Services has spent 25 years in public service. Bob has been at MAXIMUS for the past eight years and has led our financial consulting practice. Bob has been promoted to the general manager of the strategic business unit and will lead both the financial services group and the Human Services Group. He is a welcome addition to the senior leadership team.

Rounding out the strategic business units we have also promoted John Boyer to general manager of our health services strategic business unit. John has a Doctorate in healthcare administration and 25 years experience in health care delivery, including clinical, administrative and managed care services. He's been with MAXIMUS since 1995 and has been instrumental in navigating our health business over the past several years. Under his direction the company won the California Healthy Families Contract.

Keeping in the spirit of good corporate governance, we also announced two new Board appointments in the past year. Paul Lederer, former CEO of a Felcro (ph), a multi-billion dollar corporation, and Wellington Webb, three term former Mayor of Denver, joined the Board. This now brings our total number of Board members to 10 with an independent majority.

Moving on to our pipeline statistics, our pipeline for fiscal year 2003 and beyond remains healthy, with new opportunities at several stages of development. Signed contract wins for FY 2003 totaled 992 million, including Healthy Families Contract, compared to 465 million at the end of last year. Even if you remove the Healthy Families Contract, it jumped from 465 million to 574 million, so improvement was across the board.

New contracts pending, which represents awarded but unsigned contracts, increased to 95 million at the year-end from 59 million at the end of the third quarter and 63 million at the end of fiscal 2002.

As of November 17th total sales opportunities in front of us increased to 988 million, which compares to 900 million as of July 28, 2003 and 899 million at this time last year. Of the 988 million in total sales opportunities, proposals pending account for 233 million, proposals in preparation 171 million, and RFPs tracking 584 million.

Heading into fiscal 2004 we are very well positioned with re-bids. We have six contracts up for re-bid with a total contract value of 87 million. Of the 87 million, approximately 30 million would impact fiscal 2004. In fact, we have been notified of award on the largest re-bid, which is a two-year contract totaling approximately $35 million. In the case of two other re-bids we believe the client will likely extend contracts on both of them.

In addition, we have 19 contracts with option years up for extension in fiscal 2004 in the child support, workforce service and health services areas, with a total contract value of 145 million and a fiscal year 2004 value of approximately 47 million. And again, based on our performance I am reasonably confident that the majority, if not all, of these option years will be exercised.

Finally, all of us here are energized and excited to drive revenue and increase profitability. We're especially focused on those segments that have been performing below historical levels in the past year. I have spent many years growing and expanding this business. We have barely begun to tap into the potential for health and government. MAXIMUS revenues are still a very small part of the government market. All segments of our business should be growing and generating reasonable profits, whether during flush economic times or during challenging state fiscal crises. And I believe we have implemented the necessary plans to get us there. Much of this cautious optimism stems from our success in the past year and reducing costs, while simultaneously learning more about managing a large business and strengthening our management team.

I read recently that the toughest barrier to handle in transforming a company from an entrepreneurial-lead venture to a professionally managed firm in the move from 500 million to $1 billion. I believe it. We've been flat for too long now and it's time to start growing significantly again. And we are ready to do so.

Rich has already cover the financial guidance for '04, but I just want to add that I am pleased to see our 2004 growth forecast moving in the right direction. 2003 has been a challenging year for MAXIMUS, but we finished on a positive note and we look forward to improved performance in fiscal '04. So with a new business momentum, a good backlog and a pipeline of new business opportunities to pursue, we're confident in our ability to generate top-line and bottom-line growth in the next year.

With that I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS) Thatcher Thompson, CIBC World Markets.

Just a quick question. David, you addressed it briefly, but the state budgetary crisis, local crisis, and how much they are collecting and what they're trying to rationalize, can you specifically describe some of the things they are considering outsourcing now, some of the new things that are coming up, where they're going to be able to cut costs and where you can do things much more efficiently than they can?

The latter part is easy to answer -- just about everywhere. But eligibility seems to be a big topic right now. Currently the states, the welfare programs run with the classical eligibility models of the '70s and '80s, where an eligibility worker does clerical functions such as answer routine phone calls, create paper files, type data into a computer. It's ripe for technology to improve the business processes. And I think some of the states are seeing the amount of money they are paying for this function and that considerable sums can be saved not only administratively, but through more efficient administration and getting people back to work. So the back-office functions again in the welfare area.

Lynn, do you have some other points you want to make?

I would just say a couple of other areas -- federal dollar federal recoveries, health care case management, back-office administrative functions.

So I think there's plenty of opportunity.

And how about, Lynn, commentary on some of the PeopleSoft systems in the state government? That actually seemed to be something that was going pretty well. I'm surprised that the state or local governments want to spend money on that right now.

Well, I think they've seen opportunities to have administrative efficiencies. I think that's what's which pushing the initiative. We are seeing that in a number of states.

That's been an up tick from what you've seen in the last couple of years?

Yes it has been.

I think what we're seeing is much bigger contracts. The size of these things are getting bigger and bigger. In Texas, for example, they passed a House bill down there the just required a completely -- a consolidation of 11 agencies into 5 agencies. There's big projects underway down there and we think that's going to pick up.

Sounds good. Thanks guys.

Adam Waldo, Lehman Brothers.

A couple of contract questions. Can you update us on the New Jersey health-care contract renewal that was up at the end of October and where that stands and how it's affecting your FY 04 outlook?

We're currently in settlement negotiations on some past billing (indiscernible) invoices with us. The negotiations are going very well and we feel that an extension is going to go through.

So in putting together your FY 04 outlook, Rich, would it be safe to assume that on a probability weighted basis you have factored that into the forecast?

That's correct.

Turning to the California MRMIB contract, the $40 million gross revenue impact in FY 04 that you articulated, does that assume a very slow ramp in the fiscal second quarter of '04 as you go live January 1? Or how should we think about the $40 million revenue guidance relative to kind of 80 to 85 million in gross revenue when it hits full run rate?

It's a slight up ramp, but it's really -- we're responsible for the whole program immediately. So it's the big bang implementation.

Okay, if it is a big bang implementation then is it fair to say then that the $40 million figure that you threw out on which you predicated your guidance is sort of two quarters of big bang implementation in FY 04 rather than three?

You can easily drawn that conclusion, but having been through these things you never know what happens until you get into them. But the likely expectation is that we're at full implementation on January 1.

Okay. Better to be conservative then. Turning to call on capital here, obviously your free cash flow performance continues to exceed both your expectations and ours. Given the strong move in the share price since April, can you give us a sense now for how you would prioritize call on surplus capital as between inaugurating a dividend, share buy backs and financially disciplined acquisitions?

Again, our preference is for financially disciplined acquisitions. And we are constantly looking, but we're very picky, as you know. Buying our shares back is a second option. But we like to get that -- we like to get that at good prices, as you know. Giving out a dividend does the least for us. So that's the priority order.

Has the Board been having any debates around inaugurating a dividend? I know on the last call Rich indicated there was a fair amount of study of that going on.

The Board continues to talk about the concept of dividends. We think it's very important and it's a serious consideration.

Thank you.

Bill Loomis, Legg Mason.

Strong quarter. Just going back to the California contract, 18 million in up-front CapEx, can you just remind me of what the amortization -- over what period that will be amortized?

The way that works is under the contract we spend up to $18 million in costs, really the transition costs that position us to really go operational on January 1st '04. And we recover those costs basically straight line over a five-year period. So it's the 18 million divided by 60, that's the monthly portion of the bill that we receive payment on.

And is there any change in profitability on that contract? In other words, do you expect lower margins up-front, higher margins in the back half of the five years?

No. The margins are projected to be the same.

And the re-competes, you said you have been notified on a two year 35 million. Was that New Jersey, the one that you mentioned?

No, that wasn't.

So New Jersey would be --

Another one.

So new Jersey would be another one of the five that you talked about up to the 87 million?

That's just an extension. That's not a re-bid.

Okay, say you're not including -- okay. So new Jersey would not be in that figure. And what is the run rate on New Jersey again, if you can remind me of that?

It's about 20 million a year.

What's with the California or any of your other contracts that were in California? Any impact on the new Governor? He is talking about pretty substantial cost cutting. Have you been notified of any changes with the any of your contracts with potential changes?

We have not been notified of any changes, but one of our people told me that Gov. Schwarzenegger, at least during the campaign, was talking about the California Healthy Families program and thought it was an extremely important program and that every child should be a participant.

How does Healthy Families -- how does that program factor into the budget? Can you give us some background there? How is it funded?

It's a CHIP program -- it's a state Child Health Insurance Program project, so the government -- the Feds pay about half of it. But the state still pays a big substantial chunk and they're committed to it. They're very strongly committed to it.

What kind of case are you making that will save California money in that program?

Our bid was 80 million below the competitor's been, so that was a pretty good savings for them.

I'd say so. You mentioned the sales pipeline. I mean the sales cycles getting more predictable. What's the reason for that? Because obviously the states -- their own budgets aren't more predictable. What are you hearing and the state-level that's resulting in that change?

It's not that we're hearing anything; it's just that we're observing it. I guess maybe because of the political turbulence, things were put on hold while the new administrations are coming in. And that's kind of settled down, so there aren't these big holes. I think they have a better feel for where they are in the budgets and their decisions are -- they've made conscious decisions on what to go forward with. So there's less delays in the contracts.

So that realize how bad it is now, so they set they have game plan and they're moving forward instead of not moving at all?

That's what it seems like.

Thank you.

Tom Mar (ph), BB&T Capital Markets.

Just a quick housekeeping contract (ph). I was wondering who the equipment supplier was on Orange County.

It's Hart InterCivic which is the voting machines.

These are the guys out of Austin down there?

Yes.

Do you have a long-term relationship with them in terms of the other opportunities that are going to come along? Or is that a one off in Orange County?

We have been bidding with them in Orange and Missouri and Ohio and Sacramento, San Bernardino, Oregon. It's not a formal alliance, but it's an alliance that seems to persist.

Thanks very much. I appreciate it. Good quarter.

(OPERATOR INSTRUCTIONS) Charles Strauzer, CJS Securities.

Good morning. Can you talk a little bit, Rich, if you can, about margins for '04, either by segment or blended if you don't want to give by segment?

I'd be glad to do that. As we all know, FY '03 margins were less than margins in FY 02. To put it in perspective, our operating margin FY 02 was 12.4 percent and this year 10.2 percent. I think the better comparison is to adjust that 10.2 percent for the $13.4 million in revenues related to product resale, in which case you're looking at 10.5 percent. But the point being year-over-year the margins are softer. And in fact, at times the Company was significantly higher than the 12.4 percent.

Our view is that we need to get it headed in the right direction. We think we have it headed in the right direction. I think it's too soon to say that we'll get back to all-time records. I think the right approach, Charles, is to say let's get it moving towards 12 percent; when and if we get it to 12 percent then we can ask can we get it more than 12 percent.

As we build out our models for the quarters for next year, how would you expect not only margins to ramp, but also the top-line? I know you gave a little bit more guidance for Q1 (multiple speakers)

I think the key piece there, when you understand what's going on with the business and you put into a financial model, really is California Healthy Families kicking in that January quarter and in December we have the seasonality factor that we have to deal with. So I think those two factors should be very significant in your modeling.

Got it. That's in the health services category?

That's right. The California Healthy Families is in the health services category.

Talk a minute about that contract. Is that a fixed-price contract, just remind me again?

That a hybrid contract. It has fixed price components. It's got performance components, unit production components. It's a mix.

So is there an allowance for as you get in there for type of materials (ph) where you may need to achieve some overruns, maybe?

The way we structured the project was that -- let's the telephone calls. We get a certain price per minute. So it doesn't matter how many calls there are, we're going to get reimbursed. On the other hand, for the (indiscernible) the client, we gave them a fixed-price on the fixed-price of keeping a call center there and a variable cost per minute, so it's fair to both sides.

Got it. Great. In terms of the pipeline of RFPs, just talk a little bit about what you're seeing out there with (indiscernible) justice opportunities, if you can.

With justice opportunities?

Yes please.

There is general recognition in the market that new J2EE platform -- in other words, the Web-based system -- is something that all these courts are going to move to. So we're seeing some pickup in interest because of the new technology that's available. MAXIMUS is implementing it now and in Massachusetts we just went live up in Boston and participated in a conference last month. There seems to be a lot of interest in the new technology.

Are you seeing any shortening at all of the sales cycle there in (indiscernible)?

Nothing that's come to mind my attention.

Just briefly on acquisitions, what's the plan? I know you said you want to the get to one billion in revenue. With the cash of the balance sheet, with the cash flow and given where the stock price is now, and I know dividends was something you are considering, but talk a little bit more about are you going to get more aggressive on acquisitions.

I think that what we've come to understand, our conclusion we're coming to here is that while the smaller acquisitions are less risky in terms of making a big mistake, they are more risky and more difficult to keep profitable and keep growing. And so we really have to move to bigger acquisitions, let's say in 50 to $150 million revenue range. But once you get up there, we've got to be very selective about what we acquire because it's going to change the context of the Company and we want to make sure that we remained in our core competency and have the ability to manage these acquisitions. So we're looking at actually two of them right now. But we're going to be very careful about acquiring them because they have to fit into our culture and our growth aspirations, and we have to be very comfortable that we can manage them and make sure the quality is sustained.

Understood. One housekeeping question for Rich. Interest rate, kind of what you're building into your assumptions right now? It looks like interest income was down a little bit.

Interest rates are, as you're probably very well aware, very, very low. We keep our surplus funds in very liquid situations, so it's close to nominal in that regard. If you are going to look for an annual rate it would be 2 percent-inch.

Colin Gillis, RBC Capital Markets.

Rich, just a quick housekeeping item. I'm wondering if you have contracts breakdown as a percent of revenue for the quarter and for the year, too?

We'll get that for you, Colin.

Just generally going forward is there any type of mix shift that you see happening in '04 in that regard?

Let me get to your first question. As it relates to revenue by contract type, let me give you year end at September 30, 2003. Fixed-price is 36 percent, performance-based is 33 percent, cost-plus is 17 percent, time and material is 14 percent and that should add up to 100 percent. In comparison to our prior experience, we're seeing more in the performance-based category and less than the cost plus category.

Thank you.

Tom O'Holleran (ph), Lord Abbot.

David, you have spoken about the fact that the business is changing in momentum here, going to a stabilization of demand. You're encouraged by deal flow; sales cycles are tightening. You've been in this business for long time. What do you think is really going on here and how sustainable is this?

What I think is going on is that the government has now faced the reality of deficits, is now adjusting to the reality of deficits and adapting to the deficits. And still people in government are -- many of them are motivated, energetic. They want to improve things. They have the same sentiments that we do out here. So they are determined to improve services to the people and they are now learning how to do that better in the face of deficits. So they're reaching out more to the private sector, looking for efficiencies, trying to figure out how to tap into more money through our RevMax services. I think it's just an adaptation to an environment and they're learning how to do it better.

And if we get a strong economy that improve budgets, how will that affect you?

That's a good question. I know that obviously it's going to improve things for us. But I can't help but think that some of this outsourcing is occurring because of the deficit problems, that when you have a cost problem it will cause a political problem bigger than say dealing with the unions. So they are more likely to outsource. As the economy gets better and they can afford inefficiency and save political grief, they sometimes do that. But a good economy will help everything and I think that things can only get better if the economy get better for us.

You indicated that you had been looking at some large acquisitions. Could you just fill us in on what areas that you would think would be attractive and what types of companies that would make sense for you?

They are in our core areas -- human services and health services.

Thank you.

Greg Travers, Kalmar Investments.

This is Dana Walker. Greg just walked out. Not because he was bored. Could you talk a bit about your intermediate-term margin goals for the consulting and human services? You talked about how you expect the trend to be better in human services this upcoming year, but can you elaborate?

I don't want to get into specific percentages in my call. I would rather just give you direction as it relates to segment type information. Overall, I think when you look at our groups, it's almost as if we have three categories from a revenue and profit performance perspective.

I can start out with health, which, from a revenue perspective and from a profit dollar profit perspective, we expect is going to have very strong improve performance '04 over '03, while yet kind of maintaining their historical margins.

And then I think we have a couple -- and I would put systems in this category and I would also put a piece of our consulting segment, which would be the financial services group, in this category -- where they will have good revenue growth, but they've been relatively strong performers in the past. So their operating margins will maintain, and hence they will be good dollar profit contributors next year as well.

And then the third category of business that we have -- and this would really be our human services group and then our management services group inside consulting -- where last year their performance was disappointing, their margins slipped lower than they showed, we're really not pushing the revenue accelerator form them next year as much as let's get them back to better improved operating margin percentages, and then that way they will contribute to our profits.

So you do not believe that margin is only going to come from welfare? You think cost structure is the short-term remedy?

Not the only remedy, but I think the dollar profit improvement will come from both areas -- improved margins, and as I said the last category of business, but also continued strong margins on some revenue growth in other businesses.

Would you touch upon that the comment that you made earlier about child support enforcement and how that business is struggling to make fuller progress? Is there still an thematic driver there or you need to evolve?

I think that the competition in that particular area has been very intense for us. And I think that part of the challenge -- there are two components to it. One is the competitive environment, and probably the most difficult competitive environment that we have. And secondly, I think we've been stuck in the kind of services that we've been historically providing and we need to broaden our scope.

For example, that particular division has a debt collection capability and we want to expand its scope to debt collection. It also has our revenue maximization practice uncovers areas that could utilize that particular expertise. And now we've combined that child support division into the RevMax group. They're both run by the same person, same strategic business unit. So we expect some crossover selling and synergies there. But it does need some work to reinvigorate it, as I stated.

How would you describe though its performance vis-a-vis recovery metrics versus your pees and your clients' expectations?

In terms of performance, it has out-performed the peers. That's what's surprising. Many of you may have been following this Baltimore project. I just read a letter to the governor from a councilman in Baltimore saying, "what's going on here? This companies -- we've had trouble for years, and then they came in four years ago and they're doing great. Our people are happy. I've never had things so good. Why are we under pressure to change?" So sometimes performance isn't as key an indicator here on your success.

I have a question going back to Rich. It would appear that imputed in your comfort with next year's Street expectations that doesn't seem to incorporate too much operating margin improvements.

I think that's true. I think we're looking for some improvement, but we have not gotten terribly aggressive in that regard.

Thank you.

(OPERATOR INSTRUCTIONS) Seth Moshman, GARP Research.

Can you just elaborate a little bit more about the federal opportunity? Do you see this becoming a greater percentage of the business? And what are the implications for margins?

Federal -- interesting. It's a different market. It's more competitive. We will go up against six or eight firms. The margins are slightly reduced from our historical levels. But the jobs are big and we are a contender. So we're actively, as I stated in my remarks, we have just won a $25 million contract from the Department of Defense in the area of health care quality control, which is a beachhead. That means it's a place from which we can expand. So we had won in a competitive environment. The margins are not quite as high, but we see a lot of growth opportunity there.

Great.

We will take one last question this morning.

Adam Waldo.

Just a quick follow-up. Adam Waldo, Lehman Brothers. Rich, in your prepared remarks you alluded to a potential change in segment reporting. I wonder if you can just provide a little more color as to what you all are thinking there, the reasons behind it and then historically how many years of time series data you'll provide us on the new financial reporting being contemplated.

I'd be glad to do that. We would take it back three years -- at least three years. And we're in the process of finalizing what's the right way to deal with -- the fundamental question being what should be our segment reporting as we go forward.

There is, as you can appreciate, some fairly extensive accounting rules that speak to this. It's very factual intensive. And we're really won't announce how we're going to do it until we get by all of the appropriate parties, including our auditors. But I expect that we will settle that by the end of December. And what we're going to do is share with you via a Form 8-K and lay out that data for you so you take that information and drop it into your models.

Will some sort of capital intensity measures be included or just revenue and operating income?

Really just what we've historically presented, so I didn't intend it to include CapEx activity.

Thank you.

This concludes our fourth quarter and year-end conference call. Thank you very much.