Maximus Inc (MMS) 2004 Q1 法說會逐字稿

Good day and welcome to the MAXIMUS first quarter 2004 earnings conference call. All lines are in listen-only mode. I'd like to turn the program over to your host, Ms. Lisa Miles . Ms. Miles, go ahead, please .

On the call today is David Mastran, Chief Executive Officer, and Rich Montoni, Chief Financial Officer. In addition, Lynn Davenport, our President and Chief Operating Officer, is also available.

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 filing.

We encourage you to view these summary of risks in our 2003 10-K, filed with the SEC on December 19, 2003. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

Before I hand the call over to Rich, I want to apologize for the slight delay that we experienced at the beginning of call, as we were unable to hear the operator queueing us up.

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

Thank you, Lisa and good morning. Before I talk about the results for the quarter, it is important you understand how we're reporting segment data.

As a result of certain organizational changes on October 1, our reporting segments have gone from 4 to 5. In the exhibit to the press release, which was filed as an 8K last evening, we showed the new segments and have provided the historical results adjusted for this change.

Later in the call, David will discuss the details behind these organizational realignments. Here is a summary of the changes. We split our consulting practice into two separate reporting segments, the first is Financial Services Consulting; and the second is Management Services Consulting. I think you will appreciate the added clarity.

We also shifted certain divisions that had a technology and systems focus into the systems segment. Specifically, we moved our education systems division, which houses our SchoolMAX, student information system software; this division was previously reported under our consulting segment.

Also, the Children's Services Division which focuses primarily on the implementation of SACWIS systems--that is statewide automated child welfare information systems, this was shifted over to the Systems segment as well, and it had been in the Human Services segment.

So to recap, 4 segments go to 5, 2 divisions move between segments, in the exhibits to the press release, all show quarterly amounts reclassified as if we'd been organized like this all along. Okay? Now, let's move on to first quarter financial results.

We are pleased to add one more quarter where overall results were in line with our expectations, and certain aspects being particularly favorable. The company continues to make notable progress as demonstrated by several key financial matrix.

Revenue for the first quarter was in line with our expectations and totaled 138.9 million, a 5% increase over revenue of 132.7 million reported in the same period last year. Net income for the first quarter was 9.1 million, or 42 cents per diluted share, versus net income of 10.1 million or 47 cents per share reported for the first quarter fiscal 2003.

The year-over-year decline is primarily a result of weakness in our Management Services segment.

We remain extremely focused on improving the profitability in this area, and David will discuss our strategy moving forward. DSOs remained under 90 days, in fact, they were 87 days. And we generated a considerable amount of cash from Operations for the first fiscal quarter, cash from Operations totaled 16 million with free cash flow of 13.3 million.

And lastly, we ended the quarter with cash and cash equivalents of 143.3 million. Now, let's move on to the quarterly results by business segment--and remember, we are reporting under five segments this quarter.

Health Services segment. Revenue for the Health Services segment was 39.5 million for the first fiscal quarter and on sequential basis, was comparable with revenue reported in the fourth quarter. Our Health segment continues to generate solid recurring revenue and remains reasonably predictable.

Operations for the California Healthy Families project launched in the beginning of January, and we expect it to drive significant revenue growth in the Health segment. We currently estimate that this contract will contribute approximately 40 million in revenue for fiscal '04, that have 40 million, approximately 10 million will be lower margin pass-through revenue.

Human Services segment. First quarter revenue for the Human Services segment was 39.3 million, a 7% increase over the first quarter of last year, but down on a sequential basis because our fourth fiscal quarter included higher than normal pass-through revenue of 13.4 million.

We made respectable progress in profitability of the Human Services segment, income from operations was up 12% sequentially, and operating margin improved from what had been 3.3% in the fourth quarter to 4.7% in this first quarter.

Looking ahead, we do still anticipate improvement in Human Services profitability for the entire fiscal year when compared to fiscal 2003, but there may be a slight fluctuations from quarter to quarter as this business can experience some seasonality from related tax credit work. Financial Services--the Financial Services segment revenue for the first quarter increased to 19.3 million compared to 19.1 million in the prior quarter and 16.5 million reported for the same period last year. Performance in this Financial Services practice has been strong over the last several quarters, with several new wins in fiscal 2003, which should contribute to -- which should continue to contribute to its strength in fiscal 2004.

While we expect continued revenue growth for Financial Services for the remainder of the year, full-year operating margins for fiscal 2003 were roughly 27%, and we anticipate operating margins will run in the mid 20's for this segment for fiscal 2004.

Management Services. Its revenues for the first quarter were down sequentially and year-over-year, and they were 10.4 million. This decrease is primarily a result of continued weakness for certain services within this segment.

We've discussed for the last several quarters that this segment has had challenges in light of slow demand, we are in the - ongoing process of evaluating how we can best improve this business, and several initiatives are already underway.

For example, we have brought back a former manager who has considerable success in driving improved performance. We have reduced staffing levels to better align staff with current backlog levels, and we have turned our marketing focus to concentrate on healthier markets as we strive to improve the segment's overall profitability.

Systems. Revenue for the Systems segment increased 25% on a year-over-year basis to 30.3 million, driven by several key wins that started in the second half of fiscal 2003. Results were sequentially down compared to 32.2 million reported last quarter as a result of license fee revenue recognized in the fourth quarter that did not repeat to the same extent in this quarter.

In addition, the Phase II project with the Transportation Security Administration for quick smart card came to a close in Phase III, is scheduled to get underway later in this year.

I'd like to address Expenses and Operating margin. Under our SG&A line expense, we made a minor change to external reporting which I'd like to point out to you. We've historically reported deferred compensation expense and the amortization of intangibles as separate line item, separate from SG&A, in our income statement.

For our first fiscal quarter, the combined expenses for these two items, deferred comp and amortization of intangibles, totaled approximately $500,000, and since these amounts have been immaterial to overall expenses they will now be included in our SG&A expense line. The detailed breakdown of these amounts will continue to be available in our 10-Q footnote.

As you probably already noticed in our 8K filing yesterday, SG&A has been reclassified historically to include these expenses. Margins for the first quarter did improve on a sequential basis with gross margin of 30.7 %, an operating margin of 10.7%, the change in SG&A as a percentage of revenue is due to the effect of higher pass-through revenue in the prior quarter, and as I mentioned earlier, otherwise the percentage is very consistent.

In fact, in absolute dollars, SG&A was sequentially consistent as well. DSOs for this first quarter were 87 days and ahead of seasonal expectation.

As I discussed last quarter, we had a couple of large contract-specific situations, as well as certain prepayments, both of which contributed to the significant improvement in collections and positively impacted our DSOs at December 31. While this represents a much improved position over our historical trends, I see a greater likelihood of increased DSOs in the March quarter.

The overall AR balance which consists of build and unbuild, decreased sequentially by 10.9 million--so that's net 10.9 million good news. This was driven by a decrease in build AR of approximately 19 million, reflecting good collection efforts, but also an increase in the unbilled AR of approximately $8 million. This increase in unbilled AR was due mostly to certain milestone-based system contracts.

Let's move on to the balance sheet. The balance sheet remains very healthy. We end the quarter with 143.4 million in cash, and marketable securities, during the quarter we did utilize 334,000 in cash for the purchase of about 10,000 shares, as part of our ongoing stock repurchase program.

At December 31, 2003, the company had 50.2 million (phonetic) remaining available under the share repurchase program, and keep in mind that this also includes the option proceeds which also fund our program. As such, diluted weighted average shares outstanding at the end of the quarter were approximately 21.9 million.

And I would like to talk about weighted average shares outstanding, and the impact of that on our earnings per share. You may have noted that this increase in the weighted average shares outstanding to 21.9 million, represents an increase of about 2% over the prior year, and sequentially. This impacted us approximately 1 cent per share.

This increase reflects the increased stock price as well as increased stock option exercises, as it relates to the stock option exercises, there were approximately 520,000 options exercised during the period--and I attribute this simply to employees benefiting from an appreciated stock price over their exercise price and simply deciding to exercise, which in the long run is, in fact, the plan.

With that, I'd like to talk about guidance and the rest of the year. From a guidance perspective, on the last call we pointed to the consensus estimate at the time of $1.88 for fiscal 2004, and acknowledged we anticipated being in that range for the year. This continues to be our position.

We expect second quarter earnings per share to be sequentially improved over the first quarter, driven principally by the results of the Health segment.

The remaining quarters are expected to provide greater earnings contributions attributable to several factors including the following: The expected stabilization within our Management Services segment, and the Human Services segment we typically experience seasonality related to our tax service offerings, and as we expected, continued profitability within our Australian Max network division.

And lastly, we expect continued momentum from the California Healthy Families project.

With that, I'll turn the call over to David Mastran. Thanks.

Good morning and thanks again for joining us. The positive reversal of fortune that we experienced in the third and fourth quarters of fiscal year 2003, continued into the first quarter of fiscal 2004. First quarter revenue improved nearly 5% year-over-year to 138.9 million, with diluted EPS of 42 cents in line with our expectations.

The cash flow of 16 million in the first quarter represented 73 cents per share, which we are very pleased with, giving us over 140 million in cash to fund future growth and acquisitions. In terms of broader market conditions--while governments are still struggling with deficits, our first quarter performance demonstrates that we're moving in the right direction, with most of our primary business areas realizing solid year-over-year gains, we're maintaining strong bases of business.

The realities of the budget deficits have sunk in with the administrations across the country. As we review the major states, we see pressure across the board to contain costs and generate more revenue. Governments are spending only where they have to spend.

Healthcare seems to be protected, welfare-to-work programs are slightly vulnerable, nonfinancial consulting is more discretionary, and is the weakest. Systems are being procured that create efficiencies. The efficiencies MAXIMUS brings to the table are welcomed by state and local governments seeking new ways to reduce costs.

A revenue-generating financial consulting services such as Reg Max and school-based claiming are taylor-made for clients looking for additional federal funds to which they are entitled.

So while the improving economic outlook hasn't necessarily translated into more budget revenue for our government customers just yet, we believe some additional spending has resumed, and overall interest for our services has improved.

In terms of organization and lines of business-- as markets change successful companies change with them. So as the government market has changed, and as MAXIMUS has grown, we have reorganized ourselves.

I'd like to note that in the transformation from a $500 million company to a $1 billion company--by the way, one of the most difficult transitions that a company can make--that MAXIMUS can no longer easily change the organization to match the abilities of the existing management talent. We need to acquire the management talent to match the needs of the organization.

A fundamental change. The organization is so large it needs more stability to keep on improving efficiencies, leveraging the management talent and pooling resources to derive profitability.

In terms of our Financial Services and Management Services segments, the breakout of consulting into two reporting segments was driven largely because these segments had evolved into very different types of consulting practices whose financial performance contrasted sharply.

Our Financial services segment remains strong, while the Management Services segment is experiencing softness. The Financial segment continues to perform well where the Management segment has struggled with decreasing opportunities, primarily because the work is more discretionary in nature, thus impacting revenues and profitability.

While the breakout by business segment highlights the underperformance of the Management Services segment we have been working to improve that segment and mitigate risks where possible. We have cut costs, changed leadership and are re-orienting the divisions in that segment to be more profitable.

As Rich explained, Management Services was responsible for the deltas in our EPS performance comparisons from prior years. Demand remains strong in the Financial Services segment as states continue to seek other avenues for revenue sources. This segment has been a solid performer as evidenced by historical numbers we reported in last night's press release.

As a result of several new contracts awarded last year, the segments backlog is robust which will keep the staff busy over the foreseeable future. The segment adds to overall revenue growth of MAXIMUS for the year, but does not a add significantly to the profit growth, since it overperformed last year in terms of margins.

As a reminder, there are fluctuations with contingency-based contracts, such as Reg Max jobs, since expenses are incurred in advance of future revenue. We have also experienced continued improvement in the Human Services segment in the first quarter. Operational improvements remain on track, which drove improved financial performance.

Our Australian Max networks division remains on course to deliver proven profitability for the remainder of the year. As a result, we still believe this segment will deliver significantly higher levels of operating income for fiscal 2004 compared to fiscal 2003. Our healthcare segment remains strong, generating a solid base of recurring revenue.

On January 2, we successfully launched operations on the five-year California Healthy Families project, which was a major accomplishment. Since January 2, the project has been extremely active--within the first two years -- two weeks of the project, we converted well over 700,000 active participants into our systems. We answered in excess of 100,000 phone calls.

We cleared a backlog of over 8,000 applications and other materials. We determined eligibility for over 6,000 families. And also conducted 3500 annual eligibility reviews. The launch of this project required an immense amount of teamwork between MAXIMUS and the state employees.

I'm extremely proud of this momentous accomplishment for MAXIMUS in the state of California. It's truly a win-win situation for everyone. The Systems segment continues at a healthy clip as well with several new projects underway and an active sales pipeline.

We also moved the education division into the Systems segment. As many of you know, our Education Systems division supports our SchoolMAX product, and is is a new growing area and requires the expertise of a software product organization to be successful.

The education market is robust, and we believe that it's a burgeoning area with many future opportunities for MAXIMUS. However, we have not realized the desired financial performance over the last couple of quarters, primarily as a result of growing pains.

Because of our landmark SchoolMAX win in Los Angeles last year, we are developing ways to streamline operations and become more efficient to benefit from the economies of scale we are realizing. As part of the LA effort we are implementing certain initiatives which will generate improvements across the education division.

In conclusion, relative to our lines of business we're dealing with an improved demand across four of our five reporting segments. Which provides an opportunity to continue to strengthen our infrastructure and processes, to ensure we're serving this business and all our businesses in the most cost-effective way.

Going to marketing activity. MAXIMUS management remains encouraged by the flow of RPs, in particular we have a number of opportunities in healthcare that we are currently pursuing, as well as several opportunities where we have recently submitted proposals.

While decisions are not expected in the short term, there continues to be quite a flow of activity in these areas as the market for health services continues to grow. System demand remains a particularly strong area. In the area of smart cards, for example, the MAXIMUS team continues to do an outstanding job in marketing, bidding and executing projects.

In fact, the Federal General Services Administration, on behalf of NASA, just awarded MAXIMUS a [inaudible] funded for a large amount of money. The initial work is approximately 1.2 million and will likely be in the range of 10 million over the next two years. The purpose of the project is to develop a physical and logical access smart card to be used by all NASA employees and contractors throughout the United States.

MAXIMUS will lead the effort to develop a centralized management system to deploy cards for approximately 90,000 staff at 15 facilities over the next two years. The NASA smart card award is the latest in a string of wins in the smart card integration marketplace, and solidifies our position as the nation's top integrator of smart card solutions for our government clients.

We are also waiting the Transportation Security Administration's smart card procurement that will involve 11 million land, sea, and air transportation workers across the country. In terms of our pipeline, it remains health with new opportunities at several stages of development. Year-to-year signed contract wins totaled 134.1 million compared to 119.3 million for the same period last year.

New contracts pending--which represents awarded but unsigned contracts--was 94.3 million, which was consistent with the last quarter of 95 million. The total of the two grew approximately 8% from 212 million to 229 million.

As of January 30, total sales opportunities increased slightly over 1 billion, which compares to 850 million at the same time last year, a growth of about 20%. The 1 billion in total sales opportunities breaks out as follows: Proposals pending, 356 million; proposals in preparation, 213 million; and RFP tracking 446 million (phonetic).

In terms of rebids--as I mentioned to you last quarter--MAXIMUS is very well positioned with rebids as we enter 2004. To date we have won our first rebid--which was a two-year $36 million work force services contract in Wisconsin.

In addition, we have a number of contracts with option-year exercises, as opposed to recompeted rebids, that have a total contract value of 145 million, of which we've already been awarded 56 million. We remain confident in our ability to perform well with the remaining rebids and option-year exercises.

In terms of growth of the company, we all remain focused on the growth of MAXIMUS, with a five-year target and the 15% annual EPS growth range. And we see it developing several ways.

The focus is on three major areas right now: 1, taking advantage of the changing government market opportunities; 2, restructuring poorly performing units to become profitable now and in the future; and 3, building our infrastructure particularly in the Human Capital area.

In the area of marketing, you can see our growth by examining the size of the contracts we are now pursuing, and our partners on those contracts. Currently we have five major opportunities, each worth 50 million and more, where MAXIMUS's bid is the prime contractor.

Our subcontractors in each procurement are the largest companies in the business such as IBM, EDS, AT&T and others. In each of the five cases MAXIMUS was originally considered a subcontractor, but was asked to take the lead to have a better chance at winning. Clearly MAXIMUS is recognized by the big players as a big player.

In the state and local markets, and even in the federal healthcare market we are a dominant force. I don't think we could have told you a story like this last year, where so many large companies have asked us to be the prime.

By the way, these large contracts show how states are looking to develop more comprehensive projects to address their service and cost issues. These larger comprehensive projects require consulting systems and outsourcing experience.

In terms of Human Capital, elevating Lynn Davenport to president and Chief Operating Officer has leveraged his many talents and he is focusing on profitability and growth. We have a new Human Capital organization defined with new Vice President positions for Employee Relations, Management Recruiting, Concession Planning and Career Development, and Executive Compensation.

We also want to inject 3 or 4 top quality people in the business and we have searches now underway. We have never had a push on Human Capital like this before. We are recognizing that to move to 1 billion our Human Capital issues must be addressed aggressively.

In terms of restructuring poorly performing divisions, Lynn has downsized two divisions considerably and reorganized them. We believe the divisions will return to profitability in the third quarter.

We are more skilled now at recognizing problems at the division level and addressing them. So we see all the evidence of growth surrounding us, though it may yet not be as visible to others. In conclusion, we are optimistic and remain comfortable with the consensus estimates for fiscal year 2004. As Rich noted, we expect a sequential increase in revenue in EPS for the second quarter.

With these results in mind, let it be clear that we are encouraged by overall demand trends. Our backlog, the growing pipeline of new opportunities, and the level of activity within each of our business units indicate a much improved performance from fiscal 2003. We are in the fortunate position of having strong cash flows to maintain a healthy financial position.

As a result, we will continue to pursue various opportunities that help us meet our goals, including going after larger contracts that require larger amounts of capital. We are also going to focus more attention on aquisitions that closely fit our business model.

So, again, we are pleased there are plenty of exciting opportunities to work on, and to see results from.

With that, I'd like to open up the call for questions. Thank you.

Thank you. If you'd like to ask a question, please press the star and 1 now on your touch-tone telephone. To withdraw yourself from the queue, you can press the pound key. Once again to ask a question, press star.

Leo, we can't hear any questions. Can the operator please make sure that line is not on mute?

Yes. Actually, once again, I'd like to give the instructions, press star 1 on your touch-tone phone. If you'd like to ask a question. We'll take our first question from Bill Loomis. Go ahead, please, of Legg Mason.

Hi, thank you. Could you talk about some of the changes --

We're still unable to hear any questions or you any queues that the operator is doing. We will call in on another line line. Leo, we're unable to hear any questions, and we are unable to hear any operator.

You are able to hear?

At this time, if you're able -- if you'd like to ask a question, please press the star and one now on your touch-tone phone. To withdraw yourself from the queue, press pound. Ms. Miles, are you able to hear me now?

All right. We'll take our first question, once again, from Mr. Bill Loomis of Legg Mason. Go ahead, please.

Thank you. Can you talk a little bit about some of the changes in California? I know there was some legislation proposed to cap the number of children under the Healthy Families act and how that contract, if that legislation goes through, maybe impacted and plus HCO and some your other California contracts given Schwarzenegger's recent speech?

Basically, there's legislation proposed to cap the California healthy family contract at its current level. Actually, slightly above the current level.

But we don't believe it will take place for about a year. Our pricing on it assumed the current level so it doesn't really affect our margins at all, it may affect some of the out years 3, 4 and 5 in terms of what we originally forecast as revenues but then again it could turn around.

In terms of healthcare options I don't think there's any impact. There may be some impact on the Cal works projects that we have, as I mentioned that the Welfare to Work program was slightly vulnerable. We don't know. It could be because we're more efficient in the jurisdictions we're operating than our counterparts we may be okay there.

Okay. And any other - I know we're in the legislative session here in the states, but it's kind of early, but any other signs of anything like we're seeing in California, any changes in budgets or potential changes? Or do things look fairly stable?

Well, they're all talking bit, I just read our internal marketing reports for California, Texas, Florida, Illinois, and Michigan. And everybody's concerned about these budget deficits.

But there still is plenty of opportunities there. And I don't see anything in that legislation other than the California Healthy Families program, which is being capped that would affect us.

Okay. Thank you.

We'll take our next question from the site of Thatcher Thompson of CIBC World Markets.

Good morning, guys.

Good morning, Thatcher.

Dave, you mentioned five major projects worth 50 million. Is that on an annual basis or total project value?

Total project value. But, you know, some of them are much bigger than that, the 50 million was just the cutoff point on the low end.

And you also mentioned some of these may be more capital intensive. Can you give us a sense of the types of things you're bidding on here?

Well, I think I mentioned last quarter that Florida's contemplating issuing a RFP, in fact--they're working on it to outsource all of their eligibility operations across the state.

Currently, the state spends $275 million a year for those eligibility operations. So, depending on how they choose to outsource it, it could be a huge contract with huge capital demands.

Okay. Any other examples?

Well, we've got -- [ LAUGHTER ] None that big, but there's plenty of them up in the let's say 50 to 100, to $150 million range.

And the capital you're talking about is computer equipment.

Mainly the float.

Okay. All right, thank you.

You're welcome.

Our next question comes from the site of Tom Tom Meagher of BB&T Capital Markets.

Good morning, Dave can you just give us some examples of some of the work that you do in that Management Services area, and is there any area - specifically that's weak that you're seeing right now?

Let me turn that over to Lynn Davenport, the President and Chief Operating Officer.

We have several - services in that area, we help do operations improvements for local governments, we do inventorying of physical assets, we do planning and quality assurance, the computer projects, we also have a group that assists airports in retail planning.

Okay. Great.

And then secondly, in terms of - you mentioned your acquisition strategy--in light of some of the success you've had with the smart card business at the federal level, would you anticipate looking more towards that marketplace perhaps as a way you might expand your current list of services there?

We are expanding the services for smart cards in a number of different areas. Not so much in the federal, we're trying to extend it out to the states now.

Because we think there's a huge market out there. They lag the federal government a little bit.

Okay. Thank you very much. I appreciate it.

Our next question comes from the site of [Kristin Cooper] of Lehman Brothers.

Hi everyone. Just wondering if you could update us on your current thinking for your surplus capital allocation.

Last quarter you said your primary concentration would be in acquisitions followed by share repurchases, and then your board was contemplating dividends. Any update there?

The update would be pretty much in the same situation, except I would add that given the opportunities, the larger opportunities that David is talking about, we have a fourth competitor for use of our cash balance, and that obviously would be to fund the growth from these larger projects, be it fix asset capital in nature, as David says, float with particular receivables that generally result from larger projects.

That's all I had. Thank you very much.

Sure.

Once again, if you'd like to ask a question, please press the star and 1 on your touch-tone telephone. At this time. One moment, while we queue. Our next question comes from Arnold Ursaner of CJS Securities.

Hi, good morning. David you mentioned several times in this call that one of the key issues for you will be the ability to acquire additional management and human resource talent. Wouldn't it be obvious or logical that you'd go after that through acquisitions?

Well, that's one way to do it but when you get it through acquisitions you're basically buying a business and they're busy. You can get better talent there, we need to put more talent in the business we have that's growing organically.

So it's more middle level type talent you're talking about rather than executive talent?

No executive talent, and middle talent. We have a program across the board to look at ourselves in terms of-you know-middle management, diversity, top executive talent. And we've got plans, aggressive plans to significantly improve our position.

Okay. Two questions for Rich Montoni, if I could. Rich, I know about a year ago you put in a lot of effort trying to get the sales force focused on receivable collections. Obviously you are seeing some signs of success for that. Can you give us a better feel for actions you've taken and are there additional actions you'd be like to take on that?

I'd be glad to respond to that, about a year ago we really focused our nose in terms of that whole cycle and I think we identified 14 steps in that DSO management cycle, and several things we did to improve in that area.

At the end of the day, I will tell you, it's really the - it's really the focus by the team members, starting out from when we proposed and when we contract, and the billing process, and then just diligently pursuing the normal recurring types of resistance you get from customers. You know, before they pay their bill.

We have extra special resistance dealing in the government world. So I really think that the Number 1 differentiator has been just the people from the grassroots up to the management level focusing on the receivables, and getting them collected. In some situation we've been fortunate in that we've been able to get prepayments.

In other situations where we've pursued contracts, it was very important to the customers, we have in essence extended terms which increased our DSOs, but net-net we do that in a conscientious fashion, and we'd rather trade off the DSO's, for example, you will note this quarter as I mentioned earlier we had an increase in unbilled situation due to contract specific milestone situations. We'll trade that off.

But I think it's just continued focus on all of those aspects, and hopefully we can maintain DSOs that most recent history we've had.

My final question, I don't know if you'd prefer to do this on this call but at a different point in time, have you thought about, or do you care to share your views on the growth rates and margins you're anticipating by segment now that you've got these new segments?

I'm not going to give you my specific view in terms of rates by segment, but I'll give you sort of what I think will be leaders of the pack as we go into the second quarter, and really for the remainder of fiscal 2004.

I will tell you that the second quarter I expect the increase in earnings to be driven primarily by the results of our Health segment, and that really is attributable to the launch of the California Healthy Families project, as David talked, in January.

Naturally, that will continue through the rest of the year, but in Q3 and Q4 we do expect that we're going to get added help from improved performance out of Human Services.

You may remember from years past that there's a piece of that business, a piece of that segment that is seasonal in nature and it's good seasonality--basically in the June and September quarter we have some work that's tied to the tax season, some tax credit work, and a little bit within our Correctional Services they get some help from the tax seasonality of things.

And also, we do expect continued improvement of our Max network operation. The last two that I would mention that I think will also contribute to Q3 and Q4 will be improvement in the form of mitigating the losses in our Management Services segment, and lastly, Systems we do expect that Systems will continue to experience growth.

Okay. Thank you.

You're welcome.

We have a follow-up question from the site of Mr. Bill Loomis of Legg Mason.

Hi, thanks. On the - just looking at the federal business, first on the NASA smart card, the GSA said that task orders' worth 93 million, and if they get past the pilots, that they'll have - I think it was 100,000 implemented - they want 100,000 smart cards implemented before the end of fiscal '05.

So, how does that relate? I mean you said initially you had a small pilot, about a million revenues going up to about 10. But are we really looking at even bigger numbers once we roll that out?

Well, possibly. Basically, the 10 million is within NASA but that contract, the reason it has--you said 93-plus million in it, is that other agencies can tap into that contract, and based on how well things go, it's possible other agencies will tap into it, and all that money will be spent. But we don't know just now.

Right now in the last quarter, what was your federal business as a percent of total revenue, and on the pipeline figures as far as proposals and preparation and RFP tracking and so forth how much is federal versus the state and local?

I don't think there's been a big change, we're looking up the numbers now, but -- we are getting more active in the federal in terms of federal pipeline, the levels have probably increased.

From a revenue perspective, Bill, it tweaked down a little it, it had been 7% for all of fiscal '03, we're at 6% for the December quarter. But I think David's point is the one that you should focus on, there seems to be an increased level of activity in the federal arena for MAXIMUS.

And as far as the pipeline figures, how much of that would be federal?

We don't slice it and dice it in that fashion. We simply do it by segment. And we don't separately break out the federal, so we don't have that available.

Okay. But is it -- it sounds like the numbers have increased over the past.

In [indiscernible] perspective - you know - we've got the NASA situation that could provide more opportunity, you may want to mention --

Of the five I was talking about, two of them are actually in the federal area.

Okay. Okay, thank you.

Once again, if you'd like to ask a question, press the star and 1 now on your touch-tone telephone. And it appears we have no further questions. So I'd like to turn the program over to management for concluding comments.

Thank you very much for joining us this morning for our first quarter 2004 conference call. Bye-bye.

This concludes our conference call for today. You may now disconnect your lines and thank you for participating.