Maximus Inc (MMS) 2004 Q3 法說會逐字稿

Good day everyone and welcome to today's MAXIMUS third quarter conference call. As a reminder today's call is being recorded.

At this time I would like to turn the call over to the Director of Investor Relations Lisa Miles. Please go ahead.

Good afternoon and thank you for joining us. On the call today is Lynn Davenport, Chief Operating Officer and Rich Montoni, Chief Financial Officer. David Mastran will not be participating on the call today due to a very serious medical emergency of a close family member that clearly requires his presence. As a result Lynn Davenport will be filling in for David today. Since Lynn has been with the company for 13 years, many of you have already met him. With over 30 years of health and human services experience, Lynn's expertise is in the area of program administration, productivity improvement, management consulting revenue maximization. In his 13 years with MAXIMUS, he has served in many senior roles including managing our consulting and human services group, as well as his current role as chief operating officer. Prior to joining MAXIMUS Lynn was a partner of Deloit & Tush. 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 991 of our SEC filings. We encourage you to review the summary of these risks in our 2003 10-K filed with the SEC on December 19th, 2003. 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.

Thank you, Lisa and thanks for joining us this afternoon. This afternoon the company reported third quarter financial results with revenue totaling $160.2 million and earnings per share of 45 cents. Last week we issued a press release stating that the company expected to take a $1.8 million charge in the June quarter associated with the fraudulent activities of two terminated employees. This charge was intended for certain accounts receivable associated with this matter that are at risk as well as an estimated legal fees expected to be incurred. Since then, we have decided in consultation with our auditors to expense the legal costs as they are incurred which we anticipate will be in the fourth quarter and beyond. As a result, the actual charge taken in the June quarter was approximately $1.1 million, not the previously stated $1.8 million. The $1.1 million charge in the third quarter impacted the June results by approximately 3 cents per diluted share.

Next we'll go on to financial results for the quarter. We posted solid revenue gain for the three months ended June 30th of 162 million this is a 6.3 increase over the second quarter and a 13% increase over the 141.7 million we reported for the same period last year. Organic revenue for the quarter was 12% over the comparable prior year quarter. Net income for the third quarter was $9.9 million. This was an 11% increase over the comparable quarter last year. Earnings per share of 45 cents per diluted share compared to 43 cents reported in both the second quarter of 2004 in the third quarter of fiscal 2003. DSOs were 95 days including approximately 4.4 million of certain receivables that are now classify as long term other assets which I will discuss in greater detail. The DSOs remain largely within our targeting range. MAXIMUS generated cash from operations of $4.6 million in the third quarter or 26.2 million to date -- year to date. In a June 30th company had cash and cash equivalents of $131.6 million.

Let's move on to a view of the various segments. Our quarterly results by business segment as you probably recall, we realigned certain divisions at the beginning of the quarter and filed an 8K in June with historical information. All prior period information in our presentations today and in our press release reflect the new segment structure so as to be comparable. I will walk through the segment changes in addition to the discussing the segment financial results. Health services segment, as part of the April 1st organizational changes there really were no significant changes to the health segment. We did add certain federal contracts which were previously reported inside the management services segment. Revenue for the health services segment in the third quarter was strong. $59.2 million a 17% increase over last year and 45% increase compared to the $40.9 million we reported for the comparable period last year. As expected revenue for the health services segment increased significantly primarily driven by the California healthy families contract which remains on track for contributing approximately $40 million in this fiscal 2004. The health segment continues to generate solid recurring revenue and remains reasonably predictable since the vast ma majority of the contract in this segment are long-term in nature and overall we think the health segment will deliver comparable revenue and operating income in the fourth quarter.

On to our human services segment. Part of the segment realignment we merged the human services segment and the financial services segment into a single reporting business unit. This segment, now the human services segment also picked up a couple of divisions from the old management services group, including the management solutions consulting practice. Third quarter revenue for the human services segment totaled $60 million comparable to the second quarter and also comparable to the same period last year. Revenue and earnings of the segment were impacted by the $1.1 million charge, again 3 cents per share in the quarter related to the fraudulent activities of two terminated employees. Excluding this charge, the human services segment performed as expected with improvements in both revenue and income from operations. During the quarter this segment benefited from new work in the school base claiming area. In addition our Australia operation tracked as expected and as we have been targeting achieved a full quarter of profitability.

The human services segment remains on target for continued improvement in net income for the remainder of the year and this will be driven principally by improvement in our financial services practice. Much of the work in this practice is contingency based and can be somewhat unpredictable and as we discussed on previous calls the nature of the contingency based work lends it to profitability and as a result trend performance can be lumpy. The human services segment also experiences seasonality related to tax credit work which cycles through in the second half of our fiscal year.

Let's move on to the technical services segment. The majority of the technical services segment is now comprised of what had been our systems business. The segment also picked up certain divisions from our consulting practice which are complimentary to the system's work. This includes the tecnology support division, certain federal contracts, and the asset services division, which were previously reported within the old management services segment. Third quarter revenue for the technical services segment increased to $40.9 million. 3% over the second quarter and was up approximately $1 million when compared to the same period last year. As noted last quarter we initially expected a slowing in this segment for the second half of the year, but since the segment can experience fluctuations largely as a result of license sales and contract timing the segment was able to deliver improved results over the second quarter driven by higher profit achieved and a variety of products, including our NASA Smart Card contract, a couple of the ERP jobs, and solid license sales within our asset sales division. We look for revenues of the segment to be slightly down in the fourth quarter however profit is expected to increase sequentially. There could be fluctuations again depending upon the timing of certain licenses as the primary factor.

I'd like to spend a little bit of time and talk about operating margins. Our operating margin for the third quarter was 10.1% and consistent with the 10.2% reported last year, but adjusting out the impact of the $1.1 million charge, operating margin would have been 10.7% which trends up -- trends upward very nicely. Directionally we are looking for continued improvement in operating margin in the fourth quarter. Gross margin was consistent with the prior quarter after considering the impact of $1.1 million charge and SG&A held relatively constant in dollars and therefore improved sequentially to 18.3% on the increased revenues.

Accounts receivable and DSO metrics. DSOs trended up slightly nor the third quarter and were 95 days on a comparable basis. The sequential increase in build AR to 122.7 million in the third quarter is mostly related to billings in the health segment, most notable would be the California healthy families project specific to this contract. We were able to receive accelerated payment by the end of the March quarter for our February billing. This was gratuitous. It was gratuitous in the fact that it was faster than the 45 days required under the contract. In June the client settled into their normal pay cycle and as for the contract, this is 45 days which in turn as a result thus increased our receivables on a comparative basis and obviously it's a sizable receivable. Effective this quarter we did classify certain receivables as long-term within other assets in the financial statements.

Let me talk about this. This classification relates to approximately 4.4 million in accounts receivable where we had contracted to defer payment for some customers who are cities, counties and school districts within California. Under this practice we assist our customers in receiving reimbursements from the state of California under what's referred to as Senate bill 90 or for short, SB 90. Reimbursement is for state mandated expenditures and we've been doing this providing this service for approximately 20 years. Historically, MAXIMUS received the deferred payment after the state reimbursed our customer which -- which reimbursement is required by law. However, due to fiscal pressures in California, the state delayed reimbursement. Our now classified long-term receivable relates to the state's June -- June 30th, fiscal year's 2002 and beyond. California is now planning to pay claim year 2005, 2006 in later years when they become due and to pay any prior amounts due for earlier years over not more than five years and they plan to start this past due payment catch up in the 2006-2007 year.

Perhaps most monthly by constitutional amendment California must reimburse these customers and most of you is not if the state pays but rather when the state pays. Accordingly, we've classified our receivables with deferred payment terms as long-term assets since it's timing rather than collectibility that is the core issue. The total amount classified is long-term again is approximately 4.4 million. Also of note is that we have decided to no longer extend this deferred payment option for future work. Our total book of business on this service is approximately $6 million per year of which about half is deferred payment terms as a result of not extending the deferred payment in the future. We expect we'll lose some amount of annual revenue, I would estimate it to be less than a million dollars per year from customers choosing other alternatives. We do have some carryover contractual obligations which extend deferred payments terms into our 2004 and 2005 while the amount of the future obligation is not that substantial we will see an increase in the long-term other assets as we perform this work and I expect the amount will ultimately cap out at approximately $6.5 million.

Cash. Cash balances stock repurchase program and cash flows. The balance sheet remains very strong and provides us with continued flexibility. We ended the quarter with $131.6 million in cash and cash equivalents this reflects year-to-date cash operations from $26.2 million of which 4.6 million was generated in the June quarter. During the quarter the company purchased about 102,000 shares of MAXIMUS common stock as part of our on going stock repurchase program and as of June 30, 2004 we had 42.2 million remaining available under the program and I would like to mention that we do intend to remain opportunistic with our share repurchase program.

Let's move on to guidance and forecasting. After we factor the impacts of these nonrecurring charges, we now expect diluted earnings per share of at least $1.78 for the full fiscal year with the potential to achieve $1.82. And we currently anticipate revenue in the range of 605 million to 615 million. This guidance factors in the impacts of the nonrecurring charges that we incurred in the March quarter of -- you may recall slightly more than 2 cents per share. The 3 cent impact in the June quarter from the $1.1 million charge and it also assumes we will have about a 1 cent impact in the fourth quarter from the legal fees associated with the afore mentioned employee fraud matter. The impacts on these nonrecurring charges on the year total approximately 6 cents. You may recall at the beginning of the year our original guidance was "in the range of $1.88", meaning a targeted range versus the floor. Given this we believe we remain essentially on target after factoring in the impact of the nonrecurring charges albeit at the lower end to the mid point of the original guidance.

To summarize we're looking for third quarter operating results to be improved sequentially, on relatively flat sequential revenue. The actual results for the fourth quarter and therefore the year will depend upon the following key variables. The timing of license sales and new work. Continued improvement in underperforming business units, achieving existing project results, and particularly from projects in the early stages. As a result, we expect the greatest improvement from our human services segment which will benefit from the $1.1 million charge not recurring but also improved operating income that are ramping up. In our health segment we expect solid but consistent performance with a bit of upside depending on the timing and start up of new work. In our technology solutions segment we do expect consistent to moderately improved profitability on relatively stable revenue and with that I'll hand the call over to Lynn Davenport.

Good afternoon everyone and thank you again for joining us. I'm sitting in for David Mastran, our CEO, he is attending to a family issue that precludes his being here.

As Rich said third quarter results were largely as expected excluding the $1.1 million charge. Before we review the performance of our business segments in the quarter and move on to a discussion of our near term prospects I want to comment on the recent events that [inaudible]. Now that you have a general understanding of what transpired from last week's announcement I'd like to give you some thoughts from management's perspective. As you would expect, we take the matter of employee fraud very seriously and action such as those undertaken by those former employees are in direct violation of company policy. The company we pride ourselves in having comprehensive policies and procedures in both areas of approval authorities and access, has a very well-defined and clearly stated authorization metric, which serves that a step by step guide for managers in virtually handling any situation. We intend to pursue this matter civilly and criminally. Fortunately we think these represent an isolated incident.

Most importantly, and I speak for the entire management team, I believe that the illegal activities that these two individuals engaged in should not overshadow the hard work and dedication of our 5,400 employees. We are a services business and our people are truly a great asset. The actions of these two former employees will not tarnish our solid reputation that we have worked so hard to establish over the years. Despite this third quarter charge by year over year basis we still generated healthy 13% top line growth. 11% net income growth and compared to the third quarter of 2003.

In an effort to provide a comprehensive view I'm going to take you through the results of each segment and discuss the operational opportunities and challenges in each of the businesses and markets that we serve. I will begin with the health services segment. Segments by results, our health services segment drove the company's gain in the quarter with a significant uptick in business on the California healthy families contract. California healthy families remains on tack to contribute approximately 40 million in revenue this year. It should result in a sequentially flat performance. The third quarter to the fourth. Beyond this landmark contract, we see tremendous opportunities in health services sector. The overall market in health is probably the most robust across our business segment. We're seeing many government agency at both the federal and state levels looking to make significant change how they historically administer programs. We are prepared to address these changing needs and new market opportunities. Key priorities for the government we see include reducing medicaid and other health care costs. Reducing fraud in medicare spending. Limiting and reducing the cost of eligibility of termination and overall better utilizing technology to improve service performance and reduce spending. We already are a significant player providing these services and we built the foundation to effectively complete and provide quality services to our client in these areas.

Let me turn to specific opportunities with some of the projects we have in the health area. We have two large contracts that expire on September 30th both of which have options to extensions. The first is in California and in addition to the California healthy families program we have been operating another medicaid program called the California health care options program for a number of years. The client has notified us that the option year extension has been issued and we are finalizing contract execution. This extension is expected to generate roughly 35 million in revenue which will recur next year.

The second contract in is a state where we have solid relations. We are in discussions with this state to remain upbeat about how things are moving through negotiations. This is on ongoing program where our performance standards have been excellent. We are optimistic in our prospects. We also have several large contract that is will expire in the next fiscal year and we currently are in the rebid process. We're putting forth a major effort and expect the competition to be aggressive but we believe we remain very well positioned. With the healthy families project performing well we have a national qualification to build upon and we think this gives us advantage on several opportunities next year. Texas, for example, where we are the current enrollment broker, the rebid of this project is [inaudible] to a larger procurement involving technology support for the Texas welfare systems as well about sourcing major component eligibility operations. The eligibility portion of this procurement could involve up to 2,500 new staff. We believe we have a realistic chance at winning this procurement as a contractor or subcontractor.

We are still working diligently to finish contract negotiations for a major health services contract in British Columbia. As we told you last quarter we have been selected entered into negotiations with certain benefit administrative services for the entire province of British Columbia. We remain optimistic in signing the contract sooner rather than later and continue to work through the issues surrounding this contract. Primary concerns remain the patriot act it's impact on citizens health care records. We are working closely with the customer and remain highly focused on bringing this deal over the finish line. We will continue to keep you appraised and will provide additional details on execution of this contract. The opportunities that we see in the health care market remain abundant and as a company, we must work to insure that we have the right strategy and expertise in place. I'm very satisfied with the direction the company is moving in within the health care arena. I think our strategic position remains excellent backed up by solid reputation and a long history of execution.

We turn now to the human services segment. Before one time charges. The result in the realignment of our businesses human services now has several moving parts including the continency based work from our financial services practice. These contingency based practice areas continue to perform as expected, but with peaks and valleys in profitability. Largely due to the cyclical nature of our contingency based work. In the case of the third quarter, we have solid revenue generation, [inaudible], to the submission of several claims that our rev/max business was slower in the period as a result of AR cleanup, project timing, delays in acquiring federal approvals continued ramp up on a couple of large jobs where we expect increased contributions in the third quarter. We are seeing tightening of claim payments from the state on some of our financial services claiming work. In response we have become extremely active and supportive in helping our customers in ushering these through the federal hurdles and across the finish line. We think this will help tackle the receivable issues we have experienced in the past where you have to submit claims and wait for payment. We recognize the need to take a consistent active role in the entire process. We remain in strong position areas in work force services and child welfare which are two of of our other businesses of the human services segment. Many of the major government priorities that we see lie in these areas. According to a recent report the critical priorities of human services include child welfare systems, children's services, improving child protective services, expanding and improving services to families through a better service integration, immaterial proving the ability of low-income families to obtain and keep work, and a reduction of administrative cost. We feel confident in our ability to help governments achieve their goals and tackle these critical priorities. In both of work force services and child welfare offering we have a lots of opportunities with a sufficient amount of targets and good momentum to carry us into the next year.

We also see education a growth engine in human services. We made expand our education services and school based to add services in the special education area. Traffic is a great add on to our current based service. The trending is moving toward a more robust solution and we think this addition allows us to offer a more integrated solution to our current client base. Puts us into a better marketing position to target new customers. We think education will continue to be a growing market where clients are seeking a combination of system solutions program improvements. We have a variety of dynamics and challenges at work in the human services segment, [inaudible] doing well, plenty of prospects that work for our services child welfare and our financial services offerings.

In contrast to those solid performs we also see several challenges in ahead of us in this segment. We have experienced increasing competition in the child support enforcement area and as you are probably aware we've lost a couple of key rebids in the last several months. As a result we are taking a fresh look to our approach to this market. It is clear that we need to marshall our resources and go at this full throttle. We have identified specific target areas and how to effectively compete in this area.

We are changing the management team. We're going to get aggressive in the pricing front and are rolling out new sevices and improved efficiencies in our product set. We are extremely focused on rejuvenating this practice. Retooling our market efforts and delivering improved customer support services. In addition, as we continue to take a hard look across our business, we've taken steps to mitigate losses in underperforming businesses, shut down our cell smaller practices outside our core business. In July we sold a small practice and are currently winding down another one largely because they are outside our traditional areas and we do not see many opportunities for future growth. All in all, human services performed in line with our expectations before the period before the additional charge that we had to take. We do expect to sequential improvement in that segment largely driven by the financial services practice which is expected to generate increased contributions in the third quarter.

Let me now turn to the technical services segment. The technical services segment delivered improved results due from new wins in our asset solutions enterprise services and add I don't know to ARP in Indiana and Oklahoma. The technical services segment continues to make steady gains across products and product lines offerings in other areas. We have a number of new wins in the technical services segment. MAXIMUS secured another win in the SmartCards arena. With a one year $2.9 million contract with the U.S. department of veterans affairs to replacement identification cards to eligibility veterans. This contract has four one-year options for renewal, if exercised would bring the total contract value to more than $9 million. Volume of cards the first year is projected to be approximately 2.5 million cards with the volumes in subsequent years expected to be about 1 million cards a year. Another exciting SmartCard win is the recently awarded $5 million contract by the DC District of Columbia public school system to deploy SmartCards and global positioning technologies to improve transportation services and securities with students with special needs. A project involved multiple departments within the DC public school system. Including the office of special education, department of transportation and office information technology. The system also has the flexibility scalability to add students and applications including physical access control, library check out, and access to free and reduced school student lunch programs.

Our ERP and asset solutions divisions have consistently delivered for us. The first is implementation for a large metropolitan area in California. The second award is for a major metropolitan area in south Florida. The asset solutions division consummated its largest deal to a large rental car company. The customer will be deploying our proprietary FleetFocus software to better manage their fleet of nearly 300,000 leased rental vehicles, streamlined their maintenance repair processes track and recover warranty dollars, and collect disposition information. This is a major win for our asset solutions team. It puts us in a solid position as we continue to target larger customers.

We also completed a small acquisition during the quarter and adjusted solutions area. To expand our court client base in key states we acquired a business line that was largely a tuck in on a justice product that fits nicely into our suite of products. Much of the group has met or exceeded performance expectations. Other segments have not been meeting our internal expectations over the previous quarter as we've discussed. The asset services, technology support, and education division, which houses our student information software experienced challenges over the past year. Issues with each of the divisions have been identified, actions have been initiated to improve results for these divisions. That's why we've adjusted staffing levels to more appropriately match our backlog of work. Deployed new management were we thought leadership was weak, developed a stronger sales and marketing effort. As a result, education has delivered improvement on the top and bottom line over the second quarter. We continue to see moderate improvement in the asset services area.

Segments pipeline remains healthy in a number of areas with a variety of proposals pending and significant activity in the enterprise solutions group with our SmartCard initiative, ERP implementations, education, as well as a couple of adjustment solutions projects. Overall, we see many opportunities in our core systems areas.

Let me talk now a little bit about rebids. Rebids and option exercises year to date we've been awarded two rebids contract extensions on two and lost one. We have one small rebid left for the remainder of fiscal 2004. With the state of California issuing MAXIMUS option exercise on the California HCL contract we also made a minor adjustment to our data to capture this award which was initially anticipated in the beginning of fiscal year '05. MAXIMUS had several contracts with [inaudible] in the year 2004. Thus for we've secured option exercises on 13 contracts, a total value of 118 million, including the California HCL exercise. In addition as I discussed earlier we are currently in the process of negotiating an option exercise on one of our larger health contracts which will likely occur in the next couple of months as well. The remaining balance of our other option exercises account for less than 2 million in total contract value.

The pipeline has many new opportunities in all stages of development. At July 29th, year to date signed contract wins total 324 million compared to 941 million for the same period last year which included the $418 million California healthy families contract. New contracts awarded but not signed was 350 million versus 59 million reported for the same period last year. In the 418 million California healthy families project was excluded the company signed a -- a contract -- signed contracts pending in actual signed contracts are attracting 100 million better than last year. Cold sales opportunities increase at 1.3 billion include proposals pending which account for 300 million, proposals and preparation which account for 156 million, and RFP's tracking which account for the remaining balance of 870 million. There are a number of significant opportunities in the pipeline primarily in the area of eligibility. We see a major push at the state level for government to improve to stream line [inaudible] systems and processes.

So as we look to the fourth quarter we expect health to be solid but sequentially flat. Human services to increase, technical services should show profitability gains for the third quarter depending on the timing of licensing fees. This would lead to overall year to year and sequential revenue and earnings gains with our goal of four year revenue in the range of 605 to 615 million and earnings per diluted share in the range of $1.78 to $1.82. Beyond our immediate business prospects for the fourth quarter, the market tends to be improving. And revenue streams are forecasted to remain challenging. We are encouraged by the improving of mixed trends. While we continue to monitor these trends and the potential impact on our businesses we are focusing on our effort that we are offer the right suite of services while efficiently and competitively in this market environment.

In summary let me put the comments into perspective. We have been working hard within MAXIMUS to drive growth in the organization. We brought in new people, restructured business units to mitigate losses to improve profitability and we've implemented cost reduction to better balance resources with our backlog. We've also benefited with the investments we've made over the last several quarter new sales and marketing efforts including our capital initiative. We believe that these have had a positive impact. Looking forward we do see very significant opportunities in health care, eligibility systems, many other areas we talked about today. We think MAXIMUS is at a significant point in its history. We see many opportunities the likes of which we haven't seen before and we also have a challenge in competing rebids. We've made significant strides in the last two years. As a result we believe we we're in a better position today to bring some of these larger pieces of business. All in all we remain upbeat and with that we'll now take questions. Thank you.

Jennifer, we're ready to open up the questions.

The question and answer session will be conducted electronically. If you would like to ask a question press the star key followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one on your touch-tone telephone to ask a question. We'll pause for just a moment to give everyone an opportunity to signal for questions. We'll take our first question from Charles Strawser with CJS Securities.

Hi. Just a couple questions. Can you hear me okay? Talk a little bit if you can Rich about some of the -- you mentioned the legal expenses are going to be spread over the -- as they're incurred. How much o the legal expenses incurred in Q3 and roughly how much do you think we'll be hitting in Q4?

Charley, you know forecasting legal expenses is one of the toughest things to do, I think, but I've assumed about a penny -- you know, and a penny pretax in our world is 365,000 so we'll try to manage that much, much less. Beyond that we get into fiscal '05 and my aspirations will be that it gets to be basically immaterial at that point in time.

Any legal expenses hit in the Q3 at all ?

None.

Okay. And also how about the expenses from the shifting of segments and shutting down pieces of the management business? Was anything incurred in Q3?

All of the costs in terms of shifting was really internal costs so that -- I didn't view that as being incremental or separable. So I don't think that -- I think that's not the right view.

Do you think there were any expenses though in terms of -- you had mentioned I think one of the divisions was shut down, another was sold. Was that from the Q2 you're talking about or there was additional actions taken in Q3?

Really more in the category of wind down in business. Some in Q2 and Q3 as well. No real sales through that period. We've got a small piece of business that actually we sold but that's a Q4 matter so no significant closure cost as you might typically envision.

Got it. And lastly, if you look at the three new segments and the guidance you've given us with that, would you say that you know, when you went into the beginning of this quarter you thought that some of the contracts might have hit more in Q4 and it's slipping into 2005. Is that fair?

I think to a certain extent, but I think it's -- I mean, the nature of the business is we do always have slippage. So the slippage that we're seeing I consider to be normal course slippage which just translates into when does the job start. We had one large situation. There's one particular circumstance that comes to mind Charley. We had one large west coast license sale that really was quite meaningful. We had early indications that it was going to close way back in March. We took a healthy skeptical view and said let's not count on it and we're told it will probably slip to June and again we kind of held back on it and unfortunately it looks like it's going to happen in '05. The good news is we had a pretty conservative posture such that it's not going to be a meaningful impact to impact our expectations.

And I know that Lynn had talked about some of the rebids that you had lost. Do you care to quantify at all the dollar amount to that?

The one -- the one is $6 million annualized.

Okay. Were there any other competitive rebids that weren't won?

Not this year.

Got it. Thank you very much.

Once again, as a reminder, if you would like to ask a question during the question and answer session or if you have a follow-up question, please press star one to signal and again if you are using a speakerphone, please be sure to turn off your mute function in order for your signal to reach our equipment. We'll take our next question from Dana Walker with Kalmar Investment.

Good afternoon. Limited agenda here. How would you folks characterize the healthy families revenue opportunity in '05?

On that specific project you mean?

Yes.

Roughly it's about $40 million a year.

Yeah. This year we've said we expect to get $40 million for the nine-month period. You remember -- as you know, Dana, it started in January so we've got nine months this year which runs -- it will be pretty much $40 million and a little bit difficult to tell because of the particular dynamics with the project when Governor Schwartzneger said at some point in time you'd like to limit the portion of the program and he limited 700,000. I hasn't heard any more talk to do that but we do see an initial spike which we think was serged by that so the big question will be we see a leveling off -- my overall expectation is we'll continue to see strong demand so pretty consistent but I don't see it going through the roof and I certain certainly don't think that it's going to lessen.

So would one be correct in annualizing at 13 or 14 million a quarter type clip?

I think that's a reasonable approach.

You may not want to go too far down this path yet, but as you weigh the pros and the cons towards an '05 revenue climate from a rate of gain standpoint, where do you think you stand?

That's a fair question. The situation is that we're kind of in the midst of our FY '05 planning process so we'd really prefer to give you something that's fully baked and we'll talk about FY '05 in greater detail but I think throughout the call in the last couple of quarters you got a flavor for some of the key underpinnings in the industry and the dynamics and you should expect that some of those key things will continue to play out in FY '05

Also some of the practices that you're winding down, can you talk about the revenue materiality and as well what even if they're modest, what you expect that to do to change your operating margin profile?

My overall view on the businesses that are winding down, I -- and again, some of this is kind of a natural attrition. We have businesses that come and businesses that go that are just a natural rae action to the demand in the marketplace. So the way we manage our business is they tend to wind up and wind down based upon real natural demand in the marketplace. But the businesses that we're dealing with really are small businesses, Dana. And if anything, to me the greater consequence is not so much the loss of revenue and a loss of dollar contribution, margin contribution I actually see the benefit is it does free up some resources including management resources to deal with the things we're dealing with here.

Thank you very much.

And once again, as a reminder it is star one to signal for questions. We'll go now to Jeff Nixon with MCM.

Yes. I was just kind of wondering, this is the second time you have shuffled all the divisions around this year, I just wondered what the thought process was behind the first decision to -- to break it into five divisions now into three and where the people are being -- I know that we're being affected because it's no much impossible to follow you anymore but I'm just wondering if people are being affected by all of these changes as well.

Jeff, Rich Montoni. I'd will glad to field that one. And the real answer is this, that MAXIMUS has surpassed the $500 million mark and we're targeting to be a much bigger company and this growth stage is a very challenging growth stage and we have to organize the company not so much as it's been organized in the past to achieve its past success but more so so it can position itself to be successful in the future. So a lot of this in my mind has really been under that umbrella and trust me we've been very cognizant of the fact that this has been confusing at best to shareholders and we've tried our best to make it as invisible for you as we can but I just think there's always going to be a certain amount of difficulty that goes along with it. At the end of the day we really have to organize the business so it can be most successful in the marketplace and the accounting consequences will always have to -- and the accounting consequence we'll all have to live with. As it relates to the people side of that's a very important thing. Yes there's people ramifications. When you're talking about people's jobs and their roles and what they're going to do and as a result the people's business is taken an awful lot of time inside the organization and Lynn Davenport to my right and I know David have spent an awful lot of time and it's been one of the key areas of focus from their protective

So does that mean that people have been shuffled around twice this year?

I haven't looked at it from that perspective. My reaction is generally no. I think the moves that we've dealt with have been directionally in the -- in the same order.

Because you went to more divisions and then less. Right?

Well, about the same number of divisions.

Well, but -- when you reported you went from four to five to three.

That's correct. That's --

So that's -- okay. Just sounds like a -- you know, just a pretty unstable situation. Okay. Just one other question then. I [inaudible] picked up a couple of million, this quarter, what was the reason for that?

The reason for that is we actually -- there's a third party out there from who we bought software and we had a -- we prepaid or bought down that royalty, if you will, from that party for some educational software. That's not internal costs.

So both sides went up? Okay. So there's no -- there's no new income impact from that?

No no. We -- we bought that that's in essence a third party disbursement. We paid a third party for that software and that's a big uptake.

Okay. Thank you.

Okay. Jeff, thanks.

We'll go now to a follow-up question from Charles Strawser with CJS Securities.

Maybe you can comment a little bit about this. I know that you had talked or David had talked about a lot of the opportunity that is are around for '05. Has anything changed with the four '05 ones that he had mentioned a at all and I think things kind of moved from one stage to another in your pipeline that you care to comment on?

Charlie, I asked Lynn to field that one.

The opportunity is pretty significant. The area of primarily in the welfare program area and the area of eligibility systems the reduce administrative costs and we see a whole serge of opportunities to really bring together all the things we do. Consulting systems and operations into one set of businesses and there's a number of states that are targeting very, very large opportunities. Some of them have been slowed down a little bit. There's been a little bit of discussion in each state to get the -- get the procurement papers out the door but opportunities are still there. We're focusing on them and I think they're all going to become very major 05 opportunities and a number of them are working on proposals.

Have any proposals been submitted currently.

There's one very large proposal efforts just starting.

Nothing's in the final kind of evaluation stage

Nothing yet.

Got it. And on the DSO side 95 days ow what do you think ing in terms of the -- the guidance for the next quarter?

You know, I think the best thing to do is just look at a con consistent range in terms of where we expect to be and I think we had good fortune to be less than 95. You know, I think the best thing to do is just look at a consistent range in terms of where we expect to be, and I think last quarter and I'll continue to stick with it in terms of a normal range is now 100 to -- 90 to 100 days so I'd start at that point. We working on some things that could bring the 95 days down, but again, there -- sometimes they may not happen on a timely basis so I'd start at that point.

So the pick up is mostly due to some of the start up work that picked up.

No. Most of the increase in the DSOs relate to that California situation where effectively at March 31st, we had one month still outstanding and as I said, that was gratuitous because the client was just -- it was the early part of the contract and out the gate we wanted to make sure they paid us timely. We knew the investors were very concerned about this thing starting in the right fashion including the financial and timely payments so we worked with them very closely in the early months and they went a little bit overboard quite frankly and paid the bill one month faster than they had to and then they settled on a normal contractual terms by the June quart quarter. Net net, that added one month's bill on that large contract and translates into DSOs and that's -- that's a lion's share or a good portion of the increase.

Had that been more normalized what do you think the normalized DSO would have looked like this quarter?

California is the only swinger that is the only normalized position. I expect California will continue to have two months outstanding as opposed to one month which we had in March. So the idea is going to the 95 is more normalized. And again I don't expect California is going to come back down. There is one lesser factor in the whole equation and that is with California healthy families contract, they go through and -- and the other California contracts go through an annual open enrollment situation, Charley and that happens in the June quarter. It's done and with that we have a little bit of spike in revenue and by the way, there's little to no margin associated with it. So for those contracts, the amount of the July, August and September bill may be a little bit less and hence it may help the DSO a little bit but I do think that will be meaningful.

Got it and lastly talk briefly maybe to Lynn this is to you on acquisitions. Anything new you care to comment on there

We have a number of acquisitions we're looking at. We might comment on specifically acquisitions is certainly our growth strategies in 2005.

Look forward to seeing you at our conference on the 17th.

You bet.

And once again, as a reminder it is star one to signal for questions. We'll pause again momentarily for a final opportunity. To signal for questions. We'll take our next question from Larry Lee with CIBC World Markets.

Good evening, everyone. Rich, I was wondering, would you remind me in September quarter of last year what was going on in human services that accounted for the sequential spikeup in revenue? And then as a follow up, if you're looking at year over year comps for the September quarter this year, assuming there was a one-time item in last year's, what would you expect in terms of year over year for human services?

I'm going to say that I -- I believe that it related to equipment involved in our -- an assignment we had related to voter systems.

Okay.

That caused the spike. That's part one of your question. Part two of your question?

So if I wanted to think of directionally what human services could do in -- in the September quarter of this year, would it be wise to -- to extract that amount from the last year's number?

Last year's number we tend to try to take the most recent quarter and extrapolate in terms of trying to figure out what we're going on a fourth quarter.

And just as a reminder, Larry, last years fourth quarter human services included roughly 13 million in hardware that was related to our voter services in California and so that was one time, and so I think it's probably better to look at it more on a sequential basis rather than a year over year in this particular instance.

Okay. Great. That was exactly what I was forgetting about last year. And then the second question, either for Lynn or for Rich, I think last quarter you had talked about a child support enforcement contract in Nashville that you had protested the award and I believe that there's another contract with -- in the federal asset sales area that's -- I believe was awarded to you guys but is being protested by a competitor. Could you just give us an update on where those stand?

With respect o the matter in Tennessee, we are not pursuing a protest. Federal asset's proposal is under protest. It has not yet been resolved and we're watching it closely.

Okay. Thanks.

It appears that there are no further questions at this time. I would like to turn the conference call over to management for any additional closing remarks.

Thank you all for attending our conference.

Once again, this will conclude today's conference call. We do appreciate your participation. You may disconnect at this time.