Maximus Inc (MMS) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to today's MAXIMUS fourth quarter conference call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to the Director of Investor Relations, Lisa Miles. Please go ahead.

Good morning and thank you for joining us. On the call today is Lynn Davenport, Chief Executive Officer, and Rich Montoni, Chief Financial Officer. Today we're reporting under three new segments consulting, systems, and operations. Since we recognize this is the first time you're seeing this information presented this way, and it may be challenging to absorb the ins and outs of each segment we've made every effort to provide as much detail as possible in the conference call. As a result, Rich will take you through the segments in great detail. Before we begin, I'd 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 filings. We encourage to you review the summary of these risks in our most recent 10-Q filed with the SEC on August 12th, 2004. 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'll turn the call over to Lynn Davenport, Chief Executive Officer, for opening remarks.

Good morning, everyone and thanks for joining us. Last night we reported financial results for fiscal 2004. Revenue grew 8% to 603.8 million. Net income increased 10% to 38.8 million and diluted earnings per share improved 6% to $1.76 when compared to last year. While we're pleased with having year-over-year growth in revenue, net income and EPS, we did not achieve the original targets we laid out for you at the onset of the fiscal year. Looking at our overall performance for the year results were mixed with businesses that continue to meet or exceed our expectations offset by a few underperforming areas. However, during the past year we made changes in these areas and have realized some improvements. In the second half of fiscal 2004, we shed three smaller non-core practices, stabilized certain businesses, such as asset services and technology support in the systems segment, educational systems and consulting, and returned our Australia operations to profitability within the operations segment. We also have instituted a comprehensive cost reduction program, but we still have a lot of work to do. The entire team is keenly focused on the priorities at hand which I'll discuss in greater detail later. Now, let me hand the call over to Rich to cover the detailed financials.

Good morning and thanks for joining us. As Lynn mentioned last evening we issued a press release announcing our results for fiscal 2004 and our overall view for fiscal 2005. I will talk with you about those fiscal 2004 results in greater detail and then hand the call back over to Lynn. Now, let's take a look at the major financial points for the year and for the quarter. Revenue for fiscal 2004 increased 8% to $603.8 million compared to $558.3 million reported for fiscal 2003. The company reported fourth-quarter revenue totaling $154 million compared to $153.2 million for the same period last year, which included approximately $13.4 million of non-recurring equipment revenue. Net income for fiscal 2004 increased 10% to $38.8 million, or $1.76 per diluted share, compared to fiscal 2003 net income of $35.3 million, or $1.66 per diluted share. Net income for the fourth quarter totaled $10.2 million, or 47 cents per diluted share, compared to $9.4 million, or 44 cents per diluted share, reported for the fourth quarter of last year. As noted in the release, diluted earnings per share was impacted as a result of a confidential litigation settlement.

As a result of healthy cash collections near year end we generated cash from operations of $47.1 million for fiscal 2004. Of this, $20.9 million was generated in the fourth quarter. At September 30th, the Company's liquidity remained very strong with cash, cash equivalents and marketable securities of $139.3 million. DSOs were 94 days at September 30th, including approximately $4.5 million of certain receivables that are now classified as long-term other assets. Record backlog totaling 1.2 billion at September 30, 2004. And lastly, year-to-date new contract wins of $437 million and new contracts pending of $407 million at September 30, 2004.

Moving on to results by business segment. As Lisa noted earlier, we're reporting results under a new segment structure. Within the press release we provided the historical information by quarter for the last three fiscal years as well as information listing the divisions included in each reporting segment. We have modified our structure to best reflect how we do business and how we map to the market place. Our reporting segments are consulting, systems and operations. Lynn will discuss the business reasoning and benefits behind the new organizational structure. For financial reporting purposes, we believe that affecting this last organizational structural change as of September 30, 2004 will provide you the best visibility possible since the 10-K and all historical numbers will reflect the organization moving forward.

I will begin with the consulting segment. Our newly defined consulting segment represents 17% of fiscal 2004 revenue and consists of educational services, educational systems, child welfare, revenue services, cost services, and Unison. Consulting revenue for the fiscal year totaled $103.3 million, and $26.7 million for the fourth quarter. Overall the consulting segment did not perform to our expectations in fiscal 2004, due mainly to weak performance in revenue services. In the case of the Rev Max practice, we've been ramping up on two very large jobs and the resulting profit contribution has been delayed. The division has also been impacted by competition. Consequently, the Rev Max division, which was a significant contributor to operating income in fiscal 2003, underperformed in fiscal 2004. We expect to see moderate improvement in fiscal '05. The segment benefited from year-over-year growth in revenue; in profit; and educational services, its school-based claiming; child welfare in educational systems, which offers our SchoolMAX product.

Earlier in the year we had talked about the growing pains in the educational systems SchoolMAX practice. The division has stabilized and we're encouraged by the improvement trends in the second half of the year in both revenue and profit. The division has ramped up on its largest contract with the Los Angeles Unified school district, which helped performance in the second half of the year. All in all, we expect revenue and profit improvement from the consulting segment in fiscal 2005, driven primarily by educational services, educational systems, and improvement in the performance of the Rev Max practice.

Moving on to the systems segment. This segment represented 23% of total revenues and it includes asset solutions, justice solutions, technology support, enterprise services, and ERP services. Revenue for fiscal 2004 for the systems segment totaled $139.1 million, and 32.5 million for the fourth quarter. The decrease in fourth-quarter revenue compared to the fourth quarter of last year is primarily from reduced license hardware and software revenue in justice solutions. Systems revenue for the full fiscal year did benefit from solid gains in enterprise solutions and ERP, however, these gains are masked by lower revenue contributions from the underperforming divisions of asset services and technology support. For the near term these businesses have stabilized as a result of key initiatives in fiscal 2004 including organizational and management changes, reductions in staff and some key new business wins; particularly in technology support, which has refreshed their backlog. Nonetheless, both divisions remain under close review. The company expects system segment revenue and operating income growth in fiscal 2005, driven by justice solutions and asset solutions.

Operations segment. This segment now represents 60% of total revenue. It includes health services, formerly our health segment and the remaining divisions come from the former human services segment which include child support, work force services and corrections. Revenue for the operations segment totaled $361.4 million for the full year, and $94.8 million for the fourth quarter. Operating income grew 40%. From $25.1 million recorded in fiscal 2003 to $35.2 million reported for fiscal 2004. Segment revenue and profit growth were driven primarily as a result of new work in health. Let me break out the operations segment results for both health and human services starting with health.

Revenue for the health services in the fourth quarter was 57.8 million, a 47% increase over the same period last year. Full year health services revenue totaled 207.5 million compared to 162.5 million for fiscal 2003. Health services operating income for the fourth quarter increased to $7.6 million, which was a 13.2% operating margin; and for fiscal 2004, health operating income totaled $27.5 million, which was a 13.2% operating margin. As expected, revenue from the California Healthy Families contract contributed approximately $38 million in revenue for fiscal 2004. Please keep in mind that this was for nine months.

Moving into the human services side of operations, these businesses recorded revenue of $36.8 million for the fourth quarter, and 153.9 million for fiscal 2004. On a comparable basis to last year, revenue for the fourth quarter and full year was impacted by $13.4 million of non-recurring equipment revenue recognized in the fourth quarter of fiscal 2003. Human services benefited from solid results delivered by the work force services division, as well as improved profitability in Australia. The human services segment also experiences seasonality in the fourth quarter, related to its tax credit business, softness in the child support enforcement and the corrections unit's impacted revenue and operating income for the year; but both remain under close review and improvement plans are underway.

Looking out to next year for the operations segment, we anticipate continued revenue growth driven largely by the 12 month contribution of California Healthy Families, as well as the start-up of the operations in British Columbia. However, operating income for fiscal 2005 is expected to be down slightly as a result of the 3.5 million to $4 million anticipated loss on the British Columbia contract resulting from the start-up costs in the first six months of the project launch. This period is expected to be in the second half of fiscal 2005. Now, I've covered a lot of detail within the segments, so let me take a minute to briefly summarize what we expect from each segment in fiscal 2005.

Revenue growth in all three segments with the majority of the revenue growth coming from health within the operations segment. As it relates to operating income, we expect operating income to grow on the systems side, primarily from asset and justice solutions. We also expect operating income growth from the consulting segment, from the educational systems and educational services practices, as well as improvement in Rev Max; however, while we expect improvement in Rev Max, we're not forecasting this business to return to historical profit levels. This has been factored into our projections for fiscal 2005.

Let me move on to expenses and operating margin. Operating margin for the fourth fiscal quarter was 10.8%, an increase over the 10.1% reported in the prior quarter and in the fourth quarter of 2003. We exited the year with full year operating margin of 10.4%, which compares to 10.2% in fiscal 2003. On accounts receivable and DSOs, DSOs were 94 days at September 30, 2004. This included $4.5 million in long-term accounts receivable, classified within other assets. Just as a reminder, last quarter we classified certain accounts receivable related to our SP 90 practice as long-term within other assets in the financial statements. The 94 days was 1 DSO improved from the preceding quarter and very much in the range of what I view as our normalized DSO range; that is a range of 90 to 100 days. Also keep in mind that we do have some seasonal factors here. Although we have exceptions, historically the September quarter ends have been strong DSO quarters and the December quarter ends have been weaker. I believe the underlying main factor may be the holiday season that tends to slow customer payment processing. As a result, we could see an increase in DSOs in the next quarter, but we will, naturally, push to maintain collections. Strong cash collections helped improved build A/R by approximately $11 million, which had a considerable positive impact on cash from operations in the quarter. The balance of unbilled receivables is primarily driven by milestone-based contracts in the systems segment.

This leads me to our balance sheet. Its strength continues to provide us with continued flexibility. We ended the quarter with $139.3 million in cash and cash equivalents, reflecting year-to-date cash from operations of $47.1 million; of which $20.9 million was generated in the September quarter. During the quarter the Company purchased approximately 367,500 shares of MAXIMUS common stock as part of our ongoing stock repurchase program. As of September 30, 2004, we had $32.4 million available under the program for future purchases. Again, we intend to remain opportunistic with our share repurchase program. And with that, I'll hand the call over to Lynn.

Thanks, Rich. Rich took you through the financials in great detail but I'm going to change the direction a little bit here. Since our last call, I was appointed to the position of CEO and today I'm speaking with you in a new capacity with MAXIMUS. So I want to begin by giving you some background about who I am, how I view the firm, and talk about my major challenges and priorities moving forward. I will wrap up my comments with details regarding rebids, pipeline, backlog and fiscal year '05 guidance. I came to MAXIMUS in 1991. When I joined the firm we had roughly 22 million in revenue and today we're a $600 million company. I'm proud to have played a role in helping us get there. During my 13 years, I've led the health and consulting businesses. And as most of you know, I served in the capacity of chief operating officer for the past year.

Prior to joining MAXIMUS I was a partner in the consulting practice with Deloitte & Touche and its predecessor, Touche Ross and Company. What I bring to MAXIMUS is a deep understanding of government, its programs, and its people. I also have a proven track record in growing successful businesses at both Deloitte and MAXIMUS. And I know MAXIMUS extremely well, including its strengths and its challenges. So where are we today? As you all know David Mastran founded MAXIMUS 29 years ago and led this firm to where it is today. And MAXIMUS remains a strong firm with a strong future. We have over 600 million of revenue, solid operating income, a healthy balance sheet and our 5,000 dedicated employees. We have a tremendous foundation to build upon with many opportunities ahead of us, but let me be real blunt, we have some major challenges.

We have not met our numbers in recent periods, two of our three major lines of businesses, our consulting and systems practices disappointed. Our first quarter is not where we want it to be. We have already taken a number of actions and we have more planned. We are going to be predictable and we are going to grow across all of our practice areas. I want to spend a little time telling you what we have done and what we are going to do next. We are focusing on six major challenges and priorities. These are as follows: First, we need to stabilize and strengthen our organization and management team; second, we need to improve the quality of our services; third, we want to make sure that all business units are profitable; fourth, we have already initiated a comprehensive cost reduction effort; fifth, we need to better focus our priorities and our attention as a firm; and lastly, we want to grow further. Let me take you through each of these priorities in a little more detail.

My first priority is our organization and our management team. I know this is important for all of you in the investment community and it's an absolute priority for me as well. From the Street's perspective, we recognize that prior changes to our organization have resulted in challenges in assessing trend performance. We want to get our organization right. We do not want to make any more changes. We were more successful as a firm when we were organized around our three major types of services, namely consulting, systems, and operations. For the past several years we have considered various options, all focusing around the general client areas we serve, not the services we offer. After a lot of thinking we have put our original organization back in place. Let me tell you why.

First, we have found that our business is simplest to run and our synergies are greatest when we organize around our three major types of services. Each of these three areas require different skills, different types of people resources, different products, different contracting and pricing practices, different services and different management and control challenges. It has just been too complicated to bring all of these different requirements together in separate client-related practices.

Second, quite frankly, our business has not flourished under the structures that we have had in place for the past several years. Our operations practices have done well, because their mission and message has been clear because they have focused on one type of service. But our systems practice has become too much of an internal support organization. We need a systems practice that has its own identity and is a selling organization. Likewise, our consulting practice got lost within our overall structure and its profitability has suffered dramatically. We need to make each of our lines of business separate components. Each has to be able to stand on its own two feet, each has to be simple enough that it can be effectively managed, each has to be inspired to be the best that it can be on its own, and I want to identify and pursue all possible opportunities across all the types of services that we provide.

Our new organization is in place. And we've made some key hires over the past few months. We've filled some critical positions with experienced people who provide great potential for the future. We have a couple of searches underway and we're looking to finalize our hirings over the next few months to fill a few remaining management positions.

My second priority is quality. Quality service has always been important, but is clearly going to be a key differentiator in any major contract bid from here on out. More than anything, you have to perform exceptionally well in this business. It just makes good business sense, and it is also a matter of pride in what you do and a commitment to our clients. As you know, we lost a couple of rebids over the last 18 months. But quite frankly, we also took some new work from very large, incumbent competitors. However, that's just not good enough. We don't want to lose any jobs and we don't want to disappoint our clients. Quality of service must continue to distinguish us from the competition. Client satisfaction is very important to me. Our clients must remain satisfied and truly believe that our services are exemplary. To this end we are currently implementing a quality monitoring system across all our practice areas to help highlight and resolve problems. We have also established a new quality control function which reports directly to me.

My third priority is business unit profitability. We need to make sure that all our units are making money. Most are, but some aren't. Rich and I have worked hard over the past year to address this issue. We had identified the units that were not working and we have cut costs in those areas. We have reduced staff. We have assigned quality improvement teams and, in some cases, closed practices. We have seen improvements and stabilizing performance in areas that were once problems for us, including our Australian operations, educational systems which offers our SchoolMAX product and technology support. We have achieved some major successes, but we still have work to do. Moving to fiscal '05 we've identified other challenging areas including correctional services, asset services and revenue services. We made management changes and downsized these businesses. They remain under close supervision and action improvement plans are well underway in each of these three areas. Overall we need to ensure that we're pushing our units to get the most out of their businesses. We need to help them realize their full potential, we need to make sure we're balancing resources with demand, managing utilization and driving modifications to underperforming units as quickly as possible. And we need to take action when something is not working.

My fourth priority area is cost management. We absolutely have to make sure we manage our costs closely. Over the last two months we have undertaken a thorough review of costs across all of our units. We have to get rid of businesses that are underperforming and we need to shed costs that aren't critical. We completed a major cost reduction initiative last month. We reduced approximately 7% of personnel within home office, consulting and systems by eliminating approximately 80 positions. We have also decreased spending in a number of non-staff areas. These reductions occurred in September and October. Due to severance costs we don't expect the savings impact until the second quarter of fiscal 2005. We estimate that this effort will save us approximately $6 million annually.

We do not want to put our organization in turmoil, but we are still looking at other cost reductions to ensure we are as efficient as possible. Specifically, we have a team looking hard at our overall SG&A costs. They have also started an initiative to achieve further efficiencies in how we deliver our outsourcing services. Our recent cost reduction efforts are not just a one-time action. We are going to keep this same discipline in place on an ongoing basis.

My fifth area of priority is focus. Let me tell you how I view focus. I really think focus is about eliminating and expanding. Eliminating areas that aren't strategic, and expanding in areas where we see the most prospects. Specifically, we want to focus on the large outsourcing and technology opportunities that exist to date. We also want to recharge our consulting practices and, as I said before, our systems practice has to become much more of a selling practice. We have reached a point in our development where we simply cannot be all things to all people. We have too many small businesses and businesses with different performance results. We need to focus on our best possible opportunities. It is just too much of a management and resource challenge to focus on all of the things that we are trying to do, and to achieve the results that we want. We also risk underplaying the best opportunities that are before us.

To this end, we have started to look hard at all of our practices to determine where to focus our attention, where to expand, and where to eliminate if necessary. This is a significant mind shift for MAXIMUS, but is a mind shift that we have to make. We started this process in 2004. We shed some smaller practice areas that were non-core and just not strategic to the overall growth plan of the Company; including our executive search program and HR practice, and our activity-based costing operation. Looking into fiscal 2005 and beyond, we are going to keep the same focus. Starting with the business units that are having the most difficulty right now. We have set a deadline at the end of this quarter to review our least performing practices and to take actions accordingly.

Moving on, my sixth and last major priority is growth. Many of the markets in which we compete have evolved dramatically since we first created, defined or entered them. Many of them are more mature and many are more crowded. We have run up against opportunistic competitors willing to battle on price to gain a foothold in a new market or with a potential new customer. We see bigger opportunities than in the past but there are a lot more people going after them. We have the chance to grow, but we need to make sure we've got the tools in place to do it. We must improve our marketing and sales processes. We will build upon and strengthen our current sales and marketing efforts. We must push towards a more robust centralized sales function. This will enable us to more effectively compete, have access at the highest levels of government, and cross sell our products as part of a broader-based portfolio service offerings. We've got the basic tools in place like the capital city sales program and our proposal operations center which have enabled us to better respond to RFPs. We now need to make these tools work as efficiently as possible. We also need to do a better job of cross selling services from unit to unit. We're undertaking a thorough review to see what incentives we can put into place to encourage our people to cross sell further. We're also looking to bring in some additional high-caliber marketing folks. Lastly, we are currently making major investments in several new technical products that we believe have the potential to put us at the forefront of the emerging eligibility and outsourcing markets and the education market. We are also considering several significant and strategic acquisitions looking at our strong cash position.

Before I move on to our rebids and other items, let me summarize again my priorities. First, stabilization and strengthening the organization; second, quality service; third, business unit profitability; fourth, cost management; fifth, focusing on core practice areas; and lastly, making certain we have strong mechanisms for growth in place.

Let me turn now to our rebids, contract wins and pipeline. Heading into fiscal 2005, we're well-positioned for rebids. We have 15 contracts up for rebid with a total contract value of approximately 210 million. Of the 210 million up for rebid, approximately 25 million would impact fiscal 2005 revenue. We have 28 contracts with option years and/or extensions in fiscal 2005 with a total contract value of approximately 145 million and a fiscal 2005 impact of approximately 70 million. And, again, based on our performance, I'm reasonably confident that we will be successful with the majority of these extensions and option exercises. At September 30, 2004, contracts signed were 437 million and new contracts pending were 407 million, which included the British Columbia contract. Since October 1st, we've had continued strong sales results. Specifically, the British Columbia contract is now closed and we also had an additional 50 million in new sales signed, and another 163 million of new contracts pending since October 1st.

Our pipeline remains healthy with many new opportunities in all stages of development. At November 12th, the pipeline totaled 1.1 billion, versus 989 million reported for the same period last year. At November 12th, proposals pending accounted for 533 million, proposals in preparation were 58 million and RFPs tracking were the remaining balance of 528 million. We have some exciting new business opportunities in our pipeline. We do take a conservative approach, however to the pipeline by adjusting down very large pieces of work. We are in the bid process on a number of large opportunities but we've pared them back in our pipeline.

Moving into guidance. For fiscal year 2005, we expect revenue in the range of 625 million to 650 million and diluted earnings per share between $1.78 and $1.88. This includes the expected 9 to 11 cent impact for the start-up expenses related to the new British Columbia health contract. The loss impact from this contract will only be in the June and September quarters of fiscal '05. Thereafter, for the entire ten-year term of the contract, we expect this to be a solid performing contract with normal margins for outsourcing projects of this nature. So while we have a short-term loss, this sets up substantial growth for fiscal year '06 and beyond. For our Company's first fiscal quarter, we anticipate revenue will be sequentially flat over the fourth quarter with diluted earnings per share in the range of 40 to 45 cents. This sequential decrease results from a combination of factors. We experienced seasonality in the tax credit work within our work force services division, increased seasonal costs in a large health contract which has open enrollment during this period, reduced contributions from consulting of a large educational services engagement lines down (ph) and lastly, pure seasonal impacts with increased holidays. Over the last few years we've had growing pains. As Rich I have talked about today, fiscal 2004 was a challenging year with mixed results. We’ve a lot of work to do, we've got the necessary foundation in place. We continue to push forward with the key priorities I've outlined. We will be vigilant in identifying issues early on in an effort to ensure that all of our units are delivering their expected profitability and we will be relentless in managing underperforming businesses and taking actions early on. Enormous opportunities lie ahead of us and this management team is committed to taking MAXIMUS to the next level.

Our healthy balance sheet gives us lots of flexibility in pursuing new larger opportunities, as well as strategic acquisitions that complement our current businesses. Overall, I'm excited about my new role as CEO. Even though I've been here for over 13 years, we're really just getting started. We've got a lot to build on including our program expertise, wide ranging experience, brand, reputation, and people. We have a great team in place and our people are our greatest asset. We are proud of the many large successes we have had including our new win in British Columbia. And lastly, MAXIMUS is in a growing industry. This firm possesses some of the most in depth domain expertise in this industry and we are going to reestablish ourselves as a growth company in this market. The entire MAXIMUS team is committed to taking this firm to the next level of development. And with that, I'd like to open it up for questions.

Thank you. [Caller Instructions] Bill Loomis, Legg Mason.

Can you talk a little bit about the pricing on recompete cycles? I know you and a number of your competitors have bids coming up and it's been pretty hot over the last year as well. And everything we seem to hear is that the recompetes are coming in at lower pricing. Can you give us a sense of that over the next year and of what magnitude? I know you have cost reduction initiatives in order on your outsourcing practice to try and to combat that. But what's your views on that? Is the market more competitive than it was a couple of years ago?

Bill, this is Lynn Davenport. We definitely see two things going on. The market seems to be larger in terms of the opportunities, very big opportunities, but we also see definite competitive pressure. Competitive pressure in terms of the number of firms competing and, clearly, competitive pressure in terms of price. So as we go forward, we definitely see a price challenge on the recompetes and that's forcing to us really look hard at our efficiencies internally to make sure that we're going to continue to be profitable even as we're in a world with more competition and tighter pricing.

Are you seeing any larger players get more aggressive? I know, you know, for example, a Unisys or an EDS or any of the very large players getting more aggressive in this market or are they competing about as normally as they have been?

Well, we're seeing more and more larger players coming into the space that we've traditionally been in. Of course, we're also going to the space that they've been in in the past. But also as people think through their strategies, you're definitely seeing price as a strategy. I'm aware of a couple of bids where other firms have chosen -- particularly firms that didn't really have a real program experience prior, have tried to use price as a way to distinguish them in the bids. We're seeing that more and more.

And finally, just on capital intensity, with your British Columbia deal, and I know had you some upfront investments on Healthy Families, do you see capital intensity on these larger deals being more going forward as a way to differentiate your bids?

Absolutely. Technology is certainly a driving factor. We've made a number of capital improvements in our technology to have that be an asset that we bring to the bids. Mostly of these projects do involve a significant upfront capital investment. You see that in British Columbia and that's one of the reasons you see that 10 cents issue in the first year.

Michael Lewis, BB&T Capital Markets.

Lynn, can you give us an update on whether you had gone ahead and hired a new manager for the human services segment?

New manager for the human services segment. Yes we have.

Have you announced that?

Yes, we have. I believe we have. Have we not? Oh, we'll tell you, his name is Bruce Caswell. Bruce ran IBM's state and local consulting practice until the time he joined us. Bruce is a strong person, and background from the Kennedy School. He's a man about 40 years old and good, strong leader and so we're really glad to have him on our team.

And, Lynn, did you actually hand pick Bruce?

Well, we went through a search process and Bruce was identified in that process. But, yes, the management team, myself, David Mastran when he was here; we picked Bruce, definitely.

Okay. With regard to the child support enforcement area, in Q3 we had a few bids go out. Have there been any additional losses in the fourth quarter?

No, additional losses. In fact we just had a significant win in the state of Tennessee in child support. So I think we've worked real hard to -- to strengthen our practice in child support. We've had some setbacks, as you know. One of Bruce's responsibilities will be to take over the child support practice. So we've seen some stabilizing there and we also are in the finals on some very large bids in other states. So we have some hopes that we're going to start seeing that practice turn around.

Okay. And just one more question. Rich, with regard to the sales and marketing efforts, do you think that we're going to see some steady increased investment in this area, to get the productivity up?

I don't know if we're going to increase additional dollars in sales and marketing. We do have a pretty significant sales and marking investment. We'll continue, obviously, to push the organization in that direction. I know Lynn has had some comments on our sales and marking focus but I wouldn't -- I don't anticipate additional SG&A dollars as a result of that initiative. I see it more a realignment of SG&A dollars.

Yeah, we're trying to utilize the resources we have and make sure our people are doing a better job. It's not matter of spending more; it’s better utilizing the process we've already put in place.

Charles Strauzer, CJS Securities.

First can you update us on the GSA auction award that's being protested?

Yes. It's still in a pending status. I do not believe the federal government has--it's a protest was issued, the federal government decided to essentially reprocure the proposal and they have not come back with their decision to do that.

So that would not be then in your awarded but yet unsigned backlog?

That's correct, Charlie.

Okay. Let's talk a little bit about the guidance if we can. First, obviously, you've got about a 10 cent hit from the British Columbia contract. Rich, if you can, can you quantify what the lost revenue contribution hit would be as well? In other words on an annualized basis, you know, what would your guidance have been if British Columbia had been there for the full year of '05? The revenue contribution.

My thoughts on British Columbia in '05, it's about a half a year of revenue contribution, it annualizes. The contract's pretty straight forward, Charlie, in that it's ten years straight line. It's pro rata, per month for that ten-year period. We'll be in operations for about six months. The last half of fiscal '05 and that's about $12 million.

And if you look at your guidance, you're talking about 80% of backlog going to revenues in '05. I assume the other 20% is going to come out of your unsigned contract backlog for the rest of the year.

Well, it's not unsigned contract backlog. It'll come out of, basically, the sales pipeline. That will feed the backlog. That's correct.

And then talk a little bit to you giving guidance of revenue of 625 to 650. Obviously if you X out the 13 million from last year, you're talking kind of, you know, mid to high single-digit year-on-year growth; but yet you're not seeing the earnings leverage this year. Obviously you've got the British Columbia contract in there. When are we going to start to see some of that operational and profitability leverage start to show in the model?

Well, it's interesting. If you adjust out the guidance for the impact of British Columbia, which is -- I'll just use 10 cents, as the average from the 9 to 11 cent range that we've provided. I think the $1.78 to $1.88 we've provided normalizes, adjusted, for British Columbia is $1.88 to $1.98. And I think when you run the numbers that'll give you an EPS growth somewhere in the range of 7 to 12%, 7 to 13%. Now, albeit, one could argue that that's conservative and, quite frankly, that's where Lynn and I want to drive the company, is to be more predictable, more conservative. If we have upside from that, great but let's not put it into the numbers at this point.

There's one other point I want to make about British Columbia. It did have a big impact. And we -- we took a hard look at it as something we want to move forward with. It does impact our short-term earnings. You know the impact, 10 cents a share approximately next year. But in the long-term, this is a great contract for MAXIMUS, financially, from a customer base. From a market perspective and a leadership perspective, it really is the envy of the ball. And you also need to look forward to FY '06 and I know it's too soon to talk about it, but it's interesting to run forward the dynamics because that contract alone will have a negative impact in FY '05 and then it will turn around to positive profitability in the following year. And that swing alone from year-to-year will be a delta of about 15 cents.

And, Rich, if you can just talk a little bit too about the top line guidance. Is there any revenue that's missing from last year from some of the cost reduction actions that you've taken that would have normally been in that guidance?

Is there any revenue missing as a result of the cost actions? Charlie, clarify the question for me.

Well, basically you shut down, it sounds like, a few business units and obviously there's some revenue associated with that. Can you quantify what the impact would have been to revenue? Obviously you would have had more revenue.

Very, very small. You know, I tell you, it's less than 5% of our book of business. They were small practices and really not big contributors to revenue or profitability.

Yes, they were small practices. The -- the bottom line problem was -- they were small practices with big losses and so very little revenue impact, big bottom line impact.

And lastly, Rich, just if you can help us a little bit, obviously, you're shifting segments again. Can you give us an apples to apples comparison on the quarter for the way you kind of began the quarter with the three segments, you know, health, human and technical. Is there a way to kind of give us a sense of how those did, so we can at least look at our models and see what the trends were?

Mapping it, the old models to the new models is probably a too complex exercise for this call. We can give you a little color, I'd say offline, in terms of how they map over. I would tell you this that the health piece, which goes into the operations goes one for one. Human services largely combines into the operations piece as well. We did move some divisions between them. Systems is pretty much one for one as well. So you can get some color in that regard. A lot of it is -- maps over quite well, Charlie.

[Caller Instructions] Jason Kupferberg, UBS.

I wanted to just drill a little bit more into guidance and get a feel from a rebid standpoint, kind of what's factored in there. We had heard that you guys did not successfully defend the New Jersey CHIPs program and I guess you've got the Texas enrollment broker piece up for grabs also as part of the bigger welfare eligibility job that is getting close to being awarded. So if you can maybe just give us an update there and kind of how those factors have impacted your fiscal '05 operating plan and guidance; and as well as any other recompetes that might be pending over the next, you know, couple of quarters. I know you gave sort of aggregate numbers there, but if you can help us maybe identify some of the larger ones that we should be monitoring.

Jason, this is Rich. I'm going to -- I'll give you some of the metrics in FY '05 as it relates to rebid and options as well, because next year is a big year from an option year. And then I'm going to hand it back to Lynn to give you a little color on, I think you had asked about New Jersey and Texas, I think.

Right.

From a rebid perspective, and from a summary level we have 15 contracts up for rebid in FY '05. The total contract value we estimate is about $210 million, and there's not a whole lot of value in here for Texas and we also have a Georgia rebid that's up. So we have upside as it relates to those two. And the FY '05 revenue associated with these rebids is about $23 million. So really not a whole lot of FY '05 revenue impact. It becomes more an '06 and beyond impact with these contracts. Some exposure in FY '05 but, again the bigger implication is losses in subsequent years. So that's how FY '05 is shaping up from a rebid perspective. We have significant rebids in our work force services area, as well as in health. Color on the option years, we have 28 contracts up with option years or extension in FY '05. They have a total value of about $145 million. The FY '05 revenue associated with these options/extensions is about $70 million. And, again, option years are clearly different than rebid situations--

Sure.

--as you understand.

Sure.

Is that helpful?

Yes. That is, and if we can just talk about New Jersey and Texas that would be great. Thanks.

Sure. About New Jersey. As it stands right now, you're right, we did lose it; although, everybody that participated in that bid, all the firms have protested. Perhaps giving some color on the competition, or the procurement. But New Jersey started three or four years ago. It was a very difficult project. Immediately as we took responsibility for the project, the program changed, the rules changed and the procedures changed and the state and us were, kind of, trying to figure out what the new program was going to look like. We did struggle at the beginning. It took us a while to really respond to the changes and we had some internal issues as well as external issues. Over time we improved our performance dramatically.

New Jersey is a really political state as you all know. I really do believe we got caught in some of the politics in New Jersey. They had a procurement. Another firm bid extremely aggressively and that procurement is now in -- in question, but it's probably not going to go our way. I guess there's a couple of lessons from New Jersey. One, we obviously have to do a better job of making sure, client situation notwithstanding, we perform exemplary ourselves internally. So we've done a number of things in terms of looking at our computer systems and our processes, to make sure going forward we have that issue behind us. And, second, clearly we’ve learned a lot in terms of working hard with the clients-- clients in difficult situations. So we've looked at New Jersey as a learning experience going forward.

Now moving to Texas. Texas, obviously a lot of people are watching Texas, including us. As you probably know, there's three major teams that bid, we're one of those three teams. We're hopeful and we're confident. At this point in time, the procurement process is behind, proposals have been submitted, they've been evaluated. The orals process is behind us. And the state's in the process of making its decisions and I think -- I'm not sure when they're going to announce it. I would suspect there's going to be some action coming from the state at some point soon and we'll see. But that's kind of the status of Texas right now.

So if Texas does go your way and assuming that they are bundling more stuff in here on top of the enrollment brokering that you already do. Is there upside potential for you in Texas? In other words, relative to your current run rate there?

Yes, Texas has three major procurements all wrapped into one bid. One is a new eligibility process, which is an entirely new piece of the procurement. Second is the enrollment broker piece which has been expanded also and we are now the current enrollment broker in Texas. And the third is to look at their internal computer system they've built for their welfare program. All of those pieces are in one bid. It's a much larger bid than our current contract. If we're successful in winning it, we obviously would have a substantial upside.

Okay. And just a couple of other items. You guys mentioned in the press release, a legal settlement which impacted EPS in the quarter. Is this related to the -- the prior issue with the fraudulent employees that you had let go or is this something in addition to that?

I'm going to have David Francis answer that question, our attorney.

No, that settlement, actually relates to the lawsuit filed by the former executive of the company that we had previously disclosed.

Okay. Okay. So that's behind you now.

Correct.

And, Lynn, you know you've laid out a pretty comprehensive plan here with a lot of initiatives which sound pretty ambitious. It would seem that you may need some really strong managers along side you. Are you looking more closely at hiring a new COO, either promoting internally or looking externally for someone to help you kind of drive this change in the organization.

Well, a couple things. An ambitious plan, but we try to keep it as tight as possible. It's a plan we have to do so we really moved ahead on that path. While we have made some hiring decisions already, we have brought in some seven or eight, at this point, additional really strong managers to complement our team. We have searches underway for a few more positions. Right now, I'm not planning to put a COO position back in place. Over time that might be the right model. But we really have a plan right now to have the three persons leading those three business segments we spoke as being my three direct reports. I want to get -- I want to build a strong team, but I want to be real close to that team as it takes hold. And over time we may re-evaluate it again but we really need to watch our business real close right now to make sure that we're prepared to be strong again in the future.

Okay. If I can just sneak in one more for Rich. On California Healthy Families it looks like the run rate is continuing to kind of chug along at, I guess, about 12 to 13 million per quarter in revenues. If I recall correctly, when the deal was originally announced, it was 418 million, I believe, over five years, so it would seem to imply that at some point you get to a higher quarterly run rate to catch up to that full estimated contract value. What sort of visibility do you have into that? Have you factored anything more than a 12 or $13 million quarterly run rate into the fiscal '05 guidance? Is it more of a post-fiscal '05 event in terms of seeing this acceleration.

I think that's right. I mean, it's a 5-year contract and the $418 million was the client's estimate of where we would end up after a five-year period. We're just forecasting kind of a level run rate as it relates to California Healthy Families and we just can't get into forecasting with -- with a tremendous degree of precision of five-year dynamics in California. That's a tough thing to do. So we're very comfortable with the level load, and then as additional events come into place that warrant adjusting it, we'll do it at that time.

Okay. And Rich just lastly, any cash flow guidance for fiscal '05?

That's a good question. You know, we'd like to think that we're a company that has continuous profitability and continuous cash flow from operations. We were real happy with fiscal '04, as it shaped up. I do think we'll see quarterly blips, as it relates to our cash flow from operations. Overall, I do think from a CapEx perspective and a capital software perspective, we'll at least see the level we had in fiscal '04 and probably a bit more. That'll depend upon some specific investments we're contemplating at the moment but, clearly is an industry that's more capital intense than less capital intense, particularly from a technology perspective. So I would lean in that direction in terms of a bit more as it relates to those two items and then watch the seasonality a little bit. And for that reason I'd tend to look year-over-year but I clearly think that we're a positive cash flow generator on a yearly basis.

Do you think operating cash flow will be up year-over-year in fiscal '05?

I wouldn't go that far. You know we had good luck with the receivables in the prior year and that's really going to be a big swinger. So, unless we radically change how we do business to squeeze down those DSOs, I would really look for cash flow from operations to more mirror operating income. So naturally we expect more operating income next year. So we expect that cash flow from operations would trend in that direction.

Matthew McKay, Jefferies & Co.

I'd like to take a little bit of a step back here just given, you know, all of changes that are going on here and the potential of some M&A activity coming up on the horizon here. Potential trimming of some business units. And, you know, Lynn if you could just talk a little bit more about, you know, looking out a year plus, where see the opportunities for, you know, relative to competitive landscape, where you see spending picking up and really trying to sort of highlight in your mind, you know, where the opportunities are and how you'd like to position the Company going forward here.

Well, as we see going forward, big opportunities at the state level, particularly big opportunities to take basic state programs, consider using technology to fundamentally change the way these programs are done and to look at outsourcing. So we're starting to see these mega deals, if you will, in the health area and in the human services area around eligibility and outsourcing. These deals tend to be multi-year. They tend to be large. They involve technology and they involve outsourcing. So we're seeing a number of states now, there's probably at least ten or more that we're tracking, that are actively planning major, major projects almost of the Texas-type projects. So that's obviously a huge development and we're really responding to that.

At the same time, we want to make sure that's a whole different world with major players and major competition. We want to make also sure that we have strength in other places to leverage against those big opportunities. One of the reasons we made this reorganization is, take our consulting practice, which is really a higher profit practice and a chance to identify new opportunities and new initiatives. So we really want to recharge that practice so that, in addition to chasing all the big deals everybody else is chasing, we want to really make sure that we have focused attention in an area that was once very strong for us, our consulting practice. And we do see opportunities there but you’ve got to dig a little bit to find them.

I mentioned before our systems practice, it's a good, strong practice, but at least -- a lot of this work is working for other stronger parts of our organization. So we really want to get our systems practice into much more of an external selling focus and we see opportunities there. So if you look forward, I really want to see us be strong in this market of these major outsourcing opportunities. But I think that's a huge potential opportunity for us. I want to leverage against that by getting our consulting and our system practices really strong on their own chasing business in addition to that. We're probably going to see us going to larger jobs. We're going to have to -- the jobs may not be individually as profitable as the jobs in the past, so that requires us to win more work, to be stronger to get more work, to be more efficient in how we deliver the work. That's kind of where I see us going. But it's a changing world but it seems to be a world with good opportunity but a lot of challenges for us.

Okay, that’s helpful. So any acquisitions sound like they would probably be focused more in the health area?

Well, we have -- we're obviously in a good position for acquisitions. We kind of have a three-step process. We really want to get our foundation really strong internally to support us going forward. Secondly we really want to push our processes organically in terms of getting our people in a much more proactive marketing piece, but acquisitions are important. We have identified several strategic targets and we are going to probably get back into the acquisition world, looking maybe a little bit different. Looking at, perhaps, larger acquisitions and acquisitions that really fit within the strategic area. Some of the places, as I talked about, we really want to restrengthen consulting with a couple of acquisitions in that area. If we really want to grow in some of these major, major outsourcing and technical areas technology would certainly be an area to consider for acquisitions. So -- but we definitely are beginning to look again at acquisition opportunities. Anything you might want to add to that, Rich?

No, I think that's a good recap from an M&A perspective. Again, to recap, we would focus more on larger, more significant opportunities and shy away from smaller situations, unless it was really a strategic or a bolt on to some of our proprietary technology. We are seeing that some of our proprietary technology is gaining market share and has acquired some of the smaller competitors, which is a good thing to do. We've got a couple of great practices out there in justice and our asset solutions which, really, I think have great market share and they seem to be building on that by picking up some smaller competitors and functionality. So aside from that we're going to lean towards larger opportunities.

Yes. I'd say one more thing. Priorities and focus are really important. Q1 is going to be completing this process of getting our foundation where we want it to be. And that's going to probably extend into Q2. Really, latter part of Q2, Q3, Q4, is we are going to turn strategically to acquisitions; but if there's something out there right away that's in our space and is strategic, we're going to look at that. But in terms of a sequence, it's probably the second or third piece in terms of our annual priority schedule, acquisitions would be. Okay?

Okay. That's helpful and just looking at the business development side here. It looks like, you know, just with the larger number of rebids, the option years, you know, making some changes in there. You know, what-- should we expect sort of the pipeline to sort of stay flat for a little while, while the focus is really sort of on these rebids or is there an opportunity that you see out there to warrant your investing in that side that we could actually see some growth in some of the pipeline metrics going forward here?

Pipeline -- our pipeline has grown over last year. I think will continue to grow. A lot of these big bids I have talked about are so large in size, that to put them in our pipeline, it would have a very large pipeline; but it would almost be -- we're just not sure how to handle these very, very large bids in our pipeline because some of them are really, really significant in size. So we've put them into our pipeline, but in a very pared down focus. So I guess as these opportunities become more certain and we become even more certain about our chances, we'll probably bring them to the pipeline. But they would certainly have quite an impact on our pipeline. But we want a pipeline that's as conservative as possible. I think you're going to see continued growth in our pipeline. I feel confident that the business is there and as we continue to push our processes to really, you know, identify opportunities a little harder internally, I think it's going to add to our pipeline.

I would add to that I do think that the pipeline, which historically -- and pipeline being pipeline tends to be lumpy in nature, that's why we tend to focus on year-to-date new wins, new sales. But even our year-over-year new sales statistics and what's awarded unsigned, when you look at it, the lumpiness is really created, caused by these large wins. You know when you look at our data for the current year, versus the prior year, certainly California Healthy Families win, it is really -- I mean it just moves the tide. British Columbia factors into it.

Yes.

And as we move forward I think we'll see continued larger opportunities move through the -- through this -- these statistics. So you have to be watchful of that.

You know these large opportunities are going to have all kinds of implications for all of the firms. Each of the firms that are interested are going to have to think hard about how they respond to the work if they receive it. It certainly has challenges in terms of marketing. And it also has challenges in how you reflect pipelines because we're not interested in just recording all the opportunities that exist in the United States. We have to make sure they're qualified to our chances of winning them. But it's going to affect pipeline reporting given some of the these opportunities that are out there across the country.

Okay. Great and then just sort of looking again, a little more internally at the controls within the Company, could you just talk a little bit about maybe some of the changes you've made behind the scenes to, you know, help out on the controls and making sure that, you know, everyone's dotting all the I's and crossing the T's?

Yeah. We always have had a historical montra here, going back when David was here, quality, profitability and growth. And it starts with quality and it starts with quality and it's absolutely true. And we've had a few situations recently, as we've grown, that I just don't like in terms of quality. So we've done a number of things to really kind of address that process and it's really basic blocking and tackling. We're going back and strengthening our process to have a project management process that goes from the project on up to the process in terms of management reporting, just a much stronger internal control system; we've done that. We created a function reporting directly to me, the CIO function that focuses on quality. So across our whole business, I want a whole function devoted specifically to quality and that group has a reporting process and an analytic follow-up process.

Basically it's just about reinforcing just basic disciplines and habits. Making sure just-- it doesn't sound too exciting, but just control process, goals, standards, monitoring, follow-up, making sure our management process focuses around that. So we've tried to reinstitute the discipline of controls, we've put a function in place to focus -- to focus specifically on it and just try to really push us much, much harder in terms of delivering to do what we say we're going to do. We need to work constantly at a better early warning system. We don't want to hear about our problems from our clients or through the press, we want to hear about it because we found it first. So we have quite a process in place. I'd call it kind of going back to basics and reinforcing the basics, but that's what we're doing and you have you to do that. You can get kind of caught up in all the new opportunities and investments. If you don't do the fundamentals right, you're never going to be able to, either, take advantage of the opportunities or you're not going to achieve those opportunities.

Dana Walker, Kalmar Investments.

Could you address the severance that will stem or that will be prompted by the reduction in force? Is that a Q4?

I'm going to have Rich take that.

I'd be glad to do that, Dana. It's -- the severances occurred towards the end of the year, and actually into the beginning of this December quarter. We don't expect it to have -- it's basically neutral to the December quarter, because we have a balance, we have some savings on the salary side; offset by, obviously, increased severance cost and we also decided to incur some costs to help those folks find new employment. And then the real savings will kick in, in the second, third and fourth quarter.

Was there -- how would you describe the effect, though, in Q4? Was it material?

There was -- we had one or two business units that had meaningful activities in that area. So it did help them, so it was a help in the fourth quarter, but most of it won't kick in until I think subsequent to that.

There's also a severance impact in the fourth quarter too, Rich.

Right. That's correct. So some but not most.

The negative revenue delta from New Jersey will be what in '05?

Well, first of all, the contract with New Jersey has been extended through June 30th. So the '05 impact is minimized by that. In terms of our forecast, we had not forecasted New Jersey to go forward. Rich, in terms of the --

Yeah.

I think we're getting the number in just a second.

We'll lose about one quarter's worth and I expect that will be in the fourth quarter of fiscal '05 since, as Lynn just said, it's extended through June 30th. It runs about 5 million a quarter, Dana. Does that help?

That does help. Thank you. Gentlemen and lady, you talked about how the large bids that are pending are fun to consider. They certainly present opportunities. Are they so large, though, that your role as being a medium-sized player makes it less likely that you prevail?

Well, we bring some things to it that some larger players don't bring. We bring a real understanding of this business, the operations, the client. We also have some technical products other firms don't have. Those are really differentiating factors for us. We have been able to take on projects of large size recently, California Healthy Families, the HCO product, the British Columbia project and do them successfully; so we can handle large projects well. Obviously, we're going to grow, as--if we win these opportunities and grow with them, we're going to grow also. So we're a changing firm too. There's also you're seeing more and business combinations, teams coming together. In Texas we are teamed with another player and so that's another way to combine the talents of different firms' offers. So we think through what we bring, the growth we're going to have, and looking at partners, we can handle just fine these opportunities.

Dana, I want to add one thing to what Lynn has said and that is, when we benchmark ourselves against the state and local businesses of these large competitors we are, in many cases, as big, if not bigger than their state and local business.

That's a really good point. Large firms are large firms, but we don't compete against IBM's building of software. We do compete against their consulting practice and you'd find that those two groups, ours and theirs, are much more similar in size.

Two last questions. One is driven by the prevailing wind. We've talked in the past about there having been a head wind in your business for quite sometime. How would you describe wind direction now and how would you describe wind direction in the parts of the business where you think you are differentiated and where your service levels suggest that you ought to grow.

You must be a sailor! Let me think now. So you're saying basically -- the question is we've had lot the growth in the past, a lot of success. It's eased a little bit in the last two or three years, now where is it going in the future, is that the question?

Well, we've had budget constraints.

Yeah.

In your primary market, which has conditioned us to expect less.

Yeah.

And I would think that with that relaxing, that perhaps we can begin to expect more, but I would like you to place that in context.

Yeah, I think so. I think that we're certainly seeing it in in terms of the external world. There has been some budget constraints the last couple of years. But we're certainly seeing, at the least, the talking stage states talking about projects in our space, much larger than they've ever talked about. I think the Bush re-election is going to give further impetus to privatization across the country. So I do think that there's going to be the Tanus program which is a program we spend a lot of time with is up for federal reauthorization. So there's a lot of developments that we see that does give indication that there's more opportunity coming forward. And so I think that's a good sign. As we said before, obviously we're not the only firm seeing this so that competitive factor is going to be there. But in terms of opportunities to be available, yes, I do think there's going to be a growth in those opportunities. It just feels like that. We really see a pretty substantial increase in the opportunities around the country. At the same time, we see the competition to chase those opportunities. Does that answer your question? I'm not sure I've answered your question.

We'll get more into that this afternoon.

Okay. Sure.

Final question is this, your consulting margin has halved over the last two years.

Yep.

Doesn't make anybody happy. Where would you hope that that margin will be-- well founded hope that is, over the next couple of years? And why?

Well, let's go back to why it's reduced. One, we had strong margins. A lot of that margin came out of the Revenue Maximization practice. The more we became successful at Revenue Maximization, the more we got competitive pressure and that drove prices down and the more the federal government started to watch the successes of our business and put pressure on it. So that's had an impact. I think the reorganization changes we have had, have hurt consulting. Consulting became kind of a support process to our other larger projects and it -- and also the people running our consulting practices had so many more responsibilities. And I think what happened is that we kind of lost our edge a little bit. We lost our focus. We ran into some problems. And so -- so that was a factor.

Going forward, I really do believe we can bring consulting back. Maybe not to the levels of profitability from years ago. I think competitive pressure is going to have an impact on that, but the opportunities are there. We got to dig harder to find them. We have to start identifying opportunities to our client as opposed to just responding to they tell us what they want to do. I think if we put pressure and push and good organization and good leadership in that practice, I think we can see strong results. I think a couple of years ago when we used to talk about how our health operations practice was fading and perhaps we should get out of that business. Well, right now look at the size and strength of it. What we did there was we put a lot of pressure behind it and focused and it went from being a program we talked about in a "what should we do about it" to now it's our crown jewel. So we want to do the same thing with our consulting business.

If I were attempt to place words in your mouth, would you expect that this 15% business in two or three years, once again?

Rich --

Dana, this is Rich. I think directionally that's right and the time frame's probably right. I wouldn't go that high in a shorter period of time, certainly.

The other thing you notice is consulting tends to be higher margin, smaller sized practices. As these larger and larger jobs come forward, the outsourcing and the technical jobs, more and more they dominate our landscape. And so consulting, even if becomes more profitable, will not be the -- the -- the total component of our business that it once was in terms of just overall bottom line impact. We want it to be a smaller but very strong practice that becomes, if you will, an incubator of good ideas to help us identify longer term opportunities.

Larry Lee, CIBC World Markets.

I just wanted to touch back on the pipeline for a second, just a clarification on that. Do you guys not include some of the larger opportunities that you've been talking about in the pipeline, or do you just include them to a lesser extent than you think the full value of the contract could be?

It's the latter. We do include them. We include them at a pretty reduced amount relative to what we think the bid prices are going to be. One of the reasons we don't include them all is because everyone is kind of curious what bid prices are. And I don't want people to get from our pipeline a sense of what we might think the value of a job is. So we have in our pipeline these larger jobs identified as kind of placeholders, if you will, to show the opportunity is there and show our recognition of it. But we do not have anywhere near what we think the full value of what those opportunities are in the pipeline.

Larry, just to give you a little idea of magnitude of how we pare these back. In the case of California Healthy Families, when that was running through the pipeline statistics that was run through there at approximately $50 million. So just so you recognize that we do pare back some of the larger swingers that we've got in there and to what extent we do that.

Just one follow-up with that. Rich had sort of touched on this point with, I believe, the British Columbia contract; but I'm assuming that with some of the larger opportunities that you guys are going after, there is a higher probability of greater capital intensity and, therefore, maybe taking a near term earnings hit on the ramp up should you win some of these opportunities. How do you go about evaluating the pros and cons of work like that ? Especially since it seems more likely going forward that that's going to become a greater issue.

I think there's lots of different ways to view the topic that you put on the table. First off, I'd like to say from a macro view, we do expect that our customers will be looking more towards the providers to -- to finance, in essence, some of these necessary system improvements, next generation system build. I think the budgets just don't have the funding to fund the upfront system build costs, but they're also pressured because they have more people they need to serve, they need to use technology to a greater extent; so they really need to put the new systems in. So we do expect that we have that macro pressure coming at us.

The other thing would be just -- I'll say accounting rules and regulations. I won't get into the detail. But we do see more conservative accounting, you know, in BC. It's pretty straight forward. We'vegot a straight term contract-- straight line contract. And the start-up costs, just in a conservative fashion, get expensed. A bit of that was peculiar to the particular needs of that client. We really look at it from a total company long-term economic perspective. Do the long term economics make sense? Do they hit our hurdles in terms of return on investment. And if there's a short-term gap impact where we have to have a loss, the question is, do the long-term economics clearly outweigh the short-term accounting consequences?

And in the case of BC, it was clearly, hands down, that's the right answer. I'd also say in BC we're not going to be out of pocket a lot of cash on the build side. The customer's going to fund the front end build which we will capitalize, we'll defer as deferred revenue the roughly $7 million upfront we expect to incur. And that's separate from the $3.5 million we expect to incur as it relates to the loss in that first-year period. Does that help.

Yes, definitely.

I also wanted to go just a second to that pipeline question. We really--our focus internally is to win the big jobs, but we've built our pipeline and our forecast for the year assuming we won't win them. Because we want to make sure the we'll be a strong firm, whether or not we win these jobs. And so if they happen that's great. Our attentions are focused to get the work but we're not building our pipeline and our forecasts on the hopefully get the work. So that's how we've structured our numbers for the year.

Jeff Nixon, MCM.

The first question is, on the BC deal, am I understanding it right that you plan on losing 4 million in the first six months, and then if you kind of like assume, you know, normal operations margins, it's going to make about 2.5 to 3 million a year. So it's not going to make -- so really you're not going to get your money back until the second year and you're taking fixed price risk; is that right?

I think there's some element of fixed price risk, there's also some contractual adjustments so that we have mitigated a lot of those risks, Jeff.

Okay. And then how much capital do you expect to have tied up?

Good question. There's about a $7 million upfront build for a new system. The customer will pay for that. So that's not our capital and so it really will be the operating loss in the first period, plus working capital type items.

How much will the working cap--I'm just trying to--I mean you say that it clears your hurdles but, you know, it seems -- I mean to me it seems like kind of a marginal deal. I'm just trying to understand why it's such a good deal.

Sure. Well, you know from a working capital perspective, it's simply carrying a receivable which I don't expect will be more than two months of a receivable and then we've got a 3.5 to $4 million loss upfront that obviously we have to fund and deal--

So the 6 million of receivables and then a $4 million loss. That's $10 million of capital. Right? Roughly?

I think that's right. Working capital.

Okay. And then it's not going to -- you are going to lose -- you're going to make 3 million a year. So it's like a 30% return on capital?

That's about -- I think that's a little bit high, but you're in the right direction.

Which is well below what you -- you have earned. I mean that's well below your corporate average.

30% return on capital?

Yeah.

No, that's higher than our corporate average.

I guess it depends how you calculate it. But I'm right on the numbers, is that it's -- you know, it doesn't actually -- you don't actually get your money back until the second year.

I think that's correct.

Okay. Secondly, I just want--just trying to understand, I mean I know, the first time that you guys actually made $10 million was December, 2001. So I guess the one thing you guys have got good at is kind of, you know, spinning results and kind of like painting a bright future. And I just wondered what is so different from you in your position now as CEO, from where you were as COO and all of these changes that, you know, suddenly you are seeing that can be made?

Well, I'm in total charge now, I wasn't before. I have a chance to look at what I thought was going well in the Company through the years and also to look at the things that I think we need to work on. So I now have the opportunity and the authority to do the things that I think need to be done. So it's -- it's my ship and I want to run it the way I think it should be run.

But as COO you didn't have input into it?

I certainly had input and I was one of the members of the process. And also you learned through CEO process. I saw things in the last year as COO that I think we need to work on now and so things I learned over the last year we're going to put in the program going forward for next year.

Okay. Well, I guess the I hope that there are board members, you know, that understand this-- it just doesn't seem credible that someone who was COO could become CEO and suddenly kind of, you know, revolutionize a company that obviously needs some help.

Well, we're not revolutionizing it. We're in a process that started before I took over. We've been working hard on the kinds of things we talked about today in a public way for the last year. And so it's not something we just started here a week or two ago. It's something we've been working on for the last couple years and I chose to use this as an opportunity, since it's my first chance to talk with you and put publicly what we had been working on internally. But things we talked about today are things-- some are new and a number have been started over the last year. So it's not a real revelation or revolution. It's kind of a continuing to go forward with the program we started internally and make sure that program was understood externally.

Okay. And then just to summarize, like to be fair to to you, I guess the two things that really happened to MAXIMUS from December of 2001, when you first made $10 million in a quarter is that the Rev Max golden goose sort of has -- you know, somewhat evaporated or become like a normal earner as opposed to being a kind of, you know, an overachiever when, you know, sort of developed it. And that, secondly, you've had this kind of like -- obviously this kind of real problem with the states. Would that be, you know -- so in other words, it's sort of unfair to compare this quarter against the circumstances that you had, you know, in 2001.

That's correct.

We'll take our final question from Josh Sapier, NorthStar Partners.

I just wanted to talk a little bit about how you were going to be looking at business units to possibly get rid of and I just wanted to know, you know if you could be a little bit more specific about which units you're really focusing on?

We'll talk about the process first and then maybe we'll talk about the units. The first thing you have to do is make sure that business is in a business you want to be with. So you got to start with an external forecast. Look, is this a business that has potential? Does it have synergy with what we do? Is it a place we want to be? Is it a place that we can be? So the first the question is, is it an effort worth making? Then you go into an internal focus. Okay, could this practice achieve the opportunities out there? And if the answer is yes, what do you have to do to get it there. If the answer is either the market's not there or this practice, just isn't worth making the effort relative to other opportunities we have or the challenge to rebound, then we're going to move away from it. So that's the process, it's kind of a start externally, go internally. Compare the business unit in terms of the opportunity it presents and also the recipe against other businesses and make a decision. So that's what we're doing. And the actions we've been going through, obviously, is to focus on the leadership of those groups, the costs, their internal methods and their marketing practices.

In terms of the practices that we're looking forward-- looking hard at right now. There are several that are on our list. We have a corrections--a very, very small corrections practice that we're looking hard at. Our revenue services practice, we're looking very hard at it, as the previous caller said, it was once a very significant player. It is having difficulties right now. We're looking very hard to what do we do to bring it back and if that doesn't work we have to make another decision. So revenue services is an issue. We have a small asset services practice. We think we've stabilized it. We think we've done things. The practice was a difficult practice for us this last year. It is now making money again but we're watching it closely in terms of two things. It's -- it's -- its dollars and also does it's a fit with our overall businesses. And our educational systems practice. It has had some significant wins, it's doing some landmark projects. It struggled during the year. We have made a number of changes there. But we're watching it real close.

So those are probably four practices that we're looking at real hard right now in terms of making sure that they're going to be successful practices going forward, and we have action plans for each of these practices. We've done some things and we have deadlines where we're going to make decisions on them.

So you expect to have more information for us at the end of next quarter?

Absolutely.

And that concludes today's conference call. We thank you for your participation. You may disconnect at this time.