Maximus Inc (MMS) 2005 Q1 法說會逐字稿

Good morning. My name is Marvin and I will be your conference facilitator today. At this time I would like to welcome everyone to the first-quarter MAXIMUS conference call. I would now like to turn the conference over to Lisa Miles, Director of Investor Relations.

Good morning and thank you for joining us. For today's call we have posted a presentation on our website for you to follow along with. The presentation can be found on the MAXIMUS web site at www.MAXIMUS.com. Click on investor information and this will take you to the appropriate page where you will find the presentation link which is located directly underneath the webcast link.

Before we begin, I'd like to remind everybody that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions and actual events or results may differ materially as a result of risks we face including those discussed in exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks from our most recent 10K filed with the SEC on December 10, 2004. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

On the call today is Lynn Davenport, Chief Executive Officer and Rich Montoni, Chief Financial Officer. And with that I'll turn the call over to Rich for a discussion of our financial results.

Good morning and thanks for joining us. This morning we reported first-quarter results which were in line with expectations and concurrently announced the initiation of our first quarterly cash dividend which I'll talk more about later in the call.

Revenue for the first quarter was $152.5 million, a 10 percent increase over the same period last year. And net income for the quarter totaled $9 million or 42 cents per diluted share, which was essentially unchanged from the first quarter of 2004.

Let's review results by business segment. Consulting. The Consulting Segment represented 16 percent of revenue and was $24.4 million for the quarter compared to $26.7 million in the first quarter of last year. The 8.5 percent decline was largely attributable to reductions in the financial services business, such as Child Welfare and Revenue Services as well as the downsizing of our activity based costing practice. These declines were partially offset by healthy year-over-year revenue growth from both education divisions.

As expected, income from operations was just under $1 million, the sequential decline is primarily attributable Q4 seasonality in the education practice areas which do benefit from elevated activity as school districts strive to complete projects before the start of the school year. Overall we are encouraged by the results in the education business; we think the positive trends we've seen over the last six months will continue.

As I told you last quarter, we don't anticipate the Revenue Services practice to return to historic profit levels in fiscal 2005; however, we have had sequential profit improvement in the Revenue Services division over the fourth quarter and we're cautiously optimistic about the business improvement plan moving forward. In addition, we hope to realize revenue and profit on a number of claims that have been stalled on a very large job that we have been working on for the last several months. As of this type of contingency base work, the timing of revenue and profit can be unpredictable.

The Systems Segments represented 23 percent of revenue and totaled $34.8 million versus $33.3 million reported for the first quarter of last year. Operating income totaled $5 million versus $3.4 million reported for the 2004 first quarter. A couple of large license sales during the quarter helped drive (technical difficulty) higher to 14.5 percent operating margin. We are forecasting a lower amount of license revenue for the second quarter and as a result, we expect operating margin to dip into the high single digits for the Systems Segment in the second quarter.

Certainly these large license sales are great business events, but as you know the timing of large license sales can create peaks of revenue and profit within the segment and timing is challenging to predict.

Moving on to the Operations Segment, the segment represented 61 percent of total revenue. First-quarter operations revenue increased 18 percent to $93.3 million compared to revenue of $78.9 million for the first quarter of '04. Operating income for the first quarter grew 8 percent, to $8.3 million versus $7.7 million for the same period last year. The Operations Segment consists of Health Services and Human Services. I will give you the top-level details on both.

Revenue for Health Services in the first quarter grew 44 percent to $57 million compared to $39.6 million for the same period last year. As a reminder the California Healthy Families project was launched in our second fiscal quarter of last year and consequently did not contribute any revenue in the first quarter of 2004. California Healthy Families with the primary driver of that 44 percent year-over-year revenue growth with the remaining increase resulting from other new work principally in the Federal marketplace. Health Services operating income for the first quarter was $6.8 million, compared to $5.8 million in the first quarter of last year.

Switching to Human Services, revenue for the first quarter was $36.3 million compared to $39.3 million reported for the same quarter a year ago. First-quarter operating income for Human Services was $1.5 million versus $1.9 million last year. The year-over-year declines in revenue and profit are primarily a result of reduced contributions from the Child Support division where we've experienced erosion to the base business in fiscal 2004. However, we are encouraged by the progress in the area of Child Support. The division's profitability improved sequentially this last quarter. As part of the business improvement plan for this division we continue to focus on shoring up the base business by executing and maintaining good client relations as well as winning new work.

Operating margin for the first fiscal quarter was 9.7 percent, compared to 10.7 percent reported for the same period last year. The decrease in margin is largely attributable to the soft performance in the Consulting Segment which I discussed earlier. As you may note on a sequential basis, operating margin was lower by 110 basis points, this was due to a somewhat better gross margin offset by higher SG&A percentage. The sequential increase in SG&A was due to no bonus expense in the prior quarter while we booked a normal bonus provision in this first quarter.

On the last call I explained that the December quarter tends to be weaker for collections largely as a result of seasonal factors. As expected, the holiday season simply tends to slow customer payment processing. And with December 31st following on Saturday the receipt of payments at month end was reduced, in fact followed by larger collections the first couple of days into the new year. Accordingly, DSOs increased to 99 days including $4.5 million in long-term accounts receivable within other assets.

This leads me to our balance sheet. Strength continues to provide us with continued flexibility; we ended the quarter with $142.3 million in cash, cash equivalents and marketable securities reflecting year-to-date cash from operations of $10.1 million. As a result of our healthy balance sheet and continued cash generation, we've announced our first quarterly cash dividend of 10 cents per share. This dividend was under consideration by the Board of Directors for several months and is very appropriate at this time. We see a dividend as a way to deliver increased shareholder value while at the same time opening us up to a whole new potential base of shareholders. Most importantly given our balance sheet flexibility the dividend does not compromise our ability to finance growth, pursue strategic acquisitions or continue with our share repurchase program.

During the quarter the Company repurchased approximately 146,000 shares of MAXIMUS common stock as part of our ongoing repurchase program. As of December 31 2004, we had $29.5 million available under the program for future purchases. Again we intend to remain opportunistic with our share repurchase program.

And lastly, guidance. Our current full-year estimates remain unchanged with total revenue expected of $625 million to $650 million and earnings per diluted share of $1.78 to $1.88. For the second quarter we anticipate that revenue will be comparable to the first quarter and diluted earnings per share is expected to be in line with current consensus estimates of 44 cents. The estimates we laid out do not include the impact of expensing stock options as will be required under the new accounting standard effective July 1, 2005.

As disclosed in our 10-K, the expensing of options in fiscal 2004 would have reduced full-year EPS by approximately 23 cents. We will begin expensing options in the September quarter. The impact of adoption will depend upon levels of options granted in the future. However, we expect the quarterly impact to be roughly 5 cents per share.

That being said our current full-year EPS estimates do not include the impact of stock option expensing. Presently we are still reviewing how to adopt this change whether we do it prospectively or whether we restate prior periods; those are the choices. There is considerations for doing it either way and upon making a final determination, we will update guidance accordingly.

And with that, I'll turn the call over to Lynn.

Good morning everyone. Last quarter I laid out my priorities as incoming CEO for the Company. This morning we will bring you up to speed on much of what we've accomplished over the last few months. I also want to talk a bit about how I see our market. I've organized by presentation around four general items; our highs for the quarter, my assessment of our current market, the status of the six initiatives that I outlined at our last call in November and new wins and rebids and pipeline data.

Let me start with our overall performance in the quarter. All in all, I'm pleased with a number of things about our performance in the past quarter. Our first-quarter results were solidly in line with previous expectations; we surpassed consensus estimates by a penny; our cash position continues to be healthy, with a clean balance sheet in our overall capital structure provides flexibility; and finally, as Rich discussed, we today introduced a 10 cent quarterly cash dividend.

With respect to our sales, we had contract wins of 447 million for the quarter, which is very good in comparison to our performance in previous years and quarters. This includes 268 million for our recent win in British Columbia which as you know we had been working on for some time. However when this win (technical difficulty) all sales numbers for the quarter, we are still ahead of last year. I will discuss our overall sales in more detail later in this presentation.

I'm also pleased to announce that we have had several other important wins in the past quarter. As an example, we were recently awarded a contract for 17 million by the country of Israel to earn a component of its welfare program on a privatized basis. We believe this project has the potential to grow substantially. And I'm also pleased to announce that just yesterday we were formally notified that we had been selected to administer the Medicaid and Managed Care (ph) Broker program for a large state. The total value of this award is close to $100 million over five years. This is an expansion of our current project with this state.

We also have several other major opportunities spending that we are watching closely. While one quarter does not make a trend, I'm pleased that results were solidly in line with expectations. Parts of our business will always be difficult to forecast because of the timing of license sales, contingency based fees, and government procurement delays. But we are intent upon proving visibility and stability in our business through better management controls and processes as well as through increased accountability. Overall we are off to a good start in 2005 and on track to realize our financial objectives for the full fiscal year.

Turning now to general market trends and the operating environments. I know that there has been a lot of questions recently about our market area and I would like to add my own thoughts. I would like to discuss three items; how I view our current market and opportunities, the challenges we face; and our competitive positioning. From where we're sitting, the overall umbrella of current opportunities looks good. We are confident about the number and size of the opportunities we see. The trend seems to be more and more in the direction of larger procurements with expanded scope. These larger engagements are primarily in technology and outsourcing.

We also see some new areas emerging within our core businesses, particularly in Health with recent changes to Medicaid program creating new areas of potential growth at both the state and federal level.

At the same time, we also see a number of important challenges; for example, we're excited to be competing for and winning larger contracts. But these wins come with added exposure. Large deals are subject to increased scrutiny and are more susceptible to political and organizational pressures. And larger deals are driving longer lead times. In addition, we operate in a highly competitive environment where pricing can be aggressive in certain pockets of the market.

While these challenges are important, I also believe that we are well positioned to respond. We're going to compete more effectively in our markets against well entrenched incumbents and in some cases, larger firms. This includes some of our bigger wins such as California Healthy Families in British Columbia. We're doing this by bringing a focused approach to Government Services with cost-effective solutions and fresh ideas.

We have also been aggressive in terms of her pricing by finding new ways to implement cost efficiencies by thinking outside the box on the programs we bid on and by continuing to introduce new technologies. We have been able to pass these savings along to customers without restoring our target margins.

With respect to marketing, we strive to identify our opportunities early and we jump in the game before the RFP is out. I believe we are winning because of the folks in Government Services because they understand governance (ph) programs, and because we offer new and comprehensive solutions.

Let's now turn to a review of the actions that were outlined on last quarter's call. As you may recall, we spoke about six major items which include, stabilization and strengthening of the organization, quality of service, business unit profitability, cost management, focus on core practice areas, and growth. These continue to be the six major areas that we are focusing on as a Company. I would like to discuss our progress in these six areas briefly.

First with respect to our organization, I think we made meaningful progress over the last several months to stabilize and strengthen our organization. We already discussed financial performance but in terms of personnel I believe we are assembling the right team and we're nearly there. As you know we put our new structure in place last October. Since then we have completed several additional key hires; in particular, we have new Presidents leading our turnaround efforts in Human Services and Education. This month we have new leadership starting in Child Support and one area of Health Services. And lastly, active searches are underway for a few additional senior management candidates.

In terms of quality we established the Office of CIO and Quality Management reporting directly to me, implemented a new quality monitoring system in December. We've also put in place a new quality control function to oversee and support our startup efforts on large new projects such as our new British Columbia project. As part of this effort we're significantly expanding our technical staff team to help us with our overall startup efforts. We believe that by doubling our quality assurance and expanding our management and technical (technical difficulty) on new projects, we can drastically reduce project risk during the startup phase. This also provides increased quality review over the life of a project.

Moving on to business unit profitability, I indicated in our last call that our primary objective was to address and mitigate the downside on a handful of underperforming practice areas. To this end we have downsized practices, cut costs, changed market focus, and changed some management. While these practice areas remain under close scrutiny, we are realizing improvements. Educational Systems for example was profitable again for the second straight quarter after a year of transition.

The Australian Operations are performing significantly better and continue to be a positive contributor. Asset services and Correctional services remain stable. In the area of technology support we expect improvement later on this year as they further develop their presence in new markets we have already begun to gain attraction.

In the area of Child Support, as Rich discussed, we are focused on maintaining our base business which has experienced unacceptable slippages and revamping our sales effort. This business improved to just over breakeven profitability in the first quarter. With the right leadership now in place in Human Services and Child Support, we are working toward improved operating performance and renewed growth.

Finally, let's talk about business unit profitability at our Revenue Services practice which is our primary area of concern at the present moment. We have prioritized areas each of improvement by redoing each and every project. As a result we have chosen to exit some, scale back others to better balance resources but with their expected returns and have committed additional resources to projects we believe will provide larger future returns. And we're working with our staff to help clients realize successful (indiscernible) plans.

As Rich noted earlier, this increased diligence should pay off on several big jobs who have dedicated significant time and resources over the last several quarters. We're optimistic that final federal approval on some of these claims is imminent. In terms of leadership, we're finalizing plans for ongoing management of this group. We've also make changes in our marketing group and further downsized staff. These changes may take time to yield significant results but operate margins improved sequentially from the fourth to the first quarter and we expect more of the same in the second quarter.

Switching to cost management, we're finishing up efforts initiated last fall. We recently completed additional staff reductions as part of this ongoing process. We also put in place expanded spending controls for certain central office costs and we are beginning a business process review of certain internal operations. Above all we will continue to scrutinize overhead costs and reduce where appropriate while committing resources to areas where we see future growth.

In total we have cut approximately 100 positions, again our cost reduction efforts in October. This should be worth approximately 10 million in annualized savings after all severance costs are considered. We have also achieved nonpeople savings of approximately 2 million per year. Lastly we have targeted additional savings of approximately 2 to 4 million for the remainder at this year. We have a number of actions under way to achieve these savings.

These savings are important to us for two reasons, first they free up resources to support other investments that we need to make to grow and to provide the highest quality of services possible. Second, and most important, they enable us to achieve our profitability goals as a firm.

The fifth are that we discussed last time was focus. I think it especially important to understand focus in the context of larger deals we are bidding on, and in many cases winning. As our business continues to grow and we pursue and win larger deals, the need to keep our business focus will only increase. With this priority in mind, we eliminated three small non-core practice areas last year and we continue to be diligent in assessing our underperforming areas. At the same time we are expanding our efforts in core markets where we see substantial growth opportunities.

The first five priorities I've laid out are ambitious. In the last couple of months we've made some real progress. We've got the right organization and team in place. We've instituted a rigorous quality assurance oversight processes. We've reduced costs and made strides in underperforming areas, and we have focused our business particularly in light of the larger outsourcing and technology opportunities that we see. In the coming months we will continue with these programs.

All of these actions steps culminate in the last area of discussion, which is growth. With much accomplished to date, I'm turning my efforts with much more vigor to revitalize and improve our sales and marketing processes over the coming months. We are doing two things to push growth. First we are reinforcing our basic marketing practices and habits to get more people in front of clients to get more people thinking about marketing.

Second, we are expanding our internal capacity to sell. We have identified several areas for priority attention, we are adding additional marketing and delivery resources, we are putting in place more specialized marketing tools and programs. We are making additional investments in new technology solutions and services. We are also exploring certain strategic acquisitions. I will continue to update you on our overall management efforts in the months to come and in our overall action plan.

Let's move on now to a discussion of deal flow. I will start with our pipeline and rebids. As I indicated earlier, year-to-date contract wins as of January 27, 2005, totaled 447 million, which includes the British Columbia contract compared to 134 million reported at January 30, 2004. New contracts pending were awarded but unsigned were 78 million versus 95 million reported for the same period a year ago.

Our pipeline remained stable with new opportunities in all stages of development. At January 27, 2005, the pipeline totaled 1.16 billion versus 1.02 billion reported for the same period last year. At January 27th, proposals pending accounted for 559 million, proposals and preparation were 48 million, and RFPs tracking were the remaining balance of 553 million.

Moving to rebid and option exercises. To date we've been awarded one small rebid and as I told you earlier, we had been notified of award of one of our larger contract rebids totaling close to 100 million over five years. We will provide further details on this win upon completion of the final negotiations.

Additionally another contract that was up for rebid has been extended to September and as a result the client has canceled the procurement. That leaves us with 10 contracts pending rebid for the remainder of fiscal year '05. In terms of option year exercises to date clients have exercised option years with 10 contracts and we have 18 remaining.

In conclusion and overall, I'm pleased with our first quarter results and where we stand at this point on our prospects for fiscal '05. We continued to push forward with the six key priorities I've outlined for the year. We have had some important wins and we have significant opportunities ahead of us. I think we are clearly moving in the right direction.

With the initiations of dividend, we've opened the stock up to an entirely new base of shareholders while at the same time creating value for current holders. We will be opportunistic with our current stock repurchase program and we'll continue to keep our sites open on potential acquisition candidates that complement our core businesses. And above all, we will be relentless in managing our business by balancing resources with demand as we pursue new business opportunities.

We've got some good momentum going and I'm confident about our future prospects. Rich and I are excited to be working with a team that is intent upon moving the business forward.

And with that, I'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) Jason Kupferberg with UBS.

I wanted to just start by talking about the pipeline a little bit and appreciate the color that you gave in your prepared remarks. But if you could add a little bit more in terms of quantifying to some degree how average deal sizes have changed and sales cycles -- those two elements would be helpful because I guess they kind of go hand in hand for your comments, Lynn.

I'd say two things. Obviously the deals are getting bigger. We've gone as I said before for deals that were in the several million to lower to now we see ourselves more and more in multi hundred million dollar bids. So obviously, deals are getting bigger. These tend to be the deals that have both a large technology and large operations component. So I'd say deals are getting bigger and obviously the bigger deals comes a real stretching out of the time. It seems like each of these procurements are now being measured in months. Sell cycle starts several months before the procurement. The proposal takes a month or two or three or four and then we are seeing these three and four month after periods. So it's hard to predict when they are going to happen.

But I would say two things deals are getting much larger and the time to get them to conclusion is taking a lot longer also.

The sales cycles are now several quarters, roughly versus maybe historically they were more like one to two quarters?

It seems in these large, large multi hundred million dollar bids, which are certainly the ones we are focusing on, you're getting to sales cycles that are starting to have almost a year-long impact. They are running that long.

Can you comment specifically on the big deal down in Texas where you guys are subbing to the extent of what you are thinking in terms of the timing there? Obviously it looks like we've been pushed out a little bit but do you think we're getting closer in terms of a decision there? If you could also comment on what MAXIMUS's revenue potential might be? I know you already have some enrollment brokering services with the state but what kind of upside potential there might be? Thanks.

As you know, the process is going forward. The proposal has been submitted. The state is in a very intense evaluation process. They really control the schedule as to when that process will be done. I really don't know when it's going to end. I think they are probably getting down that path. But that is really theirs to call. It's really their process.

Is it really the politics of it that's holding it up at this point?

As I said before, you get into these big jobs and these bids, and the process stretches out and everybody's got an interest, internally and externally they kind of finds their way to put their impact into the process. And that is probably going on in Texas. It goes on everywhere. It makes it somewhat hard to predict when it all comes to a conclusion

And just one last one for Rich. Could you comment on for fiscal '05 your revenue target? In terms of visibility I mean, how much of that target is kind of in your backlog already versus what you still have in terms of a wedge, if you will, to fill in some new business?

Jason, we provide a metric that I think is the best metric in that context. We do it once a year at the beginning of the fiscal year. We talked about it last on the call. My recollection is we said 80 percent of our forecasted revenue was in the form of backlog.

So no material change since then since you met your projections for the first quarter?

We really just don't update it every quarter. So it's kind of an annual calculation then we take it from there and do pluses and minuses for wins and losses etc. And if we need to retriangulate the forecasted revenue, we will do that but we do just don't refresh that particular metric every quarter.

Thanks, guys.

Michael Lewis with BB&T Capital Markets.

Good morning. Rich, can I ask you a question about margins? Do you think that we will see a sequential and year-over-year improvement in like operating margins and EBITDA going out over the next few quarters?

Mike, I think that's a good question. Let me just give you my view on that. And to frame the question for everybody, this quarter the operating margin was 9.7 percent, that was 100 basis points down from the comparable quarter last year, and actually 110 basis points down from the preceding quarter. We're still looking for sequential improvement in margin percentage for the full year. As we said at the beginning of the year, we're working to pull that up. Mix will be a big driver but I'm hopeful that is quarter is in the lower end of margin for the quarters during the year.

Okay. Can we get an update regarding the California Health Care options contract and is this still expected to reach about 35 million in contribution '05?

I think that is reasonable. It's still pretty much where we expect it to be. Performance this quarter was pretty much on track. In terms of the question of the status, it's a continuing contract. It is not clear whether the state will rebid it or continue on a sole source basis. We do not know that yet.

Thank you very much.

Bill Loomis with Legg Mason.

Thanks a lot. You updated us on the RICA (ph) piece. You said in last quarter it was 15 rebids you had in fiscal '05; now you say 10. Can you update us on what the remaining total contract value was? You said 210 million last time, and also you had 23 million revenue impact in fiscal '05. Can you update that figure as well?

Bill, let me take that as an opportunity to talk about the rebids and the options, and in both categories I think we've got what I consider to be, although it's interim results for the year, but very much in the good category. To get the metrics straight, as we entered fiscal '05 we had 13 contracts up for rebid during fiscal '05. We previously said 15. That's a correction. We had 2 contracts that were actually option renewals as opposed to rebids. So the starting point is 13 contracts and refining the total contract value that's on the table in fiscal '05, and appreciate that as we go through, the client will adjust the scope and it will go up and it will go down, but it's pretty much what we said before. But the more refined number is $218 million total contract value related to those 13 contracts.

So that kind of sets the table in terms of what's in play from a rebid perspective this year. And year-to-date, here's where we stand. Of the 13, we've won 2 of them. One of them has been canceled by the customer and, consequently, our work has been extended. So I think that's in the category of good. And of the 2 that we won, one has been signed; the other one is simply in award stage, but we are counting that as one. From a real highlight perspective, and I think this is the key takeaway, from the dollar perspective we've won 47 percent of what's up for rebid. Of the $218 million, we've won 47 percent. We have not lost any, so I think those are good steps.

Let me talk about options for a little bit. The metrics going into the year for options and I think these are unchanged from what we previously shared with you. We had 28 contracts up for option renewal this year and total contract value was $123 million. And of that we have signed 10 which represents $128 million total contract value. Hold on here -- we've signed 10 of the 28 and from a dollar perspective we've won 75 percent of what's up for rebid. And we have not lost any of them again in the excellent category.

Just one on DSOs. You talked about seasonality so I assume DSOs will be down in the March quarter and can you give a magnitude?

My thinking is on DSOs which trended up to 99 days including the long-term, we had a couple days impact from the seasonality. So if I assume that we're going to get that back and won't have the seasonality factors in March it gets us back to where we had been in the prior quarter. And I think that's the right frame -- we still have to work receivable, the nature of receivables. We have to work them real hard. I was pleased to see this quarter and the team really focused on getting some of these unbilled into the billed category. So I'm a bit happy that the increases in the billed category because I view billed as one step closer to being collected than unbilled.

So the challenge in March will be to work on those billed and also keep a lid on the unbilled. I'm hopeful that the team is going to get you to focus on it and we can make some improvement but I think it's about two days from a seasonality perspective.

Thanks a lot.

Charles Strauzer with CJS Securities.

Good morning. Can you hear me okay?

Yes.

Just two quick questions. First, when you talk about the $100 million rebid you won on the Medicaid side. Any new costs associated with that contract that we should be building into our thinking and if there are, is that already in your guidance? Secondly, if you could talk a little bit too about the overall pipeline a little bit more and this is probably more for Lynn -- just in terms of the prior piece tracking, it doesn't seem to be that much a great year-over-year improvement but yet you are saying that there's larger contracts in there. Is there something -- are there more things coming down the horizon that you're hearing that could move the needle a little bit higher or whether you are dramatically higher?

Rich, why don't you talk first about the --.

Charlie to repeat what I heard as a question, you would like to know about the rebid that we recently heard about. Whether there's new costs associate with it? I'm not aware that there are significant costs associated with it in terms of capital investment or buildout. Its work we've been doing. So nothing material. And it is included in our guidance.

The second question was with respect to proposals and preparation, is that correct? (multiple speakers) Fees tracking relatively flat. Which is roughly flat over the quarters. One of the issues is that you have such several really large bids out there that we're tracking. And the size of these bids are so large that if we kind of put them in full value into the number, you'd see a pipeline that really jumps up. We're trying to keep kind of a perspective of relevance here. So we tend to factor all of our larger bids at a fairly modest about so we don't end up kidding ourselves internally by our pipeline.

So I think that yes, it looks very flat but some of the big opportunities are probably not fully stated in the opportunities and also the challenge for us is we see these big opportunities to make sure the organization is not so (indiscernible) -- the big opportunities we're not all swinging for the big home run. We were really pushing a lot of pressure internally on the other alternatives to make sure that we are continuing to put pressure on places that were more of -- I guess a little bit less intensive area of where the market is focusing on.

One quick follow-up. In terms of competition it seems like you are seeing a lot more competition these days than you have at any time really in recent memory. Is that comprised of a larger recompete cycle or is just that you're seeing some larger players kind of more downstream than they had in the past? What do you think the dynamics of that (inaudible)?

When you start to see large jobs that bring together technology and operations. Firms that may not have originally thought of themselves in those space, probably are reconsidering a little bit. That's what is happening right now. Areas that we have traditionally and historically been predominant, we are now seeing other players coming into it. So that is one of things that is happening. Bigger firms are coming into those spaces but because we were there first because we really have that kind of first hand understanding, that is our real strength. It's a home game for us. Other firms (indiscernible) come into our game and want to play in our space. So we're seeing a lot more competitors but they are coming to an area where we are pretty strong. So that is what you see happening right now.

Thank you very much.

Larry Lee with CIBC World Markets.

Just a couple of questions either for Rich or Lynn. On the consulting side it seems like the Revenue Services area has been in a point of weakness for a couple of quarters now. I'm wondering could you give us a rough idea of how much in terms of percentage of revenue for the segment Revenue Services contribute?

Rich, you talk about the percentage and I'll talk about the (inaudible).

I'll be glad to do that. The relative size of our revenue service practice, it's about a $20 million a year run rate from a revenue perspective.

In terms of the situation there, it's obviously a source of concern to us. Historically this has been one of our stronger areas of performance in terms of profitability. It's gone through some tough times. I think what happened internally, we probably didn't respond quick enough to changes in the marketplace, changes in competition, changes of favorable pushback and so on. We've gone through quite effort internally to turn this business around. First we looked really hard -- is this a business worth saving? And we think it is. It is a strategic business. It focuses on getting more revenues. States are very concerned about getting more money. So we think strategically it's still a strong business.

However if we don't make it go, we'll change our strategic assumptions certainly but in terms of turning the business around, we've done a couple of things. We've gone through all of our projects, tried to identify those that are clearly have potential to go further with all that pressure on them. Those that we are certain about we scaled back. We assigned staff to keep places. We've cut backs staff. We made changes in management. And we've got a pretty active plan going for it.

Now we have two states -- I don't want to mention by name who have we have really put pressure on big opportunities and each of these two states, one in particular we think we have got almost to the final stages now with federal approval with some pretty substantial recoveries. If those recoveries happen, along with the other things we do, we project that this business will start in the second quarter going forward will again be profitable. But we are watching it really closely. It's a concern to us -- a big concern. But we've made a real effort to respond to it. It is the biggest reason our Consulting Segment is as low as you saw, the number that you received yesterday.

Thanks. And just one follow-up on that point. Lynn, as part of your six-point plan that you outlined before, two of those points are sort of refocused on your core practice areas and business unit profitability. You had mentioned that last year, you did shut down a couple of small-business lines that you didn't see opportunity in. Is that process as you see it complete and done? And the remaining portfolio businesses that you have you are pretty happy with and that's what you are going to go with going forward or would you say that you're always going to be constantly evaluating whether or not something really belongs in that portfolio?

It's a continuous process. If somebody is not performing and we don't see the potential to perform in the future, or it's not a market we really want to be in because of its potential, we're not going to stay there. So it's a continuous process. We think we've got through a pretty hard process internally to look at what's working and not working. We've cut out some pieces that we were not satisfied with either because the performance or bidding our strategic bid. We've put in a place across a number of practice areas improvements that I just talked about Revenue Services but we have had similar programs in other areas. We're starting to see turnaround in all these areas and some of the stories are pretty good. And so right now we believe we're on a good turnaround path. If somebody doesn't perform, of if it's not working then we are going to have to do something about that. That process kind of continues.

On last follow-up question for Rich if you don't mind. I think some of the cost savings and initiatives that you have put in place should total up to roughly anywhere from 14 to 16 million in annualized savings including layoffs and non headcount reduction related cost savings. How much of that could be realized in this fiscal year?

I don't think we had much of it that's going to be realized in this first fiscal quarter. That's a good question because the real answer will depend upon how much additional cost we have to incur or reallocate for growth opportunities. Obviously all of it won't be bottom-line focused. We're hoping the lion's share of it will be but ultimately the total fraction will depend upon the offsets from other dollars we have to spend as it relates to the growth opportunities. And obviously the big swinger would be some these larger contracts that we're working on, Larry.

Just to further respond to your question. We're really trying to push places where we think there are opportunities. At the same time, we are trying to eliminate any cost that we just don't need. So it's kind of a parallel process. And obviously if the success of our cost reduction right now the savings we have -- you are seeing are built into our forecast going forward. If the situation improves you'll be the first to know about it in a formal way but that's where we are right now on that.

Thanks, everyone.

Matthew McKay (ph) with Jefferies.

Good morning guys. Maybe just a first question here. If you could just give an update on the effective ramp and margin impact just on the BC contract?

On the British Columbia contract the way I would look at it is it kicks in from a revenue perspective in the third quarter (technical difficulty) and will be pretty much the same run rate in the fourth quarter. That contract approximately should have revenue of about $6 million a quarter, $24 million a year. And we've also said that the loss and I think it's going to be pretty evenly split between Q3 and Q4 will be about 3.5 to $4 million in that period of time. So obviously that's going to pull down overall margins within our operations group but again that being said, I still expect that we'll be able even net of that have improved operating margins in Q3 and Q4. Is that helpful?

That is helpful, thank you. And also just with the reduced headcount here, were there any one-time charges (inaudible)?

Not any meaningful one-time charges. There was a net-net small charge in first quarter and there were -- we spent some money to basically help people find new opportunities which is the right thing to do. So placement firms which is probably the largest one-time charge plus severance costs but when you net out the savings because a good portion of the reductions happened in the early part of the quarter, it was a net expense but it wasn't very meaningful. It was less that $0.5 million.

I guess a question on the second-quarter guidance. Assuming that SG&A stays relatively flat given the revenue guidance here, your gross margin seems to be maybe even a slight improvement over the December quarter even though you probably have a less of a mix of license revenue there. Is there something I'm missing on the gross margin?

Well we don't really guide to gross margin on a quarter-by-quarter basis. But I would tell you the big drivers would obviously be seasonality in this December quarter. It's a key factor. And savings start to kick in in this second-quarter.

Okay. Thanks.

Roger Chuchan (ph) with Morgan Stanley.

I'm wondering if you can talk about uses of cash now that you've initiated dividend? Does that change your thinking at all in terms of stock buyback?

No, not at all. I think that's one of the advantages as it relates to the dividend. It's something we clearly think we can afford. I think MAXIMUS is well-positioned to do a dividend considering the liquidity that we now have, considering our capitalization, i.e., virtually no debt. And also the fact that we've got a pretty good demonstrated history of generating cash flow year-over-year and we think the prospects look pretty good to continue to do that year-over-year.

So, we think there will be opportunistic times when the stock repurchase program will continue to be a good thing to do. And we also think strategically that mergers and acquisitions are very important in order to maintain our position and improve our position, grow our Company, taking advantage of market opportunities. So we think we can afford to do all of those things as we move forward while we implement this dividend.

Thank you.

It's Rich Glass, if I could follow up here. Did you guys increase your savings estimate? It seems like my impression is you are using higher numbers now?

Rich, when you say savings estimate?

Cost takeouts, etc., that you --?

We had some numbers in the first quarter that reflected the efforts we had made at that point in time. That process has continued internally. So that's why the number has gone up. And also there is one last component of that program we're doing right now. We have an internal process in place looking at several other functions. That's why the number is -- if that's what you are asking -- why the number we presented today was a little higher than it was in the first quarter, is that your question?

Yes. So the answer is -- it sounds like yes and it could go up from here is what I'm taking away?

Yes.

Good news. Thanks, guys.

With that, that concludes our call for today. We would like to thank you for joining MAXIMUS on its first-quarter 2005 conference call. And have a good day.

This concludes today's conference call. You may disconnect at this time.