Maximus Inc (MMS) 2005 Q2 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference facilitator today. At this time I would like to welcome everyone to the second quarter 2005 MAXIMUS earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and- answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. I would now like to turn the call over to Lisa Miles, Director of Investor Relations. Thank you. Ms. Miles, you may begin your conference.

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

Before we begin, I would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions, and actual events or results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-Q, filed with the SEC on February 8, 2005. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events. [Inaudible question - microphone inaccessible] Good morning, and thank you joining us. For today's call we have posted a presentation for you to follow along with. The presentation can be found on the MAXIMUS website 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 would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions, and actual events or results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-Q, filed with the SEC on February 8, 2005. 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 will turn the call over to Rich for a discussion of our financial results.

Good morning, and thanks for joining us. Last night we reported second quarter results that are in line with expectations. We reported total revenue of $154.1 million in three segments, breaking down as follows: consulting representing 16%, systems [inaudible] percent, and operations accounting for the remaining 62 [inaudible] total revenue. Net income of $9.5 million, with earnings per diluted share of $0.44. Net cash provided by operating activities was particularly strong, totaling $27.1 million for the quarter. Cash, cash equivalents and marketable securities remained healthy at $161.3 million. And just a quick note on the balance sheet. Both deferred contract costs and deferred revenue increased as a result of the ramp-up in British Columbia. This contract had deferred contract costs of approximately $5 million and deferred revenue of approximately $7.6 million.

Moving into the segment reporting detail, results by business segment were largely as expected. Consulting segment: second quarter consulting segment revenue totaled $25.4 million, compared to $24.8 million in the second quarter of last year. In this segment we saw strong revenue growth from both the education systems and education services business lines. This was largely offset by continued weakness in the management and financial services practice. A year-over-year decline in operating income [inaudible] of the segment [inaudible] performance [inaudible] practice, improving its performance. Systems segment: revenue for the systems segment totaled $33.7 million, an expected decrease sequentially from the first quarter and [inaudible] explained on our last call, had an unusually high amount of license sale activity in first quarter drove revenue and pushed operating margins in the system segment 14.5%. [Inaudible] segment's second quarter operating income decreased sequentially for the first quarter $3.1 million, or normalized operating margin [inaudible]. On a year-over-year basis, revenue and operating margin were also lower, as expected. Second quarter fiscal 2004 systems segment was at the height of project cycles on a number of large jobs, including the transportation workers' identification card pilot program, two large ERP jobs, our NASA contract, and a couple of other contracts that provided significant revenue and profit, and operating margin approaching 14%. And this is above typical margin levels. But again, we experienced peaks and valleys in this segment as a result of licensees and project job cycles.

The operations segment: moving into the operations segment, second quarter revenue increased 6% to $94.9 million, compared to revenue of $89.5 million [inaudible] in the second quarter of 2004. We achieved this growth despite [inaudible] the grow-over quarter for our California Healthy Families project. Second quarter operating income for the operations segment [inaudible] 21%, $10.4 million compared to $8.5 million the same period last [inaudible]. Consulting segment operating margins, 10.9% in the second quarter versus 9.5% in the second quarter last year.

The operations segment consists of both health services and human services, and I will give you the top level details on both. Revenue for health services in the second quarter grew 17%, $59.4 million compared to $50.7 million [inaudible] period last year. This revenue growth was driven by expansion on current contracts, new work in the federal market, as well as a larger contribution from California Healthy Families. Health services operating income for the second quarter was $8 million, a 13.4% operating margin compared to $6.4 million, a 12.7% margin in the second quarter of last year. Consulting increases in margin [inaudible] the second quarter of last year, driven by contract expansion in certain western and eastern contracts. Health group continues to perform at or above our expectations, [inaudible] market remains [inaudible] opportunities.

Moving over to the human services group, revenue for the second quarter was $35.5 million, compared to $38.8 report for the same quarter a year ago. Second quarter operating income for the human services group, 2.4 million versus 2.1 million last year. A year-over-year decline in revenue is primarily the result of the loss of [inaudible] child support contracts in the prior year. However, the trends in child support are encouraging. Improved operating income and operating margins sequentially follows year-over-year, so we have the group headed in the right direction. New leadership we brought on made a significant contribution to this improvement, and while it is early on, I believe this is a good example of the improvements that can result from focused attention [inaudible] getting improved performance [inaudible].

Moving on to operating margins, operating margin for the second fiscal quarter was 9.7%, compared to 10.2% reported for the same period last year, and the same as the preceding quarter. The year-over-year decreased in margin is mostly due to the softer performance of the consulting segment, lower but expected margins from our systems segment, the improving margins we're experiencing from our operations segment. The second quarter SG&A expense decreased in absolute dollars and as a percentage of revenue, both sequentially and year-over-year, and reflects our continued focus on SG&A cost management. We incurred approximately 600,000 in fiscal 2005 in legal expenses related to a lease guaranty litigation, of which approximately $400,000 [inaudible] incurred in the second quarter. The Company strongly believes it's not liable under the guarantys [inaudible] vigorously contesting any claim [inaudible]. Estimates for these higher ongoing legal expenses have been built into our forecast for the remainder of the year. You will note that interest and other income was increased this quarter to $703,000. Part of the increase is due to higher interest rates earned on our invested cash balance and also the minority interest share of certain start-up expenses [inaudible] Israel project, which totaled approximately 81,000. Additionally, first quarter we incurred a loss of $288,000 related to the writedown of the marketables.

Moving into balance sheet metrics, total accounts receivable for the quarter were $163.6 million, of which $115.5 million was billed. $48.1 million was unbilled. Accordingly, DSOs remained at 99 days, including $4.4 million in long-term accounts receivable and other assets. Within receivables, we were successful in that we reduced our billed A/R. However, unbilled A/R increased to $48.1 million. This had been running into the $40 to $42 million for the last four quarters. As we discussed in the past, we -- we -- we contracted some new work in our technology areas, where milestone billings are common. This has been the factor on the trend of [inaudible] of A/R. Almost half of this quarter's increase in unbilled A/R was due to a single contract for the implementation of a large student information system. There are key milestones that we will hit in the third and fourth quarter that will allow us to bill out approximately $5.5 million on this contract, but we will also record a similar amount of revenue that will be milestone-based. As a result, we expect the unbilled balance related to this one contract to remain essentially unchanged, at least in the short term. While we note that DSOs remain within our previously noted target range of 90 to 100 days, we're not satisfied to allow this key metric to consistently challenge the upper end of the range. [Inaudible] must deal with existing milestone-based terms in certain cases, however, we are aggressively pursuing actions to reduce DSOs, including our unbilled balances.

[Inaudible] cash balances, stock repurchase cash flow from operations. We ended the quarter with $161.3 million in cash, cash equivalents and marketable securities. Cash from operations was strong at $27.1 million for the second quarter and $37.2 million on [inaudible] basis. The sequential increase in cash from operations first quarter, attributable to an increase of $5.3 million of deferred revenue and the timing of payables, increased approximately $8.7 million over the quarter [inaudible]. I would expect the payables aspect of this may reverse in our next quarter, depending upon the timing.

During the quarter, the Company purchased approximately 102,000 shares of MAXIMUS common stock as part of our ongoing repurchase program, and as of March 31 we had $28.8 million available under this program for future purchases. In terms of cash, uses of cash, we will continue to invest capital in ongoing operations in the business [inaudible] for our share repurchase program, recently initiated quarterly cash dividend, and we will consider appropriate acquisitions.

I'll talk a little bit about FAS 123(r). As you are aware, the SEC has amended the compliance dates for implementation of FAS 123(r). [Inaudible] amendments would require MAXIMUS [inaudible] as a start date of our fiscal 2006, that is October 1, 2005. Expected impact is approximately $0.04 to $0.05 per quarter. Presently our timing and implementation of FAS 123 remain under [inaudible].

On to guidance. Current full-year estimates, which assume we do not expense options, remain unchanged, with total revenue expected of 625 million to 650 [inaudible]. Earnings per diluted share [inaudible] $1.78 to $1.88. The second half of the year we expect improved results from our consulting segment and our operations segment. We expect the improvement in the operations segment primarily in the fourth quarter, even after factoring the start-up expenses [inaudible]. This is because we have some seasonal factors that are likely to come into play that follows the continued pull of the new work expansion [inaudible]. Specifically, in our human services group we have seasonal tax credit work in the second half of the year that has excellent margins. Also note that our health services group has some annual enrollment costs that will spike revenues, but not much margin dollars in [inaudible] quarter, and this tends to recede fourth quarter. In the systems segment we anticipate the second half of the year will run at similar levels. The first half of the year, however, this segment does benefit from license revenue and profit, the timing of which can fluctuate.

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

Good morning, everyone. As you know, I have been in this job about six months now. Today I would like to give you an update on how we are doing, our successes and the challenges that remain. On my first call with you, I indicated this is primarily a transition year for MAXIMUS. I have been working hard to achieve two overarching priorities. The first objective has been to strengthen our basic management and operating foundation and thus prepare us to achieve increased profitability [inaudible] grow significantly. My second objective has been to win new work [inaudible] solid backlog [inaudible]. We have made significant progress on both of these objectives. At the same time, we still have some additional work to do. Overall, I believe we are off to a good start. With these points in mind, I organized my presentation today down to three points: our highlights for the quarter, our success in implementing the six-point plan that I have put in place to strengthen our basic foundation and sales results, and our prospects for growth.

All in all, we have continued to make progress this quarter. [Inaudible] there are places we must continue to improve. Our results were in line with previous expectations. Our cash position continues to be healthy. [Inaudible] capital [inaudible] flexibility for the future via our first quarter cash dividend. It continued to be a very strong sales year.

With respect to sales, we are starting to see significant results in a number of areas [inaudible] the potential for considerable long-term growth. Most important, many of you are well aware, I've recently been selected as a member of the [inaudible]. [Inaudible]. The contract is still negotiation. We cannot yet add it to the win column. However, it is a large contract that will add substantial revenue in the future. It will also help position us for [inaudible] growth in the future. A number of other states appear to be considering similar initiatives. In addition to this contract, we have also won major outsourcing and technology contracts over the past quarter in Massachusetts, San Diego, California, Israel, and the province of Ontario, Canada. We also closed major ERP projects in Miami [inaudible] State of New Mexico. Overall, our total awarded and awarded but unsigned contracts are already over $1 billion for the year, [inaudible] the largest total sales year we've ever had at [inaudible]. [Inaudible] provides us with a significant growth platform for fiscal year '06 and [inaudible]. While all of these successes are good, we want to do better on a number of fronts through a number of cost reduction and productivity efforts. We have some work to do to [inaudible]. Likewise, [inaudible] we want to improve our performance [inaudible].

[Inaudible] highlights, and then I'll give an update on steps we are taking to strengthen our basic operating [inaudible], focusing on my six-point plan. In my first analyst call six months ago at the beginning of this fiscal year, I laid out a six-point plan to strengthen our basic [inaudible] operating foundation [inaudible] help us return to [inaudible] performance level. You may recall this plan covers the following six items: first, take steps to strengthen our organization and [inaudible]; second, implement an improved quality of service program; third, improve business unit profitability across [inaudible]; fourth, implement an across-the-board cost management [inaudible]; fifth, better focus our efforts on core practice [inaudible] in place to allow us to [inaudible] long-term growth. We have made progress in all of these areas. Today I'll update you on our most important accomplishments [inaudible].

With respect to our organization and management, we have completed several key hires in recent months [inaudible] our efforts to strengthen the organization and upgrade the caliber of our management team. We have a couple of active searches that [inaudible]. My goal is to bring in additional talent with significant industry experience [inaudible] after our larger outsourcing and technology opportunities. In health services, for example, we brought on two industry executives to join our [inaudible]. [Inaudible] came to MAXIMUS from the California Association [inaudible] Health Plan, where he was President and CEO. He was tapped to be our largest regional health [inaudible]. [Inaudible], who most recently served as President of [inaudible] business lines [inaudible] in health care. [Inaudible] bring a broad set of skills and deep experience in major program operation, as well as extensive knowledge in health care delivery [inaudible]. In revenue services we changed leadership [inaudible] from the internal ranks. Tom is an expert in Medicaid [inaudible] and also one of our most effective managers in managing large-scale projects [inaudible] projects [inaudible] details. This is the type of personality that we need to [inaudible] revenue service [inaudible]. [Inaudible].

Hi. This is Lisa Miles. We understand we're having technical difficulties, so we're just going to back up a little bit in this presentation and [inaudible] start with just a few [inaudible]. We apologize for the inconvenience.

Okay. Okay, we'll continue. In terms of business unit profitability, we made progress over the past several months stabilizing under-performing units, with several practice areas turning the corner. You are all aware that our Australian business, MAXNetworks, is now back on track and profitable. Asset Services, which had been struggling as a standalone business, is now contributing to profitability as a product line in assets solutions. Additionally, Child Support Enforcement, which also has [inaudible] in place, is showing signs of improvement and trending in the right direction. In contrast to this success, we have yet to get our consulting practice back on track. We're attacking this challenge on two fronts. First, we have completed a series of cost-reduction efforts over the past several months. We have short-term plans to further reduce costs in certain areas. Second, we have completed a detailed review of all our consulting jobs and our biggest opportunities to develop a priority list of must-wins. We have a number of opportunities that, if successful, have the potential to significantly turn around our consulting results for this year. Accordingly, we have developed a specific action plan for each opportunity. We have assigned one of our strongest people to lead each effort on a single-minded basis. And particularly, we have six major revenue maximization projects where we have pretty much completed all of the work needed to get us paid, where we cannot declare revenues until we receive final federal approval for our efforts, given the contingency nature of these projects. We have been working hard on these projects for months. The federal approval process continues to stretch out much longer than we anticipated. We have recently had a major breakthrough in the state of Pennsylvania. We are working to see the same results in our other project -- our other projects.

With respect to cost reduction and cost management, we have made considerable progress. As you know, we completed a major cost reduction effort in the fall. We are continuing with additional efforts, as I just discussed. As you may recall from our last call, we cut approximately 100 positions over the first quarter, as well as reduced non-people costs worth over $2 million per year. We estimate that the total value of these efforts will be approximately $6 to $8 million on an annualized basis. We should start to see the full value of these savings in the third and fourth quarter, once all severance costs are eliminated. In some cases, these savings have helped us improve our overall productivity, as evidenced by some of the major turnaround successes that we have achieved. [Inaudible] we have used the savings that we have achieved to help fund the additional resources that we've had to add to serve our new projects in British Columbia and elsewhere, and our new growth opportunities. We continue to monitor our costs and spending on an ongoing basis. Based on this effort, we are currently implementing a series of additional profit improvement efforts. We have targeted a goal of at least 4 million in additional savings as part of this effort. Our goal is to get our overall operating margin north of 10%. We want to accomplish this through our turnaround efforts, our cost-reduction efforts and our new sales.

With respect to focus, we are currently taking three major steps to best focus our priorities and attention on the businesses and opportunities with the greatest opportunities. First, we have put in place a firmwide task force to focus on the large eligibility outsourcing and technology opportunities that exist across the country. This effort is being led by Bruce Caswell, who is the head of our human services practice. Bruce recently joined MAXIMUS after a successful career with IBM's consulting unit. He is being assisted by John Lau, who has had a key role in the large Texas effort that I discussed earlier. We have also assigned an additional task force team to focus on new opportunities in the health care area, leveraging on our recent wins in California, British Columbia, Massachusetts and other states. This effort is being led by John Boyer, who is the head of our health services practice. John and his team have led -- had the lead role in our recent health care wins.

In addition to focusing priority attention on the largest opportunities available , we have also doubled our efforts in other areas where the timing and certainty of wins is more certain, to avoid putting all of our eggs in the big outsourcing and technology basket. We have seen a number of significant recent results in such areas as ERP services, education and asset services. In addition to focusing on the businesses with the most potential, we have also continued to look close at practices that are not succeeding as well as we like. To this end, we currently are conducting detailed reviews of certain smaller practices to determine the best future strategy for these practices. Our first priority is to grow these practices. If that is not possible, we are prepared to take other actions.

Finally, with respect to growth, we've taken specific actions to better position us for the much larger opportunities that we're seeing in the marketplace. In this regard, we have put in place a new quality-control process for our large outsourcing jobs, recognizing the added set of quality-control challenges that these jobs represent. We've also made significant investment in additional technology resources to support these larger efforts. Lastly, I've put in place a number of targeted marketing efforts to pursue these opportunities I just discussed.

Overall, I feel good about all of the efforts that we -- we have -- we have started to improve our basic business. We plan to continue these efforts for the months to come. We also plan to expand our efforts to strengthen our DSO and profitability efforts, building on some of the themes that Rich addressed in his remarks. I started our six-point effort to ultimately improve our prospects for growth, to take advantage of trends that we see in the market. I believe that we see a number of good signs in our recent sales successes and the marketing efforts that we launched.

I spent the last two minutes talking about our basic foundation-building efforts. I now would like to spend a little time on our growth prospects. The potential win in Texas is by far our most significant sales effort so far this year, and the one that offers the most long-term marketing promise. In addition to this opportunity we believe there are a number of other states looking to seek similar kinds of services over the next year. We are currently actively targeting opportunities in ten other states.

Turning to other opportunities and successes, as I indicated earlier, on April 1 we launched operations on a ten-year, $268 million British Columbia health benefits contract. On another front, our ERP group has had major success in bringing on new work, with nearly $50 million in new sales since the start of the fiscal year. They are working on major new jobs, most notably in San Francisco, Miami and New Mexico. We are currently tracking at least three other major ERP opportunities. In addition to our new wins, we have also been successful in [inaudible] existing agreements in our traditional markets. In Massachusetts, where we just won a $72 million rebid, our current contract has been expanded to include a variety of new provider services. Because of our strong track record in our San Diego workforce services contract, we recently picked up a new region and unseated a previously entrenched incumbent. Through this expansion, we are nearly doubling the value of this two-year contract to 30 more -- $4 million. We have also increased scope on other large health contracts in New York, where we are working to enroll new populations into Medicaid and managed care.

In addition to these recent successes, we are starting to see progress and opportunities in several other new market areas. For example, we have [inaudible] our interest in the federal markets. While we have maintained a presence in the federal market, which today represents approximately 7% of our revenue mix, we are now pursuing opportunities in this market in a more meaningful way and with increasing success. [Inaudible] federal opportunities are in health, as a result of new legislation which has been prompt -- which has prompted significant changes to both the Medicaid and Medicare programs. In this case, we can translate our program knowledge in the state environment and deliver similar services to burgeoning federal health market. To this end, we have focused on specific federal sectors, such as the Health and Human Services Department, the Department of Defense, and others that are agreeable to outsourcing new health management opportunities. We are excited about some of our early wins in these areas, which we believe offer significant expansion potential. For example, our Medicare drug card appeals contract is a transitional federal program put in place prior to the full implementation of the new Medicare Part D program. This is an important strategic win that positions us well for future projects that come up for bid. MAXIMUS is also one of eight vendors under the QIC, or qualified independent contractor [inaudible]. Under this contract vehicle, we have won a $20 million, three-year contract with the federal Department of Health and Human Services and Center for Medicare and Medicaid Services. Overall, the federal -- federal health market offers many future opportunities. We could see a pickup in RFP flow in the coming months, related to federal program changes. We think our prospects in this area are bright.

We have also successfully expanded into new geographic markets. In Canada, we started out with one primary child support contract, the Family Maintenance Enforcement Program. We further expand this area with the recent notification of a [inaudible] on a $7 million job in Ontario to develop a new case management system for the [inaudible]. In addition to our successes in Canada, we have also been awarded a $15 million contract in Israel to run a pilot welfare-to-work program on a privatized basis. We are now working through a startup phase of this project and expect an operations launch of August 1. We believe this project has the potential to grow substantially and expand to other regional markets. As a final point on our sales efforts, we are also targeting major areas in K through 12 education. We also see a growing number of opportunities in the state human services environment.

Overall, our sales in fiscal 2005 set us up with a good platform for growth in 2006. As I've indicated, we have been successful in winning larger deals and expanding current contracts. Most of these will start in 2005 and will be running at -- and will be running at full-bore in fiscal year '06. British Columbia, for example, is expected to become profitable with the start of 2006, because we will no longer have the higher project costs that account for the expected loss in 2005. This will have a significant impact on our EPS growth in fiscal year 2006. Overall, we believe that we have added over 100 million in new annualized revenue as a result of our wins to date in jobs such as British Columbia that are just starting. This adds over 15% of our current revenue base. This assumes, of course, that we will successfully complete our current negotiation efforts in Texas.

And with that, let's move on to a discussion of deal flow, starting with pipeline. Our year-to-date contract wins as of May 3, 2005 totaled $634 million, compared to 219 million reported April 29, 2004. New contracts pending, or awarded but unsigned, were $452 million, versus $242 million reported the same period a year ago. As I indicated earlier and as these numbers confirm, MAXIMUS is on target to achieve its first-ever $1 billion sales year. Our pipeline remains stable, with many new opportunities in all stages of development. On May 3, 2005, the pipeline totaled $1.1 billion and consisted of proposals pending of $199 million, proposals in preparation of $287 million, and RFPs tracking with a remaining balance of $587 million. In terms of rebid option exercises, of the 13 rebids up in fiscal 2005, to date we have won four. We have received contract extensions on three and we have six remaining. Total contract value on the 13 rebids is approximately $190 million, and we secured about 110 million of that amount. In terms of option-year exercises, we had 28 contracts with option-year exercises, and to date our clients have exercised option years on 15 contracts, and we have 13 remaining. The 28 options had a total value of approximately $145 million. To date, we've won about $120 million worth of contracts. Our success year-to-date in rebids and options translates into up -- over $210 million of annualized revenue .

In conclusion, I would say that I am pleased with some aspects of our results to date for the fiscal year, but I am not satisfied with others. Namely, I would say that the Company's overall performance in the first half of fiscal 2005 has met expectations. We're also starting to see some sales results that could bode well for the future, especially if we are successful in our efforts to improve our overall profitability. I am sure we have some challenges, but we also have some significant accomplishments. Namely, we've hired -- namely, we've hired a number of new outstanding people with extensive experience to lead key parts of the organization. We have taken steps to improve our profitability and reduce our costs as necessary. We have also been successful in turning around a number of previously troubled practices. We have developed an exceptionally strong health practice, as they win large jobs. We've also had a number of successes in the services area. As a result, we're moving into new markets with bigger contracts that have longer recurring-revenue streams. We have added significantly to our revenue base for next year and beyond. And finally, we are starting to see success outside of our traditional health and human service efforts, in our federal large outsourcing and technology space, to protect us against the competitive pressure that exists in this space.

All of these actions and results are good, and I remain positive about our opportunities and our future. At the same time, as I indicated earlier, challenges also remain, and there are still many things that we need to accomplish. In particular, we have to improve our DSO results. We also have to improve our performance in our underperforming practice areas, especially our consulting practice.

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

At this time I'd like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mike Lewis with BB&T.

Good morning. I -- I was falling out of the -- out of the conference call here and there, and so I apologize for any repeats here, but I thought it was a nice quarter. I believe you and the management team, Lynn, have done a great job so far in this restructuring, but can you discuss any areas that have not tracked as quickly as you would have anticipated by this point? In other words, are there any divisions that continue to disappoint you at this time?

Yes. Clearly, our consulting practice concerns me. As you probably saw from my numbers, our operations practice is going great guns, our system practice is going okay. Our consulting practice just has not come in where we wanted it to, and so we've gone through a process just trying to figure out what to do. As you know, at the beginning of the year we made a number of changes to consulting. We changed the management team, we brought in other people, we cut a lot of costs, we really put the pressure on a couple of proposals, and those were all good things, but we're still not seeing the results. We've gone through a process just recently to say what should we do about it. And first we've kind of looked at the viability of the business. We really do see strength in the business. In our education component of that practice, we have a number of large opportunities we're pursuing in very, very large states. As you know, we have the project in Los Angeles, which is a project to build upon. In our financial services revenue maximization area, we also -- we've received just this last couple weeks a number of new bid opportunities, and we have a number of jobs we're working on. So we see that the market -- it's changing a little bit. I'll come back to that in just a second. But it seems like a viable market, so that much is a push forward.

The second thing we looked at is do we have immediate opportunities that we can make -- turn it around this year, and we really do. We have several major opportunities in education that we're awaiting decisions. Some sound quite positive. In our revenue maximization practice we have six -- I am sorry, seven major projects. We basically finished the work, the claim is before the federal government, and we've been talking about this for two or three quarters, and the process just keeps delaying and delaying. Now finally, in two states in the last quarter, really in the last quarter, Pennsylvania and Kansas, we did see major federal approvals. So we're hopeful this -- for the future that's going to happen. But we need to push those opportunities.

What we've done internally is got a -- a team with our -- our lead person and revenue max focusing only on those major opportunities, but we've got to get those dollars closed. These are all contingency contracts, as you know, so we can't declare revenue until the dollars come in the door. So we have to [inaudible] things. And the third is just to protect ourselves in case that doesn't happen.

We went through a cost reduction process in the fall. We looked very hard at our costs over the last couple weeks. We have another program we're putting in place to -- right now. We're also looking hard at the practice, so we have a little task force group just looking at how do we refocus the business. For example, in rev max we see opportunities to move away from contingency work to fee-for-service work, which is more predictable, and use technology more than people to cut down our labor costs. So it's a -- my biggest concern is consulting. We have -- we have great opportunities on the one hand. We have some challenges on the other side. So the consulting practice is our challenge, and we're trying to really jump on it

Yes, Lynn, I -- I appreciate those comments greatly. That's good information. And -- and Rich, I apologize. Can you give me the win rates on recompetes and new opportunities? I missed that section entirely.

Yes, Mike, we can do that. Hold on a second.

Okay, thanks.

The metrics there that relate -- relates to rebids and then I'll give you options information. In -- in baseball vernacular, we're batting a thousand. We have not lost anything in either category this year. You may recall going into the year we had 13 in the carry -- category of rebids. We had 13 up for rebid which had a total contract value of $191 million. Thus far this year, we've won four, which is $102 million. We received extensions on three, which $3.5 million, and then we've had one other the -- the client has extended it as well. So we have not lost anything in the rebid category.

On the option situation, again, to set the base, we went into the year with 28 contracts where we had options up, which totaled contract value of $145 million. We won or -- 15 of these were extended, and that included $121.5 million, so we're in great shape on the option side of things as well. And I think on an annualized value these totaled -- let's see, that metric was over $100 million, I believe

Thank you. I'll pop back in the queue.

Your next question comes from Tom Moore with Friedman, Billings, Ramsey.

Yes, good morning. Once again, good quarter. Rich, perhaps you could talk a little bit more -- you -- you've obviously piled up a nice little cash [inaudible] here. In addition to the dividend, do you have any plans putting that -- for putting that to use as well?

Well, you're right in terms of the dividend, we're glad we paid our first dividend. And we have alternative uses and we continue to look at the uses and, obviously, stock repurchases. We'll continue to be opportunistic. We bought some shares during the quarter. And mergers and acquisitions, we still will seriously consider the right opportunities for MAXIMUS, and it's great to have no -- no debt and a lot of cash behind us to do that.

Okay. Thanks very much. I appreciate it.

You bet

Your next question comes from Charles Strauzer with CJS Securities

Good morning. Just one quick question, Rich. If you can -- given the kind of the swings in margins on the operating side, on the operating -- the segment side, I'm sorry -- both sequentially and year-over-year, can you give us a little bit better expectation for the margin trends for the -- the remainder of the year?

Charlie -- Charlie, can you repeat that? You broke up a little bit. I didn't catch your question

Just -- just looking at the -- the segments and the -- the margins, the operating margins, both on a sequential and year-over-year basis, can you give us a better sense for your expectations for the remainder of the year, in terms of margin trends by segment?

Okay. As it relates to the rest of the year -- first off, total company, and we're -- we -- we're addressing full year as opposed to quarterly guidance, so I'll talk rest of the year. Our general commentary is that we expect the second half of the year to be better than the first half of the year. I think that's something that's inferred by the range of estimates. We do say, keep in mind that we have some big spend in -- in health, in particular, in the June quarter, where we have a -- it's a fair amount of revenue, and you can even notice it if you look -- last year, if you look at Q3 over Q2, it will be evident in the revenue line, where we do get a spike in June, a fair amount of revenue and it's very low to no-margin work. So that tends to temper the margins in the June quarter, so I would expect temperate margins in the June quarter from that, and then we also get the seasonal work in the fourth quarter, as it relates to tax credits, which tends to pull margins up. So I would tell you that if you took everything and -- and -- and ran it out, those would be two pretty significant dynamics impacting health and also impacting -- I -- I want to talk about -- the consulting in a second, Charlie -- impacting health and systems. I do think British Columbia will be a third factor, as it relates to health. We expect that it's going to lose money in the third quarter and the fourth quarter. I would expect the impact to be relatively even in both of those quarters. And as it relates to -- as it relates to our consulting business, we do expect it to improve its profitability in the second year. Clearly, it won't get back to historical levels, but we're looking for it to improve and, hence, its margins would improve

Great.

Is that helpful?

That's -- that's perfect. And -- and lastly, just the unsigned 452 versus 242, are you including Texas in there, or is that in the numbers yet?

Texas is in those numbers

Okay. Thank you very much.

Thank you, Charlie.

Your next question comes from George Price with Legg Mason.

Hi. Thanks very much. I had to drop off for a second, so I apologize if I'm asking a question that was asked before, but just as a follow-on to the -- the prior question around what's happening in the second half of the year, can you maybe give us a little bit more color, Rich, on your -- on your comments around B.C. profitability improvement in fiscal '06 and -- and impact to -- to margins and -- and EPS? I mean, what -- what can we expect in terms of margins, relative to what we're -- what we're looking for this year?

Yes, and that's just something we've talked about in the past as it relates to B.C. From a big-picture perspective, B.C. -- we have what will be this June quarter and September quarter, which are the -- the first two quarters of operation. As Lynn talked about, that went operational on April 1, and we think very satisfactorily. But during those two periods, it's expected to generate a loss. That's when we'll have start-up costs that exceed our start-up revenue, and that's because we're in this interim period of time where we haven't -- we haven't gone operational on the new system that we're building. We expect that in -- in September we'll go operational with the new system, and that will be a more efficient situation for us and we'll be profitable at that point in time. So as we said in the past, we've said the loss will -- will approximate $3.5 to $4 million in the second half of this year, and then we expect that the contract will go profitable subsequent to that. And you will recall, it's a -- a $286 million contract over ten years. We'll recognize that revenue straight line, so it's -- I'm sorry, $268 million, not 286. $268 million contract, 10 years, straight-line revenue recognition, and we expect to get normal margins on it. So it's going to be a pretty big swing from Q3, Q4 this year to FY '06, starting in Q1. One other point you may want to keep in mind as -- as you move forward, from a top-line perspective, and I think this is more top line, keep in mind New Jersey goes away in Q4. We're in the wind-down phase of our New Jersey project, and that's within our health group. Again, it's more a top-line issue. That will run through our Q3, go away in Q4

Okay. And in terms of the -- the deferred contract costs and capitalized software going up quarter-over-quarter, that was totally due to B.C., or was there any -- anything else impacting that?

We had some small amounts related to other projects. The lion's share was related to B.C., and there's actually good news in there when you see the deferred revenue going up more than deferred cost. It means we're effectively billing or collecting more than we're incurring in costs, so that's a good thing

Okay, and last question. I -- I missed some -- some commentary around -- Lynn, I think you were talking about in -- in terms of some annual -- some annualized cost savings, some of the efforts that you're doing. You mentioned 6 to 8 and then an additional 4. If you could just review that, I'd appreciate it.

Yes. We went through a process in the fall. I've really had to kind of -- watching two things, costs and -- and opportunities. On the cost side, in the fall we do -- we went through a process to look hard at our costs. We eliminated about 100 positions. We -- we also looked at a number of non-people costs, and the total value on annualized basis was about $6 million. There was a severance impact, and the severance impact worked its way primarily out through the second quarter. So the value of those savings are going to occur in the third and fourth quarter. We're going through another process right now, as we said, it's a continuing process, just to look hard at our business, and so there's going to be additional cost reductions that will be put in place over the next week or two. But the impact you're going to see in the third and fourth quarter and going forward in fiscal year '06, the impact in some cases is going to be savings. You've seen, for example, our SG&A went down in the second quarter over last year.

Some of the money is being used to fund new investments. We started a new project in British Columbia. We've made an investment to start up in Texas. We have a project in Israel. We have added some sales people for the -- the marketing opportunities we have. And so in some cases, the savings has gone to fund increases in other places. You're always going to see the comings and goings of people and costs, and what we're starting to really look at harder is our operating margin. Operating margin is 9.7%. That's okay, compared to our competitors. It's not as good as we were in the past. We made a commitment to be north of 10%. We're really pushing our operating margins the next couple months to get them again north of 10%. That's a real focus, and that's probably the best barometer to see if our cost reduction efforts are working

Great. Thank you.

Okay.

Again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Your next question comes from Jason Kupferberg with UBS.

Good morning, guys

Good morning.

Hi, Jason.

Just coming back to an earlier question about the -- the awarded but unsigned, the 452. You said that Texas is in there. Can you give us an idea of how much is it -- of that 452 is Texas?

No.

I figured it was worth a try Let me ask a non-dollar related question, then, on -- on Texas and see where we can get on that. Can you just kind of give us some color on what the specific areas are that you guys will be charged with within this large contract, understanding that you have an incumbent position there? I know ACS does some enrollment brokering down there as well. Are you going to be taking over their enrollment brokering stuff, assuming the contract gets signed, obviously, just to give us a feel for the type of work there?

There -- there -- there's three components to the Texas project. One is to take over the -- the eligibility determination function for food stamps, Medicaid and [inaudible], which is the welfare program. That's a new function in Texas, and that's the function that's going to be primarily MAXIMUS, with a lot of support from Accenture. The second portion is the enrollment broker portion, and that's really two pieces, it's the project we had before and it's the piece that ACS currently has. And that will be the [inaudible], and that's going to be one where we probably have a little more of a lead than Accenture. We -- we were the incumbent, as you know, in one of those two pieces.

Right.

And the third piece is what they call their tiers maintenance. That's their current computer system and that's being modified to accommodate this new process, and -- and that's -- that's the piece Accenture will be taking the lead. We have a -- a component there , but that's more the Accenture-lead portion.

Okay, so should we assume that potentially in '06, or whenever this contract really ramps up, that there would be some amount of kind of upfront transition costs, a la a B.C. type of scenario?

Some. A lot of the question depends on -- as you know, the contract is not yet finalized [inaudible].

Right.

So there -- there's going to be a startup period of approximately about six months, isn't it guys, and when that starts, of course -- [inaudible] hopeful that -- that period would all happen in this fiscal year and then the job would start in -- and then -- on an operating basis in '06. There may be some lag over -- into this fiscal year, into the first of next year. We just don't know, given the contract signing dates.

Okay, but just to be clear, your guidance for fiscal '05 does not include this win, in sense of revenues and EPS?

Jason, that's right. And the other point that I would make is, ultimately, from a financial reporting impact on Texas, it depends upon the terms and conditions, but obviously we would steer toward -- steer towards terms that allow us to defer any costs that we incur at a minimum as a -- and avoid a situation where we have substantial losses on the front end.

Okay, and then for the -- for the June quarter, I know you guys didn't give us explicit guidance, and there's a few moving parts here, I guess most notably B.C., obviously starting up, which certainly helps top line, and you have the costs that you talked about. But can you kind of give us a sense, at least directionally on a sequential basis, in terms of how you see revenues kind of moving for the quarter, understanding that there is a bunch of moving parts with your contingency based contracts and so forth?

I -- I think one historical trend that's worthwhile looking at is FY '04, and I'll just give you the trend that I -- I think the data that represents total top line for the Company in FY '04, we had Q2 revenues of $150 million, and recall we had B.C. in that, so it wasn't a factor. Then Q3 revenues spiked to 160 million and then trimmed back down to $154 million. And -- I'm sorry, California Healthy Families is in that quarter, not -- not British Columbia. But I do think that that really does reflect the trend -- the trend that's embedded in Q3, and it's similar to perhaps our expectations this year.

And Jason, that -- that spike is primarily related to open enrollment that we have in a couple of large health contracts, so you see that on the revenue line, and it typically will recede back in the fourth quarter

Okay, and then just one last question. A lot of the Company has gone through a fair amount of change in the last 6 months. It sounds like certainly most of it has been for the -- for the positive. Have you seen any changes in your voluntary turnover rates, to indicate how people are kind of responding to the changes?

I don't think so I don't have the specific data. I think our turnover has stayed at historical norms. There have been a few people who have left, but I don't think we've seen a real change in our -- in the comings and goings of people.

Okay. Thanks.

Your next question comes from Cynthia Houlton with RBC Capital Markets

Hi. Just could you elaborate a little bit, I know you mentioned that there are some opportunities in the federal arena, in terms of leveraging kind of your work in the health care. Is -- is that something -- I mean, obviously it's federal procurement and there's a lot of differences in -- in going after the federal market. Is that something that you've set up for, in terms of setting up a different unit or investment that you would need to make? Could you elaborate a little bit on -- on that as a potential opportunity?

I am going to start and then I'm going to have John Boyer, the head of our health services practice, add a little bit. We, as you know, have never really targeted the federal government specifically as a market area, like we've targeted other places. We have practices that have opportunities in -- in the health care and we've begun to win opportunities there. A lot of it is in -- in the federal government -- a lot of it in the health care area, but we've now seen enough successes and we see enough things happening in the federal government, CMS, the federal Center For Medicaid and Medicare Services, which is -- the federal Medicaid and Medicare programs, as you know, is in the middle of a whole series of change efforts. So we see opportunities happening at -- at CMS and the Department of Defense, and they seem to be opportunities that parallel very much the kind of work we do at the state and local practice, and so we've gone from winning opportunistically to starting to really think about a strategy of going after the federal government, at least in certain key places. And, John, why don't you talk a little bit about what the opportunities are in the federal space, in the health care area?

I think this is the year wherein -- it's been reflected in the popular press as well -- that there -- there is a lot of activity at the federal level and regarding Medicaid. The states are struggling, and there -- there is a lot of debate about Medicaid reform, concurrently with the Medicare program. The Medicare Modernization Act that was passed contains quite a number of provisions, over 300 provisions for change. The majority of them have yet to be enacted. They're still developing guidelines and -- and -- and so forth, regulations in support of those changes, so I think there are a lot of opportunities. We have a great presence and a great reputation with NCMS and we're leveraging that through some of our new wins, such as under this new QIC contract.

I would that say our strongest state and local practice is our health -- our health services practice. We see major opportunities at the federal level and so clearly want to take our strongest state practice and start pursuing what seems to be big opportunities in the similar areas at the federal level

But I -- I guess my question on investment, you don't see the need to necessarily incrementally invest or create a different unit to focus specifically on this opportunity? You think it can be something that is -- can be a part of your state health practice?

What we're doing right now is we have our practices, our -- our practices are primarily focused around subject areas, health care, human services, financial services, and so right now those practices are expanding their focus. We look at three things: state level work, international work, we have successes there also recently, and federal work. So right now we're going to focus on the -- because the federal government is huge. It's by far it -- it's not just a -- a -- a -- a -- a one, kind of a centrally focused organization. So we think -- as we had to kind of diversify to go after the business at the state level, we're going to do that -- we're starting off focusing the same way at the federal level, so we can really kind of penetrate into the portions of the federal government that seem to be good opportunities for us. Now, if our practice starts to get really strong, because there are differences in the -- in the ways the federal government works, in terms of costing and so on, we may end up putting together a federal practice. But right now we're taking our strong state and local practices where we see similar opportunities at the federal level, and we're using those same experts to go after the federal piece, and we're augmenting our staff with experts in the federal space -- space.

Okay, and them maybe just a followup. Did you provide organic growth number on the quarter?

Rich?

We did, Cynthia. The total growth, as you're aware, is 2.2%, and the organic is 1.4%

Okay, and then, given the large -- given the number of wins, especially ones that you have that are awarded but not -- or that haven't been signed necessarily, what -- what is the kind of recruiting pipeline look like, meaning is there a big backlog of people you need to hire before these contracts can go live? I mean, is it several hundred positions or is it something where people -- you're going to get people already that are working these contracts? How do we think of what kind of people that you need to hire over the next 12 to 18 months to service what you've won?

Let's talk about that. There's two kinds of people. For these large operations contracts, the Healthy Families, the British Columbias and the Texases, we need to hire an awful lot of people to be the -- the line people, and we -- we have a group that handles recruiting that has very good major campaigns to bring people in. But we're talking about hiring thousands of people, not 10 or 12. And so what we do with those projects that typically have a very long lead time, which is good, and when we get close to a win we put in place our recruiting process, and we recruit locally to -- for those kinds of positions. And so that process we're pretty good at handling as the opportunity arises. Now, the second type of people are the people that are going to need to be the leaders, marketers and so on, and that group we've been looking at -- we've made a number of hires in the last couple of months. At the same time we've been cutting costs, we've been bringing people on, and we clearly have a -- for a number of our practices, seen the biggest opportunities. One of the things we -- we've put together is a sense of what additional kind of talent are we going to need, and we have a number of searches underway for people at the -- the more senior levels. We also have a campus recruiting program, we started to look at people coming in at the entry level. So we have an active recruiting process that we put in place, trying to look ahead towards the opportunities. I'm always trying to balance the -- the cost of investing before the opportunity versus the -- the -- the need to do that. But we definitely have put in place processes. We have a whole group of -- of a team we brought on that has -- its only focus is [inaudible] recruiting right now

Okay, great. Thank you.

Thank you.

That concludes the Q&A portion of today's call. I'd now like to hand the call back over to Ms. Miles

Thank you very much for joining us this morning. Again, I'd like to apologize for the technical difficulties, and thank you very much.

Thank you for participating in today's conference. You may now disconnect.