Maximus Inc (MMS) 2005 Q3 法說會逐字稿

Ladies and gentlemen welcome to the MAXIMUS third quarter earnings call. [OPERATOR INSTRUCTIONS] At this time I would like to introduce today's first speaker Lisa Miles.

Good morning and thank you for joining us. For today's call we have posted a presentation for you to follow along with. The presentation can be find 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 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 a summary of these risks in our most recent 10Q filed with the SEC on May 9th, 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 Office and Richard Montoni Chief Financial Officer. And with that I'll turn the call over to Rich for a discussion of our financial results.

Good morning. Thank you for joining us. Last night we reported third quarter results that we're slightly ahead of consensus expectations. The Company reported record revenue of $173.7 million driven by performance in the operations and consulting segments. Net income was $10.1 million with earnings per diluted share of $0.47. Net cash provided by operating activities totaled $11.9 million for the third quarter. Cash, cash equivalents and marketable securities remained healthy at $163.6 million as of June 30, 2005. A couple of other quarterly highlights. We signed a five-year $370 million subcontract on a Texas integrated eligibility contract. And lastly, we achieved our best sales year ever with year- to -date assigned awards of $1.1 billion. And this is through July.

Moving into the results by business segment , Consulting segment. For the third quarter, revenue from the Consulting segment increased 20% to $30.1 million compared to $25.2 million reported for the third quarter of last year. The year-over-year growth was driven primarily from robust revenue growth from the education practice areas. The segments income from operations improved significantly over last year totaling $4.6 million with a margin of 15.1%. This year-over-year improvement is principally a result of new work in education, that included a SchoolMAX license sale in Prince George's County Maryland, which we announced last week. Within the segment we're also encouraged by the continued improvement in the revenue services area which contributed to the progress of the segments income and margin expansion in the quarter. Lynn will talk more about the progress in the Consulting segment later in the quarter.

Systems segment, revenue for the System segment total $34.2 million compared to $36.8 million recorded for the same period last year. The revenue reductions are due to reduced license revenue, we also had a couple of large jobs at the height of their project cycles that we're significant contributors in Q3 of last year. This includes work in the area of justice solutions and enterprise solutions where we were completing a couple of Federal Smart Card projects with the Federal Smart Card is essentially on hold until the fall, both revenue and income contributions from our Enterprise Services area were reduced in the third quarter of fiscal '05.

Operating income totaled $1.2 million in the third quarter compared to $4.2 million reported for the same period last year. In addition to the reductions in Enterprise Services, we did not finalized a license in the Justice area in the third quarter which we now anticipate to hit in our fourth quarter. Despite the lag in the quarter, we expect profitability improvement from the System segment in the fourth quarter of fiscal '05 related to the timing of license revenue and benefits from management actions including cost reductions undertaken early in the third quarter.

Let's move on to our Operations segment. Third quarter revenue increased 11% to $109.3 million compared to revenue of $98.2 million reported for the third quarter of 2004. The year-over-year growth was largely attributable to the new federal work and approximately $6 million of new revenue from the British Columbia contract which we launched on April 1st. Third quarter operating income for the Operations segment totaled $9 million with a margin of 82%. As expected, operating income in margins were lower due to a few notable events in this quarter. As you recall, we expected the British Columbia contract to carry a startup loss of approximately $3.5 million for the second half of this year. While it is expected to turn profitable in fiscal 2006.

In our Health and Human Services groups incurred precontract expenses for large awards. In total the startup and precontract expenses totaled approximately $2.6 million in the third quarter.

The Operations segment consists of both the health services group and the human services group and I'll give you the top down level review of revenue and income for both. For health services, its third quarter revenue grew 18% to $69.8 million compared to $59.2 million for the same period last year. And this was as a result of the new federal work in the British Columbia contract which was a revenue benefit but a margin impact. Despite the margin impact from the startup and precontract expenses, third quarter operating income for Health Services totaled $6.4 million with a 9.2% operating margin compared to $7.6 million reported in the third quarter of last year.

Moving over to Human Services Group, revenue for the third quarter was $39.4 million which compares to $39 million reported for the same quarter a year ago. Third quarter operating income for Human Services was $2.6 million versus $1.8 million last year. Human Services operating margin improved to 6.6% compared to 4.6% in the same quarter last year. We currently expect the Operations segment fourth quarter revenue will decrease due to the wind down of the New Jersey contract and from the seasonal reduction from annual open enrollments that occur in the third quarter each year. However, we still anticipate increases in operating income in part as a result of seasonal tax credit work in human services.

Before I go into expense and operating margin, I want to touch briefly on our management bonus program. As we enter fiscal 2005, we developed a more ambitious program focused on reward for performance with the assistance of a leading human capital consulting firm. Over the last couple of years, the Company performed below our internal expectations and consequently we had lower bonus allocations. Our commitment to increase the bonus pool in 2005 is to ensure we are of providing adequate incentives that drive improving performance. As importantly, the new bonus structure positions us to be very competitive by providing the right rewards and incentives for key performers and helping retention and the recruitment of key talent. Lynn will address this aspect in more detail. With Company performance on track with our expectations, we've being able to increase the overall bonus pool this quarter and year-to-date and we remain committed to achieving this goal as fiscal '05 comes to a close.

Now let's talk operating margin, for the third quarter, operating margin was 8.9% and lower than the 10.1% reported for the third quarter of 2004. This decrease was expected and was primarily due to the precontract and startup expenses I previously mentioned. If we normalized for these items, our operating margin would have been 10.4% for the quarter. Other factors in the quarter included the following. The lower margin passed through a revenue associated with the annual open enrollment and a couple of large held contracts, increased bonus expense, weaker performances of our Systems group and improved performance of our Consulting group. When you analyze the components of our operating margin as being gross margin and SG&A percentage, you will observe the same dynamics are reflected in a lower gross margin while with SG&A percentage as a percentage of revenue it remained constant at 18.3% which reflects these factors, but was mitigated by our cost management efforts this year in this quarter.

Moving on to other income, you will note that this increased again in the third quarter to $1.2 million. The majority of the increase relates to higher interest earned on our invested cash. As part of our ongoing cash management strategy, we've continue to move cash into higher yielding auction rate notes. Slightly increased rates have also been a factor.

Moving into balance sheet metrics, total accounts receivable for the quarter were $172.9 million of which $128.2 million was billed in the balance or $44.7 million was unbilled. The increase in total accounts receivable was proportional with the overall growth in the Company's revenue. In fact, the DSOs improved to 93 days including $5 million in long-term accounts receivable within other assets. Also a positive note, we sequentially reduced the unbilled by $3.4 million.

The increase in accounts payables reflects increases stemming from new or expanded projects such as British Columbia and Mass Health Benefits. It also reflects normal fluctuations in payments cycles. As these fluctuations reverse, say in the next quarter, obviously cash flow from operations would be impacted. We ended the quarter with $163.6 million in cash, cash equivalents and marketable securities. Cash from operations totaled $11.9 million for the third quarter and $49.1 million on a year-to-date basis. During the quarter the Company purchased approximately 130,000 shares of MAXIMUS common stock, this is part of our ongoing cash repurchase program, as of June 30, we had $27.1 million available under the program for future purchases. Priority uses of cash include the funding of ongoing operations of the business, our share repurchase program, the continuation of the quarterly cash dividend and acquisitions. In reference to FAZ123R, the expensing of options. The Company will be required to start expensing options no later than our first quarter in fiscal 2006. The expected impact is approximately $0.04 to $0.05 per quarter.

And lastly guidance, we've narrowed our free full year estimates which exclude option expense. The Company now expects total revenue of $635 million to $645 million in earnings per diluted share of $1.78 to $1.83. On a segment basis for the fourth quarter, we currently expect consulting revenue and operating income will decrease from the third quarter. Operating income will decrease primarily as a result of reduced license revenue in the seasonal slow down in the educational claiming business related to the start of the school year. We anticipate that System segment revenue will be consistent with the third quarter. Operating income in the System segment will increase in the fourth quarter as a result of management actions including certain cost reductions which are expected to contribute to improved profitability. In addition, the timing of license revenue will also benefit the segment in the fourth quarter. And lastly, we expect operations revenue will decrease primarily as a result of the wind down of the New Jersey contract and reductions in revenue on certain contracts that experienced a seasonal spike from annual open enrollments that occurred in the third quarter. In addition, we expect operating income will increase as a result of the seasonal tax cut at work and no precontract expenses expected in the fourth quarter.

Overall, we're pleased with the financial results and the progress we've made during the year. We're focused on delivering expected full year results. We intend to provide fiscal '06 guidance on our next quarterly call in November and with that I'll turn the call over to Lynn.

Good morning everyone. As you know I started this fiscal year three quarters ago with two basic objectives. First I want to help strengthen our basic operating foundation, to build on our success from the past, and to prepare us for even better performance in the future. Second, I want to take advantage of several major opportunities in the marketplace. Such is the opportunity in Texas. I believe that we're starting to see successes against both of these objectives. I would like to take this opportunity to talk about our successes as well as our challenges and plans for the future. I will first talk about our highlights in the quarter, I will then provide an update on the action we have to improve our basic operating foundation. Next, I will discuss our prospects for growth in the future. Finally, I will summarize are pipeline and situation.

All in all we had a good quarter. Most important we closed the Texas project, but we are a member of the Texas ACCESS Alliance team led by Excenture. This is a landmark project in the state of Texas and we believe to our industry. As you probably know, this project will be worth almost $4 million to MAXIMUS in the next five years with the opportunity for additional work for success for the state.

Second, we have won a number of other projects in the recent months building on our Texas wind. As an example we have recently been notified a large enrollment broker win for another state, this project is for about $60 million over four years. We've also been notified by a number of key wins in our consulting practice, which as you know, have been an area for priority attention in recent quarters. As example, we have recently being selected by the state of New York to conduct a large-scale review of its child welfare program. We have also been selected to provide school based claiming services for the state of Tennessee, as well as revenue management services for the state of Connecticut. Each of these jobs is several million dollars or more in size, which is a significant in terms of a consulting project.

In addition, last week we announced a new SchoolMAX win in Prince George's County, Maryland which is one of the 20 largest school districts in the country. This job is for about $4 million which is another large project in consulting terms. In addition to our sales results, we also had a good quarter from a financial perspective. As Rich indicated we have a strong cash position , our DSO performance has improved, our consulting practice, which has been a challenge for us in recent years, had a much improved quarter, we completed another successful round of cost-reduction efforts and we made a significant contribution to our bonus pool. Further we made our quarterly forecasts for a third quarter in a row, which may not yet be a trend but we believe a positive sign and most important we achieved an EPS results of $0.47 a share. beating consensus by a penny.

Overall, I remain optimistic about our future. We now have sells for the year of well over $1 billion,which as indicated in my last call is the best year we have ever had, we're not yet finished with this year. This provides us with a strong base of new revenue for next year and beyond. We also have a number of very strategic wins since our recent win in Texas. All and all we're on track with our financial goals for the year which is very important to us. We also understand the importance of consistency and dependability in our forecast. We believe we are making progress against this goal as well.

With these highlights in mind I would now like to update you on the successes we have achieved to date in implementing the plan that I presented at he beginning of this year. As I have indicated on my previous calls, I started this year with a six-point plan to improve our basic profitability, strengthen our organization, and tighten our overall focus. I am pleased with the results we've achieved up to this point. I covered each element of our plan in detail on my last two calls, so it I will not do so again this time, however we have had some significant additional results this quarter. And I would like to update you on these results.

First we have to fill 14 of our most senior management positions this year, due to new hires or internal promotions. I have introduced a number of these people in my most recent analyst calls. Those of you who attended are recent investor conference had a chance to meet some of these people as well. We have continue this process over the past quarter. In particular, we have just about completed a search for several additional positions working with two nationally know search firms. We will be announcing are final additions over the next quarter.

Second, as you may recall from our last call , we have now completed two successful cost-reduction rounds to strengthen our overall productivity and financial performance. We estimate that the total value of these efforts will be approximately 10 to $12 million on an annualized basis. As indicated in my last call some of these savings have or will hit the bottom line. In other cases we have used the money we have saved to invest in new opportunities and other stronger growing parts of the Company, such as our wrapup efforts in Texas.

Third, we have worked hard to improve the quality of our efforts across the board to keep our existing clients, and to help avoid any unanticipated problems. We believe this effort is working as perhaps our best evidence, we have won or received extensions on nine rebids for fiscal 2005. We have not lost any rebids.

Fourth, as you know we have been working hard to improve the performance of some of our practices that were not performing well. Focusing especially on our consulting practices. I am pleased to announce that this effort is starting to show some promising results. Looking at the jump in our consulting income and profitability this quarter. In particular, we have had significant success in our education practice as evidence as our recent win in Prince George County. In this same regard our large project in Los Angeles, were we are implementing a new automated school information system for the Los Angeles Unified School District, is now on track and schedule after a lot of hard work and effort. This project provides us with a state of the art system that we can offer to other large cities. We have also worked hard to improve the performance of our revenue services practice which is another of our key consulting practices. Our recent wins in New York state in the area of child welfare and in Connecticut give us encouragement that our efforts in this area are also starting to work.

Both of these winds are fee based, weather in performance or contingency based wins which is made part of our improvement strategy to Revenue services. This is one of the strategies that we have adopted to bring more predictability to our Revenue Services efforts as well as our overall forecasting efforts. We will continue to apply the same diligence that we have shown in these consulting efforts as we look at other parts of our business. For example, as Rich indicated, we're not satisfied with results in our systems area this past quarter. We have made management changes in this practice area and cut costs. We are currently planning further changes to be implemented this quarter including both investments and cost management efforts.

Overall, as I've said before, our goal is to make all practices profitable as well as to best prepare ourselves for the future. We will continue to do whatever we have to do to achieve this goal. In short I believe that we are making progress and getting our internal house where we want it, not withstanding the challenges that remain.

With that I would now like to turn to our prospects for growth in the future. As I said earlier we are having a very good sales year as a result we are very positive about the market and our market prospects. Most important our win in Texas provides us with the opportunity to move to a new playing field. We are well under way with our work in the Texas project, but we are up and running. At this point, the protests issues are behind us, our team is in place, and we are progressing forward. With this win , and our other recent wins in Canada, and with helping families in California, we have shown that we can successfully compete for the biggest opportunities. Against the biggest players in our industry and in our market.

We also believe that we have the opportunity to build a model for welfare management in Texas, has the potential to be a model for other states. We are currently tracking very large opportunities in at least a dozen states. In addition to welfare eligibility, we also see significant opportunities across the country in health services, as an example we are currently responding to several large limit broker opportunities in other states. Similar to our work for California, Michigan, Texas and other states. We also believe there are a number of new policy initiatives that are going to open up the doors for additional work because of the new Federal Medicare pharmacy laws.

In addition to health and human services at the state level we are also pursuing a number of ever increasing opportunities at the federal level, including opportunities for the Center for Medicare and Medicaid, which is nationally responsibility for the Medicaid and Medicare programs and the Department of Defense. In the past we have been relatively opportunistic in going after federal work whether in pursuing a dedicated federal strategy. We are currently visiting the strategy given the successes that we believe we may be able to achieve.

As we outlined during our recent investor conference, in addition to the Health and Human services market and a federal opportunities that exist we are also very positive about the opportunities that exist in other key areas. For example, we're very positive about that opportunities that exist in education especially in the area of school information systems, special education and school performance improvement. We are currently tracking opportunities in some of the biggest cities in the country.

Our success in Los Angeles provides us with a good starting advantage for these opportunities. e've also seen an increase in opportunities across a wide range of technology areas, for example we recently won three new technology consulting engagements in the area of PVD and WIC, which is a Federal food supplement program for women and infants and children. The first is a business process reengineering efforts for state, seeking to implement a new WIC management information system. Second, is for the state of Wyoming to procure EBT services and the third is a project for the state of Alaska.

We also see a strong market for ERP services. As is evident by our recent wins of the past year in Miami, and for the BART system in California, and for the state of New Mexico. We are currently tracking at least five other major ERP opportunities. I could talk about other opportunities, but my point is probably clear. I feel very good about the opportunities we have before us, the challenges to win these opportunities. We face strong competition, both in terms of price and other firms it's also taking longer to close the big opportunities. We also face a challenge in mobilizing for the opportunities that exist by gearing up for the work that must be performed to win. We're moving to address these challenges by adding more staff in areas such as management, technology, and marketing. We also are continuing investing in and supporting are expanding our supporting processes. Including both our marketing processes and our delivery processes.

As you know we've talked a lot about some of these efforts in our previous calls and in our investor meeting several weeks ago in New York City. have our work cut out for us but I'm confident that we're up to the task, and that we are succeeding. We are winning the landmark new jobs, such as Texas, we are having a record sales year, we also have a very strong pipeline opportunities that I will discuss in more detail in just a moment. And looking towards next year we have now added about $100 million in annualized revenue base, which is equal to about 17% of our total current revenue. All in all we believe that this positions us well for next year and for the future.

Moving to our sales and pipeline metrics, our year-to-date contact wins as of July 28 total $1.1 billion compared to $324 million dollars reported in the same period last year. New contracts pending our award of unsigned for $243 million versus $352 million reported last year. Are sales pipe remained stable with new opportunities in all stages of development. On July 28 our pipeline total $1.2 billion and consisted of proposals pending of $258 million , proposed in preparation of $296 million, and RFPs tracking with the remaining balance of $617 million.

In terms of rebid and option exercises we had 13 rebids up in fiscal 2005 a total value of $190 million. To date we have won five and received contract extensions on four, so we have secured approximately $140 million in extension so far this year. At least that's with four rebids remaining. In terms of option year exercises we started the year with 28 contracts up for option year exercises, a total contract value of approximately $145 million. To date clients have exercised option years on 23 contracts, a value of about $134 million.

Due to changes since the start of the year such as program cancellation, lack of additional funding, or taking work in house, three of the option exercises worth about $10 million will not come to pass. That leaves us with two options left to exercise with a total value of less than $1 million. So we have basically wrapped up the option exercises for fiscal year '05.

All and all we certainly have our challenges, I feel good about what we're doing, where we're going, we have won some very big jobs in key market areas. Let's look at prospects and opportunities,We are growing. We have added substantial revenue base for next year. We have shown that we can win on the biggest stages, with the biggest competitors. We have address some key issues and we're on track to achieve our financial goals for the year. I am positive about our prospects for next year and beyond. And with that we'd like to turn this call over to you for questions .

[OPERATOR INSTRUCTIONS] And our first question comes to a line of Larry Lee with CIBC World Markets.

Good morning everyone good quarter.

Thanks.

Two questions. First one probably for Lynn. In the investor day a couple weeks ago you talked about some other Texas like opportunities that you saw and I think the states we're maybe New York, Michigan and Illinois, were sort of first up to bat. Have you seen any progress on when RFPs might be sent out.

Yes, Larry, theres about 12 to 15 states we are in pretty active discussions with. Let me count it up, there about four states right now either have RFPs or RFIs that are out and we are responding to those.

Great. And then just one question for, Rich. On the Consulting segment, the margin improvement year-over-year was pretty impressive I was wondering if it was possible to break up the margin improvement there between mixed and sort of other cost cutting efforts?

Larry, that's a difficult one we're always trying to balance the cost-cutting and providing new resources so there's really no true metric, but I would tell you that the cost-cutting efforts were meaningful, were substantial, and in the direction I would tell you the balance between the two.

I would say a major portion of our cost reductions were in the consulting area?

Yes and also you need to remember the license was a very significant factor in this third quarter. The PG County license was very helpful.

Okay. Thank you.

Operator we're ready to take our next question.

[OPERATOR INSTRUCTIONS] And our next question comes the line of Tom Meagher of FBR. Please go ahead.

Good morning once again, congratulations on the quarter. Rich, maybe this one's for you. You continue to share buyback during the quarter which obviously is a positive, but given the recent strength in the stock would you expect the pace of that buyback to slow in the next couple quarters?

That's a good question. I would expect the first -- the first driver really would be to the extent we have on each share repurchases I really try to neuter the effect of any dilution from those share repurchases, so we try to pulse it, so to achieve that, Tom. But otherwise as in the past we've been opportunistic about the price and it's relative to the start stock market as a whole, so it's not an absolute no, we'll just continue to watch it and see where it is.

Okay, thanks very much. Appreciate it.

And your next question comes from the line of Charlie Strauzer with CJS Securities. Please go ahead.

Good morning. Couple questions. Rich, real quick on the bookkeeping side, interest income your expectations are pretty much in line for Q3 for Q4, given where the rates are in the kind of instruments you've invested in.

Good question. On interest income you will note that we did have a good quarter from an interest income perspective and it was helpful to the quarterly results. And that is a function of -- we continue to have a significant amount of cash, idle cash to invest but we have been moving that to a higher yielding investment which started to have the effect last quarter. We talked about that and the fact that we expected that to continue and certainly had an effect this quarter and that strategy has been aided by slightly increasing rates as well and I'd also say from a perspective, a future perspective, until such time as we find an alternative use for that cash I would expect that trend to continue.

Okay. None of the cash has to be tied up in any performance bonds in Texas or anything like that?

That's correct, the performance bonds are off balance sheet commitments of the Company.

Got it. And then just staying on Texas for two seconds, any additional costs that you expect to pop up over the next couple of quarters as this contract starts to ramp or is that kind of already factored, or even doing some work to stay there.

We do have some pretty significant up front build costs in Texas, but fortunately the way the contract is structured, that's funded by the customers. So we'll have cash out but cash in so overall it should be by and large cash neutral for MAXIMUS.

Very good and then lastly -- a lot of details about the rebids for this year. Just any sense of the glimpse for '06 of what type of rebids, or number of rebids that are coming up end year?

Not at this time. We really, as part of our planning process will like to drill down and scrub those and get sentiment from folks and a big part of the equation is what we realistically think is going to happen so, we are going to defer that until we talk about '06 and our next call, Charlie.

Sounds good, thank you very much.

Your next questions is from the line of Bill Loomis from Legg Mason, please go ahead.

Hi, thanks. Good quarter, guys. Could you, first of all, Rich, did I hear you right that you're not going to start expensing the options in the fourth quarter it's going to be the first quarter '06.

There's really two options on the table, Bill, and we still continue to look at what the universe does. The two options from our perspective are just to start in the first quarter of our fiscal '06, meaning October 1. There is an alternative to adopt it early in our fourth quarter. We're still studying both alternatives.

Okay, and on the Texas contract as far as what you announced in your contract sign was that the full $370 million that you put in that bag?

Yes.

On the consulting side, on the Rev max was there any contribution from your -- not the education claiming but the order Rev Max of the States that helped in the quarter?

There was some. The Rev max practice seems to be coming back a little bit also, one of the challenges we have had in Rev max is if you really try to work with the Fed's to begin to pay for the outstanding claims, we have started to have success in a couple of states we really redouble our efforts to work with the Fed's, you are seeing some progress in that regard, we saw some results in the third quarter optimistic going forward that trend will continue also.

Okay, and on the systems. You said operating marginal increase systems in the fourth quarter. How significantly should we look for that? It's that going to be a pretty large, because it was pretty low in the third quarter?

My reaction is I expect that is going to be meaningful in terms of where it's going to head, the softness in the systems I like to think as the one quarter dip another going to come back for a respectable performance level more in line with the historical trend.

Also some comments on the systems contract that we saw the trend and were concerned about it. The last couple months we have done a couple things in the system's practice that's also been an area where we had significant cost reductions, we've made some management changes. We are finishing this quarter in terms of going forward we think we've really reduced expenditures. We've really backed out of our forecast going forward anything that's not sold so we feel pretty good about our projections for the systems group in the fourth quarter.

And a consulting margin a very good margin, at what level , I know you gave some directional but can you refine it a little bit because it was a pretty big increase?

Yes. I think my commentary on a go for perspective for the Consulting segment it did have a very good quarter at that 15.1% operating margin. In fact, from my perspective that's the best at least going back in all fiscal '04, I'd like to see basically that good trend continue probably continue -- maybe temper off a little of that 15 because obviously of that , we had that larger license and I don't see such a license of that magnitude repeating in that quarter, but I'd still like to think they're going to of a good quarter in Q4, little bit off the 15% though, Bill.

But still double digits.

Right not an unreasonable expectation, Bill.

Okay, good. Thank.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of Matthew McKay with Jefferies and Company. Please go ahead.

Good morning, guys. Nice quarter. Just looking, I just kind of have a margin question, but also looking at the pipeline trying to get arms around the pipeline with the license deals and anything that might be sort of the fourth quarter or over the next couple quarters that might swing the margins around and anything that we can kind of look for?

My thoughts are this, Matt, that -- first off the nature of our business we have a couple of our segments that do sell license division or Consulting segment and our Systems segment and just historically over the years much like any software company in the license sale business tough to forecast those. So it's an inherent risk factor in the business and one of the reasons we went back to forecasting years as opposed to quarters. So we think we're doing the right thing in factoring into our forecast licenses when they're very probable so for example in this our expectations and underline the narrow guidance that we gave, we do have a license in there in our systems group but it's very well long. They made their systems selection they've made their awards and basically the lawyers are handing papers back and forth, so we feel very good about that situation and that's much different than -- we're up against -- we submitted the bid and there are four competitors and they haven't made a decisions. So we are shying away from having those types of situations of our short-term forecasts.

And there are two pieces of variability in our forecast and the pipeline one is the Rev max tendency for federal approval, second is license as Rich said. And really exception is one Rich and I talked about and we don't have those two sets of factors that are important in our fourth quarter forecast.

Okay, thank you. That's helpful. And then just -- you talked a little bit about the share repurchase side but now that you kind of gone through 2005 you're sort of moving past a lot of the rebids as well as some of the restructuring. Any more thoughts just using the cash for may be on the acquisition side.

Yes. We started the year really with two base objectives one was to really strengthen our basic foundation, housekeeping things. And second we had such big opportunities in Texas and others that we really want to take advantage of those, we didn't want to get to scattered in our focus. We think that we've made real progress with those two objectives, we are well aware of the cash position so we started a process internally now, looking pretty hard it might be a firm for us to consider. We've had some starts in this process and it's going in now as we start looking at the next fiscal year, can you add on that , Rich.

No. I think that's right, we have always said that the use of the cash included the share repurchase, the dividend and obviously we launched the dividend this year, and acquisition opportunities. And I do think the landscape has changed in the last 12 months and as Lynn has gotten his hands around this CEO function and given us direction and focused internally in operation and now is the time to start to focus on acquisition opportunities and I think we have moved that definitely to the front burner.

Okay.

Careful, it's a real balance between organic and acquisition. The course we're on we do have an opportunity now to look at acquisitions.

Okay. So it doesn't sound like there's anything in advance so probably one to two quarters away of really making any movement in the acquisition side?

That's reasonable but we're very serious about it, to.

Okay. Thanks a lot guys.

Your next question comes from the line of Jack [Schurek]from SunTrust Robinson Humphrey. Please go ahead.

Thank you, my question has been answered.

Okay.

Our next question is from Jamie Sullivan from RBC Capital Markets.

Good morning. I just had a quick question, we're there any legal costs in the quarter? Hello. Can you hear me.

Yes, Yes. We had legal costs in the quarter my reaction is I don't think it's anything extraordinary. There were a couple of quarters back when we had settlements that we're half million dollar order magnitudes surprises. I don't think we had anything of that bill in this quarter are extordinary legal bills.

Okay. And then just one more about the overall employee bases if you could characterize that a little bit in terms of how many employees who have now, could you provide a turnover in the quarter, and also what kind of hiring you see your needs are over the next couple of quarters sort of in line with an employee base given the ramp of a large contracts?

Rich,why don't you go with the number and I'll respond to the question.

Okay that would be find. We don't provide turnover statistics although I will tell you I think our turnover you could bifurcated in terms of the call center help and it's typical for call center industry. And then you get up into middle management and senior management, and I don't think it's being substantial, in fact I think we have a lot of loyalty here at MAXIMUS. But from a numbers respective at June 30th we have 5,371 employees in total and that would of included 213 in our home office functions. And that would've being up from March 31st where we had 5,209 employees and 209 of whom which we're in Home Office and then I think Lynn's comment next will talk about dynamics and why that might of increase in the quarter.

Our hiring plan kind of where we think our business is going obviously we see a real opportunity in operations work, more work like Texas, more work like healthy families, both in the health services area in those two areas opportunities in those areas and we really need to grow one to handle the jobs we've won and that is going to be a big upsurge in hiring for Texas and second in the capacity jobs in the future of free marketing people. So you're going to see a growth in hiring at our major operations opportunities, we see an opportunity in technology notwithstanding the issues that are facing our systems practice right now we think we have a major technology opportunity for us. We are really moving after that with a lot of focus so you're going to see as building technical resources both in terms of capacity to deliver an also marketing. And then third we continuing the process of looking for selected key people helping in our marketing and delivery across all our practice. That would be more --the masses of hiring more selective key hiring. Those are kind of focus our opportunities are in technology in major operation and that is where our major hiring is going to be to build up additional capacity to deliver and win in those areas and you will see us doing that in the next couple months.

Okay. Do you see it significant like a 10 to 20% employee base increase or do you feel like it's kind of incremental sort of in the process of the corporate hiring process?

It's going to be significant in terms of total of numbers because Texas is going to add another thousand people to our payroll and we've already started that progress with we have a recruiting team in place and some of those people will be coming over to us from the state sides, so if you take that 1,000 people and put it against our 5,000 plus people, that's 20%, so you're going to see a pretty dramatic increase in our staff in Texas alone is going have a big piece of that.

Other area.

The other-- sorry go ahead.

No. I was just going to say great job. Continue and thanks a lot.

Okay.

Your next question is from Michael Keller from Keybanc Capital Markets. Please go ahead.

Hi, good morning.

Hi.

Good morning.

A couple of quick things, Rich, I know you said the target had been in the target of British Columbia loss for the second half was -3.5, did I miss it or did you give an update as far as what was realized to date and if there's any change in the expectation?

Let me comment on that. You're right, in the past we talked about the loss in the British Columbia contract, operating loss being $3.5 million for the second half of FY '05. And we had a reasonable portion of that pretty, much what we expected it's still tracking in this quarter. In addition, as I mentioned we had some free contract expenses related to a large contract that we had to expense and just to keep things simple and be able to dialogue with our investors of the impact about the impact of those two we bundle them together and as I said in my call notes, the overall impact of the precontract costs and the B.C. loss in the third quarter was 2.6. And as we go forward Michael, keep in mind, I expect the precontract cost will not recur in fact we know it will not reoccur, but the B C will still have some loss amount in B.C. in the fourth quarter.

Okay so it is not possible to achieve that specifically, there are less than two months left in the second half of '05 I wonder if relative to that 3.5 million, can you --

It's relatively balanced but we again don't want to have a lot of metrics of the same Matrix out there so we stuck with the 2.6. But if you want to know from a comfort perspective B.C., where is it, is pretty much in line with the 3.5 is pretty much balanced between the two quarters, if anything may be a little more skewed toward the second quarter and that's pretty much where we are.

Okay. And any difference as far as working capital the amount you had to put in there relative to original expectations?

No difference.

Okay.

I want to make one point on the B.C. contract because I think most of our investors understand this but it's important that all our investors understand this. The B.C. contract was very, very unique in terms of generating this loss from a outsourcing contract perspective. It's a situation where the loss is really an operating loss as opposed to a pre-operational startup type loss. We had a very unique contract situation, a client situation which we chose to accommodate effectively wanted us to start up operations before we took over operations with our new system and that's a very unique situation. As a result, we had to buy Legacy Provider Services as you would expect at Legacy Provider non discounted rates and receive normalize revenue and the proper conservative accounting is to recognize an operating loss during that unique six month period.

Of point to coming in on a spread basis by transaction but our costs don't spread the same way and the accountants would not let us recognize revenue in relationships to these costs. So we have an up-front situation where costs exceed revenues back over time.

Great. Thanks for that detail.

Okay.

Separate question in backing down a little bit on the top end of the prior ranges I just wonder what's the biggest delta there, I know you said something about maybe reducing targets and certain license sales?

I think that's a good question and let me answer it in two parts. One, I'll give you a quick comment on this concept of narrow guidance and what we did. First, you need to recall that our policy is to provide annual guidance and I still think that this is a very good policy given the nature of our business. However, when we started to prepare for the call we said to reiterate the annual guidance as one quarter are less and that's really not very helpful to our investors because it is such a broad range. We therefore decided to narrow the range to one that's helpful, but we still wanted to stick to a range that was broad enough such that it is very conservative so we want to give you a conservative view but we also wanted to give you one that we believe is supportive of current consensus. So that's why we ended up with the range, the narrow range that we provided to you and the difference here in terms of when I talk about an annual policy and it's an important foundation while we try to stick to the annual policy is as we said earlier in the call, we do have a couple pieces of business that are from a practical perspective difficult to be very precise quarter to quarter and so license sell and it's cleaning business all in year-end, is more is very practical to forecast results the quarter to quarter is difficult so that's the think behind the narrow guidance.

Okay. Did I misconstrue I thought there was something about a license sell you had taken out of the forecast for the fourth quarter.

No. We have one license in the fourth quarter but its very well along and when it gets to that point we fell comfortable including it in the forecast.

Just to clarify a point what we did say was it didn't happen in the third quarter but is now put in the fourth quarter.

That's a license sales?

That's correct.

And it's in the current guidance, correct.

That's correct.

It's in the system segment.

We are now on contract negotiations with that client. That's why we put it in the forecast.

Okay. Finally, just really quick one, sorry to ask three, but in the context of M&A sort of matrixing that against what you said about putting more focus on the federal space, any escalation in interest in a Federal deal?

Possibly we're looking hard at the federal practice as I said in my notes in the pass we'ver always taken a federal opportunities as they came before us. We're now starting to see a number of opportunities in areas that we're strong, particularly health services, so we are now looking hard internally about building a focus federal practice and the question is how do you build that practice. One of the ways to do that would be through an acquisitions and we have four or five targets internally one would definitely be an acquisition space, at least to consider it.

Okay, terrific. Thank you.

Our next question of from Jason [Hersenberg] from UBS. Please go ahead.

Good morning, guys.

Hi.

I want to talk a little bit about fiscal '06 not in terms of specifics because I know you guys are ready to go there yet but just so we can start thinking some of the moving parts that are going to impact year-over-year changes in '06 versus '05. I guess, the two obvious ones that come to mind and if you can help us put some numbers around that would be helpful would be the B.C. contract and Texas could you give us some insight into the year-over-year delta either from a top and bottom line perspective in terms of how we should think about the change?

Let me sure I understand the questions, you want a forecast for next year.

And not exclusively.

I see. You're asking what would be the impact of Texas in British Columbia.

What I'm trying to get a handle on is obviously in British Columbia had startup losses for the this year which you had forecasted and are tracking to plan and assuming that turns profitable starting in the first quarter of fiscal '06.

Yes.

What would be the year-over-year EPS fell to between your loss of let's say cost $0.10 in fiscal '05 and whatever profits you expect to earn on that contract in fiscal '06.

I'll make a few summary comments and then Rich can take a cut too. At this point we're not prepared to give guidance for next year. As I said we have a situation -- and we probably added up to our total additional annual base of about $100 million all that may not next year. For example, in Texas our current taxes -- our current revenue tax is about $30 million. We think next year our revenues will be somewhere in the $45 to $50 million range on that project because of the timing of startup. We won't get to the full annualized benefit in Texas until next year. Rich, I'll let Rich talk about British Columbia but overall we obviously see additional revenue coming in. That's good, we have to make sure we don't loss some of that revenue, we have to match against it. We feel pretty positive, obviously if these other big wins that are out there , opportunities have an impact on a year too. Rich, why don't you talk a little bit about it.

Yes, I would be glad to talk about BC and the revenue recognition on BC is pretty straight forward the operational phase, it's a ten year contract, $240 million. So it will be basically straight line. It will be to 240 divided by 10 is $24 million a year. That started effectively April 1st this year. So we are on a run rate of about $6 million a quarter so we will have about $12 million this quarter in this revenue and $24 million for next year So to line perspective, Jason, I see the incremental revenue being approximately $12 million. Since we have a $3.5 million loss in FY '05 for the six months period on this contract. If we had expected contract will be profitable in FY06. Normal margin and we've said normal margins for all outsourcing contract range from 8 to 12%, bigger tends to go towards the lower end of the range I think BC holds true to that template and I would expected to be profitable in Q1 and certainly profitable in all of FY '06 so I think you should be able to kind of triangulate that math and see what the incremental operating income EPS impact should be from those to contracts.

That's very helpful. Just on Texas, specifically for a minute, I know you made reference that you have started to rampup there. You've got some hiring under way. Can you give us some insight into what some of the initial milestones are that we should be looking for maybe between now and the end of the calendar year.

There are three major effects of the -- on November 1st we need to have the enrollment broker project up and running, that's one major piece of it. There's three major pieces as you know. The second piece is the CHIP, Children's Health Insurance Program, that has to be operationally by January 1st and a major piece of the eligibility piece, the welfare eligibility piece and that's going to come in over a installments from January through October that is going to be phased in across the states. You're going to see those kind of three major milestone events first starting in November another starting in January and another starting over January through October. So those are the three major events and people will be arriving in accordance with those events. Things will be getting done in accordance with those, the other thing that are happening behind the scenes is right now what we're doing is building operating procedures and processes the recruiting staff we're also taking our automated computer system and modifying that for the Texas situation. So that's what's going on right now, hiring staff, recruiting, mobilizing, Delta procedures modifying the computer system and it really starts in earnest on November 1st.

So of you been able to start invoicing the client for actual revenues in this fourth quarter?

Well, the project started July 1st.

Right.

The startup period goes over that time line and there's a startup by debt and we have a seminar first invoice yet but we will be able to invoice the client for the startup costs starting very soon and there's no limitation right now. Now, the payments to a large extent, are milestones driven so the client has an agreement on which specific task are going to be accomplished at which particular time and once those task get accomplished they will pay us, though we're in a position now to finish working to pay for.

Okay.

Jason, I don't expect that Texas contract is going to be a meaningful revenue event in the fourth quarter of this year.

Okay, that's fair. And just last at the analyst day you guys kind of talk longer-term about an operating margin target of 12% plus obviously you've got a lot of volatility in some areas of your businesses are going to swing that number around. You've also got your pursuit of larger contracts which is clearly helpful from a top line standpoint. But as you indicated since the trend to be a low end of margins. Could you kind of tell us to help us think through what kind of road map you might have in your mind at this time to get you some kind of a high single-digit or roughly 10% range from where you are now up another 200 basis points over time?

As you know, historically we were in the 11th, 12th North of the that percent.

Right.

Of the business more of a consulting business for higher margins as we get into practices you're going to see some margin decline but we want to be as a minimum the north of 10 percent and we're 8.9 percent this quarter as Rich mentioned and if you normalize that it improves we want to get not normalized numbers, but actual numbers north of 10 percent. Our goal is-- looking forward to next year, to be at least at 10%. 12% is kind of a goal internally to push us and rally us back in that direction, but we definitely want to be in a double digit number for next year as a minimum. Rich, thought you might add to that.

Here's my thought, I do think that this third quarter certainly was impacted by the pre contract in the B.C. law situation and I do think those are nonrecurring on the normalized basis at 10.4 is kind of where we are today when I do think we have plans and initiatives and efforts to improve on that.

What we are really doing is retraining are business to think of the higher profitability. We moved into the operations world our project started to drift in the five, six, seven percent and everybody kind of assume that's where you had to be at. We started pushing the last couple of years and now we are seeing our health practice our biggest practice and successful, I think margins north of 10 percent more than 11, 12% range and that provides a model for all of our practices so we continue to really push to improve profitability in areas that historically cannot be done. That is where we are going to see the growth, really try to push our people to see the difference. We can get this substantially north of 10% and still have a heavy operations focus towards our business.

Thanks for the color, guys.

Thanks.

Our final question comes from Roger [Chuchu] with Morgan Stanley, please go ahead.

Hi, for taking my question. Just a follow-up to Jason's question does that 10% hit margin target does that include the option expense?

Just a couple things, I think first of its operating income margins not EBIT margin yes, I think we should be able to absorb --absorb the impact of expensing options a little bit of that is going to be growth in economy of scale, but I'm not willing to back off that hurdle just because of the expensing of options.

We factored option expenses into our forecast looking forward and it's become another expense item that we want to accommodate to reach are profitability goals. Our model suggests we can do and now we need to deliver.

Okay, so from a comparison basis, excuse me you're operating income target will actually be maybe 150- 200 basis points higher than you expect to do in fiscal 2005 is that right?

On a restated basis yes we would have to improve our margin, that's right.

Okay, and then secondly any restructuring costs that are incurred in fiscal third quarter?

A little bit but not material.

Some. We made a series of adjustments in the third quarter trade there will be some in the third and for the fourth quarter?

Okay.

We have some but it was not material, Roger.

Okay, and I guess you guys talked about continuing cost-containment measures to be implemented in the fourth quarter. Can you maybe elaborate a little bit more on that is that going to be, additional savings in that area?

As you know we've gone through two a fairly significant rounds. They're difficult. We think that's behind us, obviously, we want a personality worked constantly looking at cost. We're not anticipating at this point in time, another third round of cost reduction like we've had in the last two. There will be continuous processes of trimming, looking at the businesses, and things like that but we think we've got those big changes. We think we've made the changes now we've really got to deliver on them.

Got it, thank you.

Okay.

Operator do we having any last questions.

That was are final question.

Thank you very much for a joining us for a third quarter conference call.