Maximus Inc (MMS) 2006 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the MAXIMUS third quarter earnings conference call. During this session all lines will be muted until the question and answer portion of though call if you need audio assistance please press star zero and an operator will assist you. At this time I would like to turn the call over to Lisa Miles Director of Investor Relations.

Good morning, and thank you for joining us for our third quarter earnings conference call. On the call today is Rich Montoni, Chief Executive Officer; and Dave Walker, Chief Financial Officer. Following our prepared comments, we'll open the call up to Q&A. But before we begin I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions and actual events or results may differ materially as a result of risks we face including those discussed in Exhibit 99.1 of our SEC filing. We encourage you to review the summary of the risks in our most recent 10-Q filed with the SEC on May 8, 2006. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances. And with that, I'll turn the call over to David.

Thanks, Lisa. Good morning. Last night we reported financial results, which excluding the legal settlement of $9.1 million were in line with our revised expectations for the quarter and we remain on track for our updated full year guidance. Before I get into the overall results, I want to provide a top level view of the results in Texas for the quarter. As outlined in our June 27th, conference call we were expecting total third quarter losses on the Texas project to be in the range of 35 to $38 million. The total third quarter booked loss on the Texas project was $34.3 million, of which, $17.1 million related to the write-off of deferred contract costs, and the remaining $17.2 million was the project's operating loss in the quarter. Beyond Texas there's a lot of moving parts in the third quarter that impacting overall results. That said, let's jump into the details.

Revenue for the third quarter was $186.6 million and includes $12.1 million of revenue related to voter hardware delivery in the operations segment. As expected the Company recorded a net loss of $17.3 million or $0.81 per diluted share in the third quarter with three large loss drivers. First the Company booked $9.1 million of legal settlement expense net of insurance reimbursements for an after-tax impact of $0.26 per diluted snare the third quarter. Second, a $17.1 million write-off of deferred contract costs related to the Texas project, with an after-tax impact of $0.48 per diluted share. Lastly, in addition to these infrequent items the Texas contract incurred an operating loss of $17.2 million with an after-tax impact of $0.49 per diluted share. Excluding these losses from the quarterly results, the earnings per share would have been $0.42 per diluted share.

Let's move into the results by business segment starting with consulting. Consulting segment revenue was $26.7 million for the three months ended June 30th. The segment's third quarter operating income totaled $3.8 million, with an operating margin of 14.3%. The third quarter revenue and operating margin for the quarter was slightly lower than the comparable period in fiscal 2005, due to project timing. Comparing the operating margin on a year to date basis, the operating margin was slightly higher in fiscal year '06 and performance remains on track. System segment revenue for the third quarter totaled $28.7 million, and the segment incurred a $3 million loss in the third quarter. The anticipated softness in the quarter was caused by software license slippage and weak performance in the ERP division. The ERP division has certain system implication projects that required additional expenditures in order to complete them. These projects are at or near the critical go-live stage and will be substantially complete this fiscal year. For our ongoing ERP projects, we continue to step up our project reviews and methodologies on fixed-price contracts. For new contracts, we are limiting the terms and conditions under which we are willing to accept contracts. We expect the system segment to have strong revenue and gains and be nicely profitable in the fourth quarter. As Rich noted on our June 27th call, license revenue would slip into the fourth quarter. To that point we recently were awarded a large licence for our SchoolMAX project that will be very accretive.

Third quarter results from the operation segment were impacted by the previously disclosed loss on the Texas project. Third quarter revenue for the operations segment totaled $131.2 million and included $12.1 million of revenue related to the delivery of hardware for a voter system. The segment's third quarter operating loss was $23.1 million. The loss was caused by the Texas project, which recorded a loss in the quarter of $34.3 million. As a reminder, the $34.3 million loss on the Texas project has two components. It includes a $17.2 million operating loss, and an $17.1 million write-off of deferred contract costs. The loss from Texas of $34.3 million was slightly better than our previous guidance of 35 to $38 million in the quarter. With that said, we continue to expect the full fiscal year loss on the project to be 45 to $50 million. While we've been operating under the reassignment of work as part of the amended subcontract for six weeks, it's still premature to provide any material updates on the financial progress of the project. In British Columbia, the total loss for the nine months ended June 30th, 2006, was $4.6 million. The project has continued to meet all service level requirements through the month of June. While we continue to implement the best practices in British Columbia to increase our operating efficiency, our current expectation is that our full year operating loss will slightly exceed previously provided estimates of $5 million.

Moving on to expenses for the quarter, I have covered the major expense items in the quarter including the Texas losses, and the litigation settlement. The losses from the Texas operation in the quarter and the write-off of deferred contract cost all impact gross profit in the quarter. Included in our expenditures are stock option expenses of $1.1 million or $0.04 per diluted share the third quarter. If we had expensed options in the third quarter of last year, stock option expense would have been $1.4 million or $0.04 per diluted share. Other items of note on our income statement include the interest and other income of $2.2 million in the quarter, which includes a currency gain of $662,000.

Moving on to DSOs and receivables, total accounts receivable for the quarter totaled $184.5 million with DSOs totaling 93 days. As a reminder the 93 days includes $5.5 million in long-term accounts receivables, which are classified within other assets on the balance sheet.

Turning our attention to cash and cash flow. Cash used by operations was $221,000 in the third quarter. The loss from operations in the quarter did not significantly impact the quarter's cash flow from operations for two reasons. First, the write-off of the deferred contract cost was largely a non-cash item in the quarter. Second, several large vendor obligations at quarter end will be an outlay of cash in Q4. We ended the quarter with cash, cash equivalents and marketable securities of $170.4 million. Share repurchases in the quarter were much lore than historical levels with 25,000 shares purchased. At June 30th, we had $26.3 million available under our ongoing stock repurchase program. Rich will talk to future uses of cash in more detail later.

And lastly, moving into guidance, in last night's press release the Company reiterated it's full year revenue expectations in the range of 710 to $725 million. The Company currently anticipates earnings per diluted share of 31 to $0.41, which includes the $0.26 per share impact of the legal settlement charge booked in the third quarter. Current fourth quarter earnings estimates are based on increasing income and margins across all segments. We expect improvement in the fourth quarter driven by decreased losses on the Texas project in the operations segment as well as new work and license revenue in the systems and consulting segments. And with that I'll turn the call over to Rich.

Thanks, David. Good morning. While in line with our previous estimates, results for the quarter were nevertheless disappointing. The challenges we have dealt with have been financially difficult in the short-term, namely Texas and the litigation settlement. But I believe by addressing these challenges head on, we are strengthening this organization and implementing a longer term vision that will benefit our clients, employees and our shareholders. Our first priority is improving the Texas project, but this may take some time. The overall-based business is solid with good momentum and future growth potential. My main long-term strategic focus remains optimizing our current business, taking a less volume driven sales approach and targeting smaller opportunities, and improving overall start-up operations. This strategy should position the Company for sustainable long-term growth and margin improvement. While the litigation settlement represented a financial impact to the Company, we thought it was necessary to remove the legal overhang and enable management to focus on improving operations. In short, it was the right course of action for where we are today.

Before I get into the details of business optimization and internal initiatives, let's talk about some specific contracts. In British Columbia, we've made significant progress in improving our operating performance, but we are still working to improve our overall financial performance. Initially, this project faced start-up challenges, but it is now operationally sound. We are now nine months running at or above service level requirements. On a recent visit I had the pleasure to meet the project team and government leadership of British Columbia. The client quite pleased and has publicly stated that service levels are the best they have ever been including periods prior to engaging Maximus. We believe that our performance on this contract may translate into new opportunities for us in this market. So it's comforting to see that a project which had been challenged at the start-up is now doing very well operationally.

Now Texas, as I noted earlier the Texas project remains our number one challenge. As Dave discussed, the results from Texas were in line with our expectations and remain on track with our loss projections for the second half of the fiscal year of 45 million to $50 million. Overall, management and governance on this project is critical as we move forward with your financial and operational plan. To that end, we have and will continue to avail our best people to the Texas project. The President of our Operations Segment is devoting significant amounts of time to this project. His efforts are enhanced by the participation of other Maximus employees, including leaders of other large sophisticated operations from across the country.

I personally have been spending time in Texas to meet our team, senior client, and Accenture leadership. Over the last six weeks we have made progress in addressing the needed improvements in technical performance in call-center operations. We're working with Accenture [in the state] on delivering better training for customer-care represents, a process to more quickly resolve complicated cases, better reporting tools to track cases and work load, and improved data collection. The enrollment broker and chip operations have improved and are stable, the main challenge of the project continues to be the integrated eligibility component. We have learned a great deal from the integrated eligibility pilot phase and we are determined to apply those lessons learned to the design of new IE systems in infrastructure. Structural changes have been implemented and these modifications are expected to help ensure a smoother transition for the remaining IE regions. That is work on the rollout will only continue after a readiness assessment performed by the state determines that the rollout can begin. We do not, at this time, have any information from the state on when they will authorize continuation of the rollout. We continue to work closely with the state and Accenture to demonstrate the economic viability of the model. We're specifically focused on cost management, and have taken significant efforts to balance resources with the work load. Cover costs are presently tracking as expected. I'm determined that operational and financial performance will be improved in fiscal 2007 on this project.

Despite some of the difficulties we have encountered on certain jobs, we ultimately have the substance, breadth, and capabilities in place at Maximus to execute on these outsourcing arrangements. My recent visit with two of our largest clients in California also confirmed that we have the operational capabilities to perform. I recently met with the clients and project teams from the Healthy Families an d Healthcare Options projects in California. These projects represent two of our largest outsource programs underway today. I was impressed with the project teams, and in particular, with the overall operational and financial execution on these projects. This really was a very encouraging visit.

Moving beyond the performance of specific projects, we are working to strengthen our infrastructure in several key areas to improve performance on all jobs and mitigate up-front risk. This includes project selection, bidding, implementation and performance. We're also formalizing critical processes, including best practices surrounding project start-ups as well as on-going project operations and we are increasing our internal training initiatives. To that end our contracts administration is a primary front-end procedure that requires increased rigor. We are working to standardize this across the Company and consequently we are increasing our resources in the areas of contracting and compliance. Our efforts in this area include limiting the conditions and terms under which we are willing to except contracts. We are also looking to deploy contracts managers on all large contracts. In the past, these dedicated positions were the exception rather than the rule. Going forward, contracts managers will serve as a single point of oversight and accountability on many of these large operations. They will be working in tandem with our project managers.

Perhaps one of the most important elements in working to optimize our current operations and managed risks has been giving our front line project managers the right tools and support to drive their projects towards success. We recently launched a more comprehensive project manager training program. The main principals of the redesigned program, emphasize contract management, scope management, financial management, risk management and quality assurance. Frankly the goal is to improve overall project performance in terms of quality, budget and customer satisfaction all in an effort to prevent the types of losses we've seen on some past projects. Better equipping our project managers is the first step in project optimization.

As I have stated in our two most recent calls in addition to optimizing existing business, the Company's emphasize going forward will be on size, terms, conditions and profitability over volume in pursuing new opportunities. As a result, we've already declined opportunities that did not meet our criteria, despite the prospect of adding new revenue. We will be diligent in balancing risk and reward and emphasizing profitable growth.

I also want to update you on the actions we've taken to exit underperforming non-strategic businesses. We engaged in investment banking firm to help us with the sale of two businesses, and are actively working through their process. We will also be exiting another service offering which, however modest, represents a drain on profitability. I'm still targeting calander year end for these dispositions.

In the month of August, we will be going through our fiscal 2007 planning process, which will include an evaluation from an industry platform perspective of where we are and where we ought to be. We continue to see opportunities in markets including federal fraud protection, health arbitration appeals, and many other opportunities in the health market. We will be reviewing our approach to these and other market opportunities as we go through the '07 planning process. I know many of you are anxious to see us resume our repurchase program in light of the strength of our balance sheet. We fully recognize the importance of of this program to our shareholders along with your dividend payments. However, in the near term, management and the board remain focused on preserving cash.

Today our strong financial position, it provides us several important benefits which are critical to repositioning the Company as follows. We are well positioned to deal with any project challenges we face. We can resolve overhang matters. We can continue to attract and recruit the best talent. We can invest in the real growth opportunities in our market. And we can present our financial strength as a competitive advantage, or in some cases a competitive necessity to give our customers and prospects the right comfort level they oftentimes prefer. In real life cases this can be the difference between a win and a loss.

Let's turn our focus to new sales and pipeline. As noted in last night's press release, the trends we're seeing in new sales and pipeline reflect our plan to redirect focus towards mid-sized projects with more favorable profit and risk profiles. As a result, at July 28th, we have new contracts signed of $569 million fiscal year to date, and new contracts pending or awarded but unsigned totaling $145 million. We have total sales opportunities at all levels of development. Our pipeline at July 28th, totalled approximately $1.1 billion and it breaks down as follows. Proposals pending of $280 million, RFP's in preparation totaling $150 million, and RFP's tracking of $634 million. In the area of rebids and option exercises we have done an excellent job. For fiscal 2006, we have won 16 of the 17 rebids and 11 of the 14 option exercises. Three option exercises remain, none of which have any impact on fiscal 2006, and have a combined total value of $20 million. I am very pleased with our efforts in renewing our existing business.

In conclusion, we have demonstrated our commitment to our clients, the Maximus brand and we are competitive well positioned. As I noted earlier, the most pressing priority is improving project performance and optimizing existing operations, particularly in Texas. We're well positioned to deal with the challenges, and we're going to be aggressive in achieving our fiscal 2007 operational and financial expectations for this project. Beyond Texas, I outlined some of our major business improvement initiatives, and investments to reinforce our overall infrastructure. So in summary, I view this as a period of repositioning. We're repositioning many aspects of Maximus. It's risk profile, project exposure, key infrastructure elements, our culture and our ability to execute with excellence. It is difficult being CEO on the bridge when the Company reports its first loss ever. And the shareholders certainly have a right to be disappointed. However, given my strong financial background, I am confident that we can address and deal with the challenges. I'm also confident that our repositioning plan is taking hold and will result in Maximus returning to rewarding levels of profitability and growth.

We are in the midst of our FY'07 planning cycle. Our traditional approach is to address the next fiscal year when we report full-year results in November. So you should expect a detailed briefing of fiscal '07 expectations at that time. However, in terms of backdrop, I do believe that our business, given the demand we see and once normalized is capable of delivering organic revenue growth in the range of 10%. But more importantly 10% margins. The goal of our repositioning efforts is to get us back to this model in reasonable short order, that is quarters, not years. And with that I'll open it up for questions. Operator, we're ready for our first question. and-a.

q-and-a

[OPERATOR INSTRUCTIONS] George Price, Stifel Nicolaus

Hi. Thanks very much. Good morning, Rich, and everyone, how are you doing?

Good morning, George, how are you?

Good.

Good. Just to -- so -- so just to get on -- on that last -- confirm that last comment. So you think, this business, once you get back the Texas issues, and in terms of implementing your focus on -- on the types of deals that you want to go after, you think you can basically grow in -- at around 10% with a 10% all in FAS 123 operating margin, or that's - that's the target?

That really is the goal of our repositioning plan, George, is when we pull together the results of these various efforts and certainly Texas is one of them, and the other element that we mentioned are integral to the plan including what we bid on and what terms and conditions we accept. I do believe once we execute that plan, translation, once we get the Company normalized, I really do think the model is one that's delivering the level of organic revenue growth and operating margin that I mentioned.

Okay. So you don't think that the focus on sort of, smaller deals will be -- excuse me-- a limiting factor from a growth perspective, based on what you're seeing in -- in the demand environment right now?

No, I don't think so. In smaller deals we need to be careful about what that means. I mean smaller deals is -- is -- we have -- we have routine reoccurring opportunities that are 10s of millions, $50 million size contract recurring year after year. We really do play at the heart of -- of a pretty significant demand at the state and local and federal level. These's a very healthy volume-driven projects. It's just the mega deals that I think are the ones that we really need to be very cautious about.

Okay. What time frame do you think, looking through -- looking at into fiscal '07 and beyond, I mean, what time frame do you think the business -- you know, given what you see with Texas right now, what time frame do you think the business can start to, really trend back to more normalized operating profit level? Not necessarily maybe 10%, but certainly, much closer to say 9% kind of range?

Well, that's a tougher one to answer and really will shake it out when we get it -- it's almost an refinement of the fiscal '07 plan itself, George, so I'm going to defer to that discussion. But I would say this from a -- from a directional perspective. I do think that we are seeing even in -- in these months benefits of our plan and certainly on a quarterly basis we're seeing benefits of our plan. So we're seeing ben -- immediate benefits. And it will take obviously several quarters before all of the benefits of the plan are played out. But it is a gradual realization of these benefits.

Okay. And if I could just ask you a couple of questions about Texas and then -- then I'll turn it over. Can you tell us what the revenue from that contract was in the quarter?

The Texas revenue in this quarter was $10.2 million.

10.2?

That's correct.

Okay. And you still expect basically about 30 million in revenue for fiscal '06?

It's probably going to be north of 30, so somewhere in the 30 to $40 million range, George.

Okay. And should we expect flattish in fiscal '07, based on the current plan?

You know, at fiscal '07 -- we'll give you that update when we provide FY '07 guidance, and that'll be in November.

Okay. And last -- last thing is just how do -- I guess the expenses that you've laid out previously, the portion of the expenses that are going to be outside of fiscal '06, can you talk about how you think those will trend through fiscal '07, given visibility right now? I guess you think they'll be, largely up front and then trailing off pretty quickly, or if you can help guide us around that? Thanks.

Yes, I think George that the situation is -- is pretty similar to what we talked about 30 days ago when we talked about Texas so as it relates to the nature of the cost and the timing of the cost, the situation is -- essentially the same. And as it relates to those costs, we did see the second half of this fiscal '06 being a period during which we had the lion's share of the largest amount of costs and we did see the cost decreasing sequentially as we got into FY '07 quite significantly, the decrease quite significant quarter to quarter.

Great. Thank you.

You bet, George.

Charles Strauzer, CJS Securities

Good morning.

Morning, Charles.

A couple of quick questions. And I know early on David had talked about looking at the systems segment. Talking about it being nicely profitable, very accretive from that SchoolMAX deal in Q4. Can you give us a little sense of -- maybe a little bit tighter on the margin line, what -- what that might look like in Q4?

Yes, when we had -- frank -- frankly part of the softness was the slippage of the licence revenue, and what I think I'm comfortable saying that is if that license had landed in this quarter, the segment would have been profitable. And frankly it's sufficient in size that we feel comfortable with our full-year guidance at this point.

Have it. Okay. And --

We can't disclose a lot about it, because we're under non-disclosure terms and we expect that we'll have a stand alone press release in the next couple of weeks.

Well I'm just say -- I'm just saying just in general if you just look at the segment as a whole -- it -- do you think -- expect it to kind of trend back to more kind of normalized margins in Q4?

Yes.

Okay. That's -- that's fair. And then Rich, just if you can expand a little bit more on -- on the political environment in Texas? Obviously when -- when the pilot was put on hold there was a lot of press being written about that, a lot of -- obviously a lot of bipartisan jockeying going on there. What have you heard lately? What have you heard from some of the key administrators there, in terms of, their pleasure, displeasure in terms of the steps that have been taken so far?

Charley our -- our view -- our focus really has been on kind of keeping our nose to the grindstone as it relates to operations and working with the censure and working with the state on the project. We too read the articles from a political perspective in terms of what's going on there. And as you are well aware it's an election year, so there's lots of issues, and there have been some press articles that you can access, talking about though project, and there's different camps. I think they are politically aligned but my understanding is that the current administration is very much largely supportive of the initiative, and is committed to -- is committed to the initiative. And we think that's a integral very important element in order for the project to be successful. The state has as much influence in the success of this project as does Accenture and Maximus.

Have it. And then lastly, if you -- if you can talk about this a little bit, obviously without getting into too specific details, but as the Company returns back to free cash flow -- free cash flow-generating perspective, clearly I know you want to kind of keep your powder dry on your balance sheet in terms of share repurchases, acquisitions et cetera. But once the Company does start returning to generating decent positive free cash flow again, are you inclined, or is the Board inclined to -- to revisit that maybe a little sooner than -- than expected?

I think the Board is -- is inclined to [invisit] -- to -- to revisit that topic very frequently. They -- they meet at least every quarter, and that is a topic of discussion. And-- and as-- as I mentioned towards the tail end of my comments, the right thing to do today for the four or five reasons I mentioned is to preserve our cash, but you know we're working very diligently to change some of those factors so you can rest assure if those sectors change when those factors change our plan is they will change in the short-term, the board will certainly reconsider that policy.

Great. Thank you very much. And I look forward to seeing you in our conference in a couple of weeks.

You bet Charlie.

Thanks Charlie.

[OPERATOR INSTRUCTIONS] Jason Kupferberg, UBS

Good morning, guys.

Good morning, Jason.

Wanted to just clarify the, Rich, you mentioned the 10% operating margin target out there. It -- it sounds like that's -- like you said, it's kind of a normalized number that you would shoot for. I'm assuming if you kind of exclude Texas for -- from the equation, at least for now and -- and kind of after all of your repositioning efforts start to bare fruit, is that the right way to think about it?

I think that's the right way to think about it, Charlie. We've had, and we study this, we've had several projects that we think if -- if our go forward plans had been in place we would have been able to lessen or improve margins. And when you go through that exercise, you -- you readily get to the point that demonstrates that this Company can be a 10% margin business by affectively controlling those project -- that project financial performance. And that's what we're really focused on. So if you normalize -- if you normalize the results for Texas, for British Columbia and some other isolated instances, I believe that the Company can be -- would be a 10% performer.

Okay. Okay. That's helpful. You talked about all of the resource attention you are giving to the Texas contract under the circumstances, pulling the people from across the Company, et cetera, to what extent, at least in the short-term does that create any sort of distraction or disruption when it comes to sales or delivery in other parts of the organization? How do you kind of -- how do you manage through that given that, you guys are not an enormous company, but how -- how are you kind of dealing with that?

That's a great question and it's something in the forefront of our management mind set. Obviously you don't want existing customer service to sacrifice at all, and I don't believe it has. We have made people available at the right levels. At the more sophisticated larger projects, we do have very effective structures, staffing, backups, and in those situations where we have availed ourselves we're quite comfortable client service hasn't suffered. So in some situations it's been -- let's just say it's a leading process expert in one particular area who may -- we may avail to Texas for three to five days and assist the Texas folks and provide input and best practice suggestions. So we are really have been balancing that. I think it's a great point. And I think we've done a good job to make sure we do the right thing and find the right balance.

Okay. Just a last question, on the British Columbia contract, what -- should this contract be break even for the full year fiscal '07?

I think we're looking for it to get to break even at some point in fiscal '07. I'm not to the point where I feel comfortable saying for the whole year it'a going to be break even. It's possible, but we have some work that we are doing in the short-term to -- to focus on that, see if that's a possibility. But I can't assert today that with a high degree of certainty that that will be the case.

Okay so this has just been a function of you guys pumping extra cost to make sure that the SOA's are met and the client is happy?

It's not excessive resources. It really has been more a matter of on the front end we had a lot of cost in integrating and taking over operations, training the new work force, refining this processes, getting some metrics in place, and measuring the productivity of that work force which didn't exist before. So we have sort of level one productivity achievement from an operational perspective. We think there's additional operational opportunities, and then there's opportunities for some smart systems [build] to help the performance as well.

Okay. Thanks.

Does that help?

Yes, no, it does. Thanks. Good luck.

Yes. Thank you.

Cynthia Houlton, RBC Capital Markets

Hi. Just some -- you mentioned that you're working with some investment banks on -- on looking at selling some businesses. Obviously, any color you could give in terms of -- how many businesses, the magnitude? I think that would be helpful.

That would be fine Cynthia, and we talked a little bit about this in the past. I think I told folks from a book of business perspective, it's less that than 10% of our revenues, and frankly it's less than 5% of our revenue. I think it's not so much a financial impact, as it is focus impact, and it's in line with what we're trying to do as a Company. We do have lots of opportunities out there in our marketplace. But we believe we really have core competencies. And then we have business units and service offerings in some areas, that we're not a leader. And we don't see them as growth opportunities, at least for Maximus. And we're not inclined to invest in those businesses. So for those, I think smart strategic reasons we're looking to do something else with those business units, and my hope is that that will free up very pressure management time to focus on the real opportunities out there in the marketplace.

You said some of those businesses are at a -- at a loss. Is there -- is that also in the neighborhood of less than 10% in terms of -- the businesses that you are looking to dispose of o r-- or to sell?

Modest. Modest losses. So again, I don't think this is driven by a real financial motivation to spin off loss units, as it is a strategic focus.

Okay. Great. Thank you.

You bet.

[Jack Shirk], SunTrust.

Good morning.

Morning, Jack.

Good morning. A couple of quick questions for you, just in terms of the losses on the Texas project for the remainder of the year? Can we assume a similar split between what's write-off for some operational losses? [Whether] -- will the losses for the remainder of the year be entirely operational?

Well it will be entirely operational. So the way the accounting works is when we determined we weren't going to make profit over the life we had to impair the assets. So that was a one time charge of 17.1 million which occurred this quarter. The operating loss this quarter was 17.2. And net-net, if you look at the total guidance, which we're so comfortable with for Texas of 45 to 50 for the year, that includes the 17.1 impairment that we took this quarter.

Alright, and then I just finally I missed it, what was the option expenses for this quarter?

It was $1.1 million, and that was roughly a $0.03 impact.

Great. Thank you very much.

You're welcome.

You bet.

John Mahoney, BB&T Capital Markets

Hi, guys I'm glad to hear about the optimistic outlook for profits going forward.

Good.

Just quick -- on Texas, what was the losses in Texas in the first half of the year?

Roughly $2.5 million.

And what is the -- basically, it looks like in -- in -- in the operations segment you have three bas -- three kinds of businesses, everything else operations, Texas, and British Columbia. You've give us some detail on Texas, can you give us more detail on British Columbia on a revenue run rate? And I think you mentioned the loss of Texas was what? -- I mean British Columbia was how much?

The loss year-to-date in British Columbia is $4.6 million and Dave will give you the revenue.

Yes, our revenue stream has been, 6.7 in Q1; 7.7, Q -- Q2; 7.4 in Q3. So [pret] -- pretty steady state run rate. That's the nature of the deal.

The nature of the deal you may recall it's $240 million 10-year deal. And the revenue recognition is straight line over that period. So the base revenue line is 240 million divided by 10 or 24 million a year. And that's how -- how it's playing out. We'll get little additional revenue, but basically that's it.

And you mentioned that -- oh, that's right, you mentioned the press -- or the opening remarks, the full year loss is going to be a little more than the five million?

Correct.

And what is the expectation for next year on British Columbia? How quickly can you get closer to break even?

Yes. Again, we don't -- we can't say that it's going to be break even for the full year, but we want to get it to a break even period in FY '07 and then obviously profitable af -- thereafter.

So it looks like the fourth quarter, you're going to have about a -- just a half -- somewhere between 0.5 million and $1 million loss. I guess it's a little more than five million. That's a pretty nice ramp-up down and you just hope -- you think it's going to be a slight loss in '07, is kind of the way we'd be appropriate to model it?

Well, again, I -- I'd encourage you to be conservative, and certainly I think [like] better FY '07 than FY '06 is appropriate. I would -- I need to have additional drill down opportunities to -- to push it towards the slight loss in '07. I would encourage you to be a bit conservative in that regard, John.

Okay, and I just want to make sure I understand it. The biggest thing in -- in Texas this ye -- this quarter, aside from the write -- write-off is the cover cost is what really -- really drove -- killed you?

One out of two. It -- certainly cover costs are higher, and they should be highest in this quarter. In addition we had additional resources necessary at the pilot level, which in -- and there's fewer resources on a go-forward basis.

Okay. Thanks a lot.

Yes.

[Sim Wooten], Investment Counselors of Maryland

Yes, hi, Rich. Most of my questions have been answered. I do have question on Texas. What is your fourth quarter expectation of revenue, and first?

David?

Be right with you Sim.

It's probably going to be somewhere in the range of 10 to $15 million for the fourth quarter.

10 to 15?

Yes.

And it was 10 this quarter?

That's correct.

Okay. And is that 10 to 15 -- is the 15 sort of the annual run rate of the current operations that you're -- you're currently involved with in Texas? On a quarterly basis?

You know, it -- it depends on the level of integration eligibility activity that we have in the quarter.

I think, Sim, as you know we -- there's several elements to the Texas project. There's an the enrollment broker piece, there's the chip operations which we run, there's the Midland call center, and then there's this integrated eligibility piece. And the latter is really the one that's the big challenge as we talk about. The first three are up and running and I think doing reasonably well. And those have a continuous revenue stream associated with them. So what you're seeing from a revenue forecast in -- in-- actually, in this quarter. And from a forecast basis is principally related to those operations. We haven't factored in any -- it doesn't include any substantial ramp as it relates to the integrated eligibility piece.

Okay.

Does that help?

Yes. And what percentage of the costs were -- cover costs, basically integrated eligibility costs that you are paying for?

This cover cost associated with all of the operation, including -- we need to make some progress on the chip piece, which we have made some great progress. But there's some cover cost, such that not all of it's related to the the integrated eligibility piece but I do think the majority of it is related to the integrated eligibility.

Have it, and you have no revenue basically from there?

De minimis.

Okay. Thanks that's -- answers my questions.

You bet.

[OPERATOR INSTRUCTIONS] George Price, Stifel Nicolaus

Hi, just if I could, a couple -- a couple of follow-ups. First of all, cash flow impact in the September quarter, obviously going to be dominated by -- by the payout related to Texas. But what kind of cash balance, what kind of a cash flow should we expect?

From an operating cash flow perspective we actually expect Q4 to be about break even. And frankly it would have been much better, but there were some large vendors that were currently payable at the end of this quarter. So we'll have to pay that out, and in fact have in Q4, and that was about 14 million. And overall, for the full year, we'll expect cash flow from operations to be about $16 million.

I'm sorry could you repeat that?

Yes, cash flow from operations for the full year we expect to be about 16 million. We'll be about break even for the quarter.

The September quarter.

Okay. Okay. So -- so you're -- so you're -- you're normal cash from ops is going to do a good job largely offsetting what's going to be paid out for Texas?

Yes.

Okay. Then in terms of the -- in terms of the rebids I just wanted to confirm, you won 16 of the 17 rebids you have 11 of 14 option exercises, and the three remaining don't have any impact on fiscal '06 combined 20 million value, did I hear that correctly?

That's correct.

Okay. nd when do -- when did -- does Healthy Families, MediCal, and the New York enrollment Broker, which I belive those three plus [Specie] and Texas are your five largest deals, right?

New York Medicaid Choice was rebid this year and we have been notified of award. HCO will rebid at the end of fiscal 2007, and Healthy Families, I believe, will be rebid in 2008 -- funded through --

2008.

2008.

And -- in fiscal '08?

Yes.

Okay. And then just to -- to go back to the systems implementation issues that you were talking about. The current expectations just to be clear, are that these systems that you are having to push extra resources into, detrimentally to cost are going to go live by the end of the fiscal year?

George, so I understand your question, this is on Texas?

No. No. No. No. No. System -- system segment you said you had some --

Oh, system segment, I'm sorry.

In one of the contracts we're working, in fact went live this month, and we have a couple of others that are either -- either going live or at this cusp. And then there's some continuing support beyond that, so yes, we are through the critical stage.

Okay. And what -- I guess on a go-forward basis is -- is part of your focus in -- in new deals and project management and so forth kind of -- addressing, the issues that -- that cropped up in these projects and avoiding them?

Absolutely, gorge. You know, it's -- it's-- there's several factors that we believe we can implement to better prevent recurrences of -- of this type, and-- and we are focused on that as we speak.

What-- I guess if I can try to get a little color, what the the nature of the - of the issues? Was it just simply, typical that occasionally you just require more time and resources or was there -- was there related policy shifts or something on the client side or -- ?

No. I think -- I think it's -- it really is very typical, and as you can appreciate in the period where you do go live that's the one where you have the highest risk of -- of -- of new system challenges. You need to throw more resources at it, rather than fewer resources, you should anticipate there will be complications. So in that -- in that context I don't think it was matter of a poorly-executed project, I just think we're a bit optimistic in terms of the resources rethought it might take. So my belief is that the lion's share of the improvement here is just getting a little more realistic in terms of the resources we need to schedule and deploy at that particular point in time.

Okay. And last one is on -- on use of cash, when you do get back to, wanting to look at -- more realistic potential of deploying it, I would imagine that you would favor share repos, at least if the stock was at current , share repurchases versus acquisitions?

Well, I don't think I would say we favor one to the exclusion of the other, but we have been in the past, demonstrated a preference for the hair repurchase program. Many periods in the past we had a very active program. We do have about $26 million left in authorization. So we do think share repurchases are -- are a very good thing to consider. And George, before we sign off, I do want to give you one footnote on California Healthy Families. There are two option years, I believe, on the tail of that contract.

So -- so that could take it out to fiscal -- fiscal 2010?

2010. That's correct, and as you can appreciate, that's always plan, A..

Great. Thank you very much.

All right. George. Thank you.

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