Maximus Inc (MMS) 2014 Q2 法說會逐字稿

Greetings, and welcome to the MAXIMUS 2014 Second Quarter Conference Call. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you, you may now begin.

Good morning. Thank you for joining us on today's conference call. I would like to point out that we have posted a presentation on our website under the Investor Relations page to assist you in following along with the call.

With me today is Rich Montoni, Chief Executive Officer, David Walker, Chief Financial Officer, and Bruce Caswell, President and General Manager of the Health Services segment.

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 and results may differ materially as a result of risks we face including those discussed in exhibit 99.1 of our SEC filings.

We encourage you to review the summary of these risks and our most recent 10-K filed with the SEC. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors engaged in the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons.

For reconciliation of non-GAAP measures presented in this document, please see the Company's most recent quarterly earnings press release. And with that, I'll turn the call over to Dave.

Thanks, Lisa. This morning, MAXIMUS reported second quarter revenue of $439 million. This compares to $326.4 million reported for the same period last year.

As a reminder, last year's second quarter results included the effect of a one-time revenue benefit of $16 million and $10.9 million in pre-tax income related to the termination of a contract acquired with PSI in 2012. The nature of this termination is such that it is unlikely to be repeated and does not reflect the underlying nature of the business. Accordingly, as in prior years, we will provide comparatives that exclude the effect of this contract termination.

Our press release includes reconciliations from our GAAP results to non-GAAP numbers showing our results excluding this contract.

On a GAAP basis, revenue increased 35% compared to the same period last year and organic growth was 30%. Excluding the $16 million of revenue from the terminated contract, second quarter revenue grew 41% compared to the same period last year, and organic growth was 36%.

We experienced some currency headwinds in the quarter and as a result on a constant currency basis, revenue growth would have been better at 37% or 44% excluding the terminated contract.

Top and bottom-line increases for the quarter were attributable primarily to the growth in our domestic health business, much of which was tied to contracts related to the Affordable Care Act. As expected, consolidated operating income was strong and totaled $65.5 million in the second fiscal quarter, and operating margin was 14.9%.

For the second quarter, income from continuing operations net of taxes increased to $41.2 million or $0.59 per diluted share. This included a $0.01 tax benefit that was offset by $0.01 of legal and settlement expense. Normalizing for these items, adjusted diluted earnings per share increased 64% to $0.59 in the second quarter of fiscal 2014 driven principally by accretive growth in the health segment. This compares to $0.36 of adjusted diluted earnings per share which excludes approximately $0.09 related to the terminated contract that we reported for the same period last year.

Let's jump into results by segment starting with health services. As expected, the health services segment delivered another solid quarter with revenue increasing 64% to $324.1 million, compared to the same period last year.

Year-over-year top line increases were fueled by three things. One, organic growth resulting from new work and expansion of existing contracts, most notably those related to the implementation and support of the Affordable Care Act. Two, increased transactional volumes in the Company's appeals and assessment business including the year-over-year increases from the ramp-up and the California Workers Compensation contract which we expect will continue through Fiscal 2014. Looking into Fiscal 2015, the increasing volumes on this program will help offset potential decreases in our Medicare appeals work due to changes in the RAC program. And lastly, acquired revenue from the HML acquisition that we completed on July 1 of last year.

Health services segment operating income in the second quarter of Fiscal 2014 increased 69% compared to the same period last year, and totaled $48.8 million with an operating margin of 15.1%. As expected, operating margins for the health services segment were higher compared to the same period last year and driven by accretive growth.

As we mentioned on our last call, the segment's second quarter benefited from a handful of highly-accretive change orders, many of which were tied to the Affordable Care Act. These change orders increased our scope of work in various projects to support health insurance exchange activities and other ACA requirements.

And as noted in this morning's release, we are also raising our 2014 full-year estimates to account for some additional work that supports various activities related to the health insurance exchanges and state Medicaid programs.

The fact that our clients continue to turn to MAXIMUS during times of significant need is a testament to the value add we bring, our proven track record to get the job done, and the strength of our brand. We remain a trusted partner to our government clients and we believe our experience in providing exceptional support through the first open enrollment period bodes well for future opportunities over the next three to five years as other states consider long-term options for operating their own health insurance exchanges.

All in all, another great delivery from the health services team.

Now, let's turn our attention to financial results for human services.

For the second fiscal quarter, revenue for the human services segment totaled $115 million. This compares to $128.4 million for the same period last year, which included a $16 million benefit to revenue from the terminated contract. Excluding this benefit, revenue in the second quarter of Fiscal 2014 increased 2.3% and was up 7.3% on a constant currency basis compared to last year.

Second quarter operating income for the human services segment totaled $16.8 million which compares favorably to the prior year of $10.6 million after normalizing out the pre-tax benefit from the terminated contract.

The operating margin in the second quarter of Fiscal 2014 was stronger at 14.6%, bolstered by the finalization of our contract in Saudi Arabia and a couple of highly-accretive short-term consulting engagements in the US.

As we mentioned last call, we currently expect operating margins for the human services segment to be running towards the lower end of our 10% to 15% range for the remainder of Fiscal 2014. We also have some very good news to share out of Australia where we were notified of an expansion related to re-allocation of work and two of our Australian contracts. Disability Management Services, or DMS, and job services Australia known as JSA.

Rich will provide additional details about these expansions but from a financial perspective, we will see a small, partial year contribution at Fiscal 2014 for DMS.

The additional work from our larger contract, JSA, is not expected to begin until Q4 of Fiscal 2014 and we expect both will provide full-year contributions in Fiscal 2015. Overall, this is great news and further validates that our excellent performance in these outcome-based programs are incentivized, measured, and rewarded under Australia's star ratings program.

Moving on to cash flow and balance sheet items, cash flow was again solid in the quarter. DSOs were 68, well within our target range of 65 to 80 days.

For the second quarter of Fiscal 2014, cash provided by operating activities from continuing operations totaled $34.6 million and free cash flow was $25.8 million. As a reminder, free cash flow is defined as cash provided from operating activities from continuing operations, thus property and equipment and capitalized software.

During the quarter we purchased 301,400 shares of MAXIMUS common stock or approximately $13 million under our Board-authorized program. At march 31, we had approximately $62.1 million available for future repurchases. Subsequent to quarter close through May 2, we purchased another 241,500 shares for a total of $10.3 million.

As we said in the past, we consider our buyback program to be opportunistic in nature and the recent purchases reflect our overall value that we see through the purchasing of our own shares.

At March 31, we had $131.3 million in cash and cash equivalents of which approximately 65% is held overseas. We remain focused on the same fundamental principles for cash deployment which include investing in business development and growth prospects across our markets. This includes both organic and strategic acquisitions. We continue to work an active pipeline with potential targets but we are highly selective, intend to run a very rigorous process. Therefore, the process takes time.

We also remain committed to our quarterly cash dividend and opportunistic share buyback program.

And lastly, guidance. As I mentioned earlier, we are increasing our Fiscal 2014 revenue and evenings guidance. We now expect revenue in Fiscal 2014 to range between $1.68 billion and $1.73 billion, and we expect earnings per diluted share from continuing operations to range between $2.00 and $2.10.

We are raising our guidance based on our strong delivery in the second quarter and increased visibility into additional work related to the Affordable Care Act and state Medicaid programs in the back half of the year. We previously expected a decrease in work and revenue in the second half of Fiscal 2014 following the completion of the first open enrollment period. However, we have a handful of contracts where our clients are leveraging our customer contact staff to meet other urgent needs.

In addition, we are already working with our clients on the staffing models for the upcoming open enrollment period in the fall. Much of our work will start ramping up in the summer in preparation for this open enrollment period. In certain customer contact centers, we've already been directed to increase our planned staffing levels and scope of work which also had a direct benefit on Fiscal 2013 estimates.

We're very pleased to be provided with these additional opportunities in helping our clients manage considerable change. We are reiterating our cash flow guidance for fiscal 2014 but now expect to be towards the lower end of the range due to increased working capital requirements tied to the upward revision of revenue.

Thanks for joining us this morning, and now I'll turn the call over to Rich.

Good morning, and thank you, David. Our solid results in the quarter reflect our success in responding to our clients' needs, especially during the first year of such a high-profile reform effort as the Affordable Care Act.

As a trusted partner to governments, we see many opportunities to provide them with innovative, flexible and scalable ways to reform their social programs. However, it often takes years for these new programs to move forward from concept to launch to a normalized steady state.

What we are seeing play out today are the long-term growth strategies for MAXIMUS. As a reminder, these include enhancing our US operations by supporting clients through the next phase of the Affordable Care Act; expanding our international operations through health and human services opportunities in multiple geographies; and growing our Federal business as evidenced by several years of robust growth in this business line.

I'd like to walk you through each of these drivers and provide you updates and details on how they continue to serve as growth platforms.

Let's start off with our US operations and the largest growth driver to Fiscal 2014, supporting our clients' efforts to meet the requirements under ACA.

We mentioned on last quarter's call that our clients faced some significant technology challenges during the first open enrollment period. In response, MAXIMUS provided enhanced consumer assistance through our customer contact centers. In many cases, we helped consumers complete applications over the phone in order to finish the enrollment process. This led to a high spike in volumes in many of our HIX contact centers. In fact, our customer service representatives across all of our centers handled a total of approximately 5 million calls from October through March.

We were able to react to the volume increases quickly. Our operational model is scalable and we're able to leverage existing overflow capabilities in other contact centers and rapidly add incremental capacity.

Our ability to provide responsive solutions to our clients has continued after the conclusion of the first open enrollment period. We have been pleasantly surprised with the resiliency of demand. As expected, call volumes have come down but as David noted we've added some supplemental work related to ACA and Medicaid.

In addition, we are also ramping up some of our contact center operations at higher levels than originally expected in preparation for the next open enrollment period. The result is a backfill of revenue that has largely led to the increase to our Fiscal 2014 estimates.

Over the longer term, we are preparing for the best way to support our clients with the ongoing implementation and stabilization of the Affordable Care Act. As we mentioned before, this is a multi-year growth driver for MAXIMUS as steady state enrollment in the exchanges is not expected until 2017 to 2018. Over time, as was the case with Medicaid, other states will likely adopt state-based exchanges to have more control over coverage expansion, access to Federal funds for marketing and outreach, and to maintain a closer linkage to state insurance regulations.

Medicaid expansion and other Medicaid support services are also part of our long term growth strategy under ACA. Some states including New York and California are already using ACA-related funding to expand their Medicaid programs. These expansions include new service areas such as rural counties where provider networks can now support managed care and additional populations, like the dual-eligibles.

We are proud to be working closely with several state clients who are participating in demonstration programs with the Centers for Medicare and Medicaid Services to provide coordinated care to the dual-eligibles. Other states are exploring alternative mechanisms to expansion including waivers to use Federal funds in new ways such as premium assistance and healthy incentive programs.

All waiver requests must be approved by CMS, so while we are supporting early states in this model we anticipate that this will remain a longer-term growth driver for MAXIMUS.

Let's move on to our international operations, where we have several irons in the fire to drive long-term growth. We are excited to be expanding our footprint in Australia through the service area reallocations that David noted earlier. Let's start with reallocation for our disability management services, or DMS program.

Under this program we provide case management services to individuals with injuries, disabilities or other major health issues. The DMS re-allocation shifted employment service areas from underperforming vendors to those who had demonstrated success. MAXIMUS increased its overall disability employment business share with an additional 12 service areas, bringing our total number of DMS areas to 32.

From a revenue perspective, it adds about $5 million in new annual revenue and when fully-ramped, this contract should contribute about $22 million annually. This is an important confirmation that solid execution leads to increased market share under these performance-based contracts.

The Australian government also recently announced that, effective June 23, 2014, there will be re-allocations under the Job Services Australia program which is known as JSA. JSA is our largest welfare-to-work program where we currently serve a case load of approximately 75,000 job seekers. Our performance is measured through the achievement of sustainable employment outcomes which the government reports publicly each quarter through their star rating program.

While the government hasn't finalized all the details of the reallocations, they indicated some JSA vendors will be replaced by higher-performing vendors. Our performance to date remains consistently strong and we received verbal notification that we will receive some reallocated work. Presently, this contract runs at about $125 million annually and we are hopeful that this increased market share could provide between 10% and 15% of new annual revenue, and increase our case load to more than 100,000.

We believe these additional awards will also support MAXIMUS in the next re-bid of the JSA contract. We currently expect the requests for tenders to drop towards the end of this calendar year.

And keep in mind that there are two important aspects of this type of re-bid. First, the Australian government historically has placed greater reliance on performance than price for these types of contracts. Second, it's not an all-or-nothing bid because the awards are based on site locations.

Given our past performance, we remain cautiously optimistic as we continue in our role as a significant, trusted partner to the Australian government.

In the UK, the Department for Work and Pensions recently published quarterly work program statistics that cover the performance period up to December 31, 2013. As a prime provider, MAXIMUS has helped approximately 11,000 individuals into a job that they have held for more than six months, or in some cases, three to six months.

The statistics also show that Maximums achieved targets for a significant percentage of the payment groups within the program. In fact, we were third among 18 providers for the overall cumulative percentage of referrals for which we received a job outcomes payment.

Overall, performance for all work program providers has remained stable. The department for work and pensions is currently working on its first inter-region reallocation, where high performing vendors can bid to pick up an entirely new region. Under this particular allocation, MAXIMUS is eligible to bid on the region and we are reviewing the opportunity. However, our interest is predicated on the terms and conditions of how the government intends to transition the region from one vendor to another.

This is a new process for the UK government and we will keep a close eye on the opportunity. That said, it's also important to recognize that we don't expect re-allocation under the work program to be the primary growth driver in the UK for MAXIMUS in the near-term, rather, we remain very excited about the other emerging opportunities in the UK where we established a foothold in the health services market with last year's acquisition of health management.

We continue to focus on several larger, near-term opportunities where we can leverage health management's position as the largest occupational healthcare provider and build upon our established reputation with the UK government. We are actively preparing bids and feel positive about these prospects, but we are not far enough along in the process to provide any more details at this time.

Wrapping up our long-term growth discussion with a third area, expanding our Federal book of business, we made good progress with introducing our core capabilities to new Federal programs and agencies. During the quarter we came to a successful resolution on a protest under our new debt management contract with the US Department of Education, to help administer a portfolio of defaulted student loans.

We are currently ramping up our operations and remain on track to launch in August. This new contract is a prime example of our efforts to extend our core offerings such as citizen engagement, customer contact centers and case management, to a wider set of Federal agencies. Our Federal team has also successfully launched our eligibility appeals operation for the Federal marketplace. We've been able to help consumers whose applications were previously incomplete to reapply and complete the enrollment process.

Moving on to re-bids, on previous calls we mentioned that Fiscal 2014 will be a light year for re-bids and hence overall total awards. Of the 15 contracts with a total contract value of $225 million up for re-bid, we've won or received extensions on six with a total contract value of $85 million.

During the quarter, we lost a small child support contract with a total contract value of approximately $7 million and an annual contract value of less than $2 million. So, year to date results are tracking favorably. We have eight re-bids left for a total value of about $133 million.

Wrapping up with our new sales awards in the pipeline, for the second quarter of Fiscal 2014, year-to-date signed awards were $969 million and at March 31, 2014, we had an additional $76 million in new contracts pending, where we've been notified of award and are in the contract negotiations.

This compares to $425 million in contracts pending last year which included approximately $390 million from two large program re-bids and extensions. Our sales pipeline at March 31, 2014 remains steady at $2.2 billion and includes opportunities across multiple geographies in both segments. As a reminder, our pipeline only reflects opportunities where the request for proposal is expected to be released within the next six months. These opportunities include new work, re-bids, and option periods.

This is consistent with last year's total pipeline of $2.3 billion. On a sequential basis the pipeline is slightly lower compared to the $2.4 billion reported for the first quarter of Fiscal 2014, due to more than $600 million in signed contract awards. These fluctuations are normal course for our pipeline and are primarily related to opportunities converting into new awards.

In closing, we are very pleased with our results this quarter and improved outlook for the full fiscal year 2014, and as we look beyond Fiscal 2014, all eyes are on the many opportunities ahead for MAXIMUS and how Fiscal 2015 is shaping up. We are at the start of our annual planning process, and plan to give you additional insights as factors develop on our next quarterly call, as well as formal guidance on our end-of-year call in November.

As we've said all along, the underpinnings of our growth are driven by long-term demand trends tied to operating large government social programs. The over-arching demand tails are decades long in nature and driven by demographic shifts and pressured government budgets. While program or legislative changes often create specific opportunities for MAXIMUS, it's important to note that the timing of these opportunities can vary.

We've consistently said that in the long term we believe we can grow revenue and earnings by 10%. There will be years of accelerated growth where we are above the 10% mark, like fiscal years 2013 and 2014, and there will be years where our overall growth may be tempered by start-ups, re-bids, or government procurement cycles.

So, what does all this mean for Fiscal 2015? There are many dynamics in play including meaningful new business opportunities that ultimately will drive the formal guidance we issue for 2015. But based on what we see today, we expect Fiscal 2015 to be a good growth year.

Ultimately, we manage a total portfolio of contracts so just like any other year, Fiscal 2015 will have its own headwinds and tailwinds that will shape our outlook. First, we mentioned MAXIMUS benefited from additional ACA and Medicaid-related work that helped bolster our Fiscal 2014. Based on our experience with operating other health programs, we believe some of this additional work will continue and some will abate.

In addition, we see seasonality of our HIX contracts, but it's too early to predict precisely how next year's open enrollment spike will compare to this year.

On the new business side, our pipeline remains robust with several key opportunities that could materialize in Fiscal 2015 and boost growth. There's a lot of backfield in motion on a handful of large bids that are in process. We are diligently working these opportunities that are right in our sweet spot and we remain optimistic on our overall prospects for success.

Overall, we see our year-to-date performance and expectations for the remainder of Fiscal 2014 as additional confirmation of the long-term growth opportunities for MAXIMUS in Fiscal 2015 and beyond.

So, we look forward to keeping you further informed as to specific growth expectations for Fiscal 2015 as we progress through our planning process and as these pending new opportunities evolve. We remain exited to continue to provide our clients and program beneficiaries the highest quality of service. We appreciate all the great efforts our employees put forth daily, and we thank you for your continued interest and support.

And now, let's open it up for questions. Operator?

(Operator Instructions). Our first question comes from Charlie Strauzer from CJS Securities.

Hi, good morning.

Good morning Charlie, how are you?

Good. I was hoping Rich, or David, if you could give me -- give us a little bit more color on how we should think about the breakdown between quarters and the guidance from both a segment perspective and a margin perspective, to help us kind of plan out the model since there's a shift, it sounds like a little bit more, on the back half?

All right Charlie, we'd be glad to do that and I'm going to ask Dave Walker to take the lead on it.

Hi, Charlie. Yes, from a consolidated perspective we have additional work coming through that uplifts our guidance for the year, as you know. And compared to the second quarter, the third quarter may be seasonally lower and the fourth quarter may come on a bit stronger. And this is due to some of the larger HIX contact centers winding down after the first open enrollment and then ramping back up for the next open enrollment period.

In addition historically, we've seen seasonality in the fourth quarter at the end of the government fiscal.

In human services, our guidance for human services remains unchanged. However, we've had some currency headwinds which mostly impact human services, so we expect revenue for the remainder of the year to be fairly consistent with Q2 and we still expect that operating margin for the remainder of the year will run towards the lower half of our 10% to 15% range.

In health, our guidance rates principally driven by health segment, and this work is expected to come in a bit stronger in Q4 as we prepare for the next open enrollment period. So overall, we still expect that that segment will deliver a full year operating margin towards a higher end of our 10% to 15% range.

Great, and then Rich, maybe you could talk a little bit more about Job Path Ireland. I know there's a -- a relatively new opportunity for you?

Glad to do that, Charlie, and there's a number of opportunities that we have out there, and over in the European geography. I'm not going to get into any particular one that's in progress, but there are a number of countries as we've talked about over the years that we think will be ripe for opportunities and we'll sort through them, we'll submit proposals where it's appropriate and keep our fingers crossed that we'll be successful.

Great, thank you very much.

Next question, please?

Our next question comes from Carl McDonald from Citigroup.

Great, thank you. I had a question on the Australia re-bid. Point well taken on them preferring the performance measures over price. I think you've also talked the Australia contract being above the high end of the margin target range. So, is it -- it right to think about as part of a re-bid process to margins probably would come back more towards the target level?

Carl, I think that's a fair question and generally we see performance-based contracts towards the higher end of the range. And in a re-bid environment it's always possible the government will come back and change the terms and the conditions, the pay points, that give you some adjustment.

But in my mind, I haven't really put this one on a table as one where I expect, and while there's a degree of uncertainty, I have not felt that this is one where we'd expect a dramatic change in margins.

Okay, and then just on the timing of that, if the re-bid comes out end of this year, the projected timeline for when that new contract would start?

That would be for July 1, 2015 in terms of a handover if that happens.

Carl McDonald: Got it, thank you very much.

You bet.

Next question, please.

Our next question comes from David Styblo from Jefferies.

Good morning, thanks for taking the questions, guys. Staying on the Australia topic here, could you help us understand a little bit more of the additional work that you won? Sounds like some of the DMS revenue is going to fall on this year but most of the JSA would happen next year. Can you maybe quantify the impact that that's having on guidance for this year?

No, it doesn't impact it greatly, and it's included in the guidance.

This year?

This year.

Okay.

It has a much more dramatic impact next year, obviously.

Okay, and then the -- I guess before I had thought the government's approach in frequency of reallocating work would happen more around the re-bid. So, is there an opportunity for you guys to wine even more as they go through a re-bid? Or was this re-allocation something about a one-off of then that they just decided to do it this time?

We don't view it as a one-off event. I think it's pretty much a recurring element of their process, and they're quite proud of it and I think it's a good feature. They do a quarterly star in that -- star ratings program and they use that as a driver to re-allocate work. And I think it's a very important mechanism for them to drive best value in the program, so in some I don't think it is a one-off type situation. And I had not thought of it as something tied closely to the re-bid situation.

And interestingly enough when you think it through, given that methodology, it almost sets up a re-bid situation where you'd be on -- all things considered equal, there's likely to be less turnover during a re-bid than other types of models.

Okay, and if I could ask my follow-up on the appeals, I know last quarter you talked about the RAC appeals and some of the volumes easing for next year, you knew you had line of sight for this year for stabilization. But the offsets of that that you'd mentioned, the California Workers' Comp, I'm curious. Is the margin profile on that business similar to perhaps the decline that you may observe in RAC?

The margin on those businesses are very comparable. So, in fact, the margin back fills quite nicely for any downturn we may see in other areas and it really does manage like a portfolio. You know, some are up, some are down with very similar margin features, tends to be transaction-based, and run you know, in a very careful bass across the US.

Okay, thanks.

You bet, thank you.

Next question, please.

Your next question comes from Brian Kinstlinger from Sidoti & Company.

Great, thanks, good morning guys.

Good morning, Brian.

Morning.

In your result to date, can you confirm you haven't received meaningful revenue from appeals? I think you said the DOE also is launching in August, and then when do you expect these two programs to be in a serious ramp?

Brian, I just want to ask a clarifying question. Do you mean the eligibility appeals tied to the Federal marketplace contract?

That's right, thank you.

Okay, thank you.

You know, Brian, that contract is wrapping up nicely and it's running as consistent with our expectations.

And the DOE, and the DOE contract as you know is early-stages, and it as well is ramping up and I think the hand-off's effective, scheduled to be effective August time frame.

August, yes, fourth quarter.

So then I think you take away as they're in very early route stages, moving forward according to our plan, and obviously given their early start absolutely watch them very, very closely.

Yes, DOE will not be material this year.

In Australia, the volumes that you're expecting on case loads are up 33%, $75,000 to $100,000 yet you only expect 10% to 15% more revenue. If you can talk about the disconnect between those two numbers?

Sure, I'd be glad to do that. I think that the major factor and keeping in mind that these are very, very early estimates, and we still have to sit down with a client and negotiate the particulars so all that's subject to change. But that's being said, the early different really is a function of mix. And as you know, we get paid meaningfully different pay points for different kind of cases that we handle.

So, the difference would really be in the mixed category.

Thank you.

Sure.

Next question, please.

(Operator instructions) Our next question comes from Richard Close from Avondale Partners.

Yes, thank you for allowing me to ask the questions. With respect to the long term growth you highlighted the 10% and then you commented 2015 is expected to be a good growth year. Is a good growth year somewhere between the 10% and what we're achieving in the current fiscal year?

I think it's a great question, Richard, and my sense on this is again, it's really too early to put a percentage or even a range if you will on, what does that good growth year mean. I don't think it's a simple yes or no answer. And I think it's too early to handicap because we've got so many pieces that are moving.

I think a good growth year in my mind is a growth year that supports our long-term, not meaning single year 10% metric but our long term view that we can grow our business 10%, and if we have confirming evidence in any year that that's a very reasonable expectation, then I put that in the good category.

With respect to the pending new opportunities I think that you're talking in terms of long term, growth in 2015 and beyond, as you think about those opportunities, as you sit here today and obviously you guys give us a six month pipeline, and you can see things out farther than that. You know, are you -- I guess as pleased with the opportunities today as you were a year ago, or how do you see the overall business? Is it improving, or is it normalizing?

I think that's a good question as well, Richard. I think those that -- again, I think long-term. I think the nature of our business model, the nature of our industry, is that it's a multi-year process to generate growth, long-term growth. And given the long-term nature of somebody's opportunities that can take several years to go from thought to final contract, we really do have to look at things over a long-term period. And that's why we always refer to the long-term growth drivers that we think are decades long in nature, and I do think that you'll have years -- and certainly this year is one of those years -- where we have a hyper growth rate.

You know, given 30%-plus type growth rates, those don't sustain forever. I think clearly this year we've benefited from perhaps the most significant piece of legislation in the United States history in these social programs, and we've been -- we've had a front-row seat in that regard. So, the Affordable Care Act will not repeat in Fiscal 2015, so we'll see some abatement. That being said I'm very pleased to see that there are other programs in health and human services not only in the US but in other countries that are stepping up in carrying us forward into future years.

Whether all of that adds up to be 15%-plus in Fiscal 2015 or not, I think is one metric, but I also look at how does it shape up in years beyond 2015. And again, I fall back to that long-term 10%-plus growth rate.

All right, thank you very much.

You're welcome.

Next question, please.

Our next question comes from Frank Sparacino from First Analysis.

Hi, guys. I was just wondering if you could maybe give some additional color on Medicaid expansion particularly. I'm not sure if there's any way to quantify what the impact has been thus far, but you know, also more curious just relative to your expectations. How you see that this year, and next year?

Good morning, Frank. Also with us here is Bruce Caswell, and I think most of you know Bruce. Bruce is the General Manager and President of our health segment, and we're going to ask Bruce to talk a little bit about that.

Sure. And good morning Frank, it's a great question. One way to address this is to really look at it at a top level from the enrollment numbers that have come out recently. And when you look at the sources overall about $13.5 million newly-eligible individuals have been determined eligible to enroll, and that breaks out into about 8.7 million who are APTC or tax-credit eligible, of which the numbers suggest that about 8 million of them have already paid, selected their plan and paid their premiums.

The remainder is new medicated chip lives, so that's about 6.7 million nationally, of which about 2.25 million are attributable to the woodwork effect, so these are individuals that would have been previously eligible under program rules who because of the outreach efforts of the program obviously came into Medicaid. So, if you net the 2.25 from the 6.7 I think you get actually at an aggregate scale, the Medicaid expansion effect. And there's some good data that's been published out there that breaks that out by state, obviously with the 25 states that are participating in Medicaid expansion and those that are not.

Our view has been and continues to be that Medicaid expansion is a long-term trend. There will be states that over time will expand Medicaid because of obviously the pressures related to the loss of disproportionate share payments to the hospitals. We've seen pressurization during the state legislative season, just this year. It remains the number one issue, for example, as Virginia tries to get to a budget.

In addition to that, CMS has very much indicated flexibility to states that seek waivers to expand Medicaid on their own terms. And a core element of that is doing an expansion that has a component of personal responsibility, whether it's financial participation, something as simple as a $2 co-pay every time you go see a physician, to some element of personal responsibility and engaging in active and healthy lifestyle behavior.

So, we see states now that are crafting expansion programs. Arkansas was kind of the poster child for this originally, but there are a number of others, Pennsylvania, Michigan and others, that are looking at doing expansion on their terms. And we feel that we're in an excellent position as an incumbent provider with existing infrastructures, and with -- this goes back several years. We've said we've got programs and technology that can be if you will, pivoted to support those expansion initiatives. So, we feel very strongly about our position in assisting those states as this in a multi-year basis, continues to roll out.

Next question, please?

(Operator instructions) Our next question is a follow-up from Brian Kinstlinger from Sidoti and Company.

Great, thanks. In the UK work program you said you're eligible to bid and that vendors can pick up a new region. I'm curious, is every vendor that's there able, eligible to bid, or did you have to meet certain standards? And, can you only add one new region, is that what you meant to say?

I think that's what we meant to say, Brian. I don't believe that all vendors are eligible. The government does have certain criteria in order for vendors to be eligible to bid. I don't know how many of the vendors are eligible, but it's a subset of all of them, and I believe there's one region that we're particularly interested in.

That's correct. Brian, it goes back to the original framework and what vendors were allowed to bid in that specific region when they did the initial work program bidding, and so I am more than happy to circle back with you but those statistics are also on the Department for Work and Pensions website in terms of what vendors are eligible to bid on that specific region.

Great, that's helpful, and then the last question, I was surprised the gross margin in health services, it was higher in the June quarter versus the March quarter given the higher mix of cost plus work I assume from the Federal program that you're running related to ACA. So, can you go over maybe Dave, the puts and the takes for this line item?

Do you mean the March quarter versus the December quarter?

Yes, I do. That's the second time you had to correct me, thank you. I do.

Why don't you just repeat the question for the other folks on the call, David?

Yes, I mean, the question is, surprise about the high margins essentially this quarter on a sequential basis, for health. Right. And we talked about the size of the change orders on the call that happened in Q2, and those were primarily in health. So, we just look at the ACA and the Medicaid-related change orders for work performed prior to this quarter, in which we got the change order portion this quarter, so it's highly accretive. It's $5.2 million or about $0.04, $0.045 a share which falls right to the bottom line.

And you know, when we talk about duals and Medicaid expansion, that's a lot -- that's what a lot of this work is, so we've been seeing expansion on Medicaid, we've been seeing duals, and other mandates under the Affordable Care Act. So, again, there's a lot of change out there and that's opportunity for us.

Thank you.

Next question, please.

Thank you, at this time we have no further questions. I would like to thank our participants for joining, you may now disconnect.