Maximus Inc (MMS) 2015 Q2 法說會逐字稿

Greetings and welcome to the MAXIMUS fiscal 2015 second-quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you, Ms. Miles, you may begin.

Good morning, thank you for joining us on today's conference call. I would like to point out that we've posted a presentation on our website under the Investor Relations page to assist you in following along with today's call. With me today is Chief Executive Officer Rich Montoni; President Bruce Caswell; and Chief Financial Officer Rick Nadeau.

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 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 in 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 the information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons.

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

Thanks, Lisa. This morning MAXIMUS reported second-quarter revenue of $482 million, a 10% increase compared to the same period last year. Driven by the health services segment. All growth in the quarter was organic and on a constant currency basis revenue would have grown 12% compared to the prior year.

And while financial results continued to be unfavorably impacted by currency exchange rates in the second quarter we have seen a stabilization of currencies in the geographies where we operate since our last call.

For the second-quarter of fiscal 2015 operating income totaled $62.0 million and the Company delivered an operating margin of 12.9%. For the second quarter net income attributable to MAXIMUS totaled $38.8 million, or $0.58 per diluted share, which includes approximately $0.02 of cost tied to acquisition-related activities. Excluding this adjusted earnings per diluted share were $0.60.

Earnings in the quarter were ahead of our expectations, mostly due to a couple of contract amendments in the health segment that were larger than previously anticipated. Let me speak to our results by segment starting with Health Services.

The Health Services segment experienced another solid quarter of financial results. New work and the expansion of existing contracts helped fuel the top line. As a result revenue in the second quarter grew 14% to $370 million compared to the same period last year. Health Services' segment operating income in the second quarter of fiscal 2015 increase to $51.1 million compared to the same period last year.

For the second quarter the health segment delivered solid operating margins of 13.8%. The segment outpaced our expectations for the quarter due to contract amendments that were larger than previously anticipated.

As expected operating margin was lower than the same period last year due to the anticipated borrowing decreases in our Medicare appeals business and the expected losses from new contracts in the startup phase. As a reminder, we launched the UK's Health Assessment Advisory Service contract on March 1 and second-quarter results include one month of financial contribution.

So looking out to Q3 we expect an increase in revenue and profit as the contract will be providing a full quarter of revenue and earnings contribution. All in all another solid quarter from the Health Services segment.

Now let's turn our attention to financial results for Human Services. Once again the Human Services segment felt the greatest impact from adverse currency exchange rates. For the second quarter of fiscal 2015 revenue for the Human Services segment totaled $111 million and was lower compared to the same period last year. But on a constant currency basis the segment's revenue would have increased 4%.

Second-quarter operating income for the Human Services segment totaled $13.9 million and operating margin was strong at 12.5%. As expected, both operating income and margin were lower compared to last year. And as a reminder, the prior year's results benefited from the finalization of a contract in Saudi Arabia and some short-term consulting assignments in the US that were highly accretive and came to completion.

As previously announced, we were successful in our rebid in Australia and the new contract launches on July 1. We noted in this morning's press release that the new contract includes an expanded scope of work. As a reminder, the contract contained terms that will result in startup losses in our fourth quarter of fiscal 2015, which we estimate to be $0.06 to $0.09 per diluted share. The contract is expected to turn profitable by the end of the first quarter of fiscal 2016.

Moving on to cash flows and balance sheet items. For the second quarter of fiscal 2015 cash provided from operating activities totaled $5.5 million and we had negative free cash flow of $27.9 million. The negative free cash flow was principally driven by two items: one, the increase in DSOs; and two, CapEx investments.

As expected DSOs increased in the quarter mostly due to the new contracts in the United Kingdom, the Health Assessment Advisory Service and fit for work contracts.

At March 31, DSOs were 70 days, which is well within our stated range of 65 to 80 days. Approximately five of these DSOs were related to the new contracts in the UK. These contracts in the UK were also the primary reason for the increase in deferred revenue in the second quarter. We should expect to see improvement in DSOs towards the end of the year.

Also during the second quarter we made some sizable investments in infrastructure modernization in support of our ongoing growth in the United States and the United Kingdom. These types of capital investments typically occur in five- to seven-year cycles. The investments include facilities, fixed assets and upgrades in our telephony and back-office data centers. We believe these prudent investments will help drive efficiencies down the road.

During the second quarter we also amended our credit facility agreement. The expanded credit facility gives us a revolving line of credit, up to $400 million, and an uncommitted increase option up to an additional $200 million. The facility is available for general corporate purposes including working capital, CapEx and selected acquisitions.

Subsequent to quarter close we tapped into the new credit line to complete the acquisition of Acentia in April. As a reminder, this was an all cash transaction with a total purchase price of approximately $300 million. We funded the acquisition and related costs with domestic cash on hand and approximately $225 million borrowed under the amended credit facility. Acentia is expected to contribute approximately $110 million in revenue for the second half of fiscal 2015.

Also after quarter closed we completed the Remploy transaction. We recommend that investors view this largely as an acquisition of a single contract and the incumbent workforce of approximately 850 experienced personnel. Remploy will contribute approximately $30 million to $35 million in revenue for the remainder of our fiscal 2015 and the vast majority relates to the Work Choice contract.

MAXIMUS has a 70% ownership in Remploy employees and a collective 30% stake in the business. Remploy has a long history of supportive people with complex barriers into employment. And this will help MAXIMUS better support thousands more disabled people into work in the years to come. Rich will talk about this in more detail later on.

From a capital allocation perspective we will continue to focus on practical uses of cash to grow the business both organically and through acquisition. In addition to supporting the longer-term growth objectives of MAXIMUS, other priority uses of cash include our quarterly cash dividend and our opportunistic share repurchase program.

And lastly, as noted in this morning's press release, we are increasing our fiscal 2015 revenue guidance due to the expected revenue contributions from Acentia and Remploy. We now expect fiscal 2015 revenue to range between $2.05 billion and $2.08 billion.

In addition, we are bringing up the bottom end of our GAAP earnings range. We now expect fiscal 2015 earnings in the range of $2.33 to $2.40 per diluted share with a bias towards the upper end of the range. This range considers the expected contributions from Acentia and Remploy which we are forecasting to range between $0.07 and $0.09 of earnings per diluted share for the second half of fiscal 2015.

As expected, the accretion from these acquisitions will be offset by the startup losses of the new jobactive program in Australia of approximately $0.06 to $0.09 per diluted share. As a reminder, we increased our market share through this successful rebid. As a result the anticipated startup loss is higher than we forecasted in our initial guidance at the beginning of the year.

The other consideration for fiscal 2015 guidance is currency impacts. As we discussed last quarter, we have been negatively impacted by currency exchange rates relative to when we issued guidance in November. Since our last call in February the currencies have stabilized, so the degradation has abated and there is no material change to the information provided on our last call.

We still estimate an unfavorable currency impact to total Company revenue of approximately $45 million and operating income of approximately $4.5 million or $0.05 per diluted share. This compared to the exchange rates that were assumed when we completed our forecasting in late October.

We also wanted to provide some quarterly flavor for the rest of fiscal 2015. First, as previously disclosed, Q3 is still expected to be stronger than our Q2 primarily due to a full quarter's contribution from the new Health Assessment Advisory Service contract that began contributing revenue and profit in March.

Right now Q3 is shaping up to be the strongest quarter for fiscal 2015. And our fiscal fourth-quarter will be lower on the top and bottom line principally due to the startup headwind of the new contract in Australia.

We are also maintaining our cash flow guidance for fiscal 2015. We still expect cash provided from operating activities to be in the range of $165 million to $190 million. And we expect free cash flow to be in the range of $100 million to $125 million, but toward the lower end of the range due to the capital investments we are making.

And lastly, while we think it is too early to provide formal guidance for fiscal 2016, we thought it would be helpful to provide some direction for next fiscal year.

As you know, we've had a number of developments in fiscal 2015 that will have a positive impact to fiscal 2016, including full-year contributions from Acentia and Remploy acquisitions, and the ongoing growth from new work that is presently ramping up in fiscal 2015. This includes the rebid win in Australia and also brings along increased market share.

While these are all affirmative tailwinds, we do manage an entire portfolio of contracts and, in any given year, we naturally expect to experience some headwinds. And this early look does contemplate some of those puts and takes in the overall model.

When we add this all up we think fiscal 2016 is shaping up to be another strong growth year. Our estimates are predicated on what we know today and they assume no other dramatic headwinds other than normal course fluctuations that we see year in and year out. As a result our preliminary estimate of revenue for fiscal 2016 is in the range of $2.4 billion to $2.5 billion. We preliminarily expect earnings per diluted share to range between $2.85 and $3.05.

There are obviously a number of variables that can affect our financial results. This would include changes in volumes, outcomes on performance-based contracts, fluctuations in currency and legislative changes. But overall we remain on track for solid results in fiscal 2015 and, more importantly, the foundation is set to deliver another strong year of growth in fiscal 2016.

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

Thank you, Rick, and good morning. With another quarter of solid operational and financial results under our belt we remain on the growth path we set for the remainder of the fiscal year and beyond.

Since our last call we've had several positive developments in both segments that bring meaningful contributions to the achievement of our long-term growth strategy. This includes the Acentia and Remploy acquisitions as well as the expanded scope of work in Australia. These developments, coupled with the organic growth from new and existing programs, represent the basis for our continued growth into the next year, that being fiscal 2016.

[Although we normally provide] preliminary guidance this early it is useful to offer more insight to the investment community on how we are thinking about next year as investors consider these multiple developments. So let's start with the Human Services segment where our recent rebid win and our strong historical performance helped us further expand our footprint in Australia.

We are very pleased to secure the five-year $940 million rebid for the new jobactive program. It will start on July 1 and, as we mentioned in a recent press release jobactive is the new name for the Job Services Australia or JSA program.

The rebid increases our scope of work in two different ways, the first is our market share. Under JSA we serve 12.5% of the total allocated caseloads. Under the new jobactive contract we gain a net pickup in expected volumes which increases our market share of caseload allocations to approximately 15%.

This Australian government also consolidated and restructured a number of employment service areas for jobactive. There are now 51 areas and MAXIMUS will support job seekers in 29 of them.

The second increase in scope is related to the national rollout of the Work for the Dole program. Since 2014 MAXIMUS provided services in four of the pilot employment service areas where we arrange activities with community-based and not-for-profit organizations. The Australian government has now taken the program nationwide and MAXIMUS will serve as the coordinator for 14 of the 51 areas.

In this performance-based environment our expanded role is confirmation of our proven ability to deliver the outcomes that matter to our government clients. In this case successfully helping jobseekers obtain sustainable employment. It is certainly an important component of our longer-term growth strategy and I congratulate our Australian team on a job well done.

Now turning to our UK operations where we completed the acquisition of Remploy in April. We are very excited to welcome this highly regarded organization to MAXIMUS through a 70%/30% partnership.

Remploy is well known for successfully assisting people with complex barriers into employment and complements our existing portfolio. They are one of the primary providers for Work Choice, which is the government's employment program for people with disabilities and health conditions.

Remploy has a 70-year history of delivering disability employment services throughout the United Kingdom. Following the second world war the government established Remploy to provide training and employment for injured and disabled ex-military and miners. Since then Remploy has evolved into an organization that is dedicated to supporting people with disabilities and health conditions into mainstream employment. And MAXIMUS is firmly committed to continuing this mission.

Remploy increases our global presence as a world leading provider of disability employment services. This will enhance our business development efforts for emerging opportunities. Our experience running similar services in other geographies, most notably Australia, complements Remploy's expertise in the United Kingdom.

MAXIMUS and Remploy share similar cultures and values and our integration efforts are going well. We are excited to grow together and transform the lives of even more people through sustainable long-term employment.

Let's move on to Health Services segment. Here we introduced a new growth platform for our US federal services business with the acquisition of Acentia. Most notably the acquisition provides us with additional contract vehicles and access to federal government agencies that are core to the MAXIMUS business model.

In the federal contracting market government agencies typically seek support from vendors through three different channels: contract vehicles, full and open procurements, and set-asides for entities like small businesses. Contract vehicles allow agencies to prequalify a selected set of vendors to support their needs. Only these pre-vetted companies have the exclusive opportunity to bid on contracts and task orders.

In the civilian services space, which is the sweet spot for MAXIMUS, the majority of support work is issued through contract vehicles. Acentia brings numerous contract vehicles which now allow MAXIMUS to bid as a prime contractor to both IT support and business process management opportunities.

In the past we could only access these bid by relying on teaming arrangements. Now we believe the acquisition opens up an entirely new set of opportunities for us.

Acentia also allows MAXIMUS to be a full service provider to the federal government and our integrated business development team is already hard at work on opportunities.

As a provider of technology and management solutions Acentia has cultivated positive relationships with a number of federal health and civilian agencies. These include the Internal Revenue Service, the US Defense Health Agency and the US Department of Labor.

We plan to build upon this success and over time introduce additional core services to this new set of agencies. It is important to remember that federal business development efforts often have a long runway due to the federal procurement process. We are optimistic that the acquisition will serve as an important step in our long-term strategy to continue to grow our US federal book of business and drive shareholder value.

During the second quarter the Health Services segment also wrapped up activities with the Affordable Care Act's second open enrollment period, or OE2. As we mentioned last quarter, we continue to provide value to our clients as they address additional ACA requirements such as new tax forms and special enrollment periods. Overall it was another successful open enrollment period and we believe that we are getting closer to a steady-state as we look ahead to OE3.

We are pleased that ACA revenue has come on stronger than our initial expectations at the beginning of the year. This is due in part to better-than-expected repeat work as well as providing states with additional support services tied to meeting requirements under the Act.

It is important to remember that we operate a portfolio of ACA-related work that goes beyond the call center operations. This broader scope includes the training and certification of community assisters and brokers, premium and cost-sharing collections, eligibility appeals in some states and social media management.

We presently expected that ACA-related revenue for the full-year of fiscal 2015 will be up about 10% compared to last year. At this point we think the annual revenues from ACA have largely stabilized into more of a steady-state. But it is also important to put it in perspective. We estimate that ACA-related revenue will be about 15% of consolidated revenue for fiscal 2015.

Moving on to our international health operations where MAXIMUS successfully launched the Health Assessment Advisory Service in the UK on March 1. This is the contract where MAXIMUS is conducting assessments for individuals seeking certain disability benefits according to the rules set down by the United Kingdom Parliament.

Our startup of operations are progressing well. We are working hard to achieve the program's goals related to improved service to UK citizens, including increasing the overall number of healthcare professionals who support the program. This allows us to meet our assessment volume requirements and lower the backlog so people can be assessed in a timely manner.

Nearly all of the employees transferred over from their previous provider and early indications are that we are meeting our recruitment targets for healthcare professionals. This is key in helping us bring about positive change and, although it is early days, we are also on track to meet our requirements for assessment volumes.

As a reminder, our long-term goals for the program include: reducing the long lead times; improving the quality of the assessment; and making the assessment process less intimidating.

We remain actively engaged with different stakeholder groups in the United Kingdom as a top priority for this highly visible program. As part of our stakeholder outreach we have established a customer representative group that covers more than 20 national disability organizations.

Together we are identifying areas where we can make meaningful improvements such as clinical training, the assessment interview, accessibility of sites and customer communications. In fact, we have already received positive feedback from some of the member organizations about our efforts to improve the accessibility of the clinical sites.

All in all it was a great quarter for both segments, we are executing the work we have recently won, securing our base book of business with key rebid wins and launching new opportunities for future growth.

Moving on to new awards in the pipeline. MAXIMUS posted sales at March 31 year to date, signed contract awards of $1.58 billion. At March 31 we also had an additional $1.05 billion in new awarded unsigned contracts including the jobactive rebid contract in Australia. With these two large wins now signed we are at a record level of annual signed contract amounts.

Our sales pipeline was strong at $2.6 billion at March 31, this is an 18% increase over our pipeline for the same period last year. On a sequential basis the pipeline was lower compared to the first quarter of fiscal 2015, this is very much expected as we had launch opportunities, such as the Australian rebid, move out of the pipeline and convert into new awards.

As a reminder, our reported pipeline only reflects opportunities where we believe the RFP is expected to be released within the next six months. Overall our pipeline holds a broad mix of rebids and new work representing multiple geographies in both segments.

In conclusion, we are pleased to have introduced several new initiatives that bolster our existing platforms for long-term growth. We are equally excited about our preliminary guidance for fiscal 2016, which represents another year of expected solid revenue and earnings growth much of which is organic.

But it is important to recognize that it is our people who are at the heart of our ability to continue to deliver on our commitments to our clients. They are what drive our success on a daily basis. So let me take a moment to welcome our new colleagues from Acentia and Remploy.

On behalf of the management team I thank our operations team and healthcare professionals in the United Kingdom who did a tremendous job as they successfully launched the new Health Assessment Advisory Service. And finally, I reiterate our appreciation for our Australian team whose consistently high performance played the key role in the latest rebid award. And with that lets open it up for questions. Operator.

(Operator Instructions). Charlie Strauzer, CJS Securities.

Two questions for you. The first one is I saw that the ACA revenue was up year-over-year, kind of unexpected and just wondering what your thoughts were going into fiscal 2016. And then also too if you can -- that is the second one (inaudible) done with that, sorry.

Okay, Charlie, good morning, this is Rich. Thanks for the question. You are asking what we are expecting for ACA revenue in 2016. And I'm actually going to ask Rick Nadeau to field that question.

Yes as Rich mentioned, the ACA revenue is expected to be approximately 10% higher in this fiscal 2015. We think that the revenues from ACA have largely stabilized and are more at a steady-state run rate at this particular point.

Although it is early, based on what we know today our preliminary guidance assumes that the revenue from the ACA-related work will be relatively stable and at similar levels as compared to FY15. There will be some puts and takes within the portfolio, but we are projecting stable.

And then just my second question is just any update on the Texas rebid?

On the Texas rebid, Charlie, the bids have been submitted. And as you know, we think past performance is the number one driver on any rebid type situation and we are really proud of the job that the team has done historically.

So we think that we are well-positioned. However, it is a competitive environment and we are anxious to hear. I think it is going to be probably a late summer type announcement. And as you know, the current contract runs through December 31, 2015.

Next question, please.

Richard Close, Avondale Partners.

Thanks, Lisa, for putting a good presentation together for us. I am just curious with respect to Acentia, that transaction. Can you talk a little bit more about the opportunities that you guys see ahead for that? And how big of an impact has that been on the pipeline so far?

Good question, Richard, I will talk about opportunities. I think the opportunities with Acentia, and we touched upon this in the call now. I really do think there are long-term in nature. And I think that because -- two reasons.

One, I think the nature of the business with government inherently takes -- has a long sales cycle, one to two years for these larger jobs to germinate and then ultimately be awarded. And that is true with the US federal government.

And two, I believe that there is long-term opportunities as governments look to providers who can provide a more holistic solution. We are seeing a bit of a consolidation in the industry globally as governments are stretched to deal with many, many, many vendors. In some programs there has been hundreds of vendors.

There tends to be a trend here to consolidate vendors, meaning the awards would be larger per vendor. And I also think the nature of the scope would be increased, not just traditional labor-based BPO, but with technology playing a larger role in those solutions.

So I think Acentia combining with MAXIMUS puts us in a position where not only do we have that historic BPO capability but more ITO capability which will further enhance our holistic offering in those agencies which, by the way, are key along with the vehicles that we get with the Acentia combination.

And there was a second part of your question. I think you were asking what is the impact on the pipeline. And the answer is, the information we just shared with you about pipeline at March 31 excludes Acentia. So as you would expect when we pull together the data for June 30, we will add the Acentia information on top of it.

I had a follow-up on the ACA revenue, if you could. How did you guys actually accomplish this in fiscal 2015 considering you thought there was going to be a $50 million to $100 million headwind.

I'm going to ask Bruce Caswell, who is here with us today to answer that and then I may provide some infill as well. Go ahead.

Sure, and, Richard the reality is of course we operate more than just customer call centers related specifically to ACA-related calls. So we have a fairly diverse portfolio of services that we provide our clients. It is not uncommon in some of our contracts to provide additional functions that can see increases in volumes over time.

We do things like training and certification of community assisters and brokers. We handle premium and cost-sharing collections for some of clients. We handle in fact eligibility appeals. You know us to do that at the federal level, but we also do it in some of our state contracts.

Also this year was a bit different than last year. You may recall we had for the first time people coming back and re-enrolling and renewing. And just prior to the open enrollment period opening there was a concerted effort to encourage individuals to come back to the exchanges and see how the premiums and the exchanges may have changed and not just auto reenroll.

And then as we reached the end of the open enrollment period we had transactions related to these 1095 A forms, the tax forms that the IRS is putting out for the first time. And always you will see some special enrollment period activities as the open enrollment period closes.

And then the last component I would add is that in many of our health insurance exchange contracts we do work related to supporting the Medicaid requirements under the Affordable Care Act for those populations. And many of these households have complex family situations where certain individuals might qualify for Medicaid and others for exchange policies.

So we support our clients doing things like eligibility application screening and eligibility support services related to that. So it is really just a collection of those additional call it nontraditional call center activities that comprise the growth there.

Thanks, Richard. Next question, please.

Dave Styblo, Jefferies.

I did want to stay on Acentia for another minute here. And Rich, I was just hoping you would give us perhaps some more color about sort of the shots on goal that you're going to be able to take now with this deal. Because essentially it sounds like the nugget here is you get a seat at the table where you didn't previously have a seat for somebody who's RFPs were out there.

So if that is the case and I am understanding it right, then what do those contracts look like? Are they much larger, similar size to the ones that you are going after given that you are now having access to a variety of different departments? And then also what would the expected margin profile be on those types of future wins?

Okay, good series of questions, David. In terms of the shots on goal, and I guess that is very appropriate today. I think it is a very meaningful increase on our opportunities. As many folks know, dealing with US federal government, the majority of the work in our belief is awarded through these contract vehicles. So if you are not one of the limited companies initially awarded a seat on that vehicle you are not able to bid.

And we have not had these vehicles in our portfolio up through this acquisition of Acentia, the acquisition of Acentia adds some very meaningful vehicles and good customer relationships with the exact agencies that are of interest to MAXIMUS, so that would be civilian and health agencies.

So I think the shots on goal, while I can't quantify and I can't give you a preliminary indication of how much it is going to add to our pipeline this year and next year, I think it is quite meaningful. That was really one of the principle drivers behind the strategic drivers behind the combination.

In terms of margin, as we know, US federal government work is oftentimes cost plus. A good portion of the work for Acentia is cost-plus. So it operates in a lower margin environment. I put it in the category -- we expect the portfolio to perform in the 10% to 15% range. I expect that the contracts we pick up from Acentia will be at the lower end of that range. Rick (technical difficulty).

Yes. And also you have to remember that when you do an acquisition you have intangible assets that are recorded as part of the purchase accounting, so you will see amortization of intangibles on a going forward basis. That will tend to reduce the -- that will reduce the operating income.

As you see, we broke that out on the face of the income statement this time and we plan to continue to do that for you. So if you want to do an EBITDA type of calculation you can see it readily off the face of the income statement.

Okay, that is helpful. And my follow up is on Australia. So can you maybe walk us through a little bit more about why the startup losses for the expansion? Is it you are gaining -- do you have to put up new facilities, expanding into new territories? Is that part of the reason?

And then more importantly, my understanding of sort of the contract is that it is going to be a little bit more performance-based. And so that would suggest to me that perhaps the margins would be at least the same if not higher than what you were earning before. Am I thinking about that correctly?

And then if I could kind of tag on -- as we think about an earnings slingshot from 2016, I know you don't want to go into 2017 too much, but I suspect that contract would have a higher earnings than 2016 since there is still some losses (multiple speakers) startup losses in fiscal 2016.

Okay, let me take the margin expectation given the fact that there is more in a performance-based element to it. And then I am going to hand off the first part of your question to Rick Nadeau because it is principally accounting, or at least our accounting principle, that answers the first part of your question in terms of why we have the startup loss.

You are right, there is one key aspect of the new contract over the old contract that makes it more performance-based, in particular a significant pain point is when we not only find somebody a job but they have been in that job for, under the old contract, 13 weeks. The government under the new contract has moved that to 26 weeks.

So that is more pay for performance. And yes, you are right, as a result we do think that our margin should be improved vis-a-vis the old contract or at a minimum maintained. And that is our expectation as we move forward. And you are also right that we don't want to get into fiscal 2017 speculation at this point, David. So with that, back to Rick Nadeau as it relates to why we have these startup losses.

In both the job services contract, the current contract, and the jobactive contract, the new contract, there are service fee revenues. In the old contract, the job services contract, those are earned over a three-month period. With the new contract, the government pushed that back and you now earn those service fees over a six-month period. So actually our deferred revenue, if you will, will grow as a result of that.

So we are still getting the service revenues, we just earn them over a longer period of time. We'll ultimately get the whole amount, but we will have to record the revenue on them slower than we have in the past. And thus that gives us that $0.07 to $0.09 hole that we talked about in that fourth quarter.

Thanks, David. Next question, please.

Stephen Lynch, Wells Fargo.

I wanted to see if I could get some more clarity around which contract amendments drove the upside in Health Services in the quarter. Was that principally related to ACA work coming in higher than expected?

That was a variety of -- or a couple of different contract amendments and I want to just address that briefly. That is an accounting thing as much as -- as well as a negotiation item. We can't record revenue on change orders until they are actually signed. And so you can wind up with a situation where you have the cost in one period and the revenue in another.

And so, that is really that plus the fact that it is as time progresses you learn more about the amendments and you actually have some negotiation around them and you learn more about them. So that is really what happened there.

Okay. And then if I could get any thoughts you have on the future of the Medicare RAC program, maybe your expectations for when the program could get going again and then when it does how you expect the appeals process to evolve given the efforts to increase clarity to providers with the two-midnight rule and rules like that.

Let's ask Bruce Caswell to share his thoughts on that regard -- in that regard.

Sure. I guess I would say that I feel like we have seen a bit of the new normal as it relates to the RAC program. And so while they're still working through the contract awards under the new program, and I guess there is some consolidation occurring within the industry, we wouldn't expect to see volumes return to the levels that we saw obviously in 2013 when things really peaked.

And in fact there has been a lot of discussion about that recently because that's now led to a fairly significant backlog above our level at the administrative law judge level.

So I would say we will continue to watch the space. We also noted that we had lost two small contracts related to Medicare appeals. So we operate in a slightly smaller domain presently. And I am thinking that as the rule around the two-midnight stay and so forth becomes more final and these new contracts are awarded, again we'll probably see appeals volumes where we are presently seeing them without substantial new growth.

Yes, I would add to that. I agree with Bruce as it relates to -- I think from the RAC program per se, which is just one program in the whole universe of appeals, that we may be in a new normal. I would also add to it though that we have experienced and believe we will continue to experience an increase in the demand for appeals outside of that RAC program.

So it just seems to be inherent in running a tighter ship with these programs as governments move forward -- and this is not just in the US -- that we are seeing increased demand for quality independent appeals which firms like MAXIMUS offer.

So we are very excited about the (technical difficulty) appeals space and I am pleased to see that we are more in a portfolio situation with appeals than years back we were kind of standalone with the just the Medicare appeals.

Thanks, Stephen. Next question, please.

Allen Klee, Sidoti & Company.

Within Australia how do you think about the incremental revenue associated with what you mentioned, the national rollout of the Work for the Dole program?

I think about when I think about the Australia new award my key thoughts are, one, that this is another case in point where performance is most important, where governments, large governments are building partnerships with key suppliers. I talked earlier about the trend towards consolidating suppliers, that is certainly the case in Australia and in this case. And MAXIMUS has worked really hard, our team has worked really hard to achieve that performance and the confidence of this client.

I think it is also very rewarding that they have chosen to roll into the scope of the old JSA program and now the jobactive program this additional Work for the Dole feature. It is almost like two contracts being awarded in one. And again, I think it is an affirmation of the government's confidence.

Emphasis on performance by larger vendors and in particular MAXIMUS I think picked up more than its fair share as it relates to Work for the Dole. It may be a small piece but we think it is very, very strategic.

Many governments who have welfare programs are very much focused on younger folks, looking for ways to get them employed and Work for the Dole is a feature that is being rolled out large-scale nationally in Australia but other countries are also talking about similar features in their welfare program.

Thank you.

Is that helpful, Stephen? I mean, Allen.

Thank you.

(Operator Instructions). Frank Sparacino, First Analysis.

Rich, I was hoping to go back to Remploy. It seems like a bit of an unusual transaction for you guys and just wanted to understand sort of the attraction there, what the business looks like from an [operability] standpoint and as well as synergies with all the other work that you guys are doing in the UK right now.

Great question, Frank. And we are very excited about Remploy combination. And it does have some unusual features and I actually think it is the unusual features that make it a really good fit for MAXIMUS and for Remploy.

As I talked about in the call notes, this is a function that heretofore has been owned by the UK government. It was formed after World War II to focus delivering work opportunities to disabled veterans returning from war. Then they expanded the scope to include miners. And originally they actually had factories that had been opened to employ these individuals and produce goods that were then resold.

They closed the factories some time ago, but Remploy has continued to be very dedicated and has elevated itself to being highly regarded as very, very good at helping disabled individuals find good productive work. And we think that is a capability that is just core to what we do and we'd like to get better at it. Remploy offers some model features that we would like to learn from and extend not only in the UK but in other countries as well.

We also think it is advantageous from the government's perspective and from Remploy's perspective. It is a means by way of the government can effectively spin off or [mutualize] a function that is important but not inherently governmental, which is a trend in the UK, but to do so in a responsible fashion by combining it with a firm like MAXIMUS.

And we committed to -- not only to continue the dedicated mission, the focus mission of Remploy but to enhance it. So I think in closure I would say it represents a great opportunity to the roughly 850 employees of Remploy whom I believe are very excited about this combination. So all in all I think it is a very unique one but a very exciting one. So I would say stay tuned as we move forward with the Remploy combination. Next question, please.

Brian Kintslinger, the Maxim Group.

Can you give us some quantitative details in the pipeline such as how much represents new business versus recompetes? Obviously we have Texas and then what does the geographic weighting look like?

Well, we typically stick to the quantification that we have shared with you, but I will add to it. And I would say from a geographic perspective I am pleased that it really is spread across all of our existing markets. So I don't see any particular concentration.

And our teams have been working really hard to focus on growing all aspects of the business. So demand is pretty much universal. As it relates to new business versus rebid business, again, while we don't quantify that we continue to be in a position where the majority, i.e. north of 50% of that sales pipeline is new work.

Okay, then maybe just -- maybe you can tell us particularly how the size of the Texas deal and as you have done some large deals in the past. But in addition, on Acentia, they do a lot of IT services which isn't your primary focus. So I am curious as you use those [GWAPs] for the federal government, is the plan to use those to cross sell BPO services and use them or will the focus also be a little bit more on IT services in your business?

Well, I think we would encourage Acentia to continue to move forward with its existing line of business and retain its work and grow its work. But a key element of the strategic combination of the two firms is to cross fertilize these capabilities and where there are opportunities to sell BPO into those agencies, rest assured the team is very much focused on identifying those opportunities and moving forward and rolling out with that -- those marching orders as we speak.

Thanks, Brian. Next question, please.

(Operator Instructions). Frank Sparacino, First Analysis.

Just real quick, and I want to make sure I am looking at 2016 [correct] when I'm doing the math. So it looks like on an organic basis we are looking for roughly kind of 10% to 13% growth in fiscal 2016. Is that right, Rich?

Rick Nadeau, does that feel about right?

Yes, that feels about right. And we go through and we look at it, obviously we gave you a range. So yes, you are within the right striking distance when you think about adding Acentia and Remploy which is not organic and then adding an inorganic piece. That is a hard thing to say. When you (multiple speakers) organic.

So roughly I think we are in the vicinity of top line total fiscal 2016 over 2015 of say 20% of that, approximately 12% is organic.

Perfect. Thank you, guys.

Next question, please.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.