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MAXIMUS, Inc. (NYSE:MMS)

Q1 2013 Earnings Conference Call

February 7, 2013 09:00 a.m. ET

Executives

Rich Montoni – CEO

David Walker – CFO

Lisa Miles – SVP of Investor Relations

Analysts

Charlie Strauzer – CJS Securities

Scott Green – Bank of America

Frank Sparacino – First Analysis

James Naklicki – Citi

Brian Kinstlinger – Sidoti & Company

Operator

Greetings, and welcome to the MAXIMUS Fiscal 2013 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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.

Lisa Miles

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

With me today is Rich Montoni, Chief Executive Officer and David Walker, Chief Financial Officer. Following Rich’s prepared comments, we will open the call up for Q&A.

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 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.

And with that, I’ll turn the call over to Dave.

David Walker

Thanks, Lisa. This morning, MAXIMUS reported first quarter revenue that was in line with our expectations. Revenue in the quarter grew 19% to $286.3 million compared to the same period last year with organic growth of 5%. Top line increases for the quarter came from solid growth in both our domestic and international operations and across both segments.

On the bottom line, earnings in the quarter were better than our expectations driven principally by accretive transaction based work in the Health Services segment primarily in our appeals business. We also experienced stronger than expected results in our Human Services segment from the domestic workforce services contract.

Total segment operating income, excluding legal, settlement and acquisition expense totaled $34.3 million in the first fiscal quarter and operating margins were 12%. For the first quarter, income from continuing operations, net of taxes totaled $21.8 million or $0.62 per diluted share. This includes approximately $0.01 per share of net legal, settlement and acquisition related expenses. Excluding these expenses, adjusted earnings per diluted share were $0.63 in the first quarter.

Let’s jump into the results by segment starting with health services. For the first quarter, health services revenue increased 11% to $176 million compared to the same period last year. The growth was fueled by the PSI acquisition as well as our net growth resulting from new work and expansion of existing contracts. On the bottom line, operating income Health Services segment was $20.6 million and operating margin was 11.7% in the first quarter. The segment benefited from growth on existing contracts and higher volumes in our federal Medicare appeals work. Compared to the same period last year, operating income increased 23% and operating margin expanded 110 basis points.

As a reminder, last year’s first quarter operating margin was lowered by the timing of a change order that was delayed to the third quarter and margin dilution from the managed care expansion in Texas where we experienced a temporary spike in low margin revenue.

The Health Services segment performed ahead of our expectations for the first quarter, the favorable revenue in margin results were driven principally by increased volumes in transaction based programs such are federal Medicare appeals business where higher volumes have resulted principally from the growing activity from RAC contractors. We expect this trend to continue for the remainder of the fiscal year.

In addition we’ve also started to see revenue materialized a little bit sooner than expected from work related to health insurance exchanges as states progress towards meeting the implementation deadlines in late 2013 and 2014.

Let’s now turn our attention to financial results for human services. For the first fiscal quarter, revenue for the Human Services segment increased 35% to $110.3 million compared to last year. This growth was driven by the PSI acquisition, as well as organic growth principally from our international operations, this includes the expected ramp up in the United Kingdom as well as new programs in Canada and Saudi Arabia.

First quarter operating income for the Human Services segment totaled $13.7 million, delivering a stronger than anticipated operating margin of 12.4%. The segment benefited from some performance base payments on a large domestic welfare-to-work program which we do not expect to see on this scale going forward. I’m also pleased to note that the UK program was fully profitable in the first quarter and remains on track to achieve our full year target operating margins. These contributions offset the anticipated lower margin from the Australia program resulting from economic and regulatory factors that we discussed last quarter. This margin change is expected to continue for the foreseeable future.

Moving on to cash flow and balance sheet items. Cash flow in the fiscal first quarter was consistent with our seasonal expectations. As expected, cash flow was dampened as a result of normal government payment slowdowns during the holidays, which resulted in DSOs of 67 days in the quarter. However, we do expect DSOs to continue at a similar level next quarter. As a result of a couple of large programs that both have administrative processing challenges unrelated to funding. As a result cash provided by operating activities from continuing operations totaled $10.1 million for the first quarter, free cash flow was negative at approximately $0.5 million. This reflects an expected increase in CapEx related to the high level of startups as well as the cash flow impact from the change in DSOs.

During the quarter, we continue to purchase shares of MAXIMUS common stock under our board authorized program. In Q1 we used cash of $14.6 million to purchase 249,549 shares. At December 31, 2012 we had approximately $114.6 million available for share repurchases under this program. As we’ve said in the past, our buyback program is opportunistic in nature and we will continue to execute our repurchases in this manner.

At December 31, we had $167.1 million in cash and cash equivalents of which approximate 75% is held overseas. The strength of our balance sheet continues to provide us with a lot of flexibility in deploying capital. We are committed to sensible cash deployment, where dividends and buybacks are part of our overall strategy.

The team’s recent focus has been heavily weighted towards M&A opportunities and current geographies, including international markets where we are seeing increased demand for our core services. This aligns with the investments we’re making on business development to also drive organic growth across all our markets over the next three to five years.

And lastly, guidance. As noted in this morning’s press release, we are increasing our fiscal 2013 revenue and earnings guidance driven principally by three things. First, our new guidance takes in the over delivery in the first quarter and we have assumed that we will continue to experience higher volumes in our federal health appeals business for the remainder of the year. Second, our Outlook related to our work for the California Healthy Families CHIP program has improved.

As a reminder, the state is terminating this program enrolling the kids into Medicaid. While, we are still in contract negotiation with the client, we are reasonably confident that we will be able to serve a key role in supporting the functions of this work on a go forward basis. We will provide more details once we finalized the ongoing contract discussions.

And third, we are starting to see revenue materialize sooner than expected from health insurance exchange work, including from current clients where we have supported early planning tasks through existing contract vehicles.

Rich will provide some additional color during his prepared remarks. So, when we added all, we now expect fiscal 2013 revenue to range between $1.25 billion and 1.30 billion. And on the bottom line, we now expect adjusted diluted EPS from continuing operations to range between $3 and $3.15. In addition, since our improved outlook is principally driven by the health segment, we expect that health margins could be a bit better than initially anticipated and human services margins will continue to be tempered in Australia as we discussed last quarter.

We are also maintaining our cash flow guidance for fiscal 2013. We continue to expect cash provided by operating activities derived from continuing operations to be in the range of $115 million to $135 million and we expect to free cash flow from continuing operations to be in the range of $70 million to $90 million.

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

Rich Montoni

Thanks, David and good morning, everyone. We’ve kicked off fiscal 2013 with strong performances from both segments. I think it’s fair to say that we’re starting to benefit from secular trends that are driving increasing demand for our services. As we mentioned last quarter, we have an unprecedented number of startup programs underway and I’m pleased to report that so far these are going largely as planned. All in all, these tailwinds position us for exceptional top and bottom line growth in fiscal 2013 and give us the confidence to be raising our revenue and earnings estimates so early in the year.

Let’s start with an update on our domestic operations. Healthcare reform continues to serve as our primary growth driver in the U.S. We continue to make steady progress towards securing of our fair share of this work. As a reminder, management continues to believe that a reasonable target for market share in the early years of health insurance exchanges is approximately 20% to 25% of the $500 million in total addressable market that we laid put.

On our November call, we shared that we expected to see procurement movement for the Federally-Facilitated Exchange, or as it’s referred to the FFE, in the first half of calendar year 2013, three federal RFPs that have been issued could be of interest to MAXIMUS. The first and potentially the largest is the bid for the eligibility supported functions of the FFP. The scope of work principally covers the paper support task for verifying and processing applications for enrollment into qualified health plans or insurance affordability programs as well as shop applications and requests for exemptions.

The second RFP is the call center operations of the Federal Exchange. These operating have been folded into the 1-800 Medicare re-bid. And the third RFP is for Eligibility Appeals Work; however, a vendor cannot win both the Eligibility Support Bid and the Eligibility Appeals Work.

It’s fair to say that MAXIMUS has core competencies in all of these bids, but for competitive reasons we’ve not provided further granularity on the expected size or our intent to bid on any of these. We also continue to see activity pickup in the state level for ACA-related work. We are actively monitoring all of these opportunities and identifying where MAXIMUS can best add value.

In addition to our ongoing work in Minnesota as David mentioned, revenue started to realize from our other healthcare reform activities and health insurance exchanges.

One example is New York, where the state is leveraging and transforming the existing centralized enrollment center operated by MAXIMUS for its health insurance exchange. You may recall that when we first announced New York health options contract also known as the enrollment center. In fiscal 2011, we explained that it was expected to serve as a blueprint for health insurance exchanges

The enrollment center was part of the state’s effort to offer a single entry point for assistance and information on all its public health insurance programs. The state has indicated in its explaining documents to the Department of Health and Human Services that the enrollment center will serve as the foundation for building the customer service and backroom operations of its health insurance exchange. And then MAXIMUS will be vendor partner.

I am very pleased to report that the state has modified our existing enrollment center contract to include planning and early implementation work for its health insurance exchange. As part of the customer service center operations, we are expanding our current call center scope to respond to increase from consumers, small businesses and other exchange stakeholders. We will have consumer increase about premium tax credits, as well as questions from employers and employees about the small business exchange or shop.

We look forward to helping the state realizes its goals of providing more people with access to health insurance coverage and establishing a place where they can shop acknowledgedly insurance. We were also very excited about a couple of additional states where MAXIMUS is in the process of negotiating work with their state-based health insurance exchanges. We were recently selected for the HIX Service Center operations for two small states. We are currently in negotiations with both of these states, so we are not in a position to disclose additional information at this time. But we hope to share more details in the coming months. We are excited to add these three important and strategic pieces of work to our growing HIX portfolio.

Well states like New York are moving down a path to set up their own exchange, up stage remain at various stages of preparation to meet October’s open enrollment deadline. Last month, the U.S. Department of Health and Human Services announced that it will wave or extend deadlines for states that want to operate their own exchanges or regulate insurance offered through the federal exchange.

A recent analysis by the Kaiser Family Foundation indicated that 18 states and the District of Columbia have declared intent for a state based exchange. Seven states are planning for a partnership exchange and 25 states will participate in the federally facilitated exchange. We are clearly monitoring any future adjustments to deadlines are requirements, as well as the decision made by states.

As expected, we have seen some new entrants in the state based exchange market such as commercial call center companies. In addition we are seeing an increasing presence in certain states from unions representing government employees. For example California has announced that it is it’s likely to use a combination of county and state based workers to the majority of its HIX service center operations.

Well this is disappointment for vendors like MAXIMUMS, we think that over the long-term, the market may follow a similar as both the Medicaid and chip markets. Over time some states shifted administrative functions for both programs to private vendors as a way to alleviate the work burden and state staff and achieve efficiencies by managing labor resources more effectively.

Looking beyond the initial HIX deadlines, we see future waves of procurement opportunities. One opportunity is to provide BPO support to states that will transition off the federally facilitated exchange to their own state based exchanges in 2015 and beyond. As a result, we see a steady glide path for HIX opportunities. As governments make progress for insuring citizens have improved access to health insurance, they still must address issues like quality and cost. So, we still see health reform as a multi-year long-term growth driver.

Now, let’s turn our attention to our international operations. Our pilot program in Saudi Arabia is fully operational and meeting our expectations. And our work program contract in the UK remains on track as we continue to optimize our operations and meet caseload demands. During the quarter, the UK Department of Work and Pensions published initial performance statistics for the work program. Although the report only represented a snapshot in time and did not include all job outcome secured to date, MAXIMUS performed very well compared to other vendors. In fact, our team in the Thames Valley region achieved the highest ranking for percentage outcomes achieved.

Our longer term international growth strategy focuses on tracking reform efforts where we see emerging opportunities for MAXIMUS. We think the next 12 to 24 months, maybe the right time to expand our core health offerings to markets where our past focus has traditionally been on the welfare to work business. For example, we see future opportunities in the BPO market that dovetail nicely with our core capabilities as governments continue to look for solutions to control cost and improve their benefit programs. And policy level discussions that are taking place today could lead to RFP activities as soon as the end of this calendar year or early calendar year 2014. Considering this, we believe it’s an opportune time to take a good look at bringing our health capabilities to new markets, either through a partnership or an acquisition.

Moving on to rebids, as we mentioned last quarter, we have 14 contracts up for rebid in fiscal 2013 for a total value of approximately $475 million. This includes our Texas Medicaid Enrollment and MassHealth contracts which have a combined value of approximately $320 million.

On January 7, the Texas Health and Human Services Commission announced a tentative contract awards to MAXIMUS, contingent upon the successful negotiation in execution of a contract. We will provide additional details once the contract is signed. And for MassHealth, our current contract runs through June, so we hope to have something to share with you in the next 30 days to 60 days.

Turning now to new awards and sales pipeline. At December 31, we had $178 million of new signed awards, in addition we also had awarded but unsigned contracts totaling approximately $460 million. These are contracts where we’ve received notification of award in contract negotiations, but have not yet been assigned.

At February 1, 2013, our total sales pipeline of opportunities remained robust at $2.7 billion and includes opportunities across multiple geographies and across both segments. This underscores our confidence that secular trends will continue to increase demand for our services over a multi-year period.

As a reminder, investors should expect routine fluctuations between the pipeline in the award categories. And these shifts are driven by different stages in the procurement process as well as the timing of when contracts are awarded and ultimately signed.

In summary, governments are dealing with growing case volumes, aging populations and increasingly complex benefit programs. Companies like MAXIMUS can provide much needed support as governments strive to address these issues. Most notably, we are gaining additional traction in the Health segment, as governments look for more efficient ways to run programs, while also tackling the implementation requirements under the Affordable Care Act.

We look forward to continuing to make progress on our long-term goals or expanding our global operations, securing our fair share of healthcare reform work in U.S., and growing our federal operations.

And with that, let’s open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting the question-and-answer session. (Operator Instructions). Our first question comes from Charles Strauzer of CJS Securities. Caller, please proceed with your question.

Charlie Strauzer – CJS Securities

Rich, could you explain a little bit more on the opportunities, when you look at some of the posturing by some of the Republican Governors out there about how they – what kind of pushing back against that, are you seeing any of that chain being in terms of sentiment and in terms of adopting some of the proposals that are out there.

Rich Montoni

Good morning, Charlie. Thanks for your question. I’m going to give you a tops down commentary on the ACA opportunities, and then as Bruce Caswell who has agreed to join us today as well. Bruce I think, you know he’s the President and GM of our Health Business, so day-in day-out, he has the opportunity to deal with the state-by-state opportunities. Clearly, it’s a very dynamic environment, you’ve got bifurcation of the universe, as states have decided to build their own exchanges, others have defaulted or chosen to go onto the Federal Exchange. We have some early leaders who have solidified their plans and gotten over kind of over their political deliberations.

And moving forward with health insurance exchanges, I think fewer have gotten over the health as it relates to Medicaid expansion, which is also important but it’s equally political out there. So we do see a lot of political elements into this equation, and I think we’re are going to continue to see it not only during fiscal 2013 and the build and launch phases of these health insurance exchanges, but as their operationalize in fiscal 2014, 2015 and 2016 and perfected. So I think they’ll continue to be in political fishbowl and they will get a lot of attention. Bruce, any commentary on this?

Bruce Caswell

I think that’s exactly right. I know it’s probably you’d have seen probably in recent days, some Republican governors’ now come forward showing some support for Medicaid expansion, where previously that might not have been the case. And I think that’s reflective of the legislative season that we’re in, and the decision that those governors are facing. And it’s yet to play out fully. CMS has made it clear that states have no deadline for declaring their Medicaid expansion intend. So that could continue, as Richard said, into 2015. And then similarly states still have until February 15 to indicate and provide their blueprints for whether they’re going to do a state partnership exchange versus a fully Federally-Facilitated Exchange. So those deliberations are going on presently and more in the next week.

Charlie Strauzer – CJS Securities

Great. Thank you very much.

Bruce Caswell

You bet.

Rich Montoni

Next question please?

Operator

Our next question comes from Scott Green of Bank of America. Caller, please proceed with your question.

Scott Green – Bank of America

Hi. Thanks. I had a couple of questions. First is on the revenue guidance raise. It looks like revenue essentially inline in the quarter and I recall the original guidance had a bigger than average allocation around 10% unsigned business was included. So, at this point what liners that you’re having to the 10% unsigned business and how did you balance potential risk around exchange delays.

Rich Montoni

Good morning, Scott. You’re right. At the beginning of the year as we typically do in that first quarter, we lay out our forecasted guidance for top-line and bottom line and we did say 90% of our forecasted, I think the midpoint of our forecasted range and revenue was in the form of backlog.

First, you need to understand our definition of backlog because good portion of our contracts include transaction based contracts. We will assume a certain level of revenue for those performance based contracts. hence for those that are driven by volumes, we’re assuming a certain volume level in that initial guidance.

And as we reconciled that prior position to the current position, these three things that come to mind that I think give us the comfort to raise the revenue. One is, as we’ve talked about in the call and I think we mentioned in the press release, we have seen a meaningful increase in the volumes, in our federal business relative to appeals in the Medicare program. We believe that is likely to continue at least in the short term and so you factored into our new guidance. Secondly, we have received more work in California, on that California healthy families program than we originally felt was the case and hence that’s been an uplift to our guidance and lastly of the New York health insurance exchange work. That work has come sooner than we had originally forecasted. Those will be the big three, Scott.

Scott Green – Bank of America

Okay. That’s very helpful and a follow up. Can you tell us how much exchange revenue you’ve won versus your targeted fair share of 20% to 25% out of 500 million, is that something you think you’ll give us a running updated total over the next couple of quarters?

David Walker

Yeah. At this point in time, we’re not disclosing, we are not quantifying that. We are on track, we think we’re going to pass to get as we refer we refer to our fair share of that $500 million, but at this point, we don’t have a quantification of where we stand. It’s such a dynamic environment, I think it’s best just to give you the directional commentary in terms of where we stand.

Scott Green – Bank of America

Okay. And one last one, I was just curious if you had any thoughts on the idea of immigration reform and if there to potentially be any opportunity of some of those people ultimately look for other work or have to participate in some signups enrollment program, if there would be any business opportunity for MAXIMUS?

David Walker

I think, the answer is, yes. And I think, we need to let the leadership of the country get through their phase which is the political aspect and any legislative reform or changes they’d like to make, but certainly we will keep our eye to it as it relates to opportunity for MAXIMUS. And there is a couple of aspects to it, it’s actually being a participant in whatever new processes necessary to implement any new law. And then also there is an overflow aspect if there is additional, and we’re going to allowed into the country, many of our state clients will have increased populations that they will need to manage in their state based Medicaid programs and to our HIX programs themselves.

And by the way we do actually have a meaningful role. In Australia, we want some work down there, that relates to actually helping the government manage the immigrants, who are trying to move into Australia. That’s quite an exciting program. We hope that one will grow as well.

Scott Green – Bank of America

Thank you.

Rich Montoni

Thank you, Scott. Next question, please.

Operator

Our next question comes from Frank Sparacino of First Analysis. Caller, please proceed with your question.

Frank Sparacino – First Analysis

First, Dave, on the capitalized software side of things, that number is higher than it has historically and a nice contributor to earnings, particularly year-over-year even on a sequential basis. I’m just curious as what’s driving and also what level of – should we use going forward for that figure?

David Walker

Yeah, hey, Frank. When we give guidance for the full year for the free cash flow and the cash from continuing ops, the difference is CapEx, and for us CapEx is preplanned equipment as well as capitalized software. So, actually our spending is right in line with the guidance we give and the increase is driven by the number startups. You have to put a lot of software in on these exchanges and associated with these health programs on the front end as part of the BPO and that’s what it is.

Frank Sparacino – First Analysis

Great, thank you. And then on the appeal side of things, I’m just curious what’s new, I mean, the Medicare RAC business, right, has been in existence for years and has been growing at pretty nice clips, if you look at data from, AHA, for example. So, I’m trying to figure out what’s new in the business that’s changed for you guys and then if you can also just remind me as to how you get paid in that business?

Rich Montoni

Frank, this is, Rich. First half, we get paid on a per transaction basis, so it’s a fixed price per appeal processed. Secondly, as it relates to the RAC program has been in place for a number of years, but I think it has been only in the last couple of years where there is really been an increased focus on the RAC program, so there is a lot more rack activity out there. I also think there is perhaps a bit of a tightening of the rules in terms of what’s allowable and what’s not allowable of late. And I think that is what’s behind the increased, that’s the biggest driver behind the increase in the lime of appeals.

Frank Sparacino – First Analysis

Great. Thank you, guys.

Rich Montoni

You bet, Frank. Thank you.

Operator

Our next question comes from James Naklicki of Citi. Caller, please proceed with your question.

James Naklicki – Citi

Yeah. Good morning, guys. Thanks for taking my question. So, yesterday CVO revised down its estimate for the exchange membership to $7 million, it’s down from $9 million prior, does that have any impact on the $500 million opportunity for you guys, who are the 20% t 25% reasonable penetration rate early on you talked about?

Rich Montoni

James, this is, Rich. I’m going to hand this off to Bruce as well, but from a summary level perspective, and for those of you on the call who are not from this, James is right. CVO did issue yesterday some revised guidance where they run the numbers in terms of how many participants they think there will be in health insurance exchange by year and also how many folks will participate in Medicaid expansion. And that’s a very important driver, that’s what was really behind our estimate of the $500 million total addressable market.

In summary, we’ve looked at that and we do not believe it adjust our $500 million total adjustable market or the 20% to 25%, but there is a couple of footnotes that I think Bruce Caswell might want to comment upon as it relates to changes in the CVO estimates, Bruce.

Bruce Caswell

Sure and Richard, Rich, absolutely right in that. It doesn’t really change our view of the total addressable market. The dynamics are settled here. First of all the CVO numbers point to fewer people on Medicaid obviously related to the Medicaid expansion option that states out, so that’s down. The original estimate was $17 million in 2020 and it down to $12 million, but the counter dealing pressure against that is more individuals on exchanges.

So, the exchange volumes peak at about $27 million versus $23 in the original estimate from CVO in 2012. And by the year 2022 are about $26 million versus $22 in the original estimate. The shift that you spoke out is really about a $1 million individual shift in the exchange population in 2014 pushing out to 2014, 2015, sorry. So, if you’re anything you’re seeing a slightly more gradual ramp in the exchange population, but in the end no real material change in the total addressable market.

Rich Montoni

Is that helpful, James.

James Naklicki – Citi

Yeah, very helpful. Just one other question I had was, if I look at the company’s growth rate historic over the last three years. It’s been in the high teens, mid-to-high teens. Do you think you can maintain that over the next three years given all the opportunities from the exchanges.

Rich Montoni

That’s a great question James and the answer is I think we can maintain a high growth rate. And when I think about growth over the next three years and as you know we don’t provide specific guidance, but for the current year. But on a directional basis, I think it’s helpful to share, what is see is as the drivers that are in place. It really provide us with a confidence that we have multiyear growth ahead of us. So, I mean obviously, a solid start to fiscal 2013 and a high degree of confidence in the rest of fiscal 2013 is a good underpinning. Our pipeline remains strong and it’s a multi-year pipeline. Our business model today really is, as we sell this year, what will be next year’s growth. The recent startups are on track, that’s comforting. And what’s also very important about the year – the recent startups is that they will provide a year-over-year pop in fiscal 2014, as we have a full year in 2104 versus a partial year in 2013.

We think that the new wins, again partial years in 2013, and I’d also mention that when you look at the opportunities in healthcare reform, they really are shaping up to be multi-year-type initiatives. And I think as we move forward initially they may be launched as, I will call it a health insurance exchange light. I do think as we see and monitor the participation, the likelihood is that we will receive additional assignments and our scope will grow.

And I’d also add to it that internationally, I continue to strongly believe that the underpinnings for increasing demand exists, our capabilities internationally whether or not it’s enrollment or case management, any of our core competencies, I think they are also in demand internationally, and not only in our existing countries where we do business internationally, Canada, Australia and U.K., I do think that we’ve got health opportunities there. And if we’re fortunate, we’ll discover and then have opportunities in additional countries. That’s the basis for why we think we have several years of growth ahead of us.

James Naklicki – Citi

Yeah. Thanks, guys.

Rich Montoni

Next question please?

Operator

(Operator Instructions) Our next question comes from Brian Kinstlinger of Sidoti & Company. Caller, please proceed with your question.

Brian Kinstlinger – Sidoti & Company

Hi. Good morning, guys.

Rich Montoni

Good morning, Brian.

Brian Kinstlinger – Sidoti & Company

The first question is sort of the follow-up from one of the callers. Volume in the past in the Medicaid Enrollment Brokers is only one small piece of those kind of tracks. So I guess basically I’m interested in how much the ramp will impact these contracts and at what point they will hit peak to revenue in that multi-year enrollment window?

Rich Montoni

I think it’s a great question. I think, first we’ve to bifurcate a little bit because the work that we’re doing now relates to the Medicare program, not the Medicaid program. The handling of the appeals in the Medicaid program is a different assignment. Primarily most of our work is Medicare appeals, which has been for quite some time. I always felt that the majority of the work was driven by volumes as opposed to cost plus – and that would be – isn’t would be continued to be the model. Bruce, do you have any comment on this?

Bruce Caswell

I think, that’s absolutely correct on the Medicare appeals, and if I can pivot for a second to the Medicaid Enrollment Broker piece as well, there are really two underlying dynamics there. One is we spoken about many times is the continued efforts of states to shift populations in the managed care and some of the most recent data in 2011 would suggested that only 74.2% of the population in Medicaid is presently in managed care nationally, the penetration rate being much higher in some states than others.

So we do think that there’s an opportunity and we’re seeing it for states to continue to shift additional acute care as well long-term care populations in the Medicaid and that’ll feed our growth there.

The second dynamic of course is still very much implied with these state legislative seasons, as it relates to Medicaid expansion. And now with several Republican governors including Kasich in Ohio and Brewer in Arizona and others, Governor Snyder just yesterday in Michigan coming forward supporting Medicaid expansion. We think that we feel comfortable with the range in terms of total addressable market that we put out last summer, which was $130 million to $200 million for that opportunity for us.

So, the ramp could be a little bit backend loaded in terms of 2015, 2016. Wouldn’t be surprised by that because CMS has been very clear that there is a deadline for them to declare their intention. However, the 100% money runs out in 2016 starts to decline. So, states have an incentive to try move and forward on it as quickly as they can.

Brian Kinstlinger – Sidoti & Company

Okay. Follow-up on that. Just tell us about the ramp and how volume is effects the exchange contracts one in New York. And then my final question is, on the – on California, whether you’re using unionized workers? How many are the 19 states without naming them, because that could be sensitive. Do you expect to go that route?

Rich Montoni

So, could you first of all just repeat the first part of your question? I’m not sure what that is.

Brian Kinstlinger – Sidoti & Company

Yeah. What I meant on my original question – maybe I didn’t worded appropriately is, on the Medicaid Enrollment Broker contracts, typically volume is one piece. Now the exchange is a similar project for you guys. How much is volume on those like the New York contract you won? Is it 90% of the contract it will ramp or is it right away of fixed price and you generate that revenue?

Rich Montoni

Got it. So, I think the typical pricing structure would not be different from what we see in our enrollment broker and CHIP programs. We have a combination of fixed and variable pricing. Often the volume bands are tired to obviously accommodate higher volumes as they come on. And I think we’ve consistently said that we think – we expect to exchange volumes to kind of reach their peak in the 2016 timeframe or so, because there a lot of things in place here.

The uptick is the function of the outreach efforts of the state how rapidly and the national outreach efforts that The Obama Administration is just now starting to put traction to. So, I think we need to wait and see in terms of how effective those are in terms of bringing people into the exchanges and similarly bringing in the Medicaid population, that’s currently eligible but un-enrolled. So, that would be the first point. The second question related to how significant is this indication in states like California related to using state unionized workers for these jobs.

And I would just say that we’ve seen without naming specific states, three instances in total including California where that’s likely to be the case. So, I would say it’s not necessarily the dominant model, but it’s one that adds a new dimension to the marketplace.

David Walker

And I would add, Brian. This has been a balance and I think the equilibrium in the past is – the MAXIMUS the world are an alternative to a totally state based unionized worker situation and in many states we work hand in glove with those existing infrastructures. And so, I think it’s almost on a case-by-case situation to what extent we play and I think the union interest in this area is nothing really new and there will be equilibrium that will see state-by-state.

Rich Montoni

And just a reminder the federal portion of all of this, we’ve been talking state, we know it’s going to be cost reimbursable, so that has a different characteristic, lower risk, lower margin.

David Walker

Yeah, right. Good point.

Brian Kinstlinger – Sidoti & Company

Thank you.

Rich Montoni

You bet. Next question please.

Operator

It appears we’ve not further – sorry, our next question is a follow-up from James Naklicki of Citi. Caller, please proceed with your question.

James Naklicki – Citi

Yeah. Hi, guys, again.

Rich Montoni

Hi, James.

James Naklicki – Citi

Just after you reviewed the scope of work for the FFE contracts, you talked about the appeals and the eligibly support contracts. Do you feel you have the capabilities to bid as the prime vendor on those contracts if you were to bid?

Rich Montoni

This is Rich. I’m going to ask Bruce to comment upon that. He and his team are quarterbacking all the federal initiatives.

Bruce Caswell

Yeah. I would just say, James, as you’re probably well aware the federal marketplace is quite different from the state marketplace and it’s all about the teams that you put together to address the compensate season requirements and experiences that the clients are looking for. So, I would just say that our experience has been quite strong at the Federal level and we feel very comfortable being a member of our prime, on a major team like that. But you have to look at it as one that brings together the capabilities of a number of strong companies as well as important smaller companies in minority businesses to meet the full requirements of the procurement.

James Naklicki

Okay. Thanks, guys.

Rich Montoni

Next question, please.

Operator

(Operator Instructions). Our next question comes from Frank Sparacino of First Analysis. Caller, please proceed with your question.

Frank Sparacino – First Analysis

Hi, guys. Just one follow-up. On the call center operations for the exchanges relative to Medicaid enrollment. Is there a different level of statistician or skill set that’s required there, given I assume the exchanges are going to be fairly more complex than the traditional operation?

Rich Montoni

That’s a great question, Frank. And honestly, it speaks to some of the fundamental requirements of the act, which is that there are be no wrong point of entry in a state. So, let’s talk about state-based exchanges first, very briefly. A number of state clients want to ensure that individuals can come through either a county-based office or an existing MAXIMUS call center that where may be handling Medicaid intake and eligibility or CHIP intake and eligibility, but also through a state HIX Call Center.

I would say that the characteristics of helping an individual through that process are really not materially different from what we do presently in the Medicaid program and in fact the administrations work very hard to simplify the process by moving toward things like modified adjusted gross income as a key eligibility to determinate for most Medicaid categories. So, we would expect less of missing information chase if you will and more of a movement toward the streamlined application and the streamline process. Did that help?

Frank Sparacino – First Analysis

It does. Thank you, Bruce.

Bruce Caswell

Yeah.

Rich Montoni

Next question please.

Operator

Our next question is another follow-up from Brian Kinstlinger of Sidoti and Company. Caller please proceed.

Brian Kinstlinger – Sidoti & Company

Great. Two follow ups. The first one is you mentioned that 1800 Medicare re-compete, can you tell us who the income, but it is on that.

Rich Montoni

Yeah, I can comment is the Brian, which is owned by General Dynamics Information Technology.

Brian Kinstlinger – Sidoti & Company

Great. And then the second question, you mentioned Dave the human services award fees or royalty fees that will not repeat. Could you give us a size of revenue and profits that contribute to that segment and if you didn’t?

David Walker

We didn’t, but it’s about $0.03 in the quarter. So, if you normalized it out Human Services margin, would have been about 10.8%.

Brian Kinstlinger – Sidoti & Company

And can you give a revenue numbers, so we can – it was relatively small?

David Walker

Yes.

Brian Kinstlinger – Sidoti & Company

So, just a pure – pure award that had no cost.

David Walker

It was highly accretive.

Brian Kinstlinger – Sidoti & Company

Got it. Thank you, guys.

Rich Montoni

You’re welcome. Next question please.

Operator

It appears we’ve no further questions at this time. I’d now like to pass floor back to management for closing comments.

Lisa Miles

I’d like to thank everyone for joining us today and have a great day.

Operator

This concludes today’s conference. You may now disconnect your lines at this time. And thank you for your participation.

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