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MAXIMUS, Inc. (NYSE:MMS)

Q1 2009 Earnings Call Transcript

February 05, 2009 at 9:00 am ET

Executives

Richard A. Montoni - Chief Executive Officer, President and Director

David N. Walker - Chief Financial Officer

Bruce Caswell - President, Health Services

Lisa Miles - Vice President, Investor Relations

Analysts

Charles Strauzer - CJS Securities

Analyst for Anurag Rana - Keybanc Capital Markets

Analyst for Jason Kupferberg - UBS

George Price - Stifel, Nicolaus & Company, Inc.

Richard Glass - Morgan Stanley

Lisa Miles

Good morning. Thank you for joining us on Maximus first quarter earnings conference call. I would like to point out that we have 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 would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions and actual events or results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10K 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 will turn the call over to Dave.

David N. Walker

Thank you, Lisa. Good morning and thanks for joining us. This morning, MAXIMUS reported EPS results that were in line with our expectations and slightly ahead of consensus estimates. For the first quarter, MAXIMUS reported diluted earnings per share of $0.67 compared to $0.51 reported for the same period last year. Revenue for the period totaled $180.1 million. On a constant currency basis the top line grew 5% driven by the Operations Segment which grew by 11% and offset attrition from the consulting business.

Compared to the same period last year, net income grew 13% to $12 million and was driven by continued growth in the Operations Segment. The current economic environment has bolstered the US dollar which reduces the relative earnings of our international businesses when translated in the US dollars. As we discussed on our last earnings call, our ongoing share repurchase program helps to neutralize the impact of the strengthening dollar on our earnings, all in all it was a clean solid quarter that was inline with our expectations.

Let us turn our attention to segment level results. The Operation Segment now comprises 87% of total Company revenue and provides long-term visibility and predictability with a steady stream of recurring revenue. First quarter revenue for the operation segment increased 6% to $156.3 million compared to first quarter 2008 and 11% on a constant currency basis. As a reminder, all of our foreign operations are housed in the Operation Segment. As we have emphasized before, top line growth from the segment continues to be fueled by new and expanding work primarily in our health and federal business lines.

In the first quarter, growth in our domestic business helped balance the currency impacts from our international operations. The Operations Segment’s first quarter operating income grew 20% and totaled $21.3 million with margins coming in at expected levels of 13.7%. In the second quarter, we expect to experience a temporary dip in segment operating income in March with the return to higher margin levels in Q3. The dip in Q2 was principally related to project timing and refresh of a large contract, a project we successfully re-bid last year. January 1 marks start of this contract and the margin fluctuation is the result of the transition to the new contract and the associated investment in the technology refresh. The operation segment also experiences a seasonal up tick in the second half of the year, most notably in our tax credit business. Despite the fluctuation in Q2 on a full year basis, we continue to expect that the Operation Segment will still be able to deliver margins toward the higher end of our 10% to 15% range.

Moving on to the Consulting Segment, this segment represented 13% of total Company revenue with revenue totaling $23.8 million for the first quarter of 2009. The segment posted an operating loss in the quarter of $1.5 million. While this was a sequential improvement over the fourth quarter of fiscal year 2008, the loss in the quarter is principally due to a $2.5 million project charge due to cost growth on a legacy fixed price ERP contract.

Beginning in the second quarter, we do expect improvement in the Consulting Segment driven most notably from new work including a new contract award of the New York City Department of Education. We did have a delayed start on this project which shifted contribution to the right but the project is expected to provide a meaningful revenue and profit stream that will extend well beyond fiscal 2009. We will begin booking revenue on this new project in the second quarter and at that time, we also expect to record an additional $5 million in nonrecurring after revenue.

Let us turn our attention to total Company margins. For the first quarter, we achieved total Company operating margins of 11%. This was driven by the solid margin from our Operation Segment of 14% which was tampered by the loss in the Consulting Segment. While it is not unusual to see margin fluctuations quarter to quarter, we still maintain that the business can continue to run at or above a 10% operating margin over the long term.

Moving on to balance sheet and cash flow items. In December, MAXIMUS paid approximately $40 million in cash to settle its outstanding arbitration. As part of the settlement, MAXIMUS will receive an insurance reimbursement of $13 million in the second quarter. For the first quarter, MAXIMUS used cash from operating activities related to continuing operations of $21.2 million normalizing continuing operations, cash flow for the $40 million cash settlement paid in the quarter results in cash flow from operations of $18.8 million and free cash flow from continuing operations of $14.7 million. With the continued focus on receivables management, DSOs improved to 67 days in the first quarter. While there will be fluctuations due to timing, overall, we expect DSOs could range between 65 to 80 days. Management remains committed to its ongoing cash deployment strategies including our share repurchase program and cash dividends.

During the first quarter, we repurchased 740,490 shares of MAXIMUS common stock for approximately $23.2 million. At December 31, 2008, MAXIMUS had a $59.5 million available under its Board authorized program. Also during the quarter, we declared an increase of our quarterly cash dividend from $0.10 to $0.12 per share beginning in February. We ended the first quarter with cash totaling $61.5 million at December 31, 2008. We also have available line of credit of $24.6 million providing the Company strong liquidity and flexibility in this demanding market.

Before I turn the call over to Rich, I will wrap up with guidance.

Based on what we see today, we remain on track to meet the expectations we laid out at the onset of the fiscal year. While MAXIMUS is reasonably insulated given the current environment, we have experienced some in material work delay do in part to state’s current situation in dealing with the current fiscal challenges. This has resulted in some revenue getting pushed to the right. However, we believe these fiscal challenges could be offset by some modest benefits that the Obama initiatives could provide in the latter part of the fiscal year.

At this time, the majority of the potential benefits from any new legislation will be longer term in nature and are not expected to have a material impact until fiscal year 2010 and beyond. As a result, we are maintaining our full year revenue guidance but expect it to be towards the lower end of the $750 million to $775 million range. We are also reiterating our earnings guidance of $3.00 to $3.15 per diluted share. We expect that second quarter earnings will be slightly down compared to our first quarter. We anticipate the return of earnings growth in both segments in the second half of the year driven by new work and seasonality. The larger element of improvement will be from seasonality in our tax credit business, a seasonal factor we have experienced annually in the past.

We also maintained our cash flow guidance which we revised when we announced the arbitration settlement. Cash flow from continuing operations for the full year is expected to be $35 million to $45 million with free cash flow of $15 million to $25 million.

Thank you for your time this morning. Now, I will turn the call over to Rich.

Richard A. Montoni

Good morning, everyone. I am pleased to be here with you today to discuss our solid performance in the first quarter. In summary, we delivered steady performance in the past quarter and we are ready to deal with the substantial opportunities ahead despite the economic challenges out there. Dave has already covered the quarter's financial results in detail and I will focus my comments today on what is in store for MAXIMUS going forward.

We are operating in a time of fast-moving market dynamics that surely will impact our prospects and performance over the next several quarters and years and I believe that impact will be very positive for MAXIMUS. Our business today stands well positioned to benefit in the long run from greater demand for our services due to the economic slowdown and new legislation that calls for expansion of existing programs. This includes increased funding through the proposed $800 billion plus stimulus plan as well as increased SCHIP funding of $32.8 billion in new spending over the next quarter and one-half years.

The anticipated American Recovery and Reinvestment Act and the reauthorization of SCHIP both encompass many of the benefit programs in which we operate, in fact, in offerings where MAXIMUS is the market leader. The stimulus package is expected to deliver much needed relief to states. The Bipartisan National Governors' Association,[Author ID1: at Sun Feb 15 18:14:00 2009

] in a statement issued last week, urged Congress to pass the bill quickly. The National Governors' Association statement noted that with anticipated budget shortfalls, governors support several key elements of the bill critical to the states including increased federal support for Medicaid.

So, it is clear that many states are anxiously awaiting the opportunity to put these federal dollars to work. As you know, most states cannot operate at a deficit and the stimulus package would help states deal with the deficit challenges. These legislative developments would play a significant role in shaping the market place for our services over the next several years. Social wins are clearly moving in the direction of increasing the number of people covered under government run benefit programs. In order for states to receive funds, the legislation must be passed and corresponding federal regulatory and state legislative processes must be completed.

Once the legislation is passed, we expect that it will begin to benefit MAXIMUS perhaps somewhat in the tail-end of fiscal 2009 but materially so in fiscal 2010 and beyond. As with any government funding, the expected lag of funds over the next few quarters simply reflects the process of completing legislation followed by the allocation of funds down to the states in the applicable agencies. In addition as you may know, state administered programs such as SCHIP requires state legislative action to increase funding levels while administering agencies must negotiate or amend agreements with health plans.

So, in relation to our business and expected future benefit, it is important to remember that once legislation passes, the flow of funding is not immediate. With that said, there are several areas where the new legislation could translate into new long-term opportunities for MAXIMUS most notably in health services where we will see a direct benefit from rising Medicaid and SCHIP enrolments in the states where we operate. According to the Georgetown University Health Policy Institute, the reauthorization bill increases funding by $32.8 billion taking it to about $69 billion over the next four and a half years. The major goal of the increased spending is to allow states to expand eligibility to include families with incomes up to 300% of the federal poverty level. This is up from the current levels which vary state by state.

SCHIP reauthorization also calls for $100 million for increased outreach including marketing, advertising and translation services to support enrolment of those eligible. The reauthorization also includes provisions for the removal of waiting periods for determining eligibility related to immigration. The goal and expectation of reauthorization is to grow enrolment from 7 million kids to 11 million over the next five years as the result of these changes. We believe the reauthorization of SCHIP would result in a substantial increase in enrolments in the programs we currently operate over the longer term. We expect that this will likely translate into a meaningful growth in 2010 and beyond as the program expands over the next five years.

And thanks to our hard work and continued technological improvements, we are well positioned to meet future increasing demand. In the past two years, we have realigned staff, disclosed the underperforming or non-strategic assets, resolved legacy issues, increased efficiencies and fundamentally changed our approach to new business with an emphasis on profitable growth with clear scope and defined performance milestones. We have transformed the business to focus on our core health and human services program administration capabilities. We believe this provides us with a competitive leg up as we have a leading pure play provider for the administration of Medicaid and SCHIP enrolment and eligibility services.

Today, we are at 28 states and the District of Columbia that presently outsourced Medicaid managed care. MAXIMUS runs the Medicaid enrolment in 13 of those states and commands a 67% market share based on the beneficiary served. This includes the new award in Pennsylvania for the Medicaid enrolment assistance program that we announced in this morning's press release. We are in the process of completing contract negotiations and hope to have a final signed contract in the coming weeks.

Across the national market, there are 22 states that do not presently procure managed services and this represents approximately 7.3 million beneficiaries. In the area of SCHIP where only 12 states presently outsource, MAXIMUS serves fives states with 69% of the market share based on beneficiaries. Thirty eight states, plus the District of Columbia, presently perform this function in-house. Positioned as the market and spot leader in Medicaid and SCHIP managed services, we believe that the opportunity to further penetrate this market is well within our reach. While the movement towards the public-private partnership move slowly for those states that presently provide services in house, the opportunity to grow this business has never been greater.

Today, our clients are looking for us to help them handle a larger workload while reducing cost and increasing processing efficiencies. We are well equipped to do that and we are always willing to work with our clients to ensure a long term positive outcomes and expand established relationships. Now, we spend a lot of time today talking about the prospects for our health and human services operations, but I also wanted to comment on the recent performance of our Consulting Segment and how we view this business strategically.

Performance in the segment was soft in the quarter but we expect improvement going forward as result of our focus to optimize the business and new contracts like our recently announced signing of a $55 million contract with the City of New York for special education case management solution. New York City joins the Chicago Public School District as one of our marquee clients in this promising area. The strategic wins and our successful execution on them help us establish a leading market position as we pursue new opportunities in this area. We think it is important to point out that the proposed stimulus package includes an additional funding of approximately $27 billion in the area of special education services.

Clients continue to look to us for consulting services that complement our BPO offerings especially in more difficult times like we are experiencing with the emphasis on how best to drive cost out. Those states that do not presently use managed services will look to the private sector for proven solutions to optimize their business models. As part of our effort to transition the business and improve its performance, we will also continue to explore opportunities to reposition the portfolio and will take the necessary actions as we have done in other areas of our business to shape consulting into a profitable complement to our Operation Segment.

Now, turning to our pipeline. At February 3rd, we had new signed contracts of $208 million and new contracts pending or awarded but unsigned totaling $135 million. At February 3, 2009, our pipeline of new opportunities remains robust and totaled $1.7 billion. The components include $582 million in proposals pending, $327 million in proposals and preparation and lastly, $761 million in opportunities we are tracking and expect to come out in the next six months.

Finally, we remain confident in our earnings outlook and our longer term prospects based on what we know today. We also have reiterated our revenue guidance for the full year towards the low end of our range and it now includes a modest potential benefit from the pending legislation which could offset approximately $10 million in revenue that has been delayed. We also continue to maintain a healthy capital position that remains a competitive strength in this market as governments look to partner with well-capitalized companies.

Our current cash position, coupled with our available credit line, provides us with a comfortable cushion should it be needed. In prior years, the Company has faced short term payment delays from state customers, all of which were ultimately recovered. We believe our liquidity and capital positions are adequate to weather short-term payment delays which also give us a competitive advantage over some smaller private players who may not have sufficient financial resources to navigate a protracted financial downturn.

During the quarter, we removed our last major legacy overhang with the settlement of an outstanding arbitration matter with Accenture. After this payment, we closed the quarter with $61.5 million in cash at December 31. With a healthy cash position, no debt and expected full year positive cash flows, we are very comfortable with our financial position. With that said our priority remains delivering value to our shareholders and returning excess cash when possible.

To conclude, despite the fiscal challenges that states face, demand for social programs that we administer is increasing as the numbers of unemployed and uninsured grow. New federal legislation is expected to support these programs and in some instances, like SCHIP, expand them to increase eligibility and participation over the next five years and with well over 70% of our revenue coming from federally funded program such as Medicaid and SCHIP, we believe we stand the benefit in the shift over the long term. Our job is to work with our clients to provide high quality execution and maximized efficiencies to ensure a successful public-private partnership. I believe we are up to the challenge and look forward to leveraging our leading market share and capabilities as we pursue the substantial opportunities.

With that, let us open it up for questions. Operator?

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Charles Strauzer - CJS Securities.

Charles Strauzer - CJS Securities

A couple of quick questions for you, Rich. When you look at the SCHIP reauthorization and you talked about the jump in the eligibility to 300%, if you look at California, what is the current eligibility cap there?

David N. Walker

Bruce Caswell is with us today. Bruce, why don’t you just take that up?

Bruce Caswell

Yes, in California, the current federal poverty level eligibility limit is 250% so that would be a 50% increase for them.

Charles Strauzer - CJS Securities

Got it. So that would potentially increase your enrolment work there. And remind us again that kind of a contract you are paid on volume of enrollees is that correct?

Bruce Caswell

I think as a generality, the amount of work that we do is tied linearly to the number of enrollees and the exact paid point will vary from contract to contract but I think that contract is per member per month but that is clearly a reflection of the number of enrollees.

Charles Strauzer - CJS Securities

Well, if you look at the overall revenue for MAXIMUS, roughly what percentage is tied to or correlated to enrolment growth, one way or the other?

Bruce Caswell

I think the way that I would look at that, Charlie, is to say what is our book of businesses as it relates to enrolment program, what is our book of businesses as it relates to SCHIP, and in order of magnitude I think, our SCHIP revenue run rate is about $113 million a year and I think with about a couple of hundred million a year enrolment program. I mean, those are the two largest service lines that we have.

Charles Strauzer - CJS Securities

Excellent, fair enough. And then the New York City contract for the special ed, how much of that is going to require new training and new expertise to bring on board in terms of new cost versus taking from your core competencies and being able to translate that to this new opportunity?

Bruce Caswell

I think the majority is by far the latter component. This is not custom build. This is implementing our existing Tienet software which has an installed base across the country. It is the same software that we have implemented in the Chicago public school systems and naturally, we will have to interface it with the systems in New York City and we will have to train the users in New York City on how to use it but it should not be viewed as a custom-build situation.

Charles Strauzer - CJS Securities

Got it, and just lastly when you look at the awards pipeline for proposals pending, etc, are there any potential contracts or ERPs that are out there that are pending that you think could be delayed or at risk right now, Rich, when you look at that?

Richard A. Montoni

Well, we have a number of re-bids that are up in the normal course and we are not seeing any movement as it relates to those existing works that we do. We are quite busy from a new work perspective and there are some contracts that I think are being pushed a bit to the right as a result of that but surprisingly so, less to the right than I would expect in this environment. In that, we still feel, actually our proposal folks and business development folks are very, very busy.

Operator

Your next question comes from the line of Anurag Rana - Keybanc Capital Markets.

Analyst for Anurag Rana - Keybanc Capital Markets

This is Adam in for Anurag. Couple questions for you; the first is related to the SCHIP reauthorization. Have you discussed some specific spending programs dedicated to increasing enrolment in the program that would pertain to MAXIMUS for instance, the hundred million for outreach that you discussed earlier?

Richard A. Montoni

As it relates to the SCHIP spending, our view is that there are some specific provisions in the legislation, most notably, would be the hundred million dollars as it relates to outreach and outreach is certainly one of our core competencies. We provide this in many of the programs that we administer so I think that is just increasing demand and on a case by case basis, we will expand that capacity. It might be simply just adding new hires to the situation. I really do view the SCHIP situation as increasing case loads, increasing the number of participants and really just increasing the breadth and depth of our existing offering. So, it really puts us in a position where we do not have to reinvent or invent new services, new products but rather just expanding existing services and offerings generally.

Analyst for Anurag Rana - Keybanc Capital Markets

Got it. Couple of questions, one is in terms of the Medicaid spending slowdown across states, do you think this will impact enrolment or just benefits?

Richard A. Montoni

This would be benefits.

Analyst for Anurag Rana - Keybanc Capital Markets

Okay, so no impact on enrolment.

Richard A. Montoni

I think it is unfair to say no impacts on enrolment. It is such a broad universe out there that you will get some changes in enrolment. I think generally the lion’s share really is in benefits and that is really the number one lever that states tend to pull when they need to manage the spend level, is the benefit spend itself.

Analyst for Anurag Rana - Keybanc Capital Markets

Okay, and lastly can you provide an update on universal healthcare programs in terms of any new programs that are underway or being discussed?

Richard A. Montoni

I think that is a great question and I do think that what we are looking at is really a mosaic of a system that includes many different parts. I think the general trend to cover more people is very much of all the value of the new administration. I think the SCHIP is the first step in that direction. I think the macroeconomic situation plays into it because any universal health solution, and I still think it is going to be resolved on a state-by-state basis with the federal government as the backdrop, it is going to be a mosaic of the players and how they participate, the providers, the payers, not only including government as the main payer, but also corporations and their participation as well as individuals and their sacrifice. And I do think as that as we move forward, it is today an employer-based model. I think I will expect that we are going to preserve that employer-based model and I think we are going to see incremental growth in terms of the public programs themselves.

Operator

(Operator's instruction) Your next question comes from the line of Jason Kupferberg - UBS.

Analyst for Jason Kupferberg - UBS

This is Steve Fordham sitting in for Jason. What are some milestones that we can look for to see that MAXIMUS is actually benefitting from the SCHIP legislation, I guess in the future?

David N. Walker

I think that is a great question, Steve. First of, I will keep a close eye on the pipeline statistics that we shared with you and we just talked about the pipeline statistics and the sales pipeline statistic in particular $1.7 billion and I think we shared with you the components of that. But first, the base layer of that which is the opportunities that we track currently at $761 million. As you would expect, we are having active live discussions with our clients in terms of how do they deal with, in some cases, the mandatory provisions of this new legislation through the things that they have to do, some of which has a very short window and we are also talking to our clients real time in terms of how do they take advantage of this new legislation and in the spirit of the new legislation to quickly inject these dollars into the economy.

So, I expect that what is going to happen is the details and those discussions will continue to increase over the next several months and I would expect that we will start to see specific increases in our opportunities tracking perhaps when we report in March and certainly in June and then we would expect that those would quickly move up the chain and result to new wins and new opportunities. Also, I would say on a margin, we may just see the increasing number of cases result in increasing revenue in our health operations business.

Analyst for Jason Kupferberg - UBS

Great and then the last question was, should we expect more charges with the ERP contracts in the Consulting Segment or could you guys get us more comfortable that there would not be anymore to assure?

Richard A. Montoni

Yes, I think the answer is really somewhere in between and we are comfortable with the provision today. The provision in this quarter, quite frankly, was not expected and resulted from an updated situation with a subcontract that is not performing to our expectation. So, we have to work that situation very, very closely. We have tampered a little bit in our forecast and expectation so we can absorb a reasonable amount but that is something that we are watching very, very closely. So I cannot give you absolute assurance.

Operator

Your next question comes from the line of George Price - Stifel, Nicolaus & Company, Inc.

George Price - Stifel, Nicolaus & Company, Inc.

Couple of things just to kind of follow up, so the EPS stand quarter-over-quarter, this coming quarter, that sounds primarily due to ramped up expenses with the new contract, is there anything in terms of timing issues or other impacts that primarily attributable to this ramped up cost?

Richard A. Montoni

That is the number one driver. We have lots of, obviously lots of moving parts underneath it but that is the number one driver as it relates to the second quarter, George.

George Price - Stifel, Nicolaus & Company, Inc.

Okay and what was the large re-bid that started in January?

Richard A. Montoni

That was our HCO contract, California HCO contract.

George Price - Stifel, Nicolaus & Company, Inc.

Okay, I just want to confirm.

Richard A. Montoni

And one other point as it relates to the seasonality of the business, we tend to focus on our thoughts as it relates to the full year and we are still focused on, as you know, $3 to $3.15 for the full year and when we looked at the first half of the year and compare to what we think is going to happen in the second half of the year, there is over a $0.40 improvement in the second half of the year as you probably calculated, George and the one thing that you need to keep in mind is the biggest driver to that and I think there is three main drivers but the largest driver is the seasonality in our tax-credit business. I mean that is well over a third of it and in the years passed on a recurring basis, the way that business is structured, we do not have a paid point until our corporate clients get to take the tax credit on our corporate tax return when the corporate tax return is filed. In most corporations having a December 31 yearend file their corporate taxes in the quarter ended June 30 for the quarter and some will extend and file them in the quarter ended September 30.

So that business is very profitable in the June and September quarter, the second half of our year and it losses money in the first half of the year and the order of magnitude of the swing of that business alone accounts for more than 1/3 of the seasonality or the first half or second half of the comparison. The other two drivers, the education services business is the second largest second half over first half and that is really facilitated by the New York contract win that was signed such that it is a revenue producing and profit producing situation starting in January…

George Price - Stifel, Nicolaus & Company, Inc.

To New York?

Richard A. Montoni

To New York, but that really helps education services and then we have continued to experience growth in new work steady growth in our health ops business so when we run up the new work we have, it shows improvement, continued steady improvement in the second half of the year.

George Price - Stifel, Nicolaus & Company, Inc.

Just actually following up on that line and Rich, I appreciate the level of detail there, just following up on that last point. So basically you are giving them some incentive in the early part of the year. You are starting to realize through implementation and efficiency and so forth profit. Things have improved for you as you go through the second half of the year. Is that something that, I will just confirm that I understand that correctly and is that something that you are seeing given the environment, are you seeing a lot more of that in terms of when states come to you or cities come to you?

Richard A. Montoni

Well, my thoughts are, I got two data points I will share with you. One, a couple of years ago when we started down this path, we got a great team and we have got a great starting point but they have really been very productive and effective in building new business and that has started a couple of years ago. So even the wins last year now started to cycle such that we have a full year in 2009 and some of it in 2008 that was partial year, we continue to have good wins in our health operations business even this year, most notably this Pennsylvania win in the enrolment broker work there. That is scheduled to start up April 1st. So that launches and that is a nice year-over-year and even second half over first growth type situation.

So, I think a lot of the seeds were sown a couple of years ago. We continue to see increasing demand. The second thought is, now, what will happen on top of this are the increasing case loads that resulted from these folks losing their jobs and having their sick Medicaid assistance. We will keep our eye open in terms of what happens with this COBRA requirement and how that fits into our business but I do think the storm clouds from the macro environment are actually increasing the amount of work that we have to do and that facilitate this as well.

George Price - Stifel, Nicolaus & Company, Inc.

I guess just to be clear of maybe, I do not know, let me re-ask the question, maybe I misunderstood but more of the new opportunities that are coming out that you are looking at, is there any trend toward clients basically trying to pull benefits out of you upfront beyond normal given their fiscal situation?

Richard A. Montoni

Oh, I am sorry. Basically, the deal structure is…

George Price - Stifel, Nicolaus & Company, Inc.

Yes, because it sounds like that is what you are talking about with New York and I just wanted, correct me if I am wrong but I just wanted to see if that is a trend given what we have seen in the environment.

Richard A. Montoni

No, we are not seeing that trend and we do not have any such concession in New York. So, it is a good question and theoretically, you might expect clients to pursue that type of situation but by and large, I think the contracts are very structured very much like they have been in the past without upfront concessions.

George Price - Stifel, Nicolaus & Company, Inc.

Okay, last question. Any potential concerns about cash flow timing issues specifically with the couple of the states that should do a lot of work for that are having more acute challenges like in California?

Richard A. Montoni

Sure. Well, as you are probably aware, California is the one state that we are aware of that said they will have to defer payments otherwise due in February. We have, and it is really, this is all on a state-by-state basis. California is the one that we are aware of having stated this. We have some work in California that we know is not subject to this intention and we have some work that is. At this point in time, we believe that we will have roughly $4 million, otherwise due in February that California plans to defer, I am sorry $6 million otherwise due in February that California plans to delay 30 days. So if they stick to that plan, it should not be an issue come March 31 but you also have to ask the question -might they continue with that program or have to defer another 30 days.

Aside from California, we have not heard any program like that from any other state and I think at the end of the day, two points I would make, one is we feel very comfortable that from a cash position or financial position as I said on my call notes, we can absorb this type of situation. But more importantly when we go back over prior recessions in prior years, we have had similar situations including with California. You may recall with California we even had the issue last June and in all these situations, the states have managed to find the money and they have managed to pay their bills.

George Price - Stifel, Nicolaus & Company, Inc.

Sure. I appreciate it just from a modeling perspective what we might need to just sort of have in the back of our heads.

Operator

(Operator's instruction) Your next question comes from the line of Richard Glass - Morgan Stanley.

Richard Glass - Morgan Stanley

Your core operations business, I guess there is not any core now but, it grew 11% in this environment. It sounds like a pretty good number. I am just wondering if we can really talk about the consulting business here. How much of a drag is that or what is the overall drag on both the top line this year and on the operating income from that segment once you layer in some of the start up and other things going on in New York? And following onto that, what should the margins in this business, meaning the consulting specifically, really get to because it sounds like 10% is a rather modest number for almost any consulting business out there and considering you guys have let the, or are trying to let the unprofitable business leave and are bringing on hopefully better business, why should not that be a higher number as well?

Richard A. Montoni

Rich, I think that is a great question and a couple of data points for the folks out there who may not be as focused on the consulting piece at the moment but the consulting business is really a small part of our overall business and we knew and planned that it would decrease in revenue size and one of the drivers behind that is we have proactively and for very strategic reasons chosen to exit the RevMax business which historically has been in years passed, had been very profitable business but the competitive aspects plus the risk aspects of that business, and most importantly, our desire to align MAXIMUS hand and glove with the federal government as well as the state government to not be opposed to them given all the opportunities we see. It has really led us down the path to eliminate that service business, that RevMax business and we see the first impact of that where effectively it is going to be closed this December 31. So, that has been tampering the revenue at the top line perspective.

Our long-term aspirations for consulting is that it works very closely with our operations business to help drive operations excellence and make sure that we have strategic advantage in the outsourcing world focused on our core help and human services and it is the consulting business that needs to do that. And so we are transforming this consulting business from what it had been with little connectivity to our outsourcing business to much connectivity. So, we have said in the past this consulting business is going through a transition and we expect that the turn to start to be reflected this coming March 31. We are starting to see some things of improvement in consulting this quarter, most notably our education services business with this New York contract that was critical for it to turn the corner and achieve profitability. We also have a business in consulting which is considered to be one of the premier independent verification and validation functions for MMI systems, Medicaid Managed Information systems across the United States which I think fits very well with our Medicaid business.

So, we are in a period of flux here. When we get done with it, I agree with you that a consulting business should be much more than a 10% contributor. Frankly I think it should be 15% plus and I could build the case that it should be a 20% plus business. I will say at the end of the day the consulting business is not so much about how big is it from a revenue perspective. It is more important that it really achieve its strategic mission to work with our operations to further enhance our leadership position in the health and human services environment.

David N. Walker

Does that answer your question?

Richard Glass - Morgan Stanley

Mostly but I will follow up asking basically so, given your expectations, your guidance for the year, is that sort of a breakeven business this year? Was it losing some money in the first half and then starting to make money in the second half?

David N. Walker

Rich, Dave Walker. Here is to actually what I would say, so when we talked about the New York contract moving a bit to the right, it was not that we have a lot of startup cost because I have heard some questions about that. It just took us a long time to get the contract in place and it moved revenue in the year to the right relative to our total plan which gives us some challenges but it did not really impact the quarter. The loss in this quarter was driven by the ERP job. What we will see next quarter is the revenue will spike because there is a lot of front end pass to sort of stuff on that education job but then you will see in Q3 and Q4 with the returning back down to about the level it is today.

That being said, there is a lot of dynamics so the education work is back filling a lot of other legacy work and other work that we are exiting. So we are exiting the RevMax business. There are other contracts that have been clear underperformers and we exited those this quarter. So we continue to do the things that I think you should sensibly do in a consulting business which is make to sure labor utilization is up. I mean that is pointing and tackling, drive out people that just frankly could not contribute the way they were as we change some of our product line, etc. You are not going to see any dramatic shift in terms of the growth this year and I think growing the consulting business in this economy can be demanding but you will see a focus on core profitable business that is complementary to the operation business as we move toward it. So, we will move the profitability this year.

Operator

You have a follow up question from the line of George Price - Stifel, Nicolaus & Company, Inc.

George Price - Stifel, Nicolaus & Company, Inc.

I just wanted to follow up on a couple of things. First, in terms of SG&A, was it on a continuing up spaces? Was it down year-over-year, David?

David N. Walker

I actually think it was pretty flat.

George Price - Stifel, Nicolaus & Company, Inc.

Pretty flat, okay.

David N. Walker

It is down a few points but I would always say on SG&A, I will say when it is good and bad that we tend to take a lot of operators, if you will, cost to sales people away from the contracts with a lot of proposal activity. So it can move that SG&A line around. So, overall we do focus on operating continually while we continue to do that.

Richard A. Montoni

But as a percentage of revenue, it was flat with a comparable quarter last year, 15%.

David N. Walker

Yes. But with that said, do we manage SG&A very vigorously? You bet, particularly in this environment.

George Price - Stifel, Nicolaus & Company, Inc.

Sure and what kind of work is, you may have said this. I apologize if I missed it but what kind of work is getting delayed at this point? You mentioned about that $10 million in revenue.

David N. Walker

Well the New York City thing we talked about moved to the right so we actually had hope that it would start earlier and like any large contract, it just takes a while to negotiate and work through it. No problem there. It just took time, just the bulk of it.

George Price - Stifel, Nicolaus & Company, Inc.

Okay. I am just wondering from a trend perspective, I would imagine if even more kind of incremental systems development kind of work.

Richard A. Montoni

I think that is right. As with generality, I think all of the capital spend items are under the microscope. I do not think it is fair to say that as a rule, they are all being delayed. I think there is isolated situation so for example, a new ERP system certainly is a discretionary spend item and it might get delayed or pushed to the right. Although, I will tell you I am surprised that the number of request for proposals that we continue to see and have not been delayed.

David N. Walker

I mean if you look at consulting that net when I gave you that trends with Rich, we talked about some revenue going down, some revenue going up. The education will certainly drive it up and some of the ERP will go down as what I would normally expect in this environment. So it will swing around but the profitability profiles and the risk profiles are dramatically different between the two lines of work there.

George Price - Stifel, Nicolaus & Company, Inc.

Last question, I just wanted to get your views on the stimulus and the federal money. Clearly, we have some expansion in SCHIP but how would you say we should think about what is happening in SCHIP, what is coming out of the stimulus plan for Medicaid and Teinet and stuff like that, in terms of the timing of it and when it moves or could move from stemming the bleeding if it were with what is happening in the state and local fiscal situation to being actually incremental, if that makes sense.

Richard A. Montoni

It makes a lot of sense and I think when you read the bill, variations on the bill and we are very, very close to this legislation. We spend a lot of time to understand exactly what is being proposed and how MAXIMUS is able to take what we think is going to be new law and new policy and translate that into action for our clients. Some of the key themes that are inside of this legislation are for example; one of the concepts that is right upfront of the bill is this concept to the quick start. They strongly encourage quick start programs whereby, I believe 50% of the specified funds are spent in a very short period of time and I think that is marked more so for infrastructure matters but a lot of what we see from a MAXIMUS opportunity is in the area of infrastructure.

While the bill is intended to provide benefits over several years, I think the hope of the leaders is that much of it will be spent very, very quickly. Our thoughts also are that from a state perspective, they need some of these funds very, very quickly. One of the detailed provisions that I think is very important to our state clients is the increase in what is referred to as the FMAP percentage that will help the states go and plug basically their otherwise significant budgetary deficits. It will not eliminate all of the state budgetary deficits but is going to go a long way to help them manage those such that they can maintain the current coverage levels at the various states.

The one last thing I would share with you is that when we read this stimulus bill, there is three main areas where there is just a lot of anticipated spend, certainly health is the number one area and we have worked really hard to draft that legislation, work in that legislation, and stay close to that legislation but we see that the health is evolving as we expected but what was a pleasant surprise actually is the amount that is pointed towards education. There is almost $40 billion in education dollars that are designated and almost 30 of that we think falls within an area that we operate and that is in particular the special needs area so we are excited about some education opportunity that is there as well.

George Price - Stifel, Nicolaus & Company, Inc.

Okay, last question if I could. Just in terms of the consulting legacy ERP contracts, can you just update sort of where we are with it, how many, when do they finish, that sort of thing just to round out the question I came before?

Richard A. Montoni

I think that is fine and I think that was in line with what we shared with you in the past. We really have three large remaining ERP projects and we watch them very, very closely. The one that we have been dealing with and this is the second quarter where we have taken a charge is it is limited to one particular project and that is one of the three that is legacy in nature that we think is the challenged project. Otherwise, based on what we know today, the other seem to be headed in the right direction and performing satisfactorily.

The net takeaways, we have eliminated the number of projects dramatically from what they had been in prior years.

Operator

Ladies and gentlemen, this concludes today's presentation. A replay of this call will be available to you within two hours. You can access the replay by dialing 1877-660-6853 or internationally 1201-612-7415. Enter account number 316 followed by the replay ID number 311570. Thank you for your participation. You may now disconnect.

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Source: MAXIMUS, Inc. Q1 2009 Earnings Call Transcript
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