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MAXIMUS, Inc. (NYSE:MMS)

F2Q09 (Qtr End 03/31/09) Earnings Call

May 7, 2009 ET

Executives

Rich Montoni - Chief Executive Officer

David Walker - Chief Financial Officer

Analysts

Adam Winn - KeyBanc Capital Markets

Charles Strauzer - CJS Securities

Jason Kupferberg - UBS

George Price - Stifel Nicolaus

Adam Peck - Heartland Funds

Operator

Ladies and gentlemen, welcome to the MAXIMUS second quarter conference earnings call. During this session, all lines will be muted until the question-and-answer portion of the call. (Operator Instructions) At this time, I would like to turn the call over to Lisa Miles, Vice President of Investor Relations.

Lisa Miles

Good morning, thank you for joining us today on today's conference call. I would like to point out that we posted a presentation to our website under the Investor Relations page to assist you in following along with today's call. With me is Rich Montoni, Chief Executive Officer; and David Walker, Chief Financial Officer. Following Richard’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 under 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 obligations revised or update these forward-looking statements to reflect subsequent events or circumstance.

With that, I will turn the call over to Dave.

David Walker

Good morning, and thanks for joining us. This morning MAXIMUS reported revenue for the quarter totaling $184.2 million up 1% on a constant currency basis compared to the same period last year. Second quarter net income from continuing operations, totaled $11.4 million with diluted earnings per share of $0.64. That are in line with our expectations and slightly ahead of consensus estimates. On a pro forma basis, diluted earnings per share from continuing operations were $0.66, which excludes legal and settlement expense.

We also incurred $0.02 per share of residual cost associated with discontinued operations in the quarter. We achieved a total company operating margin of 10.2%, which is consistent with our stated goal of an operating margin at or above 10% over the long term. All in all, it was another clean, solid quarter that was in line with our expectation. Let's turn our attention to segment level results.

For our fiscal second quarter, the operations segment posted revenue of $155.6 million. In the second quarter of last year, the segment arrive an unusual benefit of approximately $6.9 million related to hardware and software purchases on a large health managed services program. After normalizing for this infrequent revenue, the operations segment revenue grew 5.6%, compared to the same quarter last year on a constant currency basis.

The operations segment delivered operating income of $19.9 million and an operating margin of 12.8%, well within the target margin for the segment of 10 to 15%. As a reminder, at the beginning of the second quarter we commenced a project we successfully rebid last year. We expected the margin to be lower as a result of the transition of this new contract and the associated investment in the technology refresh. Our operations segment has a business model, which provides visibility into future periods. What we sell this year typically translates into revenue next year.

Rich will talk in greater detail about the new contract wins, the large award such as our recently announced contract in Australia will help fuel next year's growth. These large operations contracts often involve start up costs that cannot always be capitalized and therefore, reduce current earnings. In addition, certain contracts such as the Australian contract have outcome-based targets, which result in a lag of revenue recognition. We expect the combined earnings impact of the revenue lag and the projected start up expenses on current wins not considered in our previous guidance to be approximately $0.20 per diluted share for fiscal 2009.

As a result of these investments associated with recent awards we now expect profit margin for the operations segment to be in a lower end of our target range of 10% to 15% for the second half of fiscal 2009. These large contract wins also can use considerable amounts of working capital. For example, with the recent win in Australia, we anticipate capital expenditures in excess of $7 million associated with the net increase of 36 new operational sites. This will be discussed shortly in terms of guidance for the balance sheet and cash flow.

Moving on to the Consulting segment. For the second quarter, consulting segment revenue totaled $28.6 million. Performance in the quarter was driven principally by the revenue contribution on the New York City education project, which included approximately $4.8 million in pass through revenue in the quarter. While this segment continues to underperform from our expectations, the segment showed sequential improvement of approximately $1 million in operating income.

We continue to focus on fundamentals on the consulting segment, such as [lab] utilization, winding down certain practice areas, improving and underperforming legacy fixed price contract and cost management. Moving on to balance sheet and cash flow items, MAXIMUS continues to maintain healthy liquidity levels and no outstanding debt. For the second quarter, MAXIMUS generated cash from operating activities related to continuing operations of $40 million, and free cash flow from continuing operations of $34.5 million.

Cash flow in the quarter included a $12.5 million insurance reimbursement we received in February related to a settlement from the prior fiscal year. Excluding the settlement receipt, cash flow from operations was still exceedingly strong. We ended the second quarter with cash, totaling $85.1 million at March 31, 2009. Our cash coupled with the $24.6 million available under our line of credit certainly puts us in a strong position in a difficult economic environment.

This is something that is increasingly important to our clients who prefer a financially stable partner when outsourcing important programs. We’ve maintained a rigorous focus on cash and receivable management. As a result, DSOs continue to run at the favorable end of guidance. DSOs for the second quarter were 66 days. There will be fluctuations due it timing. So overall, we continue to expect that DSOs could range between 65 to 80 days. Early in the second fiscal quarter, we repurchased 187,200 shares of MAXIMUS common stock for approximately $6.8 million.

At March 31, 2009, MAXIMUS had $53.4 million available under its Board authorized repurchase program. During the quarter, we also paid a quarterly cash dividend of $0.12 per share, a cash use of $2.1 million. Before I turn the call over to Rich, I will wrap up with some guidance. We are adjusting fiscal 2009 guidance and now expect revenue in the range of $745 million to $755 million and diluted earnings per share of $2.75 to $2.85. At this, we expect the third quarter to be largely consistent with the second quarter depending on start up expenditures.

The fiscal four quarter is expected to be strong as a result of the new work coming on stream and the annual seasonality from our tax credit business. As noted in my earlier comments, the bulk of the revision or approximately $0.20 per diluted share is related to investments in new work, mostly from our expanded book of business in Australia. We have also slightly tempered our outlook for consulting in this revised guidance. While we have seen sequential improvement in this segment’s performance, improvement has been more moderate than we previously anticipated.

Lastly cash flow guidance. While some of our new contract wins require increased capital spending and use of working capital, our strong performance in the quarter allows us to maintain our full year cash flow guidance.

Just to reiterate that. We continue to expect cash flow from continuing operations for the full year to be $35 million to $45 million with free-cash flow from continuing operations of $15 million to $25 million. Thank you for your time this morning. Now I will turn the call over to Rich.

Rich Montoni

Thank you, David. Good morning, everyone. Thank you for joining us today. At the beginning of the fiscal year, we envision 2009 would be an improved year and one that sets the table for meaningful growth, meaningful growth in 2010 and beyond. These are shaping up as expected.

Our second quarter results were in line with our expectations and reflective of the resilient nature of our repositioned business. We are pleased with our year-to-date results and principally aside from start-up investments resulting from new work one and a modestly tempered outlook in consulting, we are progressing as expected.

The cornerstone of our enthusiasm for fiscal 2010 is today's announced win of a major rebid in expansion of the Job Services Australia program. This win further demonstrates our market leading position in the administration of Health and Human Services programs.

I will share with you the highlights of the Australian win and by the way, all the dollars I will mention will be in U.S. dollars, although the contract itself is valued in Australian dollars. The contract is a three year based contract in Australia and it is valued at $266 million. The contract also allows for up to six additional option years and if exercised, will take the contract out to 2018. The new contract will double our annual revenue run rate for all of our Australian operations to an estimated $90 million to $95 million.

The new contract through our MAXNetwork subsidiary calls for a major ramp in our training and employment services with a net increase of 36 sites across Australia. In line with the program's goals, we will broaden our focus to include longer term, more comprehensive skills training to increase the length of employment for the most disadvantaged clients.

MAXIMUS has been the number 1 rated for-profit provider under the Australian Government's Star Ratings Program. We are reaping the benefits of the exceptional performance of our MAXNetwork team. This gain in this important International market stems from our concentrated focus on our core, our core Health and Human Services offerings and our emphasis on maintaining a number 1 or number 2 position in key markets. Our strategy is working.

Longer term, we think the Australian market could provide broader opportunities in other core vertical markets such as health.

In addition to Australia, we recently won a five year, $49 million child support enforcement award for Shelby County, Tennessee. This contract represents the largest child support privatization contract in the nation.

Our ability to continue to win contracts and expand our business is a reflection of our optimization efforts over the last three years as we become more effective in our core markets.

Our demonstrated success, further defines MAXIMUS as the leading Pure Play provider in the Government, Health and Human Services market.

Let me review some of the important events of the second quarter. We were pleased that both the CHIP reauthorization and stimulus bills were passed into law. The CHIP legislation seeks to expand the program from 7 million children to 11 million children over the next five years. This could be a significant catalyst for future growth. As the leading provider of CHIP administration services, we are best equipped to help states meet the challenged of the new requirements.

As discussed on last quarter's call, we expect new spending from these bills to start to ramp up over the next few quarters. This is due to the multi step process of completing legislation and allocating funds down to the states in applicable agencies.

State administered programs such as CHIP may also require state legislative action to increase funding levels while administrating agencies must negotiate or amend agreement with help plans. This in turn will likely pause growth in CHIP enrolments in the near term and push out any meaningful growth from these bills beyond this fiscal year.

Now, as David explained, our 2009 earnings forecast has been adjusted primarily to account for the start up cost on new work. In addition, we have slightly tempered our outlook for consulting. In consulting, we are executing a plan to improve the segment's overall portfolio and our main focus is on improving the fundamentals, managing cost and bringing it to consistent profitability.

While we made progress here, we are focused on driving additional improvement. But the largest driver behind the modification to guidance is the new work start up. This is a net positive reflecting typical start-up cost that is a precursor to meaningful growth. This meaningful growth we expect to start in the upcoming fourth quarter. In fiscal 2010, we expect a full year of benefit in growth, in revenue and profit from this new work.

It is still early to introduce formal guidance for 2010, but we are comfortable enough with the contracts we have won thus far this year to provide some directional insight into our top line prospects for the coming fiscal year.

Assuming our base business remains intact, based sonly on the new work we have won thus far this year, we have locked in expected top line organic growth of approximately 7%. This is based of the mid point of our 2009 revenue guidance.

It is important to note that this projected growth does not factor in any additional growth from potential new work on the run way that we are currently pursuing, which by the way is quite robust.

All in all, we believe our business remains stable, and we continue to see positive demand trends in our operations business. Our ability to navigate this challenging environment has been a direct result of our focus on core services for federally funded, and federally mandated Health and Human Services work. We continue to win new work in these areas at both the state and federal levels.

However, it is critical that we continue to take advantage of new work opportunities as they develop. We have several ongoing initiatives to monitor legislative action, and capitalize on opportunities for our Consulting and Managed services.

On the federal front, we continue to closely monitor President Obama's healthcare reform efforts. The congressional budget office estimates a steady increase in healthcare spending as a percentage of GDP and it is likely that health reform will remain a legislative priority in the long run.

The administration has three goals for health reform; improve quality, maintain costs, and cover the uninsured. MAXIMUS brings valuable experience to the table particularly with our ability to contain administrative costs and increase access to include coverage for the uninsured and the underinsured. We have demonstrated success in achieving these goals for our state clients in the administration of state, Medicaid and CHIP programs. We anticipate that House and Senate Committees will introduce legislation in June and take action in early August. Right now, the likely vehicle to move this legislation is undefined but as an independent provider, we are actively participating in health reform dialogue.

We believe our ongoing work in the Government Health and Human Services market has enabled us to build upon our long-standing, positive relationship with key decision makers; particularly those at the centers for Medicare and Medicaid services, the Department of Defense TRICARE management activity and other Federal agencies. Our strong past performance as a key federal contractor makes us confident about additional opportunities that will likely result from health reform.

At the state level, we are also aggressively working to raise awareness of capabilities and experience to help position the company with prospective new clients. We established a 50 state outreach program to help dissect CHIP and stimulus legislation and identify pressure points for program administrators and key decision makers.

As part of this outreach effort we are helping states currently not-partnering with the managed services provider to implement broader measures to expand CHIP enrollment. Today, MAXIMUS is the leading provider of CHIP administration working with five of the 12 states including two of the largest that currently partner with managed service providers. We are exploring every opportunity to stay ahead of the curve expand our leadership both with existing and perspective customers.

Now turning to our pipeline and rebid data. At May 4th, we had now signed awards of $447 million and new contracts pending or awarded and unsigned totaling $338 million. Our pipeline of new opportunities remains steady at $1.4 billion. This includes $651 million in proposals pending, $110 million in proposals in preparation, and $646 million in opportunities we are tracking and expect to come out in the next few months.

Finally, our cash position remains robust. In the coming quarters we will invest in ramping up our new contracts while maintaining a healthy cash balance. This by the way, continues to serve as a competitive differentiator in the government markets. As we de-risk and focus the business, we are mindful of ways to deploy cash in a strategic fashion to drive growth and strengthen the core competencies. Company management and our Board of Directors regularly review opportunities to return capital to shareholders through our repurchase and dividend programs. We also continue to evaluate tuck-in acquisitions and we’ll pursue these opportunities as appropriate.

In summary, as we look ahead, fiscal year 2009 will be a solid year and a time to position the business for meaningful future growth, not only in fiscal year 2010, but in the years beyond. We will continue to optimize our business operations, provide our clients with high quality services, build relationships with key decision makers, and closely monitor legislative changes. We have many prospects before us today. And I am optimistic about our capability to capitalize on these opportunities and translate them into successes for MAXIMUS and value to our shareholders. With that, let's open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question today comes from Anurag Rana with KeyBanc Capital Markets.

Adam Winn - KeyBanc Capital Markets

This is Adam Winn for Anurag. A couple of question for you guys. When you referred to the new work you’re pursuing, what areas in particular are you focusing on?

Rich Montoni

Good morning, Adam, this is Rich Montoni. We’re really focused across the board in all of our business units on new work. The items that come to mind in terms of foremost would certainly be in the federal arena. Over the last couple of years we’ve experienced pretty meaningful growth in our federal business. We think strategically it is a great match with the expertise we’ve built up over the years. We also think it plays handsomely into our capabilities and dispute resolution of the fact that we’re an independent provider of dispute resolution services as well as quality oversight services.

So certainly in a federal arena, we expect new work. State and local, I think we expect new work, certainly in the Health and Human Services area. Some of this is resulting from the ongoing trend towards outsourcing by government, so we can talk about what those drivers might be, but certainly, to quickly share with you some of the drivers behind it, that’s the return on government workforce, it’s the increasing complexity of the cases. The increasing number of the cases that I think really constitutes some meaningful pressure points to increase demand in those service lines. And then consulting; we expect to grow consulting service capabilities when they best did with our core capabilities. That is the [can of] consulting space.

Adam Winn - KeyBanc Capital Markets

Great. Two more. Can you elaborate on your timing expectations for the [stage ship] legislation and final allocation?

Rich Montoni

I would be glad to talk about that. I have got to tell you, there is really no clear cut quick answer. It really will depend upon first and foremost, state by state, the individual state situation, and how those state leaders decide to move forward with the opportunity presented to them by the – this new federal legislation. There is a continuum. Some states may choose not to modify their programs extensively. Others will choose to move forward. I’d also say keep in mind, I believe the intent of the new legislation, the CHIP legislation, it’s really a five year program and the goal is to grow the coverage to children from 7 million to 11 million over five years. I think there is an earnest intent by the states to get there. But I don’t think it’s a three month or six month exercise, I think it’s multi-year.

Adam Winn - KeyBanc Capital Markets

Thanks Richard. And lastly, to what extent have the additional federal matching fund from Medicaid offset the state’s budget shortfalls at this point.

Rich Montoni

Well, that is really where you just need to read tea leaves. It is tough to quantify, and from our perspective, impossible to qualify. So qualitatively I would tell you, I think it's to a meaningful extent and I think it's very helpful. I think a lot of states did appreciate and use – it help maintain the current level of service. So, I can just give you qualitatively, I think it's substantial.

Adam Winn - KeyBanc Capital Markets

Thanks very much Rich.

Rich Montoni

You bet Adam. Thank you.

Operator

Thank you. Our next question comes from the line of Charles Strauzer with CJS Securities. Please proceed with your question.

Charles Strauzer - CJS Securities

Hi. Good morning.

Rich Montoni

Good morning, Charles, how are you.

Charles Strauzer - CJS Securities

Good. Thanks. Couple of things. First of all if you can expand a little bit on the guidance, and how we should think about the segments margins for the next couple of quarters. Are you also implying with the tempering of consulting that that could actually turn back into a loss on the operating margin side, just give us a little bit more help, if you could?

Rich Montoni

I'd be glad to do that. The key, highlights as we move forward by quarter would be, generally we expect the third quarter to be relatively consistent top-line and bottom-line with the second quarter, and the big driver there obviously is the incurrence of the start up cost, and by the way most of the startup cost, and by most, I mean. 90% plus of the startup cost relates to this Australian expansion.

And as you are aware, the adjustment and the guidance is mostly related to the start up cost. We expect that there will be a waiting of the start up cost towards the third quarter. If I were to share with you percentages, I think it would be 70-30, 60-40 waiting as it relates to Q3, Q4. So, we'll get a bit of a uplift in the fourth quarter relative to that waiting. And other things that will give you flux between Q3 and Q4, as you're well aware we have that seasonality that comes into play with our tax credit business in the fourth quarter, as its most handsome quarter and we expect that to repeat.

We also see improvement in growth and health operations in the fourth quarter. And we also see the child support business as improving in the fourth quarter versus relatively flat in the third quarter, and the big driver to that is the Shelby contract that we mentioned in my call notes. That should kick in operationally and contribute to revenue and profit in the fourth quarter, but not so much in the third quarter.

And lastly on the consulting side, we do expect consulting should be pretty close to breakeven in Q3 and then profitable in Q4.

Charles Strauzer - CJS Securities

Got it. And then segueing into Australia to get a little bit more color there, when you look at the work you're doing now versus what you're going to be ramping to do, can you give us a little bit of flavor what's different from what you had been doing in the past there, and with the size of the contract, it’s a little bit above kind of the target type of sized contract that you'd kind of dials the company back towards, are you comfortable with the size of the contract and the scope of it as well, because in the past I think larger contracts, you think you'd kind of shied away from before?

Rich Montoni

Sure. A great question. I have got some points that I think are very appropriate. First off, as you are aware, risk management has been really the cornerstone to our strategy for the last three years. And we've worked really hard to design, build out, not only our risk management strategy, but all the tools and protocols that really execute it and make it work in real life. It still is very much an important part of the strategy and will continue to be important part of our strategy. This project in particular, I believe should be most viewed as an expansion and it's been subjected to a higher level protocols. We put it through the business review committee, we’ve addressed the risk of this project expansion head on and we feel very comfortable that MAXIMUS is very capable of handling this project expansion.

To really understand this situation and the risk profile, you need to go back to 2002. We had purchased a small business in Australia. This was the [seed], this was their main contract at the time, so MAXIMUS and its predecessor have been running the contract and have been participating in this contact before 2002, so well over a decade. The risk on this has really spread over many locations.

It's really picking up new geography as opposed to inventing and designing and building new systems. We're simply expanding what we do today. Another important data point is, last year we received under the old contract, additional work on 11 additional sites and we successfully ramped up those sites last year, and they went live on time, on budget, and were as expected profitable and remained profitable today.

The last important point here is, we just have a great management team now. They have extensive government experience. A lot of them used to work with the government itself. They have a great relationship with this client. This client itself is a very sophisticated client. They know their business. They know their systems and they are very fair client.

So, when we put it all together. We think this is a great contract and we're very capable of executing on it. We see it as a low risk expansion from an operational perspective.

Charles Strauzer - CJS Securities

Excellent. It's a great clarification. Thank you, and then Rich, lastly you purchased a fair amount of shares over the years and maybe just recap for us, if you have it on the total number of shares you purchased in kind of last two or three years, so its kind of highlighted thing, the use of your cash or shareholder value.

Rich Montoni

That's a great point. To take a step back in over the last two and over the last two years I believe we purchased 1.3 million shares.

Charles Strauzer - CJS Securities

Excellent. Thank you very much.

Rich Montoni

Thank you, Charles.

Operator

(Operator Instructions). Our next question comes from the line of is Jason Kupferberg with UBS. Please proceed with your question.

Jason Kupferberg - UBS

Thanks. Just wanted to follow-up on the Australia contract, I might have missed this but how much revenue is actually being deferred here?

Rich Montoni

Dave Walker?

David Walker

Yes. It's less but it's deferred, than it is not matched with the cost. So, in this particular contract, we get these incentives or performance based payments and we've historically always had that. So, it's the same structure. It is just double the size, and so you incur the cost to run them. When people are employed for a certain period of time and they stay in their position, we get incentive payments for retention. And so, it lags a little over a quarter. And we've had a very reliable revenue stream from it. We expect it to continue. It is just doubled in size and, so the deferral relative to the cost of operations are off about a quarter and half.

Jason Kupferberg - UBS

OK. So, it sounds like there is nothing that unique about the financial structure of this rebid or expansion piece of work. So, I guess, I am just trying to understand what surprised you guys here. You said this is most of the reason for the glide down in EPS, right, is this contract specifically, I head you right? So, I'm just trying to understand what you guys weren’t sure if you were going to get the extension or what was the surprise here?

Rich Montoni

Well. It's a new contract rebid and when they award them, you don't know what they are going to award. So, that award somewhere between zero sites or in the other end of the continuum is this additional amount of work. So, I call it [conservatism], but what we don’t do in our guidance is factored new work into it.

We had basically assume that we would basically win the same amount of work that we’re doing today, but we didn’t factor into our guidance effect that we'd win a net new 36 sites and it really the cost of expanding those 36 sites, that’s the start up cost. There is no startup cost with the existing sites that we manage.

Jason Kupferberg - UBS

Right. OK. Because I noticed that the unbilled DOS, I guess spiked a bit quarter-over-quarter, is that related to Australia specifically or any other factors?

David Walker

No. No at all. We started up the contract in New York. We had a big large front loaded hardware software pass through. The milestone should be reached to be able to build that next quarter, but the reality is and the DSOs are very competitive there, you just have one large revenue and an unbilled receivable on a fixed priced contract that hit the quarter.

Jason Kupferberg - UBS

OK. And just last question, any update on the rebid down in Texas from a timeline perspective. I know the date has kind of pushed that out.

Rich Montoni

They have pushed it out in the main contract that's involved here. There was one small contract that they let to a small provider that was about $3 million a year. That I think happened in December. The main contract here which is the one that MAXIMUS is interested in still remains not awarded. There is activity active sessions between the state or in the state in their process to move forward to the decision. So, we're anxious to here a definite decision I'm going to say over the next 30 days.

Jason Kupferberg - UBS

OK. We'll stay tune. Thanks.

Rich Montoni

Thank you.

Operator

Thank you. Our next question comes from the line of George Price with Stifel Nicolaus. Please proceed with your question.

George Price - Stifel Nicolaus

Hi. Good morning, by the way, everyone.

Rich Montoni

Good morning, George.

David Walker

Hi George

George Price - Stifel Nicolaus

Just to clarify on Australia. How much of the $0.20 of new, of ramp up impact from new work. How much of that $0.20 is Australia. And how much of it is other stuff?

Rich Montoni

More than 90% is Australia.

George Price - Stifel Nicolaus

OK.

Rich Montoni

We have one other job that’s in a start up phase [CHIP] situation that will incur some start up costs in the period. But it is really not a material amount. It is virtually all more than 90% Australia.

David Walker

Yes George we routinely get these with these large ops jobs. But it is pretty easy to bake inside of what it is. But when you get something as large as Australia that ramps up and well it’s not operationally risky. And you have got the deferral stream it’s pretty noticeable. And it is very tough to forecast when you don’t know what volume or number of sites you are going to get.

George Price - Stifel Nicolaus

The reason we hadn't seen this earlier is because of the base part of the contract that’s ongoing, and stuff that you have been doing for awhile.

David Walker

Yes forever.

George Price - Stifel Nicolaus

OK. All right. I am just thinking I couldn't recall anything seems like BC that had sort of a similar kind of impact. Maybe I am not remembering.

Rich Montoni

No we did have that BC contract that was a started up, but that was a total [news doc] contract.

George Price - Stifel Nicolaus

Yeah that was a big takeover to fill. OK. I guess in terms of the timing of ramp up of the contract revenue and then maybe beyond the start up costs, any other timing to the full margin of the Australia contract.

David Walker

Well, it is interesting. The contract has two payment streams. You get like a base payment. And then you get these, those revenue stream that’s deferred, that’s performance based and so you’ll actually see the revenues spike up in Q4 on, and so the revenue will start to come on line pretty quickly. And when these bigger performance streams come in that relate to the cost that we incurred earlier. They will be highly accretive and then so they will start to run in about the second quarter of 2010. OK?

George Price - Stifel Nicolaus

OK. And then margin characteristics, I mean is this are the margins on this one shoot up to full run rate.

Rich Montoni

Very comfortable expected margin. We think that the contract should operate well within the target range for this type of business.

George Price - Stifel Nicolaus

OK. Last thing, just also to understand, it looks like $0.05 to $0.10 of the EPS lowering in the guidance is from consulting, right? It is going down 25 to 30. And you are citing 24, the start up cost. So just assume this is just general physical pressures around consulting and discretionary demand or is it more a performance related with the Legacy stuff

Rich Montoni

I think it is more the Legacy stuff. We have to wrap those up, we believe we have our arms around it. It just that executing the remedies takes a little bit of time. I do think that you have got, I was not under the impression that the order of magnitude with consulting is $0.10. I thought it was zero to$0.05 depending up the range versus $0.05 to $0.10 George. But it’s more so Legacy wrap up. And I think that’s good news because and that type of situation because we don’t expect it to be a recurring quarter-after-quarter type situation.

George Price - Stifel Nicolaus

OK. I just thought 315 to 285 that’s $0.30.

Rich Montoni

The upper-end range, sure.

George Price - Stifel Nicolaus

Last thing you talked about fiscal ‘10 thrown out growth any kind of thoughts around profitability. I mean do you think I know you said at least 10%. Do you think you guys could be at or north of 11% on an operating margin basis?

Rich Montoni

I think first of, I am just very, very pleased to have these wins in our pocket at this point in time. Such that we have got this minimum 7% top line growth as we start to look at fiscal 2010.

I would expect that all of it should contribute within the range that we have targeted. As you know, we have historically said the company should be 10% plus top line and 10% plus operating income percentage performer. I think with this development it certainly puts us in a position where that’s a very, very achievable metric. I don’t quite want to go to the point to declare that victory at this point in time. It’s just too early in the season to that but I think it gives us a really good position. To at least start asking the question is something beyond that achievable.

Operator

Thank you. Our next question comes from the line of Adam Peck with Heartland Funds. Please proceed with your question.

Adam Peck - Heartland Funds

Good morning, thank you for taking the call.

Rich Montoni

How have you been, Adam?

Adam Peck - Heartland Funds

Good thanks. On your 2010 guidance, you said that the [base payments] would be intact. What does that assume for consulting?

Rich Montoni

It assumes consulting will continue to perform pretty much at its constant level. I don't expect that it is going to be a big negative draw. I think consulting is positioned to do better in 2010 than it is expected to do in 2009 because we remedied a lot of situations. We discontinued the RevMax business. So it’s gone which is in consulting, but again we were not giving granular guidance for 2010, so it is not appropriate to say that we are assuming inside that directional guidance that consulting will improve dramatically or not.

Adam Peck - Heartland Funds

OK. Just coming at the margins again for 2010. Given that the start up cost will come in 2009. Is it fair to assume that margins will be higher in 2010 overall than they are in 2009?

Rich Montoni

All things held equal. That is true because we wouldn't repeat the start up cost which is pretty substantial.

Adam Peck - Heartland Funds

OK, great. Thank you.

Rich Montoni

But I want to comeback to your question as it relates to consulting. Again we have a plan and place to deal with the consulting and our plan anticipates. The consulting will not be as negative a contributor in future years as it is 2009.

Operator

Thank you. Our next question comes from Charles Strauzer with CJS Securities. Please proceed with your question.

Charles Strauzer - CJS Securities

Just a quick follow up Rich on guidance in Texas. Is there anything assumed in Texas for in guidance yet.

Rich Montoni

We generally assume the current level of run rate in rebate situations. And I believe that's what we are doing in Texas as well Charles.

Charles Strauzer - CJS Securities

Well thank you very much and I look forward to get you on the road in a couple of weeks.

Rich Montoni

OK, same here. Thanks.

Operator

Thank you. Our next question comes from the line of George Price with Stifel Nicolaus. Please proceed with your question.

George Price - Stifel Nicolaus

I wanted to follow up on one or two things. Mainly first around stimulus, you talked about CHIP, but beyond just CHIP what are you seeing in terms of flow of funds related to the stimulus package?

Rich Montoni

Here is what we are seeing as it relates to stimulus. We are seeing a lot of activity and by that, I mean a lot -- it is state level and federal level as well. A lot of planning activity, a lot of organizational activity, who has responsibility for what? How are we organize to deal with this? A lot of analysis, a lot of policy, discussions and preliminary policy setting, ranging from some states they are asking themselves to what extent if any do we want to avail ourselves of these bills.

We have actually won several smaller jobs, George. By smaller they are $1 million plus or minus range, more consulting in nature, advisory in nature. There is a lot of, state clients that are focused on the CHIP expansion as mentioned. As a company we have had a 50 state call program for both of these new pieces of legislation.

My take is that we were seeing meaningful interface at the federal level. As a couple of these agencies that we deal with are stepping up to take over their new responsibilities. In fact we have got couple of bids that are pending at this point in time. We are optimistic about the awards in the short term.

But and as I said earlier. Our sense is that a lot of these perhaps going to be used against existing state deficits, tough to measure. So, when I sum it all up as I have said before and I think we said on prior calls. There may be some lift in fiscal ’09 in terms of new revenue and opportunity for MAXIMUS, but I wouldn’t put it in the category of material at this point in time. I expect most of the lift will come in fiscal 2010 and really it’s really too soon to quantify.

George Price - Stifel Nicolaus

OK. Last question, status may be of the UK contract. I think there was large opportunity in the UK that you have talked about before. And I am wondering if that is some of the potential investments to fuel growth in 2010 that you’ve indicated in the slides that you know, there could be some incremental impact to current guidance from something like that. I assume you are referring to start up costs or transition cost of some sort.

Rich Montoni

Yes. From a modeling perspective again we approach it as; we will not model in any impacts from pending new work. Bids we have out there until such time as we are awarded the work and then we will factor in the additional revenue and the cost ramifications and earnings ramifications. So at this point in time we haven’t factored in any new work for the pending bids that we have out there one of which is this fairly sizeable opportunity in the UK. Again there is a continuum we may not receive any of the award or maybe a di minimis amount or it could be quite substantial and when we learn of that, that’s when we adjust our model. We do expect that the UK will decide their course of action probably in the next 30 days.

George Price - Stifel Nicolaus

OK. But just to clarify that sort of what the language was alluding to or referring to?

Rich Montoni

I think that’s exactly right. If we got additional rewards and additional ramifications we change our model.

George Price - Stifel Nicolaus

OK, great. Thank you.

Rich Montoni

Thank you.

Operator

Thank you, 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 1-877-660- 6853 or internationally 1201- 612- 7415. Enter account number 316 followed by the replay ID number 321261. Again thank you, ladies and gentlemen, for your participation. You may now disconnect.

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Source: MAXIMUS, Inc. F2Q09 (Qtr End 03/31/09) Earnings Call Transcript
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