MAXIMUS Incorporated Q4 2007 Earnings Call Transcript

Nov.15.07 | About: MAXIMUS, Inc. (MMS)

MAXIMUS Inc. (NYSE:MMS)

Q4 2007 Earnings Call

November 15, 2007, 08:30 am ET

Executives

Lisa Miles - Director, Investor Relations

David Walker - Chief Financial Officer

Rich Montoni - President and Chief Executive Officer

Analysts

Anurag Rana - KeyBanc Capital Markets

Matthew McKay - Jefferies and Company

Charles Strauzer - CJS Securities

Jason Kupferberg - UBS

Shlomo Rosenbaum - Stifel Nicolaus

Rich Glass - Morgan Stanley

Jerry Weintraub - Weintraub Capital

Steve Balog - Cedar Creek Management

Operator

Ladies and gentlemen, welcome to MAXIMUS Fourth QuarterEarnings Call. During this session, all lines will be muted until thequestion-and-answer portion of the call. (Operator Instructions)

At this time, I would like to turn the call over to LisaMiles, Director of Investor Relations.

Lisa Miles

Good morning. And thank you for joining us on today'sconference call. If you wish to follow along, we’ve posted a presentation on ourwebsite under the investor relations page.

On the call today is Rich Montoni, Chief Executive Officerand David Walker, Chief Financial Officer. Following our prepared comments, wewill open the call up for Q&A.

Before I begin, I would like to remind everyone that anumber of statements being made today will be forward-looking in nature. Pleaseremember that such statements are only predictions and actual events or resultsmay differ materially as a result of risks we face including those discuss in Exhibit99.1 of our SEC filings.

We encourage you to review the summary of these risks in ourmost recent 10-Q filed with the SEC. The company does not assume any obligationto revise or update these forward-looking statements to reflect subsequentevents or circumstances.

And with that, I'll turn the call over to David.

David Walker

Thank you, Lisa. Good morning. Today we're reporting fourthquarter record revenue and earnings per share. In addition, we have concludedthe strategic review process and are launching a $150 million accelerated sharerepurchase program, which is immediately accretive and demonstrates ourconfidence in the future success of the company. Rich will talk about this ingreater detail later in the call.

Let's jump right in to the details of the financial resultsfor the fourth quarter. Today, MAXIMUS reported fourth quarter revenue totaling$201.9 million, a 17.5% increase over the same period last year.

The company reported net income in the fourth quarter of$14.2 million or $0.63 per diluted share. This includes a $2.5 million legalexpense primarily related to the Accenture arbitration or $0.06 per dilutedshare, excluding the legal charge earnings per share with $0.69 per share.

Fourth quarter operating margin was solid at 10.8%. This isconsistent with the double-digit operating margin delivered last quarter.Excluding the unusual legal and settlement cost.

Earlier in the year, we talked about the achievability of a10% margin. The management team remains committed to continuing this strongfinancial delivery. We will see quarterly fluctuations related to timing orseasonality, but this target remains achievable.

Other highlights in the quarter include, cash and marketablesecurities of $196.7 million at September 30, 2007 and as expected DSOs wereslightly higher than last quarter but remained respectable at 80 days.

Moving to results for the full fiscal year. For the fullyear, fiscal 2007 revenue increased 5.4% to $738.6 million, compared to $700.9million last year. Excluding revenue from the divested businesses for fiscal2006 year-over-year organic growth was 6.8%.

For fiscal 2007, MAXIMUS reported a GAAP loss of $8.3million or $0.38 per share. This compares to fiscal 2006 net income of $2.5million and diluted EPS of $0.11 per share.

In order to set the platform for next year, let me walk youthrough results normalized for certain items. On a full year GAAP basis, incomebefore taxes was $3.1 million, as a result of large amount included in legaland settlement expense that is not tax deductible, we reported an after-taxloss of $0.38 per share.

This after-tax loss was driven by three main items includinglosses on the terminated Texas subcontract totaling $25.2 million or $0.67 ashare, a $4.2 million loss or $0.11 a share related to the Ontario project andlegal and settlement expenses of $44.6 million or $1.61 a share.

Excluding these items, total company income before tax forthe full fiscal year would have been $77.1 million or a pro forma dilutedearnings per share of $2.01.

Overall, financial results for the quarter and the year wereconsistent with the expectations we outlined in our call in August. The fourthquarter is traditionally our strongest quarter due to seasonality in certainbusiness lines and benefits derived in the quarter from the timing of indirectexpenditures.

While our fourth quarter results were strong we expect ourfirst quarter to be sequentially lower due to seasonal trends and several largeprojects in operations and consulting, which required planned start-up costs inthe first half of the year.

Let's jump in to the details by segment, starting with theoperations segment, which posted another solid quarter. Revenue for theoperation segment increased 23% to $141.9 million, compared to the same periodlast year.

For the full fiscal year, the operation segment deliveredrevenue totaling $503.6 million, a 6.9% increase, compared to the same periodlast year. Excluding revenue from divested businesses in fiscal 2006, operationsegment revenue grew 9%.

The operation segment recorded fourth quarter operatingincome of $23.5 million or an operating margin of 16.6%, compared to a loss of$2.9 million reported in the same period last year.

For the full fiscal year, the segment had operating incomeof $39.1 million or an operating margin of 7.8%. Excluding the losses relatedto the now-terminated Texas subcontract, the segments pro forma operatingmargin was approximately 13.1%.

The new contract in Texas provides significant improvementin second half of fiscal 2007, the segment also benefited from strong organicgrowth. The segment continues to win new work, which will be a major source oftop-line growth in fiscal year '08.

As previously discussed planned start-up costs required forcertain new contracts will reduce sequential operating income in the first halfof fiscal 2008.

Consulting segment revenue was $22.5 million for the fourthquarter with operating income of $554,000 and a 2.5% margin. Full year revenuefor the segment totaled $93.7 million with an operating income of $6.4 millionand a margin of 6.9%. This compares to last year's revenue of $102.8 millionand an operating margin of 14.1%.

The reductions in revenue and margin compared to last yearare primarily related to a couple of projects that were substantialcontributors in fiscal 2006. Also, hindering revenue growth and marginexpansion is the transition away from contingent fee terms for our federalhealthcare practices.

As we make this shift, we're refreshing the backlog with newwork in Medicaid program integrity such as our statewide fraud, waste and abusecontract in New York and our Payment Error Rate Measurement or PERM contractsin Colorado, North Dakota and Florida.

Some of these new growth areas require up-front cost andwill soften earnings in the first half of the year. Moving on to the systemssegment, systems revenue in the fourth fiscal quarter grew to $37.4 million,compared to $30 million reported for the same period last year.

For the full year, revenue increased 11% to $141.3 millioncompared to fiscal 2006. Year-over-year revenue growth was driven primarily bynew contracts in the ERP division, including statewide implementations inTennessee and Delaware.

The segment was slightly profitable in the fourth quarterearning $466,000. For the full year the segment lost $4.7 million, much of thefull-year loss resulted from ongoing software investments as well as chargestaken during the year relate to efforts to resolve legacy contracts.

Moving to corporate expense items and core responding profitmargins. MAXIMUS achieved a solid 10.8% operating margin in the fourth quarter,SG&A was favorably impacted by timing of indirect cost largely between thethird and fourth quarter as well as cost management actions.

As I stated earlier, Q1 is traditionally our softestquarter, the SG&A benefit recognized this quarter coupled with seasonalityand planned start-up expenditures related to New York firm operations willresult in a lower sequential operating margin in the first quarter of 2008.

Moving on to balance sheet and cash flow items. Our accountsreceivable for the totaled $175.2 million in addition, we also have $1.9million in long-term accounts receivable, which are classified within otherassets on the balance sheet, which brings me to DSOs.

Over the last 18 months, Rich and I have talked a lot aboutmanagement actions such as requiring or stringent business terms, enhancing ourcontracts and compliance team and increasing program training. The results areclearly showing in our DSOs with fourth quarter levels at 80 days.

As I stated last quarter, we have laid out a more aggressiveDSO range of 75 to 85 days, which reflects our ongoing focus on tightly managein cash and receivables throughout all levels of the organization.

As expected, cash flow was negative in the quarterprincipally resulting from a cash outlay of $30.5 million related to thepreviously disclosed settle inspect the District of Columbia.

Excluding the DC payment, cash from operations in the fourthquarter was $22.3 million with free cash flow of $14.9 million. For fiscal2007, cash from operations totaled $51.2 million with free cash flow of $33.4million, adjusting for the DC settlement, cash flow from operations was $81.7million and free cash flow would have been $63.9 million.

Our efforts to focus on balance sheet optimization as wellas our accelerated share repurchase program demonstrate our commitment tomanage working capital an enhancing shareholder value.

And with that, I'll turn the call over to Rich.

Rich Montoni

Thanks, David and good morning, everyone. I want to kick offthis morning with some late great breaking news. Last night MAXIMUS receivednotification from the California Department of Healthcare Services of their intentto award the California Healthcare options rebid to MAXIMUS. This is trulyfantastic news and I'm very proud of our team's collective effort to solidifythis win. Thanks.

We are very pleased to continue our partnership with thestate in support of their efforts surrounding this critical program. The basecontract is expected to run for 57 months base with additional options forthree years beyond that. We hope to finalize the contract in the next couple ofweeks, but we're not at liberty to provide specific contract details at thattime.

Okay. Let's jump in to our other announcements fromyesterday. As noted in the press release, we have recently concluded ourstrategic review process in conjunction with UBS our financial advisor. This isa thorough, extensive process and we considered all options.

Dynamics in the capital markets weighed in the process andwhile we received much interest from outside parties on a variety of fronts, weare not immune to those broader market conditions. There's been substantialtightening of availability of capital, which impacted the ability of buyers tostrike acceptable terms and conditions.

As a result, we have concluded that continuing as anindependent public company coupled with meaningful capitalization efficiency isthe best option in the best interests of our shareholders. We're not going totalk specifically to how the process unfolded, but I would remind you that theBoard initiated this process. And I can assure that the scope and the intensityof the process was very significant.

MAXIMUS has a great portfolio of assets and people and I amexcited and dedicated to leading the company forward. As part of our strategy,we have three key initiatives underway.

First, we're addressing our capitalization head on. We havelaunched an accelerated share repurchase program, which will commence at theend of business today, this is additive to our current Board authorizationprogram.

At September 30th, we had approximately $40 millionremaining under that program and in addition we're seeking to secure a $50 to$75 million line of credit in the coming weeks.

Second, we are narrowing and concentrating our focus on coremarkets to fuel growth. Then concludes potential investments, partnerships andtuck-in acquisitions. Third, we may pursue selected divestitures of businessesthat may not fit within our primary markets, but could be very attractive tothose more focused in those markets.

Our program calls for the accelerated repurchase of sharesin the amount of $150 million. We will purchase these shares effective todayfrom UBS, which will then borrow the shares. Over the next nine months UBS willpurchase an equivalent number of shares in the open market to cover the sharesit borrowed.

At the end of that period, MAXIMUS' initiative purchaseprice will be adjusted up or down based upon the volume-weighted average priceof the stock or what is reviewed to view out during this period.

The price adjustment may be settled in cash or shares ofstock and we expect this program will be accretive by approximately $0.15 to$0.20 per diluted share in fiscal 2008 and it provides the company with theflexibility necessary to continue to invest and grow the business.

This is the first window of opportunity we have had in atleast the last 12 months to pursue a meaningful share repurchase. Clearly, theoutstanding arbitration in the unassuming strategic review process factoredinto the timing of share repurchases.

To refresh your memory on the Texas time line, we hadentered into arbitration in December of 2006, terminated our subcontractagreement in February of 2007 and then entered into contracts directly with thestate at the end of March.

Shortly thereafter, we began laying the groundwork for thestrategic review process, which was announced in July. This ASR program willimprove the efficiency of our capital structure, lower the cost of capital,increase earnings per share and better position MAXIMUS for the future.

In addition to the ASR, MAXIMUS still has approximately $40 millionavailable under its previous board-authorized repurchase program, thisadditional authorization remains available us to for share repurchases upon thecompletion of the ASR program.

After the $150 million use of cash for the ASR program, cashat September 30th on a pro forma basis would have been approximately $47million. I also note that, while we may have quarterly fluctuations ourbusiness has and is expected to generate substantial cash from operations.

However, we also intent that our moving to put in place anadditional $50 to $75 million line of credit to be available for futurebusiness needs.

In addition to our capitalization program announced today,we're taking positive steps forward as we better define our longer-term visionfor growth. We have a clear understanding of what businesses us with -- whatbusinesses provide us with the most value and best fit with our strategicgrowth objectives.

The review process facilitated a rigorous assessment of ourindividual businesses and confirmed our view that refined focus is the mostappropriate path as an independent company.

We’ve concluded that returns are highest when a businesssuch as ours focuses on its core competences and this we defined to be holdinga number one or number two position in the market.

Having the ability to meet clients' needs and cost effectiveand efficient solutions, significant growth potential in those markets then abusiness can drive highest returns to its shareholders. And for us that landsus squarely within our traditional BPO service offerings and certainly ingovernment health and human services programs.

As we look at the overall portfolio, we see business haslaid out across three major categories, one, those business lines that areclearly core to achieving our longer-term objectives.

Two, those businesses on the periphery of these areas thatfor example may share common customer bases these still make sense to have inthe mix. These are typically practice areas that remain accretive and offercertain synergies.

And three, certain business lines that may not be a clearfit in our organization. And in support of this effort to focus on ouroperations we are actively working on alternatives for certain assets.

We successfully benefited from the divestiture of twobusinesses in the beginning of fiscal 2007, which were not consistent with ourlonger-term objectives and we're prepared to take additional action in thisarea.

With a wrap-up of fiscal 2007 and the completion of thestrategic review process, we are entering fiscal 2008 with a much-improvedbusiness.

We spent the last 18 months placing more emphasis on qualityand risk management, which has resulted in the elimination of several legacyissues, more favorable contract terms on new awards, solid cash flow, lowerDSOs, improving operating margins and accelerating topline growth.

We successfully turned the Texas projects into profitablecontributors, which speaks volumes about the company's solid brand reputationand perhaps more importantly, our extensive experience in providingcost-effective and efficient business process outsourcing in complexgovernment-funded programs such as Medicaid and SCHIP.

In fiscal 2007, we resolved the majority of the legaloverhangs including matters such as Ontario, the District of Columbia,Department Of Justice Settlement and we restructured our business relationshipswith Emergis, which turned this into a partnership.

In the coming year, we will build on the progress made infiscal 2007 to further optimize operations in fuel growth as we emphasize thosebusinesses which offer us more predictable reoccurring streams of revenue andsustainable levels of income.

We are investing in the necessary -- we are investing thenecessary dollars to succeed in these core areas where we see potential. Forexample, we are investing in a productization effort around both our enrollmentbroker and eligibility work, primarily for our Medicaid, enrollment broker andSCHIP operations.

This is where a plug-and-play technical solution is neededin support of our BPO services. Productization is key to maintainingcompetitive leg up as we seek to serve a wide range of states.

Now, we're launching this new technology platform in Indianawhere we just signed a new two-year $50 million base contract to provideenrollment broker services for several state Medicaid programs.

The project provides the option to extend operations for anadditional two years, which would bring the total award to $26 million overfour years. This is an extremely strategic award for MAXIMUS, with universalhealthcare being a key component of the overall program.

In addition to serving as enrollment broker for the state'sprimary Medicaid program, MAXIMUS will also provide services for the state'snew healthy Indiana program, or what is referred to as HIP.

The state sponsored HIP program is the principal platformfor providing affordable health insurance for uninsured low-income adults. Thisthen further solidifies our position as the nation's leading provider of Medicaidenrollment broker services. More importantly, it demonstrates our leadership invision in assisting states with the rollout of universal healthcare.

MAXIMUS remains at the forefront of the opportunitysurrounding universal healthcare initiatives. At this juncture, we believe thatmost state initiatives will continue to be complementary to their current SCHIPand Medicaid programs.

Let's move on to backlog, new awards and total salespipeline, all of which I believe confirm and support our forecasted revenuegrowth for fiscal '08. At September 30th, 2007, backlog totaled $1.3 billioncompared to $1.5 billion reported last year.

This reflects certain larger jobs moving in to rebid oroption phases. You may recall that option-year revenue is added to backlog whenthe option is formally awarded by the client.

In fiscal 2008, we have a few large programs where thecurrent base contract will run out in fiscal '08 and is then followed by anexercisable option period. Signed awards of September 30, 2007, totaled $569million which compares to $717 million reported same period last year.

This is offset by an increase in awarded in unsigned atSeptember 30th, 2007, to $310 million from $103 million at September 30th,2006. For fiscal 2007, approximately 70% of new-signed awards are in theoperations segment, which reflect a targeted effort on the growing health andhuman services markets.

Now, let's take a moment to focus on the sales pipeline. Asof November 8th, 2007, our overall sales pipeline is at record levels and total$1.7 billion. This compares to $1.1 billion at September 30th, 2006.

As a reminder, the company reported pipeline. It onlyincludes those opportunities where an RFP is expected to be released in thenext six months. So the opportunity has to be on the horizon for it to beincluded.

Of the $1.7 billion pipeline, approximately 60% isattributable to opportunities in the operations segment. In addition, themajority of the overall pipeline is coming from new opportunities that are lessthan $50 million in value.

This reflects our continued efforts of securing new workthat is less volume driven and centered around our core competencies in thearea of operation management and BPO outsourcing.

Moving on to rebids, as I noted earlier, late last night wereceived a notice of intent to award the California Health Care Optionscontract to MAXIMUS, which was our final rebid -- which was our final rebid in2007.

We'll be working to finalize that award in the coming weeks.As we look out to fiscal 2008, we have 13 rebids. These are 13 rebids expectedduring the year for a total contract value of approximately $280 million. Sincemost of this year's rebids are in the second half of the year, the impact torevenue for fiscal 2008 is approximately only $4 million.

Shifting over to option year exercises, we have 27 expectedoptions in fiscal '08. These have a collective value of $223 million totalcontract value of which we expect revenue of approximately $47 million infiscal 2008.

Moving on to guidance, we expect revenue for fiscal 2008 tobe in the range of $850 million to $880 million with a diluted EPS of $2.40 to$2.65. Now this EPS range, this is before the expected accretion of $0.15 to$0.20 per diluted share from the $150 million ASR program, so that you shouldknow that's before the accretion.

The company estimates approximately 83% or forecasted fiscal2008 revenue is presently in the form of backlog. This metric is a very strongindicator in support of our forecasted revenue for fiscal 2008.

As we talked about the last few quarter fiscal 2008 toplinegrowth is expected to be fueled by new work in the operations segment. Weexpect that consulting will return to more normalize financial performance infiscal '08 with expected 10% growth.

On the systems side we're looking for revenue growth in therange of 10% to 15% with a much-improved operating income compared to fiscal2007.

As David talked about earlier the first quarter is expectedto be sequentially lower as a result of the planned investments related to newwork and seasonality in the fourth quarter that does not repeat in Q1.

And now before I open it up to Q&A, I want to re-enforcecommitment of this management team and the board of directors to creating anddelivering long-term shareholder value.

We undertook this strategic review process to assessMAXIMUS's future in different scenarios and we emerged with a focused strategyand clear sense of next steps.

The repurchase plan provided us a more efficient capitalstructure and it is meant to send a message to our shareholders that we areintent on delivering value in this case immediately.

I believe these actions underscore our confidence and ourprospects as an independent company and our outlook and current pipeline of newopportunities for the current year speaks to the anticipated growth in ouroperations as we shed legacy issues and focus our business on profitable workwithin our more narrowly defined scope of operations.

I look forward to updating you throughout the year on ourprogress. We also will be reaching out to the investment community throughoutthe year to broaden our audience and raise awareness and understanding of thegrowth opportunities within MAXIMUS.

I thank you for your interest this morning and now let's openthe call-up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the lineof Anurag Rana. Please go ahead.

Anurag Rana - KeyBanc Capital Markets

Hi. Good morning, everyone. Could you please give us someinformation on the offers that you received on the sale of the company andwhether they were above the current stock price and if the board was notinterested in the price that was offered?

Rich Montoni

Anurag, this is Rich. Good morning. I'm not going to getinto extensive details about the buyers' specific offers but I would say this,just let me talk about the process and give you a little bit of color.

It is clear that when we started this process in June, thecapital markets were totally different. I would say who would have guessed thatboth the equity and the debt markets would have experienced the dynamics thatthey have gone through since that point in time.

And we all know there's been an incredible drop in thevolume of M&A activity in the marketplace and as David said, that not a dayhas passed where transaction has not been tabled.

We did receive very strong indications at first nearly 70indications of interest. We did received written and verbal offers but thesestarted to dissipate as the market dissipated, just as you have seen about thetransactions. So those who had strong initial interest did not advance to thefinish line in this process.

You know, when I think about the situation again, that thesefolks were very, very mindful of the premium that, perhaps they sensed wasfactored into price and again, these are determinations to be made by buyers,not by us. But I do think as you asked that some folks were mindful of whatthey sensed was a premium factored into the price of the stock.

I would also add that some folks were interested in partsbut not all of the business and some were preoccupied with other deals quitefrankly that they had in the [hopper 40:27]. And lastly, I would say that somewere simply not financially or otherwise in a position to pull it off, perhapstide up with their own LBO issues.

So as I wrap it up, again I get back to the one predominantissue that was clear in this situation was the overall addition indeterioration of the capital markets. That helpful?

Anurag Rana - KeyBanc Capital Markets

That's really helpful. Thank you. And also your guidance fornext year suggests the margins around 10%. Now after an internal review andrevised focus what do you think long-term margins for MAXIMUS could be in a fewyears?

Rich Montoni

I don't think -- I don't want to go there at this point intime. I think what we need to do is move forward and look at those businessunits that require some action to get us the focus and one of the byproductscertainly will be margin, certainly we would like to take actions that improveand not deteriorate margin, but that's one element of the equation.

So when those margin improvements happen and to what extentI think is really a question to be asked on future calls but a very good one.

Anurag Rana - KeyBanc Capital Markets

Thank you.

Operator

Our next question comes is from the line of Matthew McKaywith Jefferies and Company. Please go ahead.

Matthew McKay - Jefferies and Company

Good morning, guys.

Lisa Miles

Good morning.

Matthew McKay - Jefferies and Company

First question just onto you, Rich, is just what your plansare, if you plan to -- now that there's a no sale here, you know, are you goingto stay with the company or you know, just kind of a little incite in to whatyour thinking is?

Rich Montoni

No question. I'm going to stay with the company. I won't getinto details about why I like the company, what I like about the company, why Ienjoy working here, that’s the longer conversation. But the short of it is I'mvery submitted to the company, very pleased to be here and very pleased withthis path and opportunity to take it to the next chapter.

Matthew McKay - Jefferies and Company

Okay. Good. And then, just on the winning California,congratulations.

Rich Montoni

Thank you very much.

Matthew McKay - Jefferies and Company

Yes. If I understand how that's going to work I think theexisting contract runs through the end of this fiscal year for you guys. Withthe new contract, is going to run in parallel through this fiscal year so wouldit actually be accretive to your guidance?

Rich Montoni

No. I think the way this will work, I think actually the newcontract is effective in January of '09, so this new contract, I'm sorry.

Matthew McKay - Jefferies and Company

Of '08…

Rich Montoni

Of '08. So for -- this is a win that really is for purposesof revenue in operations in '09 issue, not in '08 issue.

Matthew McKay - Jefferies and Company

Okay. So you are not going to get any revenue from this startingJanuary 2008?

Rich Montoni

There's a transition period, so we're not going to getadditional or double up on revenues.

Matthew McKay - Jefferies and Company

Okay.

Rich Montoni

We have already factored full operations of this projectinto our '08 forecast.

Matthew McKay - Jefferies and Company

Okay.

Rich Montoni

So really what this does is solidify revenue beyond fiscal'08, '09 and even beyond fiscal '09.

Matthew McKay - Jefferies and Company

Okay.

Rich Montoni

Okay?

Matthew McKay - Jefferies and Company

That is helpful. And just one last question, just I'mcurious as you went through this, strategic alternative thought process andobviously, came out with accelerated stock repurchase. And just was there agood reason why you didn't think about maybe doing a more aggressiveacquisition strategy?

Rich Montoni

Yes. I think there is a good reason why and there's severalfactors that went in to this and we really did explore all alternatives. Wereally do think focus is important. Quite frankly when we look at our stockprice and we look at the potential of our operations and certainly you are wellaware of what we have managed to do in improving that in fiscal '07 and I thinkwe have got some pretty good headway as we go in to fiscal '08.

We think the price of the stock is right for purposes ofrepurchases. We think it's substantially accretive and frankly, ourshareholders and we have had discussions with our shareholders, they are veryreceptive to some form of repatriation.

So, I don't think we're excessively capitalizes, excessivelyundercapitalized with this ASR program. I think it leaves us with goodcapitalization to consider alternatives as we move forward but we didn't wantto rush into an acquisition type situation, it was not the right path for us atthis time.

Matthew McKay - Jefferies and Company

Okay. Great. Thanks a lot guys.

Rich Montoni

Okay.

Operator

Our next question is from the line of Charles Strauzer withCJS Securities. Please go ahead.

Charles Strauzer - CJS Securities

Good morning, Rich.

Rich Montoni

Good morning, Charles. How are you?

Charles Strauzer - CJS Securities

Good. Thank you. Just a question just to clarify on theguidance if I could. Last quarter you gave initial '08 guidance of your revenuegreater than 10% and now you have been implying kind of, your high -- yourmid-high teens topline growth, which is very robust. But you are kind ofsticking to the 10% margin goal and only raising the bottom end of youroriginal EPS guidance.

Are there some factors there other than the Medicaidintegrity upfront costs. There are factored into that the EPS, because the cashinterests on income is going away? Is it a higher tax rate, what are thefactors that going into that?

Rich Montoni

I'll ask, Walker to respond to that.

David Walker

You know, we normalized revenue. I guess the way, I think ofit that we normalize for it $2.1, we are showing you our revenue increases andlot of reasons for that a lot of new wins this year.

On the fourth quarter Texas for a full year run rate underthe new contract certainly drives up the topline, but that's why we have gotthe guidance of the 8.50, 8.80. So you take the 1011 to 141, which is incrementof revenue over this year.

You know, when you put a 10% operating margin added taxaffected you are talking $0.30 -- $0.29 to $0.37 a share. And so of course likeall things Rich and I take on additional challenges. So there's about a $0.10to $0.27 challenge to in fact continue to improve the operating income, so that'sthe basis of it.

So it's the 201 plus the $0.29 to $0.37 a share that'simplied in the revenue growth and $0.10 to $0.27 a share just really fromcontinuing to drive up margins. And certainly when we look at some of oursegments, we would like to see improvement.

Rich Montoni

And I would also add Charles that again, this is before theASR program, so…

Charles Strauzer - CJS Securities

Yes.

Rich Montoni

As you move forward with your new models you will have tofactor in all of the impacts of the ASR and that would include as you refer to,there would be less other income, interest income so that would have to beadjusted. But also the big impact obviously would be in the denominator of theEPS calculation.

So you will have to do that and on top of the 240 to 265. Wefelt very comfortable in moving up the lower end of the range from what hadbeen 235, keep in mind that 235 through that earlier range was very early inthe year.

It was before we went through our planning process. We feltcomfortable moving up the lower into the range but I would emphasis it is bydefinition the low end of the range.

Charles Strauzer - CJS Securities

Got it. Now, just we are trying to get, you know when youlook at the various segments and you gave up, your pretty good guidance foryour growth rates for the top line. But are you implying on that certainsegments maybe will have less profitability year-over-year, that is the systemsand consulting segments?

Rich Montoni

We are not looking for any of our segments to have lessprofitability year-over-year.

Charles Strauzer - CJS Securities

On a margin basis?

Rich Montoni

On a margin basis.

Charles Strauzer - CJS Securities

Got it. Great. Thank you very much. And is there any cap onthe VWAP adjustment, Rich on the ASR?

Rich Montoni

I can't get into the details on that one. We're goingthrough the legal processes of filing that document and what should be publicand what shouldn't be public is something the lawyers are deal with right nowCharles.

Lisa Miles

And Charlie we will be filing that as an 8-K probablyearlier next week. So you will able to take a look at it.

Charles Strauzer - CJS Securities

Excellent. Thank you very much.

Rich Montoni

Okay. Thank you.

Operator

(Operator Instruction) Our next question is from the line ofJason Kupferberg with UBS. Please go ahead.

Jason Kupferberg - UBS

Thank you and good morning. Just a question on, Rich as yousaid pretty much all alternatives were considered here. And I was curiousspecifically with regard to the potential for a Dutch tender and why that mighthave been ultimately decided against in favor of the ASR, kind of what the prosand cons specifically as it relates to that potential option?

Rich Montoni

Yes. I think this and boy, it quickly gets almost nearlyjudgment Jason in terms of what form what vehicle do you select to effectuatethe return to your shareholders. And we went through that whole litany ofalternatives, including Dutch tender increasing an ordinary dividend, largedividend and we ended up on the ASR, because there are certain aspects to theASR that we liked.

We liked the certainty. We liked the immediate aspects ofit. We liked the immediate accretion. We felt that since we're not necessarilystock pickers it also provided us a vehicle to get the stock at what we thinkis fair prices.

The Dutch tender had some appeal but also had some negativesit to as well. They are not always successful. They are certainly not as fastas an ASR. So we decided to go with the ASR for that -- those reasons.

Jason Kupferberg - UBS

Okay. That's helpful. And on the Accenture arbitration anyupdates there and I know you had $0.06 of legal charges in Q4 for that. Whatare you looking for going forward? Are there going to be continuing ongoinglegal expenses there and are any of those baked into the EPS guidance?

Rich Montoni

Here is where we are with the arbitration with Accenture itis basically law firm-to-law firm and representing each side as they moveforward to currently scheduled arbitration in the middle of April, I believe.

So that's really the process, there is not been settlementdiscussions or negotiations at this time. We did accrue an additional amount inthis fourth quarter and it depends how things work out.

But we believe that the accrual is necessary and sufficientto get us through the beginning of next year. And we're also exploring theviability of some insurance coverage as it relates to legal cost beyond thatpoint in time.

Jason Kupferberg - UBS

Okay. And just broad macro…

Rich Montoni

Jason if you -- last amount of your question, we have notbaked into our '08 guidance any additional legal costs for that matter.

Jason Kupferberg - UBS

Okay. And just a broad macro question obviously there arelot of question on a state local budgets now with some of the slow down of themacro economy and property taxes being down and I think there were some articleabout.

California is specifically yesterday facing some unexpecteddeficits. I mean, how are you guying looking at that, I am sure you watch itclosely in arguable your businesses different to some extent now than duringthe last time the states faced a real fiscal crunch.

But to what extent have you tried to factor some of that into your outlook as well, some of the stuff that might be beyond your control?

Rich Montoni

Well, I think of it this way and I do think there are somemacro issues in local issues that are circling and certainly the general stateof the economy does have -- somewhat delayed but does have impact on state andlocal budgets. The other factor is one might mention is what's going on from apolitical perspective with SCHIP authorization etcetera, so we watch that veryclosely.

It's interesting with our business model and we have learnedthis in prior periods you go back to the beginning of 2000, when states hadsimilar issues is most of our product line and service offerings are tied tofederally mandated programs, so the programs must continue.

Our experience is that the states generally continue withtheir current level of spending, so we find during steeper recession theirtimes some risk of marginal cut back on some programs, but the more hardyprograms those that are federally mandated tend to continue at the same levelof spend.

So I think, that's one good thing about our business model.States do have some discretionary spend areas but we tend not to concentrate onthose discretionary spend areas.

Jason Kupferberg - UBS

Okay. And just a last question for David, if I can.Operating and free cash flow expectations for fiscal '08?

David Walker

Sure. Your cash flow from operations will range somewherefrom $50 to $60 million and I'll provide a little flavor for that and the freecash excluding the purchase will be somewhere in the $30 to $40 million range.

And you know one things, I'll say if you lookyear-over-year. We did a great job in '07 of driving down DSOs, so receivableson a cash flow perspective, actually was a net contributor. But as we grow,when we look into '08 the receivables -- and we're using 80 days in ourmodeling -- will consume working capital, so growth has a tendency to do that.

On our CapEx, you know we averaged about 1.8% of our revenuelast year in CapEx spending capital assets but we will need some additionalinfrastructure, financial systems, et cetera. So we picked that additionalspending in. And then we spent cap software about $1.5 million a quarter in '07and I would expect something to continue in that range.

You know, last year we generated a lot of cash from taxesand we -- you know, fortunately we'll be in a tax paying position, it's ahigh-class problem and we like that. So that will change the dynamics a littlebit, so hopefully that helps.

Jason Kupferberg - UBS

It does. Thanks, guys.

Rich Montoni

Yes.

Operator

Our next question is from the line of Shlomo Rosenbaum withStifel Nicolaus. Please go ahead.

Shlomo Rosenbaum - Stifel Nicolaus

Hi. Thanks for taking my question. I want to deal in alittle bit to some of your business units the margins were very high inoperations segment for the second quarter in a row. We historically havethought about that segment being maybe 8% to 12% margins and now we're seeinglike 17.6%, 16.6%. Can you talk, specifically about what happened in the lastcouple of quarters and has the bar been raised?

David Walker

You know, there's certain aspects of the operationalbusiness is somewhat seasonal, so you have to be careful for that. For example,we have a tax crediting business in there that tends to come on really strongin Q4, so that certainly plays a factor.

And some of our growth in operations will be lower riskwork, but lower margin work, so that on a weighted average will blend it downnext year. But there is no doubt about it the team has done a great job in '07,I think of optimizing return to shareholders and striking the right balance.

Rich Montoni

I would only add to that in Q3, we did see a non-recurringup-tick as it relates to some non-recurring in essence recoveries on the Texasproject.

Shlomo Rosenbaum - Stifel Nicolaus

Yes.

Rich Montoni

So that helped the margin quite a bit and as Dave says in Q3and Q4 we do get a respectable amount of seasonal and profit from our taxcredit business, which disappears in Q1 and Q2. So you should expect to seesome flux because of those dynamics.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. Then on the consulting business you talked a littlebit about some work that I guess was federal -- some healthcare work. Is thatRevMax work that you are not pursuing over there, is that the reasons some ofthe work that you are getting out of?

David Walker

Well, we're pursuing RevMax we're just no longer pursuingRevMax on a contingent basis, when we are chasing after federal dollars, we youknow, I think that's in our best interest. So we're still doing that on afixed-fee per basis on basis. But with that said, you know some customers won'tmind that model attractive even though we think it provides high-valueproposition.

So with that said, I think we're transitioning in to some otherwork area. And we have been pretty successful with some wins in fraud, wasteand abuse and the PERM work that we talked about.

And the nature of some of that for the fraud, waste andabuse, it's similar to RevMax and that we have to incur some costs and buildsome models and do some things before we start getting some transactionalrevenue from that.

So we're going to be spending some money towards that whichultimately will be accretive in the year, in the early parts of the year and weshould see the benefits on the backend.

Shlomo Rosenbaum - Stifel Nicolaus

Now, what about some of the timing and billing of workissues and consulting features, could you give a little more detail on whatthat was?

David Walker

Well, there's always seasonality inside of consulting. Youknow, so when we have these contingent work things, you know, it could swing onan individual contract by several million dollars from one quarter up or onequarter down, so it can be volatile quarter-over-quarter and frankly as we getaway from the RevMax fee for service it should have the effect to release thatportion of the work smoothing and over.

But overall, you know, we looked to have an operating incomemargin there in excess of 10%. It is a consulting business should be muchbetter than that.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. Do you have a percentage of your work that isfederally funded, just of your overall business?

Rich Montoni

We have looked at that and we believe approximately 70% ofour business is federally funded. And now it may ultimately go through thestates and the states would be the direct payor to us but it's federal fundsthat pay the states and then pay ourselves. Our estimate is about 70% ourrevenues.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. Great. And I'm going to sneak in one last one.

Rich Montoni

Yes.

Shlomo Rosenbaum - Stifel Nicolaus

Can, are there any, you talked about some of your contractsthat are being rebid and then some of the option seems like the rebids are nothave been taken pack this year but there are any pretty large dollar-sizedcontracts that we should be keeping our eyes on for either the rebid or theoptions?

Rich Montoni

Yes. I think '08 shapes up to have some significantrebids/option periods, up until last night, I was thinking that HCO would bethe most significant rebid event in '08 but as it works out, we're great tohave that in the win column. That's a great way to start out fiscal '08 to putthat one in the win column.

So as we go in to '08, the significant engagements thatwe're focused on would be winning the long-term Texas contracts.

Shlomo Rosenbaum - Stifel Nicolaus

Right.

Rich Montoni

Because we have some work in Texas that will run throughDecember of '08 and then will be up for rebid. We have some other work thatruns through June of 2010 which contracts on the process of finalizing but sosome of that work will be up for rebid in fiscal '08, so that will beimportant.

And I think we also have large, we have some work that we dofor the federal government, CMS in particular, quality assurance work in yourfederal division within our operation segment that's up for rebid. And then Ithink we have a New York contract where we have got some option extensions thatwe need to achieve.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. But your biggest two or three, are these the biggesttwo or three, basically, you are working at the Texas, the one with CMS andthen the New York contract?

Rich Montoni

That's correct.

Lisa Miles

I just want to clarify Shlomo on the rebids, Texas and theCMS work, the bulk of the rebids, New York Medicaid choice that actually is anoption here that will be cited in fiscal 2008 but it's not a revenue impactuntil fiscal 2009.

Shlomo Rosenbaum - Stifel Nicolaus

Okay. I'll let somebody else ask and I'll get back in line.

Lisa Miles

Okay. Thanks.

Operator

Our next question is from the line of Roger Chuchen withMorgan Stanley. Please go ahead.

Rich Glass - Morgan Stanley

Hi, guys. It's Rich Glass actually. So much for thatone-question rule? Can I ask you to give us a little more insight into the partof your release where you talked about refining its focus on core health andhuman service operations and seeking possible alternatives for certain non-coreassets and basically, what we're talking about there potentially?

Rich Montoni

I would be glad to do that, Rich. What we are doing and whatwe have done and will continue to do -- I don't think you just do this once andthen go back. We're going through all of our business offerings and assessingthem vis-à-vis the criteria that I talked about in the call. And to recap thatwe have some that fits squarely in what we consider to be our real growthareas.

We have some that and it's a bit of, a circle in an ovalpeg, but still they are profitable, they are accretive, there's no compellingreason to exit that line of business and then we have some that quite franklywe don't have the time to thus manage those businesses.

We don't see them as synergistic with our other businessesand we think in the hands of others, they could do much better, the employeeswould have more growth opportunities, their shareholders would see greaterreturns.

One experience I have had over the last 18 months and thisis a reconfirmation that I get on quarterly basis. It's a very pleasantconfirmation and that is we do extremely well in our model when we are numberone or number two.

We just, one of our key differentiators in the market is oursubject matter expertise. And I think that's another way to say we really knowthis space better than other people. And when that happens our customers cometo us. They have a strong preference to renew with us. They are very willing tohave more fair negotiations about price and terms, which translates in to ourmargins they really are biased for MAXIMUS serving them.

And I think that's all good and I think that all translatesfrom a shareholders perspective into greater returns that are margins. So we'regoing to focus the company in that direction as opposed to being a quitediversified company.

I really want to move the company to be focused on thosegrowth areas and we're mapping that over to what we think our macro growth areais. It is very clear in our society and in our governments that they continue tohave big issues as it relates to health, government management of health,fraud, waste and abuse, even in all of those areas where we see management ofemployment in these various governments and we're seeing some strongindications of what we do in the workforce area as coming back, particularlywith DRA.

So there's a lot of things where we see strong growth andwhat we want to do is make that our bulls eye, be number one or two in themarketplace and I think that's going to translate in to better financialperformance.

So with that as a backdrop, we are going through and lookingat those business units that we think we should consider, for which we shouldconsider alternatives. I'm not going about it as a fire sale.

I want to be reasonable about it and I'll be reasonable tothe employees but we are definitely marching down the path and looking atselective divisions for other alternatives.

Rich Glass - Morgan Stanley

Okay. So we are really focusing on maybe operations hereconsidering on what we're talking about in terms of…

Rich Montoni

Yes. Our model, I think works best when we have long-termoutsourcing contracts, contracts that run two, three, four, five years andquite frankly plan A is we're going to be doing these work for thesegovernments for not this contract but our model works very well and theindustry I think is very much driven towards renewing the contract. So Plan Ais that you do the work for 20 years not 10 years.

Rich Glass - Morgan Stanley

If I'm hearing it right, your systems and consulting youdon't have to own, maybe they are worth more to somebody else, maybe they are abetter fit. And you put in a buyback today of $150 million and then $40 millionbeyond that and then you might have proceeds from any other sales above and beyondthat as well, which you could use for other corporate purposes, is that fair?

Rich Montoni

Yes. That is very, very fair.

Rich Glass - Morgan Stanley

Okay. Sounds good. Thanks.

Rich Montoni

Thanks. Good. Thank you very much, Rich.

Operator

Our next question is from the line of Jerry Weintraub withWeintraub Capital. Please go ahead. Jerry your line is open.

Jerry Weintraub - Weintraub Capital

I have no questions.

Rich Montoni

Okay.

Operator

Our last question is from the line of Steve Balog with CedarCreek Management. Please go ahead.

Steve Balog - Cedar Creek Management

Thanks. The original stated reason for selling the companywas there was some thought we should be part of a much larger company. If Irecall something with systems expertise so that was not a financial buyer.

I would have thought that a larger company like that theequity markets, excuse me, the debt markets and getting financing wouldn't bean issue for the IBM, DDS's, Accenture's those are all companies to that classthat wouldn’t matter.

That question one where does that work, are we now at adisadvantage because we're not part of larger company with the systemsexpertise and maybe the whole explanation of this is not to put words in yourmouth but were the strategics to ones that only wanted part of the company, theoperations part but then what the rest. (inaudible67:05).

Rich Montoni

David refer to all that.

David Walker

Actually again. I'm not going to get in to individual buyersituations but it's a not fair to map it over and say just the strategic justwanted parts. That's not a general rule that's fair to the situation.

We did receive substantial interest across the board and asit relates to your question on the systems piece you are right. One of the reasonsfor considering a combination with a strategic and perhaps, the most compellingone is to further improve the company's sure IT capabilities.

That being said we have not rested on our Laurels and as wetalked about in our call, we have made pretty significant investments in someproprietary technology that gives us a competitive advantage as we offer ourBPO solution in the marketplace.

And I specifically mention the productization efforts we'vemade an EB as well as SCHIP. That's not the type of technology solution we werelooking for from a complementary partner. It would be more just think aboutclassic ITO.

And I still think that that is a factor and I still thinkthat that remains, how we couple with those types of providers because we don'tenvision ourselves as being ITO -- a pure ITO outsourcing firm.

As in the past, we have partnered with them. We will subthem in and we'll continue to do that. So we don't lose any -- I don't thinkwe'll lose any momentum but I still think that's a potential synergy that's outthere.

Steve Balog - Cedar Creek Management

Okay. Back to the other question I had, those kinds ofcompanies that I would have thought would be interested are not in compare tofinancing no problem this is a smallish kind of acquisition for them.

So I guess the highest interest or they didn't want to paythis kind of those types of buyers didn't want to pay the price we needed?

David Walker

I think that's right. I think that's a fair conclusion andit's very difficult there's no generality in terms of why a strategic took aposition. As I said earlier there are some factors out there that I thinkcertain ones may have considered in the process again sensing, many weremindful of a premium being factored into the price.

I said some are interested in parts but not all of thebusiness and I do think that some were preoccupied, you see someone else andslightly that are pre sizeable for some of those folks but you otherwise wouldthink we would have an interest.

Steve Balog - Cedar Creek Management

Great. Thank you.

David Walker

Okay. Okay. I have one last clarifying point in response tomy discussion, in response to Rich Glass' situation about consulting insystems. I want to emphasize that these are certain divisions inside these systemsnot persuasiveness as it relates to all of consulting or all of systems.

In fact I do think there's a very good fit for some of ourconsulting work that is complementary to our service offerings and productofferings in health and human services, this is one of the ways we distinguishourselves as subject matter experts. Okay.

Lisa Miles

And operator, that ends our call today.

Operator

Ladies and gentlemen, a replay of this call will beavailable to you. Your replay information can be found on the press release.The direct link isreg.linkconferencecall.com/DigitalPlayback/DigitalPlaybackRegistration.aspx?recid=5826.

Ladies and gentlemen, this concludes today's presentation.Thank you for your participation. You may now disconnect.

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