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HMS Holdings Corp. HMSY

Q2 2008 Earnings Call

August 1, 2008 9:00 am ET

Executives

Bob Holster - Chairman and CEO

Bill Lucia - President and COO

Walter Hosp - CFO

Analysts

Charles Strauzer - CJS Securities

Richard Close - Jeffries

Tony Perkins - First Analysis

Greg Williams - Sidoti &Company

Kyle Evans - Stephens Inc

Whitt Mayo - Robert W. Baird & Co

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the HMS Second Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Holster, you may begin your conference.

Bob Holster

Thank you, Chris. Good morning, everyone. It's a appreciate pleasure to have you join our second quarter 2008 earnings call. I am Bob Holster. I will be hosting the call along with Bill Lucia, our President and COO; and Walter Hosp, our CFO. The slide presentation designed to complement the conference call may be found at our website at HMS Holdings.com. Please see the quarterly results page under investors, and click on the link to the webcast.

We'll be making forward-looking statements in the course of this call, so please refer to the list of qualifiers included in this morning's press release and the Safe Harbor statement on slide 1 of the presentation. HMS turned in a strong second quarter with revenue up 26% and EPS up 27% from the second quarter of 2007.

Our managed care business continues to grow at better than 100% annual rate, but it is also very encouraging to us to observe that our core State Medicaid agency business, which contributes two-thirds of total revenue grew 15% over the prior year quarter. That's 15% growth in the face of relatively flat fee-for-service Medicaid spending, and speaks to say our continuing ability to increase the breadth of services utilized by our state government contract base, and improve the proportion of their Medicaid expenditures that we recovered.

Before I turn this over to Walter Hosp, I should note that there are three things about which there is no news. First, we're still waiting for the administrative law judge's opinion on our Florida protest. Second, we're still awaiting a CMS decision on [Med] task order 2. And third, along with many others, we're still awaiting a CMS decision on the Medicare rack award. Nick and rack are not in our guidance. We're hopeful the verdict on all three of these matters will become known in the August/September timeframe.

Now Walter Hosp will take you through financial statements, and Bill Lucia will update you on new business, then I will comment on general outlook and revised guidance. Walter.

Walter Hosp

Thank you, Bob, and good morning, everyone. HMS posted a new record quarter of financial results in Q2 '08. As Bob has already reported, revenue for the second quarter of 2008 increased 26% to 44.2 million, versus the second quarter of 2007. For the first half of 2008, revenue growth year-over-year was 23.5%. Total operating expenses for the quarter were $35.3 million, an increase of $7.5 million or 26.1%, compared to the $27.9 million in the same quarter last year.

Looking at the individual expense lines, we see the compensation expense of $17.3 million increase $3.9 million from the same quarter of 2007. We ended this quarter with an average headcount of 821 employees, a 28.5% increase over our average headcount of 639 employees in the prior quarter last year. Data processing expenses of $2.8 million increased $0.4 million or 18.7% from the prior year quarter.

Additional software expense associated with platform upgrades and an upgrading of data communication lines contributed a substantial portion of this increase. Occupancy costs of $2.6 million increased $0.3 million or 14.9% from the prior year, a result of new and expanded office space opened in the past year.

Direct project costs of $6.4 million increased $1 million or 19.1% year-over-year. As a percentage of revenue, direct project costs were 14.5% in the quarter. Other operating costs of $5.1 million were $1.8 million higher in the same period of the prior year. Almost 35% of this increase resulted from additional non-payroll contract staffing expenses in our service centers. The balance of the increase related to travel, office supplies and local municipal charges. Amortization of intangibles associated with the BSPA acquisition was $1.2 million for the quarter, the same as the last year.

Operating income for the quarter was $8.8 million, an increase of $1.7 million or 23.1% year-over-year. Operating margin was 20% for the quarter, and we continue to guide to the 20% operating margins for the full year 2008. Net interest expense was $0.2 million for the quarter, versus $0.4 million for the same quarter last year, which is due to lower debt levels and higher cash balances than in the comparable period.

Income taxes were $3.6 million for the current quarter, compared to $2.9 million for the same quarter in the prior year. The effective tax rate is now at 42% versus 43.7% for last year, reflecting a lower state tax rate as our business and operations are distributed across relatively more tax advantaged states. The above resulted in net income for the quarter of $5 million versus $3.8 million for the same period in 2007, a 31% increase.

The weighted average common shares outstanding for the quarter were 26.7 million shares. Fully diluted net income per share grew 27% to $0.19 versus $0.15 in the same period last year. When comparing our first half results to the revised full year guidance, our first half revenues of $83.1 million are at 47% of the $175 million in revised guidance revenues. Fully diluted earnings per share of $0.31 in the first half are at 41% of the revised $0.75 guidance EPS for the full year.

While we are confident in achieving these revised full year guidance figures, given that the second half of the year is typically stronger than the first half, there is still a significant performance challenge ahead of us for the rest of this year. We now turn to our balance sheet and look at our general financial condition at June 30, 2008. Our cash and cash equivalents increased from $16.7 million at the end of March to $24.9 million at the end of June and has increased further to just under $30 million as of the close of July yesterday.

Our cash continues to be invested in taxable money market accounts with a major money center bank, and we've not had any valuation adjustments in these investments. Accounts receivable was $44.9 million, an increase of $5.1 million from the end of December 2007. This was due in part, to a seasonally consistent slower collections which coincides with the state fiscal year which ends on June 30. The number of day sales outstanding, DSO, at quarter end decreased to 91 days, compared to 97 days in the first quarter of 2008. We aim for continued improvement in this measure in the third quarter of this year.

We had $20.5 million of debt outstanding at quarter end, from our original $40 million term loan. We continue to make principle repayments of $1.575 million each quarter. There still have been no borrowings under our revolving credit facility during the quarter. For the remainder of 2008, we anticipate existing cash balances and funds generated by operations will be sufficient for all our cash needs.

Looking at the statement of cash flows, cash provided by operations was $6.8 million for the six months ended June 30, 2008. Cash provided by operations was comprised of net income of $8.2 million, non-cash charges and depreciation and amortization expense of 5.8 million, non-cash share based compensation expense of 1.5 million, and a change in prepaid assets of 0.9 million. This is offset by an increase of accounts receivable of 5.1 million, and a decrease in accounts payable of 4.9 million.

During the first half of 2008 cash used in investing activities was $4.2 million which was purchases of property equipment and investments in software. Cash provided for financing activities of $1 million consisted of principle payments on our term loan of $3.2 million, offset by $1 million received from stock option exercises and 3.1 million for the tax benefit of disqualifying dispositions from stock option exercises.

We expect that given our outstanding pool of unexercised stock options, our cash taxes will continue to benefit substantially from these disqualifying dispositions. However, we could begin paying a higher level of cash taxes in the second half of 2008. This is dependent upon the level of stock option exercises which we do not control. We now look at EBITDA and adjusted EBITDA was $12.4 million for the quarter, an increase of $2.3 million or 23% over the same period of the prior year.

The adjusted EBITDA margin was 28% for the quarter. This was our fifth straight quarter of generating adjusted EBITDA in excess of $9 million, and we are well on track to meet the revised guidance of $50 million for the full year 2008. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA represents EBITDA adjusted for share-based compensation expense.

And that concludes our review of the financial results and financial position of the company. Bob.

Bob Holster

Thanks, Walter. Bill Lucia is now going to updated the group on the new business brought in-house in the last quarter.

Bill Lucia

Thank you, Bob, and good morning, everyone. Q2 was again a very healthy sales quarter for HMS on all fronts; brand new business, reprocurement, scope of expansion, and contract extensions. In our State Government services area, we were successful in competitive reprocurements for our cost containment and recovery work in the states of Arizona, Kentucky and Louisiana, despite some new competition. We also received annual contract extensions from the states of Colorado, Idaho, Oklahoma, and Virginia. Virginia Medicaid also expanded the scope to include our verified cost avoidance services.

Mass Connector, the Massachusetts Health Reform Program that offers subsidized coverage and facilitates the selection and purchase of private insurance plans by individuals and small businesses awarded HMS a cost containment contract in which we're providing investigation and identification of availability of other health insurance, through both government and private programs, including subsidized insurance from state employee, unemployment benefit plans, TRICARE and College/University State Health plans.

And in our managed care business, we added Coventry Health Care, which has 400,000 Medicaid members. This is one of the large nationally focused Medicaid plans to be added to our portfolio of customers. We also expanded the scope of a number of our other managed care contracts, adding pharmacy recovery services to both Gateway Health and AmeriHealth Mercy, and pharmacy cost avoidance services to WellCare. And CareSource has expanded its contract with HMS to improve program integrity services, medical bill audit and clinical review services, leveraging our sincerity for median.

Lastly HMS expanded its footprint in the child support arena, with contracts to operate a child support customer service unit for the New Mexico Human Services Department. To summarize and despite all the talk about proposed Medicaid cuts, we believe this continues to be an excellent sales environment for HMS. Our contingency fee model is self funding for clients. In the managed care world, the addition of Coventry Health Care now raised our managed care customer base to 11.7 million lives, of which 9.1 million are generating revenue. We continue to sell new clients and close our implementation backlog. Bob.

Bob Holster

Thanks, Bill. As you know from our press release this morning, HMS is raising guidance for 2008. As the slide indicates, we now project that for the full year we'll generate $175 million in revenue, $50 million in adjusted EBITDA, and $0.75 of earnings per share. The guidance raised is called for not because we see things unfolding so differently in the second half, but simply because in the first half we grew a bit faster than we had originally anticipated.

As Walter noted, our earnings are traditionally weighted to the second half, and so while we're comfortable with the increase, we still have to execute well to achieve the higher earnings number. Aside from that, I will conclude by saying that we feel pretty good about the overall environment.

Our analysis of pay claims status still suggests that Medicaid is growing at about a 6% annual rated, but virtually all of that on the managed care side of the ledger where we continue to add lives and expand services. The uncertain U.S. economic situation is still more or likely than not to produce increased Medicaid enrollment during the second half of 2008 and our analysis of the proposed Democratic and Republican healthcare programs suggests that both are fundamentally expansive and likely to increase the demand for our services overtime.

We'll now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Witt Mayo with Robert W Baird and Company. Mr. Mayo, your line is open. Okay, we'll go to the next question. Your next question comes from Charles Strauzer with CJS Securities.

Charles Strauzer - CJS Securities

Good morning. Can you hear me okay?

Bob Holster

Hello.

Charles Strauzer - CJS Securities

Can you hear me okay?

Bob Holster

Yes.

Charles Strauzer - CJS Securities

Hi sorry. Good morning. Bob, can you talk a little bit about some of the or maybe this is for Bill, some of the remaining competitive re-bids that are up for grabs this year and into next year?

Bill Lucia

Yeah. Charlie, this is Bill. Out of the larger states, this year the kind of largest state that's up for re-procurement is California. I believe our contract expires sometime in the fourth quarter, and the procurement is out now and I think they've extended the deadline for response as well.

Charles Strauzer - CJS Securities

Got it. And then we start to look into 2009. Are there any other larger states that are coming up for grabs?

Bill Lucia

I believe really the largest state up for re-procurement in 2009 is New York State.

Charles Strauzer - CJS Securities

Got it and then Bill, just remind us, too, again of the kind of the market opportunity on the MCO side, the number of lines that you've won versus what potentially the entire pool of lines that are out there.

Bill Lucia

Well, we think and you know the specifics change every month, and depending on who reports them, CMS or Private publications, there is probably about 22 million to 25 million members in Medicaid managed care at any given point. We have just under 50% of that membership, and ours is primarily scattered across the larger plans in the nation. We are starting to market to some of the mid-sized regional and smaller plans.

Charles Strauzer - CJS Securities

Got it, great. Thank you very much. And then, Walter just a couple of quick questions, on the data processing and occupancy costs, they were down sequentially from Q1. Was that related to kind of winding down some of the older facilities in Texas?

Walter Hosp

They were not down on an absolute basis, but they were down as the percentage of revenue that you are referring to?

Charles Strauzer - CJS Securities

Right.

Walter Hosp

Yeah part of that had to do with really just the additional leverage you get from the higher revenue base. So they were up modestly, again on an absolute basis, but as the percentage of sales they begin to drop down, and that you should see continuing as well.

Charles Strauzer - CJS Securities

Got it. And lastly, Bob, just when you think about kind of uses of cash, of the additional tuck-in acquisition opportunities you think that are available right now or kind of given the uncertain state of the economy and state budgets and things are you seeing people kind of moving more towards the side lines?

Bob Holster

We have a couple of things in our pipeline now, Charlie. In terms of use of cash, while we're very pleased to be up to roughly 30 million in cash as we speak today, that's not so much as you can pleasure think about having some dry powder available to support our M&A program, so we don't have any plans for that cash right now other than to keep it in reserve hopefully for use ultimately an M&A

Charles Strauzer - CJS Securities

Great, thank you very much. Great job in the quarter.

Bob Holster

Thank you.

Operator

(Operator Instructions). Your next question comes from Richard Close with Jeffries.

Richard Close - Jeffries

Great, thank you very much. Congratulations on a good quarter. Just quick question, just want to touch base. You talked about the revised guidance and that usually the second half is seasonally strong, but you have some performance challenges. I wonder if you can just talk in and around that how you really feel about the second half based on what you saw in the second quarter. Are you guys just being somewhat practical that you are seasonally weighted to the second half, but is there anything you see that would make achieving your guidance difficult?

Bob Holster

When we talk about performance challenges, we mean executing on the work that's already in-house. There is nothing on the sales front that's going to have an impact on our second quarter. We have a lot of work to do to get through the opportunity that is already in-house, and I am referring to nothing more than that. We feel confident about the second half and confident about the overall guidance that we've given.

Richard Close - Jeffries

Okay. That's helpful. Walter, you’ve made a comment in going down the P&L, you know, with respect to just trying to find it here in my notes, on the other expense line, and you mentioned 35%. I think you said non-contract staffing. Is that correct?

Walter Hosp

That's correct.

Richard Close - Jefferies

Okay. And if you can talk in and around non-contract staffing, that to me I guess would indicate that you're ramping up ahead of expected I guess volumes. Is that on target?

Bob Holster

Yeah. I'm going to let Bill handle that one, because it's related to what's going on in our operations.

Bill Lucia

Hi, Richard. It's really non-payroll contracted staff and that's as we have peaks in -- I'll give you an example, implementation of a new MCO, and we get a peak because we've run the entire membership. And part of our service includes telephone verification on things you cannot retrieve electronically. We will hire contract staff to help us through that backlog.

So it's really based more on peaks and valleys. We also do in our non professional staff, we also do a lot of contract-to-hire, meaning that, they work with us for 90 days and once they're up to speed and we agree to make them a job offer, they're offered a full time job. So it's a combination of those two.

Richard Close - Jefferies

Okay. And maybe back to Walter, is there -- should we look at their expense as a poor shadowing of revenue to come?

Walter Hosp

Well, all of our, Richard by virtue of the way that we recognize revenue only when cash is actually achieved by our customers that we're always sort of ahead of the curve on spending. But you shouldn't think of this as a specific indicator. We're going to be using contract temps, when volumes are high and volumes are low simply because as Bill noted it's an efficient way to bring people into your workforce.

Richard Close - Jefferies

Okay. With respect to I guess we're about a year or so removed from [Para-median] and maybe, Bob, if you can talk about what that acquisition has done for you. In looking back has it been a success and do you -- what do you see for that on a go forward basis?

Bill Lucia

This is Bill again, Richard. Para-median really I think if you remember back when we in acquired Para-median, our primary goal with that subsidiary was to acquire clinical review services and onto bring clinical qualifications to HMS, as part of our [armor] median for our program integrity services. It's really required function within program integrity. So we now have clinical review services and a medical director, and it's been a very important part of our arsenal. As we talked about, we see program integrity as a true driver for HMS in 2010 and beyond.

Richard Close - Jefferies

Okay. And then just I guess a follow-onto that would be would program integrity 2010 and beyond, has there been an increase in program integrity here in the current year or are there RFPs out there on the state level that you see as opportunities right now more nearer term?

Bill Lucia

There hasn't been what I consider a flurry of RFPs. But you have to remember that the federal Medicaid Integrity program has really just launched. And CMS is both training states, as well as, the audits have not begun for many Mick auditors to the best of our knowledge. So I think states are still in a wait and see in a prepare mode. But one of the nice things about our model is some of the services that we deliver in program integrity are rolled under our traditional TTL contracts.

Richard Close - Jefferies

Okay, and then just one final question. In covering the healthcare IT area on the provider's side, obviously with I guess racks coming eventually, you know. On the revenue cycle side a lot of people are talking about the providers preparing for the racks, but a lot -- there has been a lot of focus on maybe the front end of the revenue cycle, checking eligibility, and ability to pay and all of that prior to services being provided.

Does anything in terms of movement, by providers to try to get information accurate before service is provided? Does that create a risk to HMS or down the road in terms of being able -- maybe there is not going to be as many errors out there?

Bob Holster

Richard, providers have been focused on payment accuracy and eligibility identification early in the revenue cycle for decades. We think we've seen a gradual improvement overtime in provider's capacity to submit accurate claims as the functionality of patient accounting systems has improved overtime. But tools to determine eligibility have been available for many years. There have been services that provided eligibility query capability to providers. There has been an intense focus on determining eligibility at admission or preadmission.

So while we think we'll see a gradual increase in payment accuracy that's stimulated by things like the federal focus on rack and nick, we don't really see it as a threat to our business. Our recovery rates have been increasing over the same decades that provider efficiency has theoretically been improving. It just gets to be a more complicated reimbursement environment with every passing year with more complexity in contracts between providers and carriers, with more complexity in the government sponsored entitlement programs, and complexity is good for HMS.

Richard Close - Jefferies

Okay thank you. Congratulations.

Bob Holster

Thanks, Richard.

Operator

(Operator Instructions). Your next question comes from Tony Perkins with First Analysis.

Tony Perkins - First Analysis

Good morning.

Bob Holster

Good morning, Tony.

Bill Lucia

Good morning Tony.

Tony Perkins - First Analysis

I might have missed it. Did you give the growth for the Medicaid agency business and the MCO business specifically for Q2?

Bob Holster

The growth for the government business was approximately 15%, and the growth for MCO was -- I am sorry, Walter?

Walter Hosp

Its 100%.

Bob Holster

In excess of 100%.

Tony Perkins - First Analysis

Okay. EPS guidance, I know you've touched on this a little bit. Guidance was raised by $0.02 which is less than the $0.03 each consensus, so should we read that as hesitation for the second half or as maybe conservatism for operational execution in the second half?

Bill Lucia

I don't think you should read it as hesitation. Keeping in mind that we do not give quarterly guidance, the fact that we were $0.03 ahead of external consensus doesn't mean that we were $0.03 ahead of where we expect it to be for the quarter. So I wouldn't read anything into the amount by which we exceeded Q2 consensus. What I draw from this is how we feel about the full year.

Tony Perkins - First Analysis

And just one other thing. Can you give us your insight into the medical budget cuts? Do you see cuts like this to be one off or do you view this as a potential risk as more states kind of come under fiscal pressure?

Bob Holster

Just two points I’d make. It is a rare year in which you don't see a lot of dialog about cutting Medicaid programs in state government. They are now the largest single line item in virtually every state budget. Second, between the idea of the cut and the implementation of the cut are many steps. The legislators get involved. The courts sometimes get involved.

Ultimately the kinds of expenditures that get cut are those that have no counterpart in the employer-based third party coverage world with which we're coordinating benefits. So while it always sounds dramatic, in practice when you look back over time you see that Medicaid has increased like clock work. Over the last thirty years at about a 7% average rate of increase. Bill, you want to supplement that?

Bill Lucia

I think the other thing that's promising and in spite of the cut, 23 states in the nation have an active healthcare expansion initiative, ranging from very small ones to large ones. They'll do it incrementally, but they stand between this fiscal year and next fiscal year and in implementation, so there are states are trying to wrestle with controlling cost, but they are also expanding healthcare to the other insurers. And the last, offsetting point to those cuts are Medicaid enrollment which we'll have to see how that develops, but it appears to be heading in one direction and that's up.

Walter Hosp

Yes, especially as there are new unemployment rates just came out, too.

Tony Perkins - First Analysis

Alright. Thank you for your insight.

Walter Hosp

Thank you, Tony.

Operator

Your next question comes from Greg Williams with Sidoti &Company

Greg Williams - Sidoti &Company

Good morning, everyone. Thank you for taking my call.

Walter Hosp

Good morning, Greg.

Greg Williams - Sidoti &Company

Can you talk a little bit about sort of on the high level contribution margins when you sign contracts, maybe comparing them with MCOs versus the traditional state programs? Are MCOs higher and why the difference?

Unidentified Analyst

Yeah well, as you know that with our cost structure we are looking at centralized costs looking at incremental margins is somewhat clouded because we're allocating a large centralized cost lock across products. As we've also said before, we view the MCO sales and the government sales on a comparable basis. We’ve responded when we've talked about the shift of lives from one area to the other. Again, I would just emphasize that word in terms of comparable profitability that we get from the State and the MCO side.

Greg Williams - Sidoti &Company

Okay. Thanks. Shifting gears a little bit and talking about the bidding renewals and Arizona, Kentucky, Louisiana, you are seeing some of the larger players as ACS in these bids?

Bob Holster

You know, I think what we are willing to say about the competitive landscape is that we see among public companies we see ACS and Maximus showing up in procurements, and we expect that they’ll continue to show up in procurements.

Greg Williams - Sidoti &Company

Okay. And just final thought I had following up on some of the program integrity dialog. So it sounds like the states are in a wait and see attitude. So can we expect maybe mid-2009 sort of timeframe when it starts gaining traction?

Bob Holster

You know, as we've kind of advertised from the start, Greg, as we think about the drivers of our business entering into the managed care market has been the most important driver in 2008 and probably 2009 still. We see program integrity while we're beginning to make in roads as really an opportunity of their future that will begin to have a significant impact, we think in 2010 and subsequent years.

Greg Williams - Sidoti and Company

Okay, great. Thanks, guys and great quarter.

Bill Lucia

Thank you.

Operator

Your next question comes from Kyle Evans with Stephens Inc.

Kyle Evans - Stephens Inc

Thanks. Good morning, guys.

Bob Holster

Morning, Kyle.

Kyle Evans - Stephens Inc

I am still a little bit early to this one. So I'm sorry if some of these questions sound a little basic, and I don't mean to

beat the quarter versus guidance thing to death here. But was this quarter 10% better than you anticipated at the top line?

Walter Hosp

The quarter was a little better than we had anticipated. And it was better in a way that suggested our good performance would be durable enough so that we could comfortably raise guidance.

Kyle Evans - Stephens Inc

Follow-up question to one earlier I believe from Tony on the regarding potential Medicaid budget cuts. Bob, you mentioned that those cuts that get implemented typically don't affect the components that you coordinate. Could you provide a little bit more detail there? I am not sure I understand exactly what that means.

Bill Lucia

Hi, Kyle, it's Bill. I will just give you one example. So state may cut adult dental, and dental is not a coverage that every employer offers anyway. And it's a little trickier sometimes to do dental coordination of benefits, and some of the states having contracts that work with us. So while cutting adult dental or dental services offered to adult Medicaid members may save the state millions and millions of dollars, it has to impact on HMS's claim flow.

Kyle Evans - Stephens Inc

Okay, that's helpful. If I recall in 1Q, the fee-for-service business grew in the 10% range, and I believe you just give a 15% number -- and you also mentioned that you had kind of flat spending there. So that's five points of growth from cross selling. Can you give a little bit more detail on what you're selling there?

Bob Holster

Let me talk about that phenomenon and maybe Bill could give you an example. The growth comes from improved yield meaning we're doing a better job of extracting payments from the universal claims that we built on behalf of clients. It comes from increased scope of services. And it also has to do with timing because individual projects are large and may pop up at different times of the year. So you have all of those factors entering into the improved government growth performance. Bill, maybe you could give an example.

Bill Lucia

I think all of those factors are true, which is why you can't just pick on any one. But an example of cross-selling would be we do a kind of integrated program integrity for lighter audit that's data driven. And then we use our field audit staff to go out and do audits, and so we're selling more of that. You don't see that, we don't call that a program integrity sale because it's sold under our traditional recovery contract that we won many years ago with the state, but it's been an add-on sale and that's part of the revenue growth.

Kyle Evans - Stephens Inc

So if I look at the five points of accelerated growth there. Could you rank order the yield, scope and timing of projects as contributors?

Bob Holster

It would take a lot of homework to do that.

Kyle Evans - Stephens Inc

Okay.

Bob Holster

I think I will reiterate something we've said over the beginning of the year, that we expect to see over the full year our government business grow at a low-teens rate and get averages up to the rate implied by our guidance, by our managed care business, which has been the most rapid grower this year.

Kyle Evans - Stephens Inc

Last question and I will get back in queue. The New York and California contracts that are coming under review in the next 18 months or so, does ACS have the MMIS contract in either of those states and if so, would that be considered a risk in your mind?

Bob Holster

They do not have the MMIS contract in either state. I don't know what other contractual relationships they have in those states. I am not quite sure that's a greater risk or less of a risk at this point. We don't necessarily see the skill set and the abilities the same. We don't have a very highly specialized skill set in cost containment and recoveries, and we don't think that's easily reputable.

Bill Lucia

But in terms of our state of mind as we think about the competitive situation we go in to every procurement now assuming that, we're going to be up against every potential competitor that's raised their head, and that will continue to be our attitude.

Kyle Evans - Stephens Inc

Thanks. Great, guys.

Bill Lucia

Thank you.

Operator

Your next question comes from Whitt Mayo with Robert W. Baird & Co.

Whitt Mayo - Robert W. Baird & Co

Thanks. Good morning and sorry, have been juggling a couple of calls this morning. Really only have one question and don't want to duplicate any other questions so far. But just looking at the managed care business, this has been a multi-year growth strategy for sometime now that just continues to evolve. And I hear the strategy of pursuing more sounds like tier-2 regional plans at this point in time. And is this where you begin to apply your COB match product or is this something that's more of a tier-3 targeted market and if so, where do you still stand in the development of that particular product?

Bob Holster

Well Whitt, to kind of give you an update on that. We've really developed that product to really be an internal engine for us. We've taken it the next step it's truly a totally real-time application for us to do our identification and matching and validation services. A black box, so to speak, that really we can take any type of standard transaction in and export a standard transaction. So we're going to be using that as we roll out new functionality across our entire customer base.

What we're trying to determine for the smaller plans is the economic model for selling our services to them. As you probably know, there is a fair amount of consolidation in this market anyway. And so our existing clients grow from both adding new lines by entering the state or via acquisition.

Whitt Mayo - Robert W. Baird & Co

Okay. So this is still something that's sort of in the beta test right now, you haven't rolled this out or turned it on line for any small plans?

Bob Holster

We have some small plans that utilize the service. But it's not an application that they use. It's a service they use from HMS.

Whitt Mayo - Robert W. Baird & Co

Okay, all right. That's it, guys. Thanks.

Bill Lucia

Thank you, Whitt.

Operator

There are no further questions at this time. Mr. Holster, do you have any closing remarks?

Bob Holster

Thank you all for tuning in and we look forward to speaking with you next quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Source: HMS Holdings Corp. Q2 2008 Earnings Call Transcript
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