Q4 2019 Earnings Call
Greetings and welcome to the back Smith fiscal 2019 fourth quarter and yearend conference call. At this time all participants are in listen only mode of question answer session will follow the formal presentation. If any watch require operator assistance. Please press star zero or the telephone keypad.
As a reminder, this conference is being recorded.
It's my pleasure to introduce your host Lisa miles senior Vice President Investor Relations. Please go ahead.
Good morning, Thank you for joining US with me today is Bruce Caswell, President and CEO and rented out Chief financial Officer, I'd like to remind everyone that a number statements being made today well before looking in nature. Please remember that such statements are only predictions.
Actual events and results may differ materially as a result of risks we face, including those discussed an exhibit 99 dot one or as you see filings.
We encourage you to review the information contained in our earnings release today and our most recent forms 10-Q, and 10-K filed with the FCC.
The company does not assume any obligation to revise or update. These forward looking statements to reflect subsequent events or circumstances, except as required by law.
Today's presentation may contain non-GAAP financial information management uses this information in its internal analyses of results and believes this information maybe informative to investors and gauging the quality of our financial performance identifying trends in our results and providing meaningful period to period comparisons.
For a reconciliation of the non-GAAP measures presented in this document we see the company's most recent quarterly earnings press release, and with that I'll hand, the call Overture Rick.
Thanks, Lisa fiscal year 2019 was characterized by consistent execution and demonstrated progress on management strategic plan to lead a digital transformation.
Grow our clinically related services and expand in key priority markets and adjacent sees.
We generated healthy cash flow.
Completed our largest acquisition.
And returned additional capital to our shareholders through an increase to our dividend.
We finished fiscal 2019 with revenue and earnings growth driven by the acquisition of the U.S. Federal citizen engagement centers last November .
As noted in our press release. This morning total company revenue for fiscal 2019 increased to $2.87 billion, which fell within our guidance range of $2.88 billion to $2.9 billion.
On the bottom line total company operating margin for fiscal 2019.
Was 11%.
Well, our U.S. health and human services and U.S. Federal services segment delivered good margins, we experienced downward pressure on our pre tax income outside the United States.
As expected diluted earnings per share for fiscal 2019 increased 11%.
The $3.72 compared to the prior year a $3.35.
Our fiscal 2019 tax rate.
Benefited from work credits and R&D credits, which yielded an effective rate of 24.2%.
I will start my comments on segment results with the U.S. health and human services segment.
Revenue for the U.S. health and human services segment in fiscal 2019 decreased to $1.18 billion compared to last year.
The anticipated decrease was due to contracts that were rebid were extended.
It is worth noting that fourth quarter revenue increased to 4% compared to the prior year period and was all organic.
The segment delivered a strong operating margin of 18.8% for fiscal 2019, which was inline with our expectations and compares to 18.0% for the prior year. The segments full year operating margin also benefited from cost synergies, resulting from the November .
2018 acquisition.
Our U.S. Federal services segment.
Revenue for fiscal 2019 in the U.S. Federal services segment increased a $1.11 billion driven primarily by the acquisition and to a lesser extent by organic growth.
The acquisition contributed revenue of $615 million for the full fiscal year.
And $174 million for the fourth quarter.
Absent the acquisition full year organic revenue for this segment increased 3% over last year, driven by new work, which was offset by temporary work that end.
The acquired census contract is tracking in line with our expectations over the life of the contract and delivered approximately $185 million of revenue for the segment for fiscal 2019.
U.S Federal services delivered a 10.4% operating margin for fiscal 2019.
As a reminder, the segment's margin may fluctuate due to contract mix for example cost plus contracts typically carry lower margins than performance based contracts.
Looking forward to fiscal 2020 , our contract mix will be weighted more heavily towards cost plus contracts with the census contract ramping in a full year of revenue from the acquisition.
This means that while revenue will increase there will be some downward pressure on operating margins in the segment.
For the outside the U.S. segment fiscal 2019 revenue was $599 million as compared to $699 million in fiscal 2018.
The decrease was a result of three primary drivers first.
Revenue declined by $36 million due to the expected conclusion of the work choice and work program contracts in the United Kingdom.
Second the segment was unfavorably impacted by foreign currency translation of $35 million and third pass through revenue declined by approximately $16 million in our Australian welfare to work contract.
The segment's operating margin for the full year was 2.7% as we disclosed in prior quarters, the new employment services contracts in the United Kingdom are progressing toward profitability, but they are unfavorable to earnings in the near term.
As we discussed last quarter.
And accretive component of a contracting candidate was unexpectedly discontinued which negatively affected results in the second half of our fiscal year.
Overall, the segments employment services business continues to be impacted by robust economies in most of the geographies we operate.
As discussed on prior calls this macro dynamic has led to smaller caseload lower volumes any more challenging environment for keeping harder to serve populations in sustainable employment.
While the segment operated below our expectations for the fiscal year, we are managing the business with a goal of moving operating margin towards 5% in the near term.
Over the next three years, we are targeting to move the operating margin up to high single digits, and then 10%, but economic trends will play a role in the length of time. It may take to move this segment north of 5%.
Let me turn to the balance sheet and cash flow items.
For fiscal 2019, our cash flow from operations in free cash flow was $357 million and $294 million respectively.
Exceeding our estimates for both metrics.
Our dsos balance at September 32019 was 72 days.
Four days of which was a noncash item, which resulted from the adoption of the new revenue recognition standard implemented at the beginning of fiscal 2019.
Capital expenditures for fiscal 2019 increased compared to the prior year due to fixed asset additions related to the census contract and increased capitalized software expenditures as part of our Microservices investment discussed on last quarter's call.
During the second half of fiscal 2019, we implemented a new accounts payable system.
As of September 32019, our accounts payable was higher than normal by an estimated $25 million to $30 million, which increased our reported cash flow from operations and free cash flow for fiscal 2019.
We expect the cash flow from operations and free cash flow will be negatively impacted in the first half of fiscal 2020 as this normalizes.
We finished fiscal 2019 with $106 million of cash and cash equivalents.
We remain committed to a sensible and disciplined approach to capital deployment as we aim to create and deliver long term shareholder value.
Our priorities have not changed M&A remains our number one priority. We're pleased with the 400 million dollar US Federal acquisition last November which enabled us to build scale expand our customer base improve our competitive position and bring on new technology platforms.
Our M&A objective is to find targets that enable us to build long term sustainable organic growth by continuing to build scale.
Enhance our clinical and digital capabilities and extend into new adjacent sees.
We increased our cash dividend, 12% to an annualized $1.12 cents per share.
The board evaluates our cash dividend on a regular basis.
Our share buyback program remains a viable avenue for uses of cash, but it is opportunistic in nature, and we're conscious of providing shareholders with reasonable returns.
At September Thirtyth, we had approximately $146 million remaining under our board authorized program.
We will continue to make ongoing investments into the business to maintain our competitive edge and ultimately ensure that we continued to deliver value to our clients.
We invest in people process and technology as we work to fundamentally reshape our government's approach program delivery in consumer engagement.
In closing we are establishing guidance for fiscal 2020.
For fiscal year 2020 , we expect revenue will range between 3.15 billion and $3.3 billion.
With the increase driven principally by the us Federal services segment.
We currently anticipate the diluted earnings per share will range between $3, a 95 cents and $4 in 15 cents.
This implies an operating margin range between 10.7% and 10.8% and reflects an increase in revenue from cost plus contracts in the U.S Federal services segment, most notably from the census contract and an additional six weeks of operations from the November two.
Thousand 18 acquisition.
We were pleased to see organic growth in the U.S. health and human services and the U.S Federal services segments at the end of fiscal 2019.
In terms of fiscal 2020 , we have good line of sight to organic growth of 8% year over year, with 6% or $175 million from the census contract as it ramps to full capacity.
You will note we fell a little short of our projection for sensus revenue in fiscal 2019, but expect to make it back in fiscal 2020 .
The remaining 2% of growth to achieve the midpoint of fiscal 2020 revenue guidance of $3.2 billion to $5 billion is forecasted new work.
Our forecast a new work assumes a variety of probability weighted opportunities.
We show this math in the revenue crosswalk exhibit on the guidance slide of the accompanying presentation to this call.
We thought it would be important to provide some color on the periods within fiscal 2020 first the timing of revenue and profit on the census contract will fluctuate and given the scale of the program. This will cause some lumpiness in our quarterly results.
Second based on what we know today, we are forecasting that total company revenue in fiscal 2020 will be stronger in the first half of the year.
As a reminder, we will benefit from favorable seasonality in our first quarter from the open enrollment period under Medicare and the Affordable Care Act and the census contract.
Our second fiscal quarter is currently expected to generate the highest levels of revenue driven by the census contract.
On the bottom line total company earnings in the first quarter will be sequentially lower than our fiscal fourth quarter of 2019.
Mostly due to contract mix and program maturity as new work comes online.
We expect earnings to grow sequentially through our fiscal third quarter of 2020 .
Our guidance also assumes that the census contract will begin to wind down in June 2020, and as a result, our fiscal fourth quarter will be sequentially lower than our fiscal 2020 third quarter.
We also thought it would be useful to provide some direction as it relates to segment operating margins for fiscal 2020 .
For the U.S. health and human services segment, we are anticipating operating margin in the 17% to 18% range.
US Federal services segment operating margins are expected to range between nine and 10% the lower margin reflects the increasing revenue from cost plus contracts in fiscal 2020 , most notably the census contract.
Ultimately the operating margin in the U.S Federal services segment will be impacted by the portion of revenue from cost plus contracts.
Our outside the U.S. segment is expected to perform in the low single digits.
With the goal to realize mid single digits by the second half of fiscal 2020 and continue that trajectory in future periods as I mentioned earlier.
For the full fiscal year 2020 , we estimate the income tax rate to range between 24.5, and 25.5% and weighted average shares outstanding to be approximately 64.9 million assuming no further stock purchases.
Our cash flows in fiscal 2020 , we expect cash flows from operations to range between 300 $350 million and we expect free cash flow to range between 275 million and $325 million.
In addition, the ongoing ramp up of the census contract will result in significant receivables throughout most of fiscal 2020 , partially offset by an increase in payables.
We hope that provide you with insight into our fiscal year 2020 based on what we know today.
And with that I will turn the call over to Bruce. Thank you, Rick and good morning, everyone.
As Rick noted in his opening remarks during fiscal year 2019, we made substantial progress on the key tenets of our strategy to position Maximus for future long term success.
When you examine the macro trends we've aligned our plan with how the markets are evolving how our government clients are seeking to address challenges and how consumers are best served through an improved experience in engaging with government programs.
With demographic trends of aging populations with more complex health needs, we see an opportunity to deliver services at the heart of the intersection of clinical VPO and digital services.
Today I wanted to take the time to track our progress towards our three goals of digital transformation clinical evolution and market expansion and further provide you commentary on how these support our strategic trajectory moving into the new fiscal year.
First I would like to address digital transformation or the cultural shift towards digital disruption within government services, we operate.
We help lead our clients towards digital maturity by defining and Operationalizing bees technologies and innovations.
We seek to primary objectives with our digital efforts first we aim to deliver a unique citizen experience.
Second we use digital technologies and innovation to improve our overall program efficiencies and to operate smarter using tools that propel our overall productivity.
By meeting citizens, where they are on their phones computers and tablets, we're providing a better experience with unparalleled service, while lowering costs and delivering efficiencies for our government clients.
We apply innovative tools that integrate with existing systems maintained security and optimize workflow.
The result is that we're seeing more and more citizens engage through digital channels for instance.
Between 2017 in 2019, we double digital enrollment volumes during open enrollment for Louisiana Medicaid.
In North Carolina, 64% of Medicaid beneficiaries used digital channels to research their 2019 open enrollment choices.
And in Virginia, Medicaid applications that were completed by digital channels more than doubled over last year.
As a result of this growing trend towards digital we have launched 20 consumer web sites globally. Since November 2016 that promote and simplify the interaction with government programs.
Developed to mobile applications that were trending in the top 100 mobile apps on the Google play store during October 2019, and.
We've been awarded the prestigious 2019 PR News Digital award in the mobile App category for our healthy, Louisiana Medicaid enrollment App. The first Medicaid enrollment app in the country distinguishing Maximus has a digital pioneer.
Our digital efforts drive real value for our clients. We can greatly reduced processing time for all types of documentation, helping prevent and reduce backlogs. We are able to automate repetitive manually intensive tasks to better utilize staff improved profitability and most importantly offer the most efficient use of tax dollars.
Yes.
Digital security is also Paramount for our operations I'm pleased to share that as a result of our cyber security program management capabilities. We were awarded the internal revenue service information technology security implementation or ITSI to contract to implement strategies to address cyber security vulnerabilities.
Within the IRS environment. This New award has a total contract value of $119 million over five years.
Our success is also illustrated by two additional you asked patents awarded to maximize the first Patton recognizes capabilities, we developed to streamline performance monitoring increased staff optimization and pinpoint lost productivity in our operations.
The second patent for process tracking and defect detection enables our projects to monitor and maintain the health of business processes by receiving real time alerts whenever anomalies occur within them such as when a task becomes stuck in a Q.
These patents are embedded in our proprietary analytics products that differentiate our VPO services. They build on the foundation of process analysis and extended to the analysis of contact center and age inefficiency.
Complementing one another our three collective patents provides the ability to run real world, what if scenarios, which enable our government clients and maximize to easily understand and visualize how changes such as a major technology investment or policy change could impact their program operations.
Continual integration of data across our programs allows for new insights into the performance of our projects and extends operational value from metric management to outcome and behavioral analysis initiatives simply put it through innovations like these that we're able to deliver outcomes that matter for our customers.
Further these optimizations can achieve cost reductions of 20% to 30%, while improving workflow resource utilization and quality.
Turning now to clinical evolution governments are challenged with finding a responsive and cost effective way to manage aging populations individuals with more complex healthcare needs and to address population in public health imperatives.
These macro trends underpinned demand for BPM services with more of a clinical dimension.
By employing our strength and clinical assessment case management and consumer engagement, we're a natural partner to governments as they address issues ranging from long term services program eligibility to disability benefit determinations to the social determinants of health outcomes as I highlighted earlier in the fiscal year.
We were recently awarded the California Independent Medical review or Aimar rebid.
We first assisted California with this solution in 2013 and further advance this adjacent see with a win in New York earlier this fiscal year.
We currently estimate a total contract value of $300 million for this five year performance based contract.
Connecting our digital and clinical solutions with artificial intelligence and robotic process automation, we have created a web based document intake portal supporting a fully paperless environment that provides a sophisticated decision support tools to our clinical staff.
We're also able to maintain a remote workforce saving costs on overhead and allowing us to retrain staff and transition them to more strategic and satisfying work.
This integration of our digital and clinical capabilities has yielded a 30% reduction in assessment submission cycle time through our recent patent optimizations, which I discussed earlier.
Additionally, we were awarded an extension by the Michigan Department of Health and human services to implement work requirement services for mission Medicaid beneficiaries.
Through this contract we will assist state residents enrolled into healthy Michigan plan to comply with qualifying work activity requirements in order to continue receiving their state sponsored health insurance coverage.
With a total contract value of $44 million extending the work through March of 2023.
The contract scope includes inbound call center operations self attestations outbound dialing and SMS reminders.
Moving overseas.
As we've said for years, our fundamental goal is the land and expand in our geographies.
Most recently in Saudi Arabia, we've been awarded the social beneficiaries employment program. The program works to reduce the number of Saudis, receiving welfare through training and job placement serving job seekers on long term welfare benefits, who require more specialist support.
The program includes soft skills training end market demand led training in addition to job placement support.
This program will serve a different target population than our current to caught contract, which serves those who are unemployed and actively seeking work.
The total contract value is $43.2 million for two years.
Moving onto New awards for fiscal 2019 signed awards were $2.6 billion of total contract value at September Thirtyth further at September Thirtyth. There were another $242 million worth of contracts that had been awarded but have not yet been signed.
Let's turn our attention to our pipeline of addressable sales opportunities. Our total contract value pipeline at September Thirtyth was $30.2 billion compared to $29.6 billion reported in the third quarter.
Our total pipeline of sales opportunities, 67% represents new work.
As I noted last quarter and integral part of returning the company to organic growth is converting our pipeline of addressable new sales opportunities into awards.
As part of our approach. We also continue to invest and expand our business development resources as well as other areas that provide meaningful support to winning new work.
In closing we have shown continued progress on management strategic plan to lead a digital transformation grow our clinically related services and expand and key priority markets and adjacent sees as Rick pointed out M&A remains a priority for us as we aim to find targets that enable us to build long term sustainable organic growth.
Both by continuing to build scale enhance our clinical and digital capabilities and extend into new areas.
Lastly, I.
I wanted to thank our employees around the globe for their hard work and continued dedication to providing superior customer service and connecting people to government benefit programs every day and with that we'll open up the line for Q1 day operator.
Thank you will now be conducting a question answer session for that to be placing the question Q. Please press star one on your telephone keypad a confirmation Tony will indicate your line is in the question Q you May Press Star too if you like true question from the Q.
Confusing speaker equipment, it may be necessary to pick up or have said before pressing star one one moment. Please when you pull for questions.
First question today is coming from Richard close from Canaccord Genuity. Your line is that alive.
Great.
Thanks for the questions.
I was wondering if you could sort to help us out with.
Digital transformation and the clinical evolution.
Specifically I'm trying to gauge in terms of.
Well first on digital transformation, how much of that initiative do you think is.
Yes provides the opportunity for incremental revenue versus maybe increasing your competitiveness.
Pricing and driving increased profitability for the company.
Hey, Richard Good morning, and thank you for the question. It's a great question because there are several components to the digital transformation strategy that you've highlighted.
Clearly as we got started we looked at how digital could really help us drive process efficiencies in our back office operations and that's going to drive profit improvement. It also allows us to redesign workflows and create more efficient workflows for the work that we do which can drive greater productivity all of that enables us.
Just to maintain competitiveness and expand competitiveness and also obviously generate.
Better margins generating profit that we can invest to expand into more markets.
I'm really pleased with the progress that we've made in areas like robotic process automation recently, one of the big RP a tool vendors out there automation anywhere.
I would like to supposed to kind of case study if their work with Max Smith to talk about the bought that we've been developing and implementing in some of the savings that we've been driving and so forth. So theres, that's definitely a important component to it.
Also through a lot of those automation efforts, we can improve quality and assure quality in our operations, which is critical as well, especially when were held the SLR contract.
But at the same time, we've been working to improve and experience and the example, I'd use to illustrate how you can drive an expansion enrolled our scope and more revenue comes from the work that we're doing in British Columbia. We've got what is really an omnichannel customer contact center platform, there and to make a bit of distinction theres a difference between.
An omnichannel and multichannel and Omnichannel platform implies that there is process choreography going on behind the scenes and so that a citizen can can be can begin to transaction and one modality and completed another and it's relatively seamless. So you're not for example, reoffending authenticating people and an agent that might be serving a citizen over a voice channel.
Is aware of correspondence that might have been add electronically through chatter email previously in British Columbia, we implemented a video.
I'd authentication platform or video chat platform. It's important for two reasons number one citizens historically had to go to a government office as soon as they receive their health benefit card and literally be authenticated face to face. So you have people pick and buses around town and often in many instances in rural areas traveling hours to get to go.
From an offices. They can now do that through video chat, which is fantastic government started thinking what other use cases could we possibly use this floor and there are many I'm one of which there Eric we have implemented already enables students that are studying outside of the country are really students, they're sitting in the country to authenticate themselves to government to then apply for and risk.
Student loans, historically, thats very difficult if you're out of the country and you have to wait to your next break to come back apply for your loan and so and you get a delay in your funding it's not a good citizen experienced a very small example, but one where I think if you put these platforms in place government will work collaboratively with you to figure out additional use cases and applications.
Absolutely a way to grow the business.
The other component of your question I think was the clinical side and so I'm going to help you there.
Yes, I was just trying to get the sense of.
With digital transformation and then clinical evolution.
How much you think that increases.
The company's competitiveness and I'd just like the overall.
Contracts you guys can go after.
Well.
Hi level I'd say, there's no doubt that as we continue to evolve our clinical capabilities. We increased the competitiveness of the company because there are few companies that can operate in that domain with programs such scale and complexity.
And deliver on the quality requirements in the service levels at a requirement required while having that work done by a highly trained clinical staff. A great example would be the health health assessment Advisory services in the United Kingdom.
Similarly, as we look at additional markets, where they're not necessarily looking at providing direct clinical care delivery, but rather clinical services related to assessments, whether it's up and thats for duty or.
Pre preemployment screening assessment.
Related to individuals applying for certain benefits that.
Opening that aperture and we can go even further I mean, where we're doing some work right now on further evolving our health related strategy and the federal business. We are seeing that opening new markets over the course of the next two to five years quite substantially so I'm confident that by pivoting in this direction and opening the aperture and becoming more clinical.
That we do well repositioned the company into new exciting adjacent markets.
I think that makes is relatively unique in our ability to deliver this as I said in my remarks, the combination of digital technologies and clinical services or clinical VPO as we call it at scale.
Does that answer your question.
But that's good and then just as a follow up.
Okay.
We got the new pipeline information and the new definition over this last year.
Obviously, the new work is going to be the driver to the reemergence of organic growth is there any sense.
You could provide us in terms of the pipeline maybe how.
A breakout in terms of how much of that is near term maybe over the next year or two versus longer term.
Yes, there are some helpful data Richard in our press release, I think that will.
At least so a few steps toward.
Answering that question and that specifically, we've got of that pipeline of 30.2 billion $2.9 billion proposals pending pending decision 1.2 billion is proposals and prep and the remaining 26.1 billion our opportunities tracking and it's worth noting again that we're looking two years out in terms of the total.
Pipeline view and this is not a probability weighted pipeline so as as opportunities move in and out of those farther out stages, what we call. The identified stage, it's not uncommon to have that pipeline flux as values can change as programs become either more definite or less.
Okay. Thank you.
Thanks, Richard next question please.
Our next question is coming from Charlie Strauzer from CJS Securities. Your line is that a lot.
Hi, good morning.
Good morning.
That's all thank you for the actually if you gave us relating to the guidance, but I was hoping that you could provide us with some additional detail on the quarterly cadence that's implied within the guidance.
Charlie I'm going to ask Rick to address that sure. Thanks Charlie.
Recognized at fiscal year, 2020 has many dynamics and the census contract being a large program that is ramping to pre peak operations. During the year in mid year, and then is expected to go into ramp down does create some complications I think as a result of that program the timing of the revenue and the profit.
Will cause some quarterly fluctuations in our results.
Based on what we know today revenue for the first half of fiscal 2020 should be greater compared to the second half of fiscal 2020.
We expect revenue in the first quarter of fiscal 2020 to be sequentially higher compared to the fourth quarter fiscal year 2019.
This is driven by the census contract and by open enrollment under the Affordable Care Act.
Our second fiscal quarter is forecast to generate the highest level of revenue during the year.
Revenue in the third quarter in the fourth quarter steps down as a census contract begins a slow ramp down.
We anticipate that the earnings will be sequentially lower in the first quarter of fiscal 20 compared to the fourth quarter of fiscal 19, there are some startup contracts and some seasonality for contracts that are performance based that are causing that.
Based on our present expectations, we are forecasting sequential improvement in earnings through the third quarter of fiscal 20.
Our fourth quarter of fiscal 20 is forecasted to be sequentially lower compared to the third quarter as a sense as contract begins to wind down.
That's helpful.
That's helpful. Thank you and then just switching gears, a little bit to kind of rebids and upcoming contracts I know that.
UK not released an RFP yet for the integrated service contract, but is that the timing with that.
You know you're right.
They have not and so from a timing perspective.
The current contract is going to run through June of 2021.
On the health assessment Advisory services and were standing by to late further news RC an RFP as it relates to next steps on the integrated services contract that they've talked about.
Great. Thank you.
Thank you Charlie our next question. Please Churro next question is coming from Donald Hooker from Keybanc. Your line is allies.
Hey, good morning, So it's good to see I guess the pipeline continues the warm.
I guess my question is in the pipeline.
There is a big number there of opportunities tracking and I'm wondering if you could provide some sort of contacts. There are these are these renewals I guess, there's that big CMS renewal. That's now captured in there. So my first question is is there any way you can kind of.
How much of that renewal versus new work.
And then secondly, how much of that how do we think about that from a discretionary projects versus sort or less discretionary products considering that we have a presidential election next year.
Great questions, Don Let me start and ask some color commentary if you ask them at the end of my answer I get the first part would be you're absolutely right. There is a large opportunity that we talked about previously I think it's.
At about $5 billion in the pipeline related to the renewal of the CMS customer contact operations or CCOH contract.
We've got I would also say in terms of given your color.
67% of the total pipeline that we talked about is new work related.
And I think theres strong representation in that pipeline there is that theres of weight towards federal in that pipeline, but there is representation across our geographies and across our business.
And I think thats fundamental to the discussion that we had about the returned to organic growth that were.
I'd also say as you would expect for a company of our nature there will be some larger.
So deals in that pipeline.
That we would be chasing again.
Across the segments of the business.
And in some segments of the business you see a preponderance of relatively smaller transactions that are maybe more related to that IP services types contracts that we have or even the consulting type business that we had in our us health and human services. So it's a it's a reasonable mix.
Not dissimilar relate to what we've had historically as VPO driven company.
Your question, though about what kind.
Kind of which programs are.
Have kind of staying power across administrations, and which ones down it's interesting I would tell you it fundamentally our business as.
As a business that obviously as you know is linked to long term demographic trends and is linked to critical social benefit programs that governors and governments are going to administer across administration I think it's interesting that you know and we could go into great lengths on this that the affordable Care Act continues to.
To roll along in fact, this year with rates, even lower in the marketplace and we're back into the open enrollment period. There a lot of conversations about even under next administration, how the patchwork quilt of care and coverage could be adjusted but there is fundamentally there's that set of core health and human services programs that governments will come.
Can you to support administered to those populations.
It's much much harder to take something away when and entitlement has been granted and then there are mission oriented programs I would say specifically in federal.
And that we've talked about this a little bit on prior calls where as the budget Scott in place for federal agencies, we saw the agencies being willing to bring to market transformational contract RFP that really will go out another three 510 years for that agency and so with the funding certainty that dates that they gained through the budget process.
Able to then bring some of those RFP doubt and we expect in most instances those types of major like it transformation driven programs in those agencies would continue across administrations as well I hope that provides a little bit of color.
That obviously being able to put specific.
Metrics to it.
Gotcha and then maybe my my other question would be.
Maybe any updated thoughts I mean.
Gave guidance for fiscal 20.
But I guess, we as you think about beyond fiscal 2000 with the census contract rolling off.
What is sort of the the.
How are you maybe.
Quantitatively or qualitatively sort of managing that drop off in revenue can you reallocate resources and I'm sure you get been getting this question a lot.
But maybe just update us on sort of fiscal 21 really with regards to census rolling off.
I'm going to ask Rick to start by just speaking to the dynamic.
Fiscal 2001 and then.
To add to the number the action that we're taking.
Sure.
And our second quarter earnings call, we estimated that sensus revenue to be about $200 million for fiscal 19 and about $350 million for 20.
And less than $50 million for 21.
We as you heard from my prepared remarks today, we came up a little short on F. Why 19 and the actual results were approximately 185 million. However, we do expect to recover that shortfall next year with about $175 million of incremental revenue for total fly 20 revenue from that census con.
Track of approximately 360 million.
There will be some revenue.
Similar to what we said in the second quarter call that goes into F. wide 20, but you will have a step down there and that revenue should be less than $50 million Nf why 21, let me kick that back to the Bruce I mean, you can you can rest assured that we're going through and we're doing it do everything we can to make sure that we write.
Size and when evaluate all of our programs, but but Bruce and then.
Other side of that Donald is the growth side right and so we've been very.
Focused if you will on first of all the.
Reconstruction and growth at the federal sales organization, which is really driven excellent pipeline expansion. However, now able to field opportunities from other agencies and departments and to take our abilities deeper into the federal marketplace.
We are running a similar play if you will in the U.S. health and human services business. We had an excellent sales leader joined our organization in the third quarter.
In the process of building out the sales team there and we've made good progress and making some strategic hires in that marketplace.
Fundamentally that that's something to sound that that markets to address and I'll go back to kind of.
Paradigm of it that I've spoken to earlier about growth, one and that as we kind of look at it through three lenses.
The rings, if you will enter most ring being our teams need to do everything they can to sell off the current contracts and expand the Corbett thats driving volume increases and taking new opportunities to our customers in the core programs that we serve the second ring would be call it markets or services that we currently don't offer but real.
We don't require an acquisition to be completed so we can do it with organic growth.
Issued its a great example, in our U.S. health and human services market would be.
Earlier this year the opposite personnel management clarified some critical federal regulations as it relates to weather private sector contractors can perform certain functions for public benefit programs.
And that regulation and that clarification was quite clear that as long as the private sector contractor meets the merits system principles for employment. They can this can open up new opportunities for us to serve populations historically that we couldn't and perform functions more deeply in programs like Medicaid and snap and.
Department of labor programs as examples that we couldn't now that we've got that opportunity you can bet that we're not talking to our customers because the core service as we can provide really don't provide new tech they don't require new technology or acquisitions, but they expand the those services to new program areas. That's an example of the second third ring as you would imagine.
It is where in acquisitions required and we continue to have a very disciplined priority new markets program, where we are consistently looking at adjacent markets up to two adjacent sees away and evaluating them for suitability, we're pretty I'd say, we're very disciplined in terms of the criteria that we look at they need need to meet.
Strict threshold in terms of size expected profitability growth rate and so forth and Rick always says you also can't go by a company at the giant when you want to buy one so the point being we are constantly promoting or demoting or de prioritizing our priority new markets list dynamically as our analysis progress is and as the universe of action.
Well targets in those markets also evolves and our priority as we've said many times for deploying capital remains a strategic M&A that can create new platforms of growth for the company and obviously with that by 21 on the horizon.
Focused like the laser on that hope that helps Donald yeah. Thanks for the commentary I appreciate it.
Thanks Donald next question. Please. Thank you as a reminder, its star one to be placed into question Q.
Our next question is coming from Dave Styblo from Jefferies. Your line is now lives.
Thanks matching good morning, thanks for the questions.
First one I had was related to the outside the U.S. segment.
You guys had talked about reaching a 5% margin target for for all of fiscal year 20.
Guidance here is implying something a little less than that low single digits. Does curious is is the lower slower progress on that again related to the to the new UK contracts that are that are working through maturity right now or is there some other.
New headwind that's on that book and then as you guys talk about getting to the high single digit margin target over the next three years can you help break that down and help us understand how much of that is self help if you will verses meeting some help from that a more favorable.
Economic backdrop.
Great Great question, Dave and Rick's going to jump in there sure first thing Dave is we're not satisfied with that outside the us margin and we do have a goal to achieve 5% plus margins in the near term.
I consider this to be a goal for us to reach by the end of fiscal 2020.
However, when you look at it.
We should fall a little bit short of 5% for the full year, but as I said, 5% toward the end of the year.
Also mentioned that three year timeframe.
And this is our goal of aiming to get that margin into a more acceptable range and I do say, we want to achieve that a 10%.
As I mentioned in my prepared remarks, the combination of robust economies and the ramp down of that accretive contract component in Canada has negatively impacted our margin outlook in the near term.
We are making investments in business development across the portfolio and we're working on several large new procurement opportunities.
The nature of these opportunities are longer sales cycles, and so I think you'll see revenue contribution not expected to to effect this year, but.
Fall into the future years Youre right that we've had the startup programs in the United Kingdom that have.
That are working on achieving toward profitability over time.
I think theres really anything new I think it's just the same things that we've been talking to you about over the last year I.
I do think those programs in the UK are coming to profitability a bit slower than we would've liked but they will be profitable.
And.
They will be programs that we were happy to have in the long term.
I.
I think that you should also see improvement in our occupational health business in the United Kingdom. We've made some investments that are now in place relating to.
Clinically related technology platforms that really will enhance the both the customer end the clinicians experience and should improve our competitiveness there.
And so I think all of those combined its.
Better operations, and and winning more work and we do have some good large procurements that were working there Bruce to Joe anything else on that.
Just as related to the last question element of your question around macro drivers.
I mean, clearly we are affected by cyclicality in our employment services business and I think Thats places an emphasis on our land and expand strategy, where we continue to work to diversify our portfolio.
Outside the U.S., so that we have opportunities to.
Move into the health space and address other needs of government died during a period of otherwise unprecedented low unemployment. It's also worth noting that priorities of government change in this environment and a focus a bit more on first of all employing the.
Call it structurally unemployed or individuals that have had the greatest challenges to finding and sustaining employment, but also they look at upscaling and training requirements. They look at job retention issues.
And so you can imagine that as we look at those areas, including labor mobility and cross border Labor mobility, we want to design program that address the immediate needs of government in the macroeconomic climate.
Okay. That's great and then just a second one on capital deployment.
You guys have little over $100 million of cash now some some calculus their suggest that should grow to maybe nearly $350 million by the end of fiscal year 20. After considering your free cash flow expectations and inclusive of dividend payments. So so that amounts to 7% year market cap, obviously gives management a lot of flex.
The ability curious how you guys are balancing.
Deploying that towards buybacks versus waiting for the right acquisition.
I know you've been very disciplined to want to make sure you're getting the right asked for the right price, but how aggressive is management want to be on buybacks versus versus willingness to us to use some of that cash and then perhaps lever up for deal.
So Dave this is Rick.
We've been consistent and we will remain consistent that M&A and strategic M&A will be our number one.
Priority, we do run an active program, we look at a lot of things I'm very proud to say that I think we've been very disciplined.
No. There is lot of things that we look at and we just don't think fit our profile and we don't think are worth of price.
That some people are asking for them.
I think that having a good clean balance sheet like ours allows us to be opportunistic with that and and when the when the right deal comes along.
I think we will pull that trigger with respect to buybacks. We do say that we're opportunistic with respect to those buybacks. So I don't think we're going to lose that discipline. I think we will continue to look at it and when it's a good opportunity to opportunistic situation. We will we will we will do buybacks I have a $146 million of.
Of authorization from the board of directors with respect to that topic and.
We use it at the right time, but opportunistically.
Great. Thanks much.
Thanks.
Next question.
Thank you. Our next question is coming from Frank Sparacino from first analysis. Your line is alive.
Hi, guys.
Just one from me maybe.
Bruce had made a comment earlier just around.
The marketplace and.
Obviously, it looks like enrollment this year will be down again versus last year.
Maybe first just talk about.
What impact that would have to maximize I assume that was in your forecast and then.
Secondly related to the marketplace.
If you could talk about just the state level activity I guess theres, a number of kind of moving.
Pieces, some positive some negative clearly Medicaid expansion still maybe happening and some of these states.
It looks like the work requirements have taken a step back.
And a number of states.
And then at the same time, you have some states launching on marketplaces and trying to move away from health care Dot Gov and not enough. When you look at all those.
Factors together, whether you think that's a positive opportunity for Maximus.
The future but.
That'd be helpful. Thanks.
Absolutely Frank good question so.
It's kind of early to comment on OCC enrollments sense or in the middle of open enrollment now. So you know I'll note that I think we had there was.
There was about a 4% decline last year relative to 2018, but that one's in the reader EMIR. So kind of stay tune what I'd tell you is that before we completed the combination with the.
General dynamics customer engagement centers. We studied this dynamic pretty extensively and typically about a third party advisors as well and really modeled out what we expected the declines to look like over time and there are dynamics that are not just to the aka market as you reach.
Historically low rates of uninsured, but also the dynamics in Medicare as a greater portion of the population coming into Medicare may elect that part managed care plan all of that's baked into our forecast and I would say the trends that we've seen are consistent with what we expected based on our Preacquisition modeling.
So thats that piece in terms of state level activity you're right.
Got a number of dynamics I'd, probably say the positive that.
The positive basically counterbalance any negatives I don't have an overall view that it's creating a growth in market opportunity nor do I feel concerned about it putting pressure on our business on the dynamics are positive for us in states that are expanding Medicaid with what's going on in Virginia for example, and the outcome of the election, there strong support.
Medicaid expansion moving onto implementation, it's one of the state that we support we're thrilled to support the Medicaid program, there and have for years.
Similarly, you do have hosted states more than half dozen that are moving have said theyre going to move off at the federal exchange into state creates state based marketplaces and that does open up opportunities for US we are by far the largest provider services for health insurance exchange call centers and so we're excited to participate in those types of procurements. We think our credentials are you on.
A lot in that market.
And some similarly as states still.
Try to figure out how best they want to address emerging issues in Medicaid, we're very well positioned and I will just if I may take just a moment to address social determinants of health.
I spoke on a prior call about the phase one project that we did in West, Virginia, where we conducted surveys of.
The population that we were enrolling as part of Medicaid to determine really what their major gaps were in other areas of their lives weather related food and security or other issues.
Survey response rate, we conducted 23000 surveys and our survey response rate was in the 65% range, that's really high for the Medicaid population back there a lot of health plans out there that would kill they have a response rate at that level and when you have that brought a population and that higher response rate, we have a 99% confidence interval ended.
Data that we have that has identified these gaps in service. So then we shipped into phase two and we're now working with our client there to implement pays to where we're going to take all that knowledge and then help.
Basically manage the members through a great technology platform that a partner companies, providing that'll give us the capability to add virtual coaches and track the members as they react as they interact with community based organizations and will create a curated network of community based organizations to serve these individual individuals and ultimately help.
I get to the services that they need and also communicate back through the network. If they have additional gaps that need to be addressed so thats a great next step in that pilot and it's an expansion of that pilot and we're going to start working with specific counties in West Virginia that have really high levels of reported needs I think thats an important element of.
The market because there's an open question as to whether that responsibility progressing so its determinants rests with the managed care plans or with the problem administrators and companies like Maximus. So that's a long way of just saying.
There are more dynamics I think that Medicaid continues to involve that we and evolve that we can benefit from.
Does your question Frank.
Yes. Thank you.
And you have any other.
No that's it thanks Lisa.
Our next question please.
That does conclude our question answer session at ladies and gentlemen that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.