Q1 2020 Earnings Call
Greetings and welcome to.
The mask NEXMET fiscal 2021st quarter Conference call.
At this time, all participants are in listen only mode.
Hey brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Lisa miles senior Vice President of Investor Relations for maximum thank you Ms. miles you may begin.
Good morning, and thank you for joining us.
With me today is Bruce Caswell, President and CEO and rented out.
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 or results may differ materially as a result of risks we face, including those discussed an exhibit 99 dot one or FCC filings.
Well.
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 in 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.
Thank you Lisa this morning, Max and this reported revenue for the first quarter fiscal twentytwenty of $818.2 million.
<unk> compared to $664.6 million in the prior year period.
Up one growth was driven by the expected increases in the U.S. Federal services segment due to a full quarter contribution from the acquired business the expected ramp up of sensors contract inorganic growth in.
Both our U.S. health and human services and U.S. federal segments.
This was partially offset by reductions in our outside the U.S. segment.
Total company operating margin was 9.7% for the first quarter.
And lower compared to the prior year period.
This is due to a greater mix of cost plus contracts that generate lower operating margins and continued weakness in our employment services businesses.
Our outside the U.S. segment, which continues to be challenged by market conditions.
For the first quarter diluted earnings per share were 91 cents.
And better than our expectations benefiting from strong operational and financial performance in our U.S. health and human services segment, and the timing of revenue and income within our U.S. Federal segment.
I will now speak to our segment results in the first quarter.
First quarter.
Revenue for the U.S. health and human services segment increased 6% to $312.3 million compared to the same period last year.
All growth was organic and attributable to new contracts and expansion of existing work.
The operating margin for the segment in the first quarter came in.
Better than expected at 18.6%.
The segment benefited from strong operational and financial performance across a number of health services contracts.
Additionally, cost synergies, resulting from the federal citizen engagement centers business acquisition in November 2018.
Continue to help this segment's margins.
Revenue for the first quarter of fiscal Twentytwenty in the U.S. Federal services segment was $366.6 million, representing an increase of $149.6 million compared to the same period last year.
First quarter revenue for this segment exceeded our expectations, mostly due to the timing from the acceleration of approximately $10 million of revenue into the first quarter from future periods.
In addition, the census contract continued its ramp.
Toward peak activity levels in the segment realized the full.
Full quarter benefit related to the acquisition of the federal citizen engagement centers business.
The census contract delivered approximately $70 million of revenue in the first quarter and is expected to grow in the next two fiscal quarters.
On the bottom line the U.S. Federal services segment finished the quarter with an.
The margin of 8.6%.
As a reminder, fiscal year 20, twentys contract mix will be weighted more heavily towards cost plus contracts, which increases revenue and operating income, but dilutes margin.
Outside the U.S. segment first quarter revenue was 100.
Hundred $39.4 million and lower compared to the prior year period.
We experienced organic declines primarily in our employment services businesses in which volumes in case loads continued to be challenged by the effects of robust full employment economies across our geographies.
The segment.
Ended the quarter nearing breakeven.
As we have previously discussed with nearly half of the work in the segment tied to employment services contracts in Australia, and the UK, we have already taken measures to manage our costs.
We are working with our clients and other industry partners about the appropriate terms and.
It's based measures needed to sustain a viable supply chain in light of the macro economic environment.
The devastating bush buyers in Australia also tempered results in the first fiscal quarter.
The government has taken measures to protect its citizens and has temporarily modified certain requirements for.
Graham participants, which will disrupt our employment services case flows placements and outcomes in the coming months.
Australia has also been affected by the outbreak of the Corona virus. While it is too early to quantify we anticipate an unfavorable impact due to the reduced need for job seekers in certain sectors.
Such as tourism.
Both of these events will have temporary unfavorable impacts on the business in Australia.
The degree of impact will largely be determined by the duration of impact and length of recovery in the region. We are monitoring the situation closely and supporting our government client customers and.
Yes in this time of need.
We're also taking steps to diversify our portfolio in markets, such as the United Kingdom by making strategic investments to broaden our efforts in emerging opportunities new market development and additional sales and marketing activities.
To give you some color for fiscal.
Gtwenty, we are investing approximately $5.5 million in the UK as our team has been developing key partnerships and working to extend our reach into new agencies.
These investments come at a time when the UK is in need of financially stable partners to deliver key policy objectives for the government.
And while many of these opportunities have long runways, our efforts could prove to be pivotal and expanding our portfolio in the coming years.
I will speak briefly on balance sheet and cash flow items.
In the first quarter Maximus delivered cash flows from operations of $84.6 million.
Yes, and free cash flow $76.8 million.
Days sales outstanding were 71 at December 31.
Which is within our expected 65 to 80 day range.
At December 31, 2019, we held cash and cash equivalents of $149.5 million.
Yes, and no outstanding draws on our credit facility.
During the quarter, we purchased 26000 shares of Maxim stock for a total of $1.9 million.
On the topic of capital allocation.
Our number one priority continues to be acquisitions that drive long term sustainable organic growth.
Okay.
And he targets would be based on the need to build scale to enhance our clinical and digital capabilities extend into new adjacent sees or any combination of these attributes.
As is our standard practice, we will opportunistically purchase our own shares as well as pay a quarterly dividend of 28 cents per share.
Finally, we're maintaining our revenue guidance of $3.15 billion to $3.3 billion.
And our diluted earnings per share guidance of $3, a 95 cents to $4, a 15 cents for fiscal year Twentytwenty.
We continue to expect a general profile, a slightly higher revenue in the first half.
The year compared to the second half.
As we indicated last quarter, there may be fluctuations in our results due to the timing of revenue.
We have two dynamics at play.
First as I mentioned earlier, approximately $10 million of revenue accelerated into the first quarter from future periods and second.
We're also expecting the timing of a large change order to occur in the third quarter, whereas we had previously forecast to recognize this change order in the second quarter.
As a result, we now expect that earnings for the second quarter will be consistent with the first quarter and will peak in the third quarter driven by the census.
Our guidance for cash flow from operations.
And free cash flow remains unchanged, we still expect to finished the year with an income tax rate between 24.5 and 25.5%.
And with that I will hand, the call over to Bruce.
Thank you Rick and good morning, everyone.
Max.
Delivered solid first quarter results driven by topline growth in the U.S. Federal services segment, and solid operational delivery and strong financial performance in our U.S. health and human services segment.
As Rick noted we remain on track to achieve our fiscal year 2020 guidance.
Our CCOH program over delivered in the.
Her with open enrollment for Medicare and the marketplace ending in December under both programs, we achieved favorable statistics during the 2019 open enrollment season.
Under the Medicare program, we received more than 4.5 million IDR calls with more than 3 million answered by csrs.
Answered.
Nearly 300000 web chat contacts, 129% higher than last year and achieved a 93% customer satisfaction score and the 97% quality monitoring score.
Under the state based exchanges, we received nearly 5 million Ivy our calls with nearly 3 million answered.
Csrs completed an estimated 840000 enrollments through csrs and achieved a 91% customer satisfaction score and a 96% quality monitoring score.
With the Affordable Care Act and Medicaid as underpinnings. The state health insurance landscape is still evolving states are addressing.
Our unique demographic needs with new Medicaid expansion initiatives and efforts to establish state based marketplaces.
In light of this we were recently awarded the get covered New Jersey contract by the New Jersey Department of banking and insurance to help transition the state's marketplace from the federally facilitated marketplace.
To a state based exchange.
The New Jersey marketplace is targeted towards consumers, who are seeking a medical and or dental qualified health plan that do not receive employer sponsored health insurance and do not qualify for Medicaid or Medicare.
In addition to the consumer engagement center the scope of our operations includes.
Assisting consumers with eligibility consumer health plan choice counseling supporting inquiries from brokers navigators sisters, and carriers and referring consumers to other agencies are stakeholders as needed.
This is a key step in the effort to improve health coverage access for New Jersey residents and allow the.
Greater control over its health insurance market and related policies in the long run.
We're excited to utilize our innovative approach to focus on seamlessly supporting consumers through multichannel engagement and helping to state achieve its programmatic goals.
With the New Jersey contract Max MS now operates.
State based exchanges across the U.S.
Additionally, we continue to expand the work we're doing to assist states and delivering Medicaid enterprise services with the recent win to deliver provider management services in Ohio.
Whereby we will implement and operate our provider Credentialing and management solution for the state's Medicaid providers.
Our work in provider management started more than a decade ago and our portfolio has since grown to include work in nine states along with a healthy pipeline of additional opportunities.
This new Ohio contract is anticipated to be $44 million over 10 years.
While each of these individual contracts is small.
Together they comprise a nice portfolio of strategic contracts built upon our core business.
Lastly, and most recently February Onest marked the launch a phase two for the 2020 Decennial census, which runs through July 30, Onest 2020.
Our operational scope includes 10 contact centers across eight.
States and 8500 customer service Representatives during peak operations, who will help support the censuses goal of surveying 146 million households.
In preparation for this peak performance period.
Dozens of candidates were interviewed and we made more than 3300 job offers I.
Look forward to providing additional color on census, 2020, as we progress during the fiscal year.
Over the past two years, we've been working to understand our government clients changing priorities and forward looking policy initiatives.
We're now seeing shifts in policy that may provide new opportunities for companies like Maximus.
In November 2019, the office of personnel management opium issued a memo to state leaders that clarified that states have the discretion and flexibility to determine appropriate staffing methods through employees or contractors in the administration of federally funded state administered programs.
This.
This overturns the long held assumption and prior guidance that certain functions must be performed exclusively by government employees.
This clarification enabled states to engage in public private partnerships that are better prepared to address program gaps in funding talent technology and.
The level of customer service that people expect.
For example in many states historically Siloed program in administration model has limited their ability to provide seamless and comprehensive customer service to multi program beneficiaries. This clarification grants flexibility by allowing states the option to work with private.
Sector partners to implement integrated citizen services models.
With the role of private partners no longer as limited more cost effective customer centered digitally enabled services are now possible across any number of state administered programs.
It's early days in a change to an interpretation of the 50.
Our old law, but our efforts, creating awareness and action across states in federal agencies have shown positive results on a bipartisan basis.
Theres no requirement that the state's change anything but states now have additional options and a great deal more freedom to transform and modernize their operations.
Governors and agency leadership alike have called this a game changer and many have already embraced the flexibility. This clarification provides to allow them to rethink how best to deliver essential public benefits.
And quickly transform their policy interest into efficient and more cost effective services.
Thats.
Terrific and cultural shift in the way States think and we're working directly with state clients on white papers and ideas on how to make this shift without disruption.
These are long term opportunities that could take years to develop with the decades long tailwind.
But it's also a new opportunity that could help governments address arising retirement.
Dave potentially save hundreds of millions of dollars overtime and help close potential gaps they may be encountering.
Moving onto New awards for the first quarter fiscal year 2020 signed awards were $176.6 million of total contract value at December 30, Onest 2019.
Further at December 30, Onest, there were another 439.5 billion dollars' worth of contracts that had been awarded but not yet side.
Let's turn our attention to our pipeline of addressable sales opportunities.
Our total contract value pipeline at December 30, Onest was $30.6 billion compared to 30.
$2 billion reported in the fourth quarter of finite team.
Of our total pipeline of sales opportunities, 69% represents new work.
M&A remains our number one priority for capital deployment as we look to supplement our current capabilities and as we seek to create new growth platforms.
In markets with strong long term fundamentals.
We view M&A as a series of concentric circles. The innermost circle is represented by tuck in acquisitions. These are straightforward directly incorporate into the business and are often done for tactical advantage, such as a near adjacent market play or to position for an important procurement.
The second circle represents a capability play.
Such as our previous ascend and essentially acquisitions.
These provide additional capabilities that further complement our business.
The third circle offer scale in priority markets such as our recent November 2018 citizen engagement Center acquisition.
The.
Last and most outer circle represents transformational acquisitions.
Max Mrs not undertaken and acquisition of this nature, but it's certainly something we would not shy away from for the write property at the right price.
Our M&A objective is to find targets that enable us to build enduring sustainable organic growth.
By continuing to build scale enhance our clinical and digital capabilities extend into new adjacent sees and seek brand new growth platforms.
As a management team, we believe that continued growth relies upon strong governance and good governance starts at the top with how we govern ourselves as such.
Over the past year Maximus has met with many of our shareholders to understand your priorities related to environmental social and governance.
Yes G matters.
As well as our material SG interests, such as human capital data security and privacy and governance.
As a result of your feedback.
Back we modified our board of director makeup implemented and anti pledging policy with respect to our stock.
And as you may have seen redesigned our proxy to be a more engaging and intuitive document.
As part of our ongoing efforts to reduce our carbon footprint, we're piloting the conversion of our facilities led.
Lighting and our federal citizen engagement centers, we look forward to disclose any additional efforts and impacts.
Finally at our upcoming annual meeting shareholders will have the opportunity to vote to remove the staggered board model Declassifying, Our board of directors such that all directors will be elected annually.
We thank you our shareholders for.
Your Frank feedback and support.
In summary, I'm pleased with our continued progress on management strategic plan to lead a digital transformation grow our clinically related services and expand in key priority markets and the Jason sees driving our strategic trajectory into the 2020 fiscal year, we look forward to continued engagement with shareholders.
Clients and employees.
And with that we'll open up the line for Q in a operator.
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One moment, please while we pull for questions.
Thank you. Our first question comes from the line of Charlie Strauzer with CJS Securities. Please proceed with your question.
Hi, good morning.
Good morning, Charlie.
No it's a bit of a moving target, but can you share what impact you assuming from the Australian Bushfires incarnate buyers.
Four basis for the year.
Absolutely.
Sure sure I think it sure Charlie I try to before I answer that I think I got a little current tied on my prepared comments I do want to make one slight correction.
The cash flow from operations number that is in the press release and that is in the presentation is that correct number had 87.3, sorry for getting tongue tied let me help you with.
That does that question now.
Well both of these situations or are temporary.
And it is impossible really to determine was certainly the true scope of the impact until we really understand the degree the length of time and how quickly the region will recover we did feel it's helpful to.
Esters into the analysts that we model some potential impacts for the remainder of the year. So based on what we know today.
I do want to stress.
And emphasize that Theres a lot that we do not know we would estimate the impacts of the.
The.
Problem in Australia to be in the range of seven cents to 15th.
Sense, that's on a diluted share diluted EPS standpoint for the rest of the year.
Now it is important to remember that it is a fluid situation in Australia.
And as I said in my prepared remarks that the government took immediate measures to ensure the safety of their citizens and to enable people to return to stability quickly.
Yeah.
And as part of this the participants in the program that we operate our temporarily exempt from job searches until March six that's really what's causing the issue for us.
Now Australia also is closed its water to incoming travelers who are recently in China. This will have an impact on.
Sectors in the travel industry, where visitors from China, Duke become a Ari large representative group.
In that population tourism has been a thriving industry and a good place to help job seekers get back into the workforce.
So as I mentioned earlier that reduce need for job seekers in tourism roles.
We'll have an impact on our business, but until we have a better understanding to what degree the what length of time, how quickly the region will recover.
It really is not possible with certainty to determine what the ultimate impact will be.
And lastly, I'd really Bruce and I would like to thank our team and Australia. They responded immediately to help.
Community there by contacting all of our customers to offer support and mobilized resources such as psychologists to help in the most affected areas.
The company's employees funded not for profit maximization I'm, sorry, the Companys Maximus Foundation in Australia also raised $50000 for the benefit of the Bush fire.
Relief efforts.
That answer your question Charlie Thats, great. Thank you very much right. Okay. Thanks Hello.
Sure well for Bruce if I could you talk a little bit about the M&A.
Patrick circles, and obviously with the policy change that you mentioned.
That's going to be an area of focus of trying to find companies to buy and.
It was the pipeline look like currently thanks.
Sure.
We see a lot of opportunities that are brought to us and I think I've said before that we're always looking at the characteristics of these deals in terms of what they really mean to the business into long term, we want to make sure that.
As we look at specific.
I think opportunities.
There really no more than about to adjacent fees from our core they've got a reputation for quality. They can provide sustainable revenue and that appropriate growth rate. Good sustainable net margins at least in the high single digits strong cultural fit the company as well so we've been very selective as.
As we've looked at opportunities and further.
We've we've tried to EBIT more proactive if you will in our M&A strategy. So as we're looking down the road and we are identifying areas, where we can strengthen the company in terms of our technology assets and digital assets, where we can become more clinical and the work that we do but also where we can.
Get into new markets, we've begun dialogue with with companies that may not currently.
The active in the market with the hope that as things evolve over the coming years, They think about Maximus as an as at home or a portion of their business as it relates to specific policy I'd be happy to address a little bit more on the LPM.
That I mentioned in my remarks, or any other potential policy shifts there of course have been the Medicaid block Grant guidance that the administration has provided recently as well.
We can speculate about so is there any more specific area of policy that you're interested in as it might relate to that strategy. Charlie I was just thinking.
More in terms of the M&A company types of companies you would try to try and by that.
For those new policies.
Well without speaking about specific companies I would say.
Number one we we certainly feel that we and we've long said that technology is a critical component of what we do we really say.
We delivered technology enabled VPO services to our clients and so companies that can fill specific gaps in our technology portfolio and can help us deliver more seamless end to end solutions to our clients and that really.
Our forward looking forward leaning in terms of the technology that they bring to the table would be.
Of interest to us the digital arena, just really continues to explode and we feel like we've got a nice competitive differentiable position right now in our core programs, but.
Rich or would you say and I agree with them completely you can't keep your technology saw sharp enough. So that would be one area. We've also talked.
About.
How citizen transaction services and citizen engagement will remain a critical component of what government.
Over time, and we found that the citizens we serve expect more and more these days to be served as they would by traditional.
Commercial companies, whether it's in the financial services industry or other sectors.
So again that kind of points back to technology enabled citizen services as an area of interest and lastly, we've said for some time that the federal marketplace as a great market you asked about the government's very strong customer and we continue to look at opportunities there too.
To fill out our portfolio as they come along.
Great. Thank you very much.
Thanks, Charlie next question please.
Our next question comes from the line of Richard close with Canaccord Genuity. Please proceed with your question.
Great. Thanks.
With respect to that Oh PM memo Bruce.
It sounds like that seems to be.
A little bit more of a longer term opportunity. So yes, you can do this.
To gauge that for us or just your thoughts there on.
Maybe the size of the opportunity and timing.
As you have these discussions with state.
Absolutely I wanted to put this Richard and a little context as well the memorandum that I spoke of was.
Was released on November 27, 2019, but it was really a follow up and it provided a lot more clarity to initial.
Guidance that was provided and notification that was provided by Joakim that was.
Just in the Federal Register back in April of 2019. So this is something that's kind of been developing over time the.
The memorandum.
Went to head of executive departments and agencies and it really clarified.
That these executives have to certify that the system of personnel administration.
For federally funded stated minister programs that they operate better called grant made programs is satisfied by Governor government employees that meet these merit system principles, but also it doesnt preclude the same program from utilizing contractors.
That are consistent when that is consistent with prevailing state law as well.
And you might it makes a lot of us and what are these merits system principles and not to go on a dissertation on this but to give you a sense of what they are because they do applied to both government and contractor employees, it's things like.
Things that govern the recruitment selection and advancement of employees based on their merit provision of equitable inadequate compensation training to ensure their high quality.
It performance separation of personnel Windows, Annette with inadequate performance can't be corrected nondiscrimination principles of course, and the elimination of political influence. So we're excited about the flexibility. This gives states and it's important to note that.
Just to frame at that this is a change to.
Cretaceous over 50 year old law.
The Intergovernmental person now act, our IP of 1970, and Theres no requirements that states change anything, but it gives states a great deal of freedom. So pivoting to the opportunity we've been out having a number of cousin conversations if you will with our customers and one thing we've noted is.
That there is really bi partisan interest and support for this because governors and their agency administrators like the idea of having flexibility in this area. It opens up new areas of thinking in terms of how services that have historically been silo and as I mentioned in my prepared remarks can be brought together into an integrated service delivery model.
It is early days and so the initial opportunities that we've seen I would say are more kind of incremental to our core business activities that we had so you wanted to frame. It if you had a contracting a specific state the opportunity might be like a 5% to 10% of the value of that type of opportunity I think where the opportunities we would.
Hope would develop is as states become more comfortable with this model and they get a bit more creative in terms of the scope and breadth that it can comprise.
That could lead to opportunities growing but in as we've said before we would characterize this as we have things like Medicaid block grants and work requirement and so forth as more kind of singles and doubles.
In the early stages, but it's certainly something that has the ability to provide a nice longer term tailwind for us.
Okay.
Lisa.
Two questions one is housekeeping, so if I could asset but.
Bruce.
Yes, so if you look at.
The investments in the UK.
Are you foreshadowing some things there is there like a bolus of contract opportunities there and then my housekeeping question is.
Did you guys say seven to 15 cents headwinds from the fly errors and the.
And the virus as a headwind for the current years. So essentially you would have raised your deluded EPS guidance without the fires and virus.
Richard I'll handle both of those and let me do them in reverse order I did say seven cents to 15 cents. So youre.
Correct on on that.
Of course, this would put pressure on the guidance and it puts more pressure obviously on the profit numbers than it does on the revenue numbers.
Really we are only one quarter ended the year and we do have a healthy pipeline of opportunities the range on our our EPS guidance is 20 cents.
So theres.
There's always the potential for offsetting upside to defray some of the downstream impacts from this event and I did want to make sure that I stressed again that this is a temporary situation, but it really is too early to determine the full impact because of the uncertainty. That's that's involved with it I mean these events are still unfolding.
And.
And we really don't know, but we've only one quarter into it ended the year and.
I think we feel like the guidance range is appropriate and it is a 27 range on the other issue of the of the UK, both Bruce and I have spent time in the UK and we've met with key stakeholders.
And our devoting a lot of time to to discussions with the team. We both believes that there is a clear demand for partners like Maximus, who are financially stable and have a strong track record of delivery.
We see a number of viable opportunities that will diversify our portfolio, while leveraging the core skills that we have as.
Well as our to digital and our technology assets.
So I think we believe it's the right time to invest more heavily in the UK and that debt. It's time for us to start looking at a variety of opportunities. Some of these have longer runways that others.
And our but.
Basically the bottom line is that our efforts could prove to be pivot.
Well in expanding the portfolio in the United Kingdom, particularly since we are very financially stable contractor.
Okay. Thank you very much appreciate that.
Okay. Thanks, Richard next question please.
Next question comes from the line of Donald Hooker with Keybanc capital markets. Please proceed with your question.
Great Good morning, well I want to ask about the Medicaid.
Grant regulation.
You mentioned earlier, it's a lot of puts and takes there and would love to hear your opinion as how that might impact Maximus. If it went into effect over the next.
Years.
Absolutely Donald I'll put him I had is the.
Policy walk here, a little bit and talk to talk about that.
Interestingly first of all its important to note that that this guidance on Medicaid block grants really applies to just a portion of the Medicaid population. So it applies to adults without children back when we've talked about the food stamp program. They have an acronym they use called a bought able bodied.
We did also about dependent so these are adults without children that largely obtained coverage under the expansion of Medicaid. Some folks have had five speculated that the block grant guidance is an effort by the Trump administration to kind of bring along those states that have not yet expanded Medicaid for those populations by giving them just additional flexibility now.
As.
As we've talked about block grants in the past they can be a double edged sword because on the one hand, they provide a lot more flexibility on their their hand, they end up capping funding and without going into the.
Nuances of per cap the funding cap versus.
CPI based funding cap or various models I.
I think what we're seeing as states are.
Cautious right about and they're doing the ROI calculation to say is it worth the benefit of having flexibility for these populations.
When I also understand the risk that I could end up having to fund more this program myself, if it expands into down economy, and often obviously Medicaid expenses would.
Strip.
The other.
Our other measures ended down economy. So that said populations that are not included in the block Grant and this is important our children people to qualify based on disability people needing long term care folks that are 65, an over so.
Thats the first point the second point would be.
With this flexibility.
Yeah.
Comes also reduced federal oversight of managed care organizations, the ability to kind of custom tailor on some of the Medicaid benefits like non emergency medical transportation.
And the SDT program, which covers folks up to 19, and 20 years old States would have more flexibility there.
Well as.
We read the tea leaves and it's very early in the process. There are only a couple of state. So far that have signaled that they have an interesting going in this direction and I think thats, Tennessee and Oklahoma.
Others have been fairly cautious about it.
And.
No.
The commentary that I've read I think mat sales because the executive.
Her of the National Association, Hermetic Medicaid directors put it put it well.
Said that there are lot of states that are concerned about losing funding as I've mentioned.
If federal dollars are.
Our constrained at all there so it's going to move into glacial pace I guess, the the way we would consider it is on even with the normal.
Plantation of this type of guidance.
No state would get a wafer before 2021. So you then have to bring the presidential election into the into the lens and if theres a change in federal administrations that that could change as guidance. We're also sensing that theres going to be likely litigation in this area number folks have come out and taken issue with that impact I think the house.
Has been pretty vocal on this point.
So I would say stay tuned you'll probably see a few small states begin the process, it's hard to say with the threat of litigation whether it will.
Come to its conclusion and have an impact anytime in the near term.
All of that said we.
Have.
Always been I think excellent at helping our stake clients custom fit and Taylor programs to their needs and one of the programs. We always kind of juxtapose. If you will with Medicaid is the children's health insurance program, which functions more as a block grant presently the Medicaid.
Gentlemen, and in the Czech program, we've been able to achieve.
[music].
Admirable accuracy rates and low era rates in the administration that program all the way through the eligibility process with if you consider Medicaid block granting in conjunction with the LPM guidance that we talked about.
Well give us that ability to kind of provide similar services at the Medicaid level should a state want to go in that direction. So I.
I'd say.
These are not opportunities that we're seeing in the pipeline presently but there's.
A lot to watch and lot of moving parts.
Super Okay, and then maybe more in the Nitty gritty the numbers.
The U.S. health and human services segment operating margins continue to impress there and I wonder is.
There are going to be a step down at some point.
These these levels are for multiple quarters now been set are trending above your guidance for that segment.
How long can we hope for those margins to remain high.
But you're correct those margins have been higher than.
We have previously signal to you all I think it's you need to remember that the acquisition. We did last year. The citizen the engagement centers acquisition did have the effect of having some of the home office cost CSG and eight costs get spread over toward the federal group and away from Us health.
In human services. So that helps some I think that will be a and I think ultimately the margin will be a function of how much work. We also when I think that you have pretty good.
Portfolio, there I think we've done a good job of operating it.
We are aggressive in bidding that and trying to expand that portfolio and.
As I've said.
Previously, we generally try to bid in the area of 10% to 15% over the longer term for contracts. So.
I think that if we're successful in expanding that.
That business I think you'll start to see those margins come down more toward that 15% and we've talked about previously, but you're right. It has been quite good for.
A number of.
Quarters here, and I think Thats, a tribute to the quality of our operators.
15% in that segment.
Yes, okay. Okay. Thank you.
Yes.
Thanks, Don next question please.
As a reminder, if he would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Frank Sparacino with first analysis. Please proceed with your question.
Hi, Good morning, as Rick maybe first for you what is the organic growth at the federal you et cetera segment.
The organic growth this year in this quarter.
Can you just let me pull approves paper so.
No when when we file the 10-Q, we do put a very good short in that in the Mdna section and we do a chart that rolls forward. The prior year income I mean revenue cost of revenue and gross profit we roll.
From the prior year, all away through and it is kind of a complicated situation. This year, because we had that acquisition.
Mid quarter in that first quarter of fiscal year 19.
And actually so I'm reading from that we started and reported 216.
987 was the revenue last year in federal.
In the period from October one through November 15th I'll call that the pre acquisition period last year.
We estimate that the revenue that we received that we would have received if we've done the transaction at the beginning of year was 98 million 400.
29, so I really look at it is our pro forma.
As if the transaction that occurred at the beginning of the.
The first quarter.
Fiscal 2019 would've been 315 for 163 hundred 15 million for Onesix.
Now we broke the growth into two pieces from there.
One because that since this contract is big and it's in the ramp up period, we had growth from the actual contracts that we bought.
In the first quarter of last year, Thats 38 million.
And then we had organic growth from other contract you might call that the core the the federal was before the.
Acquisition, that's 13 million, that's 13 million is 4.1% if you work off of that pro forma number now the growth from the acquisition from the contracts that we had is another 12%, but I just wanted to make sure I broke that into two pieces. So we did have nice organic growth in the.
In the in the core of 4% and then.
Very nice growth in the.
In that sense is contract as we've been signaling consistently through the last seven quarters.
Thank you Rick that's very helpful.
Okay and that will be in the Mdna Frank.
So you can see the exact numbers and you can see the cost I mean, those are the exact numbers, but you can see the cost of revenue and also the impact on gross profit.
Great and maybe Bruce on the provider management side.
Can you just talking a little bit more detail I'm not sure.
What's new in that market, both from an ex terminal as well as maybe internal perspective.
Theres something you on the technology side that you guys have done, but maybe just a little bit more color there.
Sure from an external perspective, I really I think it was the affordable care Act that.
And create new requirements right around provider Credentialing, and really has kind of stimulated that provider credentialing and enrollment and provider management marketplace.
And with those requirements for example, and I don't have them all memorized, but I think that there are.
And with strict requirements as it relates to which types of.
Doctors require actual physical visits to their facilities to get through the certification process for Medicaid and so forth.
That created a nice pipeline of opportunities because I think states in order to qualify for federal funding half too.
After you.
Move within a certain timeframe to meet those requirements.
We are already fairly well established provider of those services and a number of state marketplaces and you can imagine as we looked at that as a potential for growth, it's kind of fits into our organic growth strategy. We did look at our technology and weather, how our technology, which originally was interestingly developed.
In response believe it or not to the high Tech Act years ago that created the requirement for meaningful use payments to go to providers that implemented HR any EMR systems that original platform, which we deployed in Tennessee.
Thank you guys, having effectively a full database up the provider network and we were able to pivot that and turned it into more of a.
Credentialing asset overtime Weve continued to invest in that platform and modernize it. We've also looked at other platforms that are out there in fact configurable costs products and so forth. So we're trying to go to market with.
Suite of solutions that enable us to meet the requirements of the customers and their budgets.
The last thing I would say is that this is part of a broader.
Our marketplace.
Medicaid modularity solutions and as CMS continues to push the modularization of what have historically been large monolithic am I ask platforms provider credentials enrollment is one of those natural modules that states can kind of break off from that larger monolith.
And procure separately and in fact.
There are certain states that are coming together to buy in a cooperative fashion.
Through corporate purchasing agreement these types of provider credit services and other modules of Medicaid. So we feel good about the market we feel like we've got competitive technology, we've got.
Let us say around a half dozen states, where we provide.
IP services, and we've got a decent pipeline of opportunities ahead of us.
Great. Thank you.
Thanks, Frank next question please.
Thank you. Our final question comes from the line of Richard close with Canaccord Genuity. Please proceed with your question.
Great. Thanks for the follow up.
I got two quick ones here.
Rick just wondered if you could just go over the again the reason for the pull forward of that 10 million and may be.
On the change order push from second to third quarter any type of magnitude there and then I do have a follow up.
Okay.
Okay sure.
Let me do those in what was the second half the question how many would change order change order. Okay. Yes. So when we did the analysis at the beginning of the year when we gave the the.
Guidance.
And reported to you in the.
Third week in November we had a change order that we were anticipating would get signed in the quarter ended March 31, the quarter that we're in today the second quarter.
As we look at it and we look in the Crystal ball, we think it's more likely that that change orders actually.
Third quarter so.
Based on that we actually said that.
Third quarter will actually a little stronger than we thought in the second quarter will be more consistent with what the first.
The acceleration of revenue.
Was really in our federal group and had effect of about a penny and it really.
He was an.
And over delivery of a variety of contracts as I said, primarily in U.S federal but a couple also in the us health and human services.
Business, but as we looked at them and we do a full analysis every quarter and look at our guidance.
We concluded it was really timing and.
Is that we thought we're going to hit the second quarter that hit in the first quarter.
Okay, Great and there's just my final question here, Bruce maybe thoughts regarding the pipeline.
We're in an election year, obviously very hard to handicap.
But.
What.
Usually happens in an election year.
In terms of.
[music].
Potential contracts out there.
Are there any goto types.
People pull back on the process any thoughts in in the around that as we.
Go throughout the rest of calendar 2020.
It's a great question and I'm going to actually answered it by Canada at international level as well to begin we thought that we thought that actually Brexit might slow down the UK pipeline.
Interestingly.
As the election, there so definitively placed a conservative as Conservatives and power.
And really created a long runway for them, we've seen them with some confidence continue to progress.
Pipeline opportunities that we thought otherwise might have been slowed down.
So that's a.
That's positive outcome there to see things continue to progress Rick Rick always talks about our adjudication rate wanting to make sure that there's one thing to have it in the pipeline to ultimately it's another to have it through the adjudication process in either awarded earned or not so secondly back to the U.S. b.
The majority of the work we do as you know is related.
To kind of mission critical programs supporting vulnerable citizens and.
As we bridge away from the BPL opportunities and more into.
The technology opportunities often network. Similarly is supporting kind of the core mission of the departments and agencies, whether its maintaining IP infrastructure or whether its.
Modernizing.
And assisting with the modernization of certain platforms. We talk for example on the last call about the work that we do at the IRS, particularly now managing a portfolio of cyber security initiatives.
So as I think about across the portfolio of contracts, it's difficult to see any specific opportunities that.
Might be more.
Rob.
In initiative of eight.
The administration that would be subject to.
For the revision in the election year or may be slowing down in the election year because of potential change in the administration and thats not to say there aren't.
And you never really know how policies might shift over time.
Certainly programs have been put in place as kind of stop GAAP measures to provide supplemental resources I think about for example in the VA and other areas are subject to change as the policy interest of the administration change, but programs that are more kind of corn fundamental like supporting the Medicare program in supporting.
Student loan population and so forth, we find to be stable across administrative transitions.
Our next question please.
Our next question comes from the line of Donald Hooker with Keybanc capital markets. Please proceed with your question.
Hey, just one quick follow up I mean to ask.
With these employment contracts and Australia and other countries that are being negatively impacted by low unemployment and now you have.
The fires in Australia, and the current of Iris and other other issues I mean, you know, they're not clearly there you're struggling with profitability there I would imagine others are as well there.
Other contractors are as well and if you guys had any kind of conversations with your with your partners and Counterparties in those governments about.
The structures are those contracts because it seems of seems kind of kind of rough on you guys.
Given the environment and sort of.
Just curious how those at some point these things are going to renew.
Or is there need to sort of changed how these contracts are structured to the they can at least be somewhat profitable for the contractors.
Yes, let me begin and then I'll turn it over to Rick for some further color one of the questions. We always ask as I know this is this a tough sledding and with what we pushed the teams to manage their cost as tightly as they can while still delivering the quality of service that.
Customers come to expect from us and so forth and we always ask how we do income compared to the competition. The answer actually is that we're doing quite well we're off in the top performer or near the top performer in the markets.
With the contracts overriding. So yes, everyone is suffering and we work to ensure that we maintain a high quality of service and that we're delivering on our commitments thats always been a.
Our value obviously of ours such that if you can then get into a conversation about rebid and how that should be structured you're doing it from up more and more of a position of strength as a consequence, our custom one of our customers came to US and said look at we'd like you to be the.
Voice, if you will end the focal point for collecting input from industry.
While the other providers as to how these contracts need to be reformed and and and modified so that they can be.
More attractive and lead to a more sustainable supply chain in this area. So we are exactly doing that separate from that effort in pulling together kind of the input from all the players as you can imagine we're engaging in direct.
For stations with our clients and I'll I'll kind of pivot to that with Rick because we view that as a team effort that we're engaged.
Yes, I just wanted to stress and we were not happy with where the margins are and what our operators are doing a good job of trying to contain costs.
Where we can still meet the requirements of the country.
Correct, they didnt want to make sure that I pointed out that.
We talk about we were reduced our accounting on a fully absorbed basis. So when you see operating income you're seeing an operating income EFO after allocation of all the indirect SGN a cost so when we analyze the businesses. We look at the gross profit we look at the.
Operating income before.
DNA and before home office allocations from SGN, a and at operating income. So we look at all of them.
And.
There are many of them, although they're not giving us the operating income margin that we would like and that we would like to drive the businesses.
As toward.
We do look at that gross profit line too and mix. They are making good healthy contribution to indirect costs and if they're not than that spurs us to further and more dramatic action.
And you've done I might add one more thing our customers want to ensure that there is a sustainable.
Okay.
To provide these types of services and.
A healthy stable of providers and so it's not as if our fleets fall on death years in fact, as we sat down the Abbvies conversations theyve been very engaged and very concerned and want to ensure that they have the ability to continue to provide these.
Essential services to their citizens and that they have healthy suppliers to do that there have been examples.
Some of the government customers that we serve whereas where there has been market failure and and ultimately collapse of the supply chain and so there I think particularly attentive to that and as a consequence.
We think that our messages landing as it should.
Okay. Thank you.
Operator next question please.
Thank you we have reached the end of the question and answer session. This concludes today's teleconference. You may disconnect. Your lines. This time. Thank you for your participation and have a wonderful day.
Paul.