Q1 2025 Maximus Inc Earnings Call
Greetings and welcome to the Maximus fiscal 2025 first quarter conference call. At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Jessica back Vice President of Investor Relations, and ESG, where maximus. Thank you.
Speaker Change: Mr. <unk> you may begin.
Bruce Caswell: Good morning, and thanks for joining US with me today is Bruce Caswell, President and CEO, David Mee, CFO and James Francis Vice President of Investor Relations.
Bruce Caswell: Like to remind everyone that a number of statements being made today will be forward looking in nature. Please remember that such statements are only predictions actual events and results may differ materially as a result of risks we face, including those discussed in item one a of our most recent forms 10-Q and 10-K.
Bruce Caswell: We encourage you to review the information contained in our recent filings with the SEC and our earnings press release.
Bruce Caswell: 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.
Bruce Caswell: Today's presentation also contains non-GAAP financial information management uses this information internally to analyze the results and believes it may be informative to investors and identifying trends gauging the quality of our financial performance and providing meaningful period to period comparisons for a reconciliation of the non-GAAP measures presented.
Bruce Caswell: Please see the company's most recent Form 10-Q, and 10-K and with that I'll hand, the call over to Bruce.
Bruce Caswell: Thanks, Jessica and good morning, we have strong first quarter results to share with you today and I'll offer my perspective on Max misses favorable position in government services as we navigate the first weeks of the New administration.
Bruce Caswell: But first I'd like to recap the highly positive developments for the business that have occurred since our November 21st year end call.
Bruce Caswell: I'll start with the two large recompete that we faced and what I believe was the best outcome. The government withdrew the attempted early recompete of our CMS contact center operations or C. C. O contract also known as the one 800, Medicare and federal marketplace contract, we objected to the basis for the Recompete and took our case first.
Bruce Caswell: The government Accountability office and subsequently to the court of Federal claims.
Bruce Caswell: Following the election in late November the government cancelled the procurement, thereby clearing the way for our current contract to continue operating which we expect it to through 'twenty 31, using the available option periods.
Bruce Caswell: Then as announced last month, we were successfully re awarded the successor contracts for our V. A medical disability examination or M. D. E work. These two year contracts began on January 1st and enabled our support of the VBA in the veteran community to continue uninterrupted.
Bruce Caswell: Next we completed the divestiture of our employment services businesses in Australia, and South Korea that resided in the outside the U S segment.
Bruce Caswell: We had previously committed to reshaping this area of the business and are pleased to have worked again with a recognized provider who has proven to be an excellent home for our employees.
Bruce Caswell: This recent divestiture achieved an important goal of reducing volatility and is expected to improve profitability in the segment through fiscal year 2025 and beyond.
Bruce Caswell: Finally as announced in mid December the board of directors authorized an increase of $200 million to our share repurchase program.
Bruce Caswell: When we go to David for financial results, he will share the latest activity on that front.
Bruce Caswell: I'd like to turn now to how Maximus is uniquely positioned to continue being a proven value added partner to government. This speaks to both our current book of business as well as new opportunities that May lie ahead. During the transition period, we've witnessed the durability of our core business as well as early insights as to the priorities of the new administration to.
Bruce Caswell: We believe we are well equipped to respond well.
Bruce Caswell: While we predominantly serve the federal civilian side of government and its related state administered benefit programs.
Bruce Caswell: Our durable portfolio is tied to well established entitlement programs and others, requiring mandatory spending that have broad bipartisan support.
Bruce Caswell: Medicare and veterans disability benefits are prime examples and we witnessed recent events that demonstrate their criticality to government.
Bruce Caswell: One was the recent hiring freeze on federal civilian employees, which exempted positions related to the distribution of benefits under Medicare veterans benefits and social security.
Bruce Caswell: Separately, the office of management and budget instituted a temporary pause of agency grant loan and other financial assistance programs. While the funding freeze was ultimately rescinded OMB had already clarified that programs, providing direct benefits to Americans, including mandatory programs like Medicaid and Medicare were explicitly excluded.
Speaker Change: In a fast moving policy environment that can introduce uncertainty and ambiguity for some companies. We believe our track record has demonstrated that our core business across major federal and state programs has desirable characteristics that contribute to its resilience.
Speaker Change: Looking beyond the core benefit program areas I've mentioned, our earned reputation as an efficient and accountable service provider in our view positions us well to respond to the evolving needs of our customers and priorities of the new administration.
Speaker Change: One area receiving ongoing attention of course is the department of government efficiency or Doge.
Speaker Change: As you know the Doge now resides in the renamed United States, Doge service or U S. D. S. Previously known as the United States Digital service.
Speaker Change: The legacy U S. D. S was established in the executive office of the President in 2014 to bring top tier technical talent to partner with federal agencies to among other objectives improve critical government services.
Speaker Change: The executive order, establishing and implementing the Doge updates are subjective and it's stated purpose to include quote modernizing federal technology and software to maximize governmental efficiency and productivity and quote.
Speaker Change: In our view recognizing that we are still in the early innings the importance of technology modernization to the administration and capabilities needed to achieve the U S. D. S software modernization initiative goals are well aligned with the demonstrated experience of Maximus in the areas of software development network infrastructure and it systems.
Speaker Change: Finally, turning to the state level and our U S services business much has been written about potential changes to reduce the level of federal Medicaid spending through levers ranging from F map reductions to per person spending caps or block grants.
Speaker Change: Many states in turn are developing contingency plans that for some include accessing reserves and for others may include examining eligibility requirements.
Speaker Change: While it's too early to know, which if any proposed policy changes will proceed I'll offer two observations on the dynamics that characterize our Medicaid business.
Speaker Change: First changes requiring consumer engagement, such as steps to verify eligibility generally increase our volumes most of our state contracts are based on the volume of activity, we perform rather than a flat rate per member per month.
Speaker Change: And second in many of our largest states. We also administer state based exchanges in which consumers may become enrolled when no longer eligible for Medicaid, meaning our engagement with those consumers is sustained.
Speaker Change: We anticipate states will take varying approaches and addressing potential Medicaid policy changes and see opportunity to work collaboratively with them to apply our deep experience to tailor solutions to their different needs and desired outcomes.
Speaker Change: Let's turn to awards and I'll share two recent wins that provide further evidence of our execution on our three to five year strategy.
Speaker Change: First we're pleased to have been selected by the Federal reserve system to provide technology enabled contact center services through our recently announced total experience management or T X M solution.
Speaker Change: The Federal Reserve Board of Governors were in need of modernized contact center operations, including self service capabilities all to be delivered meeting strict data privacy requirements and in a sox compliant and fed ramped environment.
Contract value of the award is $76 million over nine years with options and as reported in our unsigned award balance at December 31st 'twenty 'twenty four.
Speaker Change: Our T X M solution Leverages data insights and cost effectively enables federal agencies to reach citizens through a multichannel secure cloud based platform.
Speaker Change: Through potential shared services agreements it is anticipated that other agencies, including the federal deposit insurance Corporation and the National Credit Union administration could benefit from TX M in the future.
Speaker Change: I'm also excited to announce a recent win at the National Energy Technology Laboratory or N E. T. L part of the Federal Department of energy.
Speaker Change: Valued at $123 million total contract value with a five year performance period Maximus will provide expanded professional IP services to meet the business and research needs of the any T. L in areas, including high performance computing, AI ml development and ongoing operations and maintenance.
Speaker Change: Delivered by our technology consulting services, our Tcs team our services reflects strong core capabilities in enterprise it infrastructure cyber data management and AI ml.
Speaker Change: I'm proud of our Tcs team, whose exceptionally qualified to support the modernization operation and maintenance of any T cells complex portfolio of enterprise cyber and research infrastructure.
Speaker Change: Let's go to awards reporting in the pipeline.
Speaker Change: In the first quarter of fiscal year 'twenty twenty-five signed awards totaled $2.1 billion of total contract value. Further at December 31st there were $410 million worth of contracts that had been awarded but not yet signed.
Speaker Change: These awards translates into a book to Bill of approximately 0.7 times using our standard reporting for the trailing 12 month period or about 1.5 times when measured in the quarter. This represents a healthy step up from our book to Bill at September 30th and track to our expectations for an improved metrics in this fiscal year.
Speaker Change: A key driver this quarter was the successful recompete for the M. D E contracts, demonstrating rebid award activity picking up again after lower rebid volumes in preceding periods.
Speaker Change: As we approach the mid way point of the second quarter I'm pleased that we're continuing to see awards flow and thus far solicitations tracking to expected schedules.
Speaker Change: We maintain our slightly cautious approach to forecasting this year, while also being optimistic about our deal flow.
Speaker Change: Our total pipeline of sales opportunities at December 31st was $41.4 billion compared to $54.3 billion reported at September 30th.
Speaker Change: The prior period pipeline figure had included the early rebid of the CCL and Recompete for the MTA contracts. So the reduction is largely driven by the successes discussed at the start of my remarks.
The current pipeline is comprised of approximately $2.5 billion in proposals pending $1.5 billion in proposals and preparation and $37.5 billion in opportunities tracking.
Speaker Change: Of our current pipeline approximately 57% represents new work. Additionally, 63% of the $41.4 billion total pipeline is attributable to our U S. Federal services segment.
Speaker Change: We are continuing to focus on the U S federal sector, where we believe technology modernization and cost effective program administration using private sector partners will remain a priority, while maintaining a balanced mix of federal and state opportunities.
Speaker Change: This approach aims to ensure our responsibly diversified portfolio and well managed exposure across the segments.
Speaker Change: Over the past few years, we've communicated ways in which our company culture has evolved leading to greater organizational agility and a heightened ability to innovate.
Speaker Change: As an example, the Maximus forward initiative has been a positive forum to challenge established structures and processes promote more efficient operations and provide for reinvestment in the business to address priorities from talent acquisition and development to technology and innovation.
Speaker Change: Reflecting the goals of Maximus forward, our chief digital and information Officer, Derek Pledger established an AI and data accelerator group to advance our AI capabilities, providing the necessary resources frameworks and infrastructure to harness the full potential of AI across our operations.
Speaker Change: The AI and data accelerators designed to speed up the development and deployment of AI driven solutions from pilots to scale, while ensuring they adhere to our governance principles.
Speaker Change: Central to our strategy is our commitment to responsible AI development and use while taking steps to help ensure that our AI solutions are implemented ethically transparently and with accountability to government guidelines and regulations.
Speaker Change: In this spirit I'm excited to announce our inaugural investment via Maximus ventures, our corporate venture capital function.
Speaker Change: We will be partnering with a company that is developing human in the loop AI capabilities specific to clinical assessment services. Our objective is to support our clinicians in a manner that allows for fully auditable timely effective and quality health assessments and evaluations. We have structured an investment that is designed to drive increased.
Speaker Change: <unk> financial performance on our existing clinical programs, while bringing differentiating technology to our government clients.
Speaker Change: We believe our unique positioning with federal and state governments makes us an attractive partner for innovative health technology companies and startups wishing to access these large markets, where our contract vehicles relationships and the complex nature of government contracting are challenging for outsiders.
Speaker Change: In addition to driving efficiency in our service delivery Maximus is also focused on helping government gain access to proven safe and ethical new technologies through its venture investments.
Speaker Change: Before I turn the call over to David I'd like to congratulate our teams on an excellent start to the fiscal year with our C. C. O N V. A M D E contracts now secure and fueled by our strong start to new contract wins. Our teams are focused on consistent operational execution, while supporting our clients as policy priorities continue to evolve while.
Speaker Change: We like many of our peers continued to face unknowns and the risks they represent overall, we believe the balance tilts toward opportunity and with that I'll turn the call over to David.
David: Thanks, Bruce and good morning, we're pleased to start fiscal 'twenty twenty-five with strong first quarter results and an improvement to our full year earnings guidance, we're delivering them from a strengthened position after successfully securing favorable outcomes on the two key rebids. We also completed the diverse.
David: Stitcher of our employment services businesses in Australia, and South Korea, thus, reducing volatility in the outside the U S segment, and providing a lift to the segments profitability in.
David: In addition, we significantly increased our pace of share repurchases in the quarter from our fiscal year start on October 1st through last week, we have deployed approximately $290 million through share repurchases enabled by our strong balance sheet and consistent with our capital deployment strategy.
David: Let's turn to quarterly results, where Maximus reported revenue of $1.40 billion for the first quarter of fiscal year, 'twenty twenty-five, which represents 5.7% year over year growth or 6.3% on an organic basis.
David: The U S. Federal services segment was the primary driver of growth in the quarter with the outside the U S segment also posting strong double digit organic growth.
David: Adjusted EBITDA margin was 11.2% and adjusted EPS was $1.61 for the quarter, which compares to 10.6% and one dollar and 34 cents respectively for the prior year period.
David: The outside the U S divestiture was completed in the first quarter and as a result of the transaction, we incurred divestiture charges of about $38 million. The majority of this about $21 million results from foreign exchange losses that had accumulated over decades related to Australia.
David: <unk> had been recorded in other comprehensive income, but the transaction event requires them to move to the income statement. There is no cash impact related to this shift. These divestiture charges also caused a higher effective tax rate to be recognized in the quarter.
David: The divestiture charges and the related tax rate impact, which together make up 64 cents per share are excluded from our adjusted EPS and adjusted EBITDA metrics consistent with our methodology.
David: I'll now move to results for each of our segments.
David: For the U S. Federal services segment revenue increased 15.3% to $781 million, which was all organic.
David: Revenue growth stemmed from multiple areas throughout this segment, including clinical assessments, some outsized volumes on other clinical programs as well as customer service type programs.
David: The operating income margin for the segment in the first quarter of fiscal 'twenty twenty-five was 12.7% as compared to 10.2% in the prior year period, the outsized volumes and certain smaller clinical programs helped bolster this quarter's margin and are not expected to carry through the remainder of the year at these levels.
David: Yes.
David: For the U S services segment revenue decreased 7.7% to $452 million the prior year period, which had outsized growth at the time benefited from strong performance across the Medicaid related portfolio, most of which were excess volumes from the now completed unwinding exercise.
The segment's operating income margin this quarter was 9.0% and compares to 13.5% for the prior year period.
David: A portion of the margin gap stems from the prior year periods enhanced profitability from the excess volumes. The other portion is some seasonality that was contemplated in our full year outlook for this segment, which is unchanged and our updated guidance.
David: Turning to the outside the U S segment revenue increased 6.0% year over year to $170 million for the quarter.
David: Organic growth was 10.7% and driven by strength in flagship contracts in the U K such as the new functional assessment services contract.
David: The segment generated $8.1 million of profit, which was a 4.8% margin compared to an operating loss of zero point $1 million in the prior year period.
David: Following the divestitures of predominantly employment services contracts that we have completed in the last two years. We are now seeing a notable reduction of volatility in this segment. We will continue to evaluate this segment's performance, though we believe that the shaping actions requiring prioritization has now been completed.
David: Turning to cash flow items cash used in operating activities was $80 million and free cash flow was an outflow of $103 million for the quarter ended December 31, 'twenty 'twenty four first quarter negative cash flows reflected expected seasonality around timing of paint.
David: Meant that we tend to have in this quarter, which I noted on our November call. Our days sales outstanding were 62 days.
David: During the quarter, we significantly increased the pace of share repurchases buying back approximately 3.1 million shares for $237 million. This increase is consistent with our stated capital allocation approach, which features opportunistic share repurchases enabled by our strong balance sheet.
David: Since quarter end through January 31st we repurchased an additional 686000 shares for $53 million, leaving approximately $85 million remaining under the current 200 million dollar board of Directors' authorization.
David: We ended the first quarter with total debt of $1.40 billion and our net debt to EBITA ratio increased from 1.4 last quarter to 1.8 times. This quarter, primarily as a result of the share repurchase activity.
David: As a reminder, this ratio as our debt net of allowed cash to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement. We remain below our stated target net leverage range of two to three times adjusted EBITDA.
David: Our capital deployment priorities have not changed and we continue to seek acquisitions that can accelerate future organic growth. Meanwhile, we continue to pay a dividend that increases with earnings over time and maintain an opportunistic share repurchase program, which has been consuming a larger portion of our capital deployed over the last.
David: Few months.
David: I'll finish with 20 twenty-five updated guidance, where our implied organic growth rate is increasing and we are raising both earnings and free cash flow projections.
David: On the revenue side, our updated guidance is $5.2 billion to $5.35 billion.
David: Cross walking from formal guidance in November $100 million was removed for the completed outside the U S divestiture, which means other areas of the business, including Q1 results have increased guidance by $25 million. This translates to a 50 basis point bump to the implied full year organic growth rate for us.
David: This last fiscal year.
David: On the earnings side for fiscal year, 'twenty twenty-five our full year adjusted EBITA margin guide improved by 20 basis points to 11.2% and our adjusted EPS Guide increases by 20 cents to range between $5.90 and $6 20 per share.
David: Free cash flow guidance increases by $10 million to $355 million to $385 million.
David: There are several drivers to the increased guidance number one our Q1 results were strong and ahead of internal expectations. This was evident in the U S. Federal margin of 12.7% in the quarter number two the divestiture and outside the U S. At the time of announcement in December we noted the transaction.
David: Was estimated to be slightly accretive, which is now baked into the full year forecast and number three the higher levels of share repurchase activity, especially in the first quarter of this year is providing a benefit to our full year adjusted EPS.
David: It's worth noting that our forecast for the remaining three quarters of fiscal 'twenty twenty-five remains largely intact and reflects a continuation of a more cautious approach, which was our objective when we laid out initial guidance for the year.
David: I'll touch on segment margin assumption.
David: We expect the U S federal segment to deliver a full year margin of around 11.5% for fiscal 'twenty twenty-five reflecting more typical performance after a strong first quarter.
David: The U S services segment remains on track to deliver our full year margin of around 11%, reflecting improvement for the remaining quarters. After the lower first quarter margin, which as I mentioned was largely expected.
David: For the outside the U S segment, we expect 3% to 5% for the full year as we noted on our divestiture announcement. This is a 200 basis point increase from initial guidance and while the actions. We've taken are still fresh I'm pleased to see us tracking to our committed 3% to 7% margin range for this segment.
David: Other updated assumptions for fiscal 'twenty twenty-five would be an updated interest expense of approximately $75 million, resulting from greater borrowings tied to higher repurchase activities.
David: Our full year tax rate.
David: Is now expected to range between 28% and 29% as a reminder, the higher first quarter rate was tied to the divestiture related charges and not an indicator of the three remaining quarters, which are expected to be in the 25.5% to 26% range.
David: Finally on a full year basis, the weighted average shares are expected to be about 58 million shares.
David: We continue to track favorably to our 10% to 13% adjusted EBITDA near term margin expectations that I shared on our November call today's guidance for fiscal 'twenty twenty-five is approximately 11.2% and our goal beyond 'twenty twenty-five is ongoing incremental improvement to move into the upper half of.
David: That range. We believe there is cause for optimism with the business firmly rooted in essential bipartisan programs, a healthy pipeline of opportunities and a reputation for solving challenges for government customers through the efficient delivery of quality programs often at scale.
David: And with that we will open the line for Q&A operator.
David: Thank you.
David: We would now be conducting a question and answer session.
David: I would like to ask a question. Please press star one on your telephone keypad.
David: A confirmation tone will indicate your line is in the question queue. You may push start soon to remove yourself from the queue.
David: Participants using speaker equipment, it may be necessary to pick up your handset before getting started.
Speaker Change: Our first question comes from the line of Charlie Strausser of CJS Securities.
David: Please proceed with your question.
Charlie Strausser: Hi, good morning.
David: Good morning, Charlie.
David: Bruce.
David: Good.
David: He talked about the strength in Q1.
David: Very very strong quarter.
David: Well ahead of our expectations.
David: Any.
David: It will pull forward some.
David: And therefore.
David: I should say.
Speaker Change: Yeah. It's a good question and David will give you some.
David: Some more details on that yeah. Thanks, Charlie just to put it in the context of the annual guidance as well.
David: It would be helpful to kind of roughly quantify some of the changes in the full year guidance. So I said the forecast for Q2 to Q4 is largely intact.
David: The share repurchases. If you look at the change in share count the higher interest and combine that with a slightly higher tax rate that gets you about 10% improvement to the full year our earning.
David: So kind of below the line and then the other two drivers I mentioned, which were the Q1 over performance as well as some accretion from the divestiture actually drive a little bit more than 10 then.
David: So altogether that would be a little bit over 20th then given we're only one quarter and maintaining a disciplined approach we decided to keep the earnings guidance raise at the 20th that level.
David: As we said on the last call, we have intentionally kind of derisked the forecast for potential any potential impact of procurement timing there.
David: They are now less than 2% of our revenue midpoint is coming from new work. The Q1 was it was less of a pull into Q1, but just wanted to put put the Q1 over performance.
David: Yeah.
David: Into the context as it relates to the full year guidance is that helpful.
David: Yeah definitely.
David: Maybe talk a little bit too about your confidence in the guidance.
David: Okay.
David: Yeah.
David: Your.
David: Thought process.
David: Yeah.
David: I think confidence remains high when we give guidance we're careful to.
David: Not going forward too much and I think you're used to it having.
David: Having that.
David: Thinking around it I think the new business assumption I mentioned, its probably the clearest and most precise kind of evidence I can show that we're.
David: Being careful about the environment and making sure we've got good visibility.
Bruce Caswell: Great Thanks and Bruce.
Bruce Caswell: Given the headlines from the new administration.
Bruce Caswell: Obviously.
Speaker Change: You probably have some smaller pockets of your portfolio that are not tied to durable programs, where you might have opportunities or risks, maybe you can talk about that and give us a little more color on that front.
Charlie Strausser: Yeah, Charlie I'd say, it's a good question. Thank you and I think you hit an important point that these are would be small pockets we've really.
Charlie Strausser: As you can imagine look very closely at the portfolio kind of across all of our federal customer areas on a contract by contract basis and as we have done that we have.
Charlie Strausser: The process, we looked at is to say look at what is the core function of its being performed here and.
Charlie Strausser: If for example, there were to be a structural change at a department level, where would that core function have to go to continue because in our view. The the programs themselves are not going to go away and the basic functions of providing service and managing portfolios. For example on behalf of the government has to continue to be performed.
Charlie Strausser: And so we've looked at you know where where that might go in the future if necessary and.
Charlie Strausser: We'll be ready to adjust it if we needed to but fundamentally.
Charlie Strausser: We really havent seen many pockets that would be if in fact any pockets that would be directly impacted by any of the executive orders.
Charlie Strausser: It's worth also saying that we've been pleased to see continued.
Continued deal flow in the pipeline and be happy to go into more detail on that but.
Charlie Strausser: Compared to.
Charlie Strausser: Other presidential transitions or the last part of it wasn't presidential transition it.
Charlie Strausser: Really you know normal course presently in from a deal flow standpoint.
Speaker Change: Yeah, I was going to ask you too, but last time when Trump was first put into office.
Charlie Strausser: Can you quite a while too.
Charlie Strausser: At this point, he's et cetera, it seems like you know.
Charlie Strausser: I hit the ground running here.
Charlie Strausser: Yeah.
Charlie Strausser: To help you.
Charlie Strausser: With you.
Charlie Strausser: Pipeline.
Charlie Strausser: Going out.
Charlie Strausser: Fees in our PV, let out.
Charlie Strausser: You see a.
Charlie Strausser: It slowed down.
Charlie Strausser: Net sales.
Charlie Strausser: Sales cycle, if you will.
Speaker Change: Yeah, Let me give you a little more context on that so we're not seeing any real direct impact presently on deals that were watching in the pipeline, particularly in the health and the defense and homeland security areas.
Speaker Change: Some individual agencies within that group as you might expect are temporarily pausing new acquisitions to ensure that they are aligned with administrative administration priorities and that's a very common thing for them to do during a period of transition kind of as expected and we baked that into our expectations in terms of new work for the year and set forth on the civilian side of the business is at.
Speaker Change: Slightly different dynamic, we're seeing some customers turn to extensions and bridges on existing contracts to get worked through and get it programmed and accommodate delays in <unk>.
Speaker Change: Other procurement vehicles. So that of course is a great position to be in when you are an incumbent because you're picking up work with really very low or no cost of sales on existing vehicles, it's less of a great position to be in when you're waiting for procurements to come out and I'm pleased that from a civilian perspective I feel like we've been at more on the beneficial side of that.
Speaker Change: Another point I would make it that many of the GAAP to non companies as you well know are dependent on government wide acquisition vehicles or G. Wax wide acquisition contracts and we really haven't seen any material delay in the acquisition schedules for those so that gives you a sense of the lay of the land.
Speaker Change: Note. However that there are some other variables that that everybody's watching one is the FY 'twenty five appropriations process that could impact the timing of new contracts.
Speaker Change: Cross the dotcom community, if they represent actually new spendings.
Speaker Change: <unk> would obviously go above.
Speaker Change: The funding that would be available through a continuing resolution. So already we've seen talk about what will happen on March 14th when the current CR expires will we see another CR will that carry us through the remainder of the fiscal year.
Speaker Change: In some instances.
Speaker Change: If we're maintaining our current funding levels that could keep new contracts from being funded with new money.
Speaker Change: We're also cautiously watching B O P M deferred resignation and voluntary early retirement authority or bureau process for the potential impacts on government procurement staff.
Speaker Change: We've talked about this before Charlie the government procurement teams and contract shops have been stretched for a number of years in some agencies and we want to obviously consider.
Speaker Change: The industry consider how resignations and retirements could exacerbate that issue. So that's why I think David put it well when he said yeah, we're maintaining a disciplined view of the remainder of FY 'twenty five and that we've got less than 2% of our FY 'twenty five revenue coming from anticipated pipeline conversions.
Speaker Change: Hope that helps.
Speaker Change: Yeah definitely thank you very much Bruce and David sure.
Speaker Change: Maybe if we could talk a little bit more about the segment margins.
Speaker Change: You know what it kind of the assumptions you're baking into.
Speaker Change: Your stated goals there.
Speaker Change: Are there any drivers key drivers are impediments to achieving those goals.
Speaker Change: Sure.
Speaker Change: Start with you out there with the U S. There is a margin in Q1.
Speaker Change: Bit lower than what we expect for the year is.
Speaker Change: As a backdrop as you recall last year in 2000 and for U S services had at higher than normal margins are the result of the extra volume from the Medicaid unwind.
Speaker Change: We have tough year over year comps through the first three quarters there and.
Speaker Change: And then recall in Q4 of last year U S services delivered a more typical margin of 11%.
Speaker Change: Again, as what we're guiding to for the full year.
Speaker Change: By the first quarter being in at 9%.
Speaker Change: Hum.
Speaker Change: The dip in Q1 was largely anticipated.
Speaker Change: No that was really the impact of open enrollment on that segment.
Speaker Change: Especially this year, we were prudent in how we staffed.
Speaker Change: Our contracts there that are typically paid on a either a volume based or more of a fixed price basis.
Speaker Change: Especially given there's been a lot of change in that population that we largely anticipated that when we gave the guidance back in November.
Speaker Change: And we still expect that segment to come in around 11% for the full year for U S. Federal margin was a little bit higher in Q1 than our guidance of 11, 5%.
Speaker Change: Again as I said there were there were some smaller clinical programs that really over delivered in the quarter.
Speaker Change: Just given higher volume coming through that.
Speaker Change: We are not currently anticipating that level of volume continuing at such a high level, though.
Speaker Change: That explains what we do there and then outside the U S. Yeah, I'm pleased that at 3% to 5%.
And it.
Speaker Change: It should be more stable as a result of the shaping we've done.
David: Great and when housekeeping question for you David.
Speaker Change: Tax rate was a little higher in the quarter and implied.
David: Implied tax rate guidance.
Speaker Change: As well you know what's driving that.
Yeah. So the first thing is the impact of the divestiture related charges.
Speaker Change: So those are non tax deductible, therefore, the Q1 rate.
Speaker Change: Very high which we've adjusted out of our adjusted ETF members, even apart from the divestiture related impact.
Speaker Change: In my commentary that the tax rate in Q3, and Q4 should be in that $25, 5% to 26% range, which is just a tad higher than the 25 range.
Speaker Change: Range, we said last quarter. So there's just a small upward impact there wasn't a single driver once you normalize for the divestiture impact.
Speaker Change: Great. Thank you very much for taking my questions.
Speaker Change: Yeah, you bet. Thanks, Charlie.
Speaker Change: Thank you.
Speaker Change: Our next question it comes from the line of Ryan.
Speaker Change: Old with Raymond James. Please proceed with your question.
Ryan: Hey, good morning, really nice job on the quarter and the execution.
Speaker Change: Wanted to Bruce kind of appeal into some of the commentary you had.
Ryan: Around Medicaid I appreciated that color.
Ryan: I think it makes it's pretty intuitive that you get incremental volume for more consumer engagement or changes in the program.
Ryan: Thought it was really interesting your discussion around running the state based exchanges as well at picking up incremental volume as perhaps populations decline in Medicaid, we we'd had the Medicaid chip population peak at about 94 billion. We're now under 80 can you maybe talk about that relationship and what you've seen over the last 12 months.
Speaker Change: Sure, Brian and good morning, and thanks, Thanks for the question.
Speaker Change: So to give it some context at the national level. We just ended the 'twenty 'twenty four open enrollment period total health plan selections made during open enrollment were $21 4 million.
Speaker Change: And that's at the federal marketplace and also includes the state based exchanges. So the 21.4 million is a $5 1 million increase over 2023 or 31% increase across the entire system. Interestingly there was a 41% increase in new consumers signing up for plans. So the dynamic that you referenced.
Speaker Change: Saying is borne out in the data.
Speaker Change: As people are transitioning problem after all the recertification process and Redetermination process and Medicaid it's clear that individuals are traversing over to the exchange business and as I said.
Speaker Change: We are fortunate that in many instances, where operating state based exchanges or really a single entity that could include the Medicaid work as well as a basic health plan as well that's an exchange alternative for consumers and also of course through the work that we do on the 100 Medicare Federal marketplace contract, we're picking up enrollment activity related to federal.
Speaker Change: Our marketplace states.
Speaker Change: So as reported by CMS just to drill into some of the numbers New York, who is a big customer of ours saw open enrollment plan selections. During this period increased 35% from 2023 to 2024, so individuals' clearly moving from one coverage area to another.
Speaker Change: All of that it's yes, it's important to note in the context, however that it's a very fluid policy environment. So as you're I'm sure very well aware there was a final rule on streamlining that was issued by CMS that affects Medicaid chip and basic health plans.
Speaker Change: And that came out in March of 'twenty 'twenty four there are a number of states that are challenging requirements of that rule.
Speaker Change: And with things like for example, continuous eligibility requirements and so forth and that could overall.
Speaker Change: Further affect enrollments going forward in programs and in some instances maybe caused more individuals to meet to need to make a plan selection in our product other than Medicaid or chip.
Speaker Change: The last thing I'd say is that.
Speaker Change: Still hanging out there of course are the subsidies that were provided to the American rescue plan and the inflation reduction Act.
Speaker Change: Those subsidies have enabled consumers with higher income levels to get coverage, including about a million and a half consumers that reported income over 400% of the federal poverty level. This last open enrollment period. So again.
Speaker Change: Sustaining those subsidies would be critical to keeping those enrollment levels, where we're seeing them I hope that helps.
Speaker Change: Oh, that's great answer I appreciate all the all the data that it was embedded in that thank you.
Speaker Change: Sure.
Speaker Change: Talk about the the the veteran assessment business. It looks like inventories are drawn down slower in other words, there's there's a lot more kind of ongoing activity on this can you maybe just talk about your outlook for that in terms of of growth as we think about it embedded in your guidance and maybe this really nice new contract renewals that you had how we think about.
Speaker Change: The particulars of how that might impact the business as well.
Speaker Change: Yeah, I'll start and then I'll hand, it off to David for some more color.
Speaker Change: Right the claims inventory that the VDA reports.
David: It came down from a peak of what appears to be about $1 1 million down to about 953000 and has kind of stabilized at that level.
David: So there continues to be an awful lot of work to be done and we continue to.
David: Two to have our fair share of that work and we're very pleased with the performance of the team and the volumes that they're handling and what is a complicated program and complex choreography. If you will between the work, we do with the veterans and the clinicians and so forth and the VA.
David: So David can comment on kind of our volume expectations that are embedded in our guidance for the full year, but I'll just say as we've said on prior calls we're very focused on continuing to improve the veteran experience and ensure that we can increase our ability to handle these volumes and what might be further volumes in the future but.
David: More importantly to ensure that we're maintaining quality and that we're meeting the handle time requirements within the contract. So we are making a significant investment in technology to support that program that we expect to be coming online more fully I'd say towards the end of this fiscal year. So.
David: With that said I'll hand, it off to David to talk a little bit about what's embedded in our guidance yeah.
David: In short our view and expectation providing hasn't changed much over the last couple of quarters. Obviously, we had a big step up in volume as did the other vendors over the past two years.
David: And from here, what we see is more stability certainly we see the volume.
David: Standing at the current level, but more and more of it.
David: Studied a modest growth level rather than.
David: Another step up.
Speaker Change: Great. Thanks, maybe just a couple of other real quick ones housekeeping.
Speaker Change: Can you maybe comment on the loan servicing you have with the department of education and student loans.
Speaker Change: Maybe just talk about all the noise around the headlines that are seemingly coming out on a daily basis.
Speaker Change: Yes, I appreciate the question and I would just say in our view.
Speaker Change: That's a perfect example, but I spoke to a little bit earlier, which is that the core function, which is managing a portfolio of federally direct let student loans that are yeah. We've now been through returned to repayment and we.
Speaker Change: We are in kind of full operational node, that's going to need to continue one way or another.
Speaker Change: I would have to say that you know, they're obviously all of the borrowers out there are going to need continuity of service, regardless of ultimately where that function land in government and there has been some speculation as to other agencies that have similar financial management.
Speaker Change: Functions as part of their revert that where a portfolio like that could go and continue to be service, but we don't feel that that would in any way change the contracting model that governments use them to service those loans. So we'll just continue to support our customers and we're pleased to continue to to handle the portfolio that I will say has grown.
Speaker Change: Over time as a reflection of our high customer satisfaction scores and the confidence that the customers expressed in the work that we're doing.
Speaker Change: And we will let the other decisions related to department structures, and so forth be handled at.
Speaker Change: At the at the political level.
David: Appreciate that and it just just final one David probably for you to.
David: To help us a little bit on the rhythm of the free cash flow you've got a lot of free cash to generate in the in the next over the next three quarters.
David: Is it a linear progression or are there any kind of consideration to take on a quarter by quarter basis, and maybe really just a little bit of help on how we shape that.
David: Yeah, I mean, Q1 I guess.
David: As I highlighted timing of certain payments that we expected if you look at our cashless debit for Q1, you can see.
David: The cash outflow related to accrued comp and benefit that that has to do with our annual incentive payments as well as just the timing of payroll, which we anticipated.
And then even though our dsos were only up one day you can still see it.
David: The of cash on accounts receivable, that's really just revenue being quite high in December, especially during open enrollment so that tied up a little more than a R. So we do expect both of those to be Q1 specific.
David: For the rest of the year.
David: Really to highlight I think will continue.
David: Continued to see strong cash flows come in over the next three quarters that sometimes even difficult with collections coming in right at the end of a month to pick which quarter. Among the three so there's nothing unusual I would call out.
Speaker Change: Understood. Thanks, so much guys.
David: You bet. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: And this concludes today's teleconference. You may disconnect your lines at this time.
Speaker Change: Thanks for your participation.
Speaker Change: [music].